WASHINGTON - President Barack Obama seized the wheel of the failing U.S. auto industry on Monday, forcing out General Motors Corp's chief executive, pushing Chrysler LLC toward a merger and threatening bankruptcy for both.
Major U.S. stock indexes opened sharply lower following the harsher-than-expected medicine for the distressed U.S. auto companies whose fortunes have steadily worsened amid recession and consumer credit woes this year.
All three of the major U.S. stock indexes fell more than 3 percent on the developments out of Washington, which prompted Standard & Poor's lead auto analyst to say that the bankruptcy risk for all three domestic automakers, including Ford Motor Co, remains high.
GM shares lost 24 percent while Ford was off 7.5 percent. Chrysler is privately held by Cerberus Capital Management.
Given where the industry is, these highly unprecedented actions are consistent with the unprecedented times we're in, S&P's Robert Schulz said in an interview.
Obama was to detail his plan for overhauling the car industry as a new poll of analysts showed Detroit and top foreign automakers are expected to report another severe sales decline for March later this week.
Obama's task force on autos rejected turnaround plans submitted by both GM and Chrysler following their December bailout of $17.4 billion. The bailout required the companies to reach new concessions and lay out a case for survival.
Nevertheless, a senior administration official said we want to do everything to try and save the companies.
THE OBAMA PLAN
Obama is promising only to fund GM's operations for the next 60 days while it develops a sweeping restructuring plan, instead of granting GM's request for up to a further $16 billion in loans.
GM CEO Rick Wagoner, who had presided over the company's rapid decline in the past five years and had run the automaker since 2000, was forced out at the request of the autos panel headed by former investment banker Steve Rattner. A majority of GM's board will also be replaced.
We are left to look back and say that Wagoner's appointment as both chairman and CEO in 2003 was little more than an act to ensure the dynasty of GM boardroom arrogance and failure continued, said Howard Wheeldon, senior strategist at brokerage BGC Partners.
Wheeldon said Wagoner's departure had been all but inevitable since the automaker sought government funds and said he was disappointed the authorities had not insisted on an external replacement.
Wagoner protege and GM President and Chief Operating Officer Fritz Henderson was named as new CEO. Wagoner's departure came as the Obama administration came under fire for not blocking bonuses to executives at American International Group Inc.
NOT JUST GM
Chrysler, controlled by Cerberus Capital Management, was given 30 days to complete an alliance with Italy's Fiat or face a cut-off of its government funding that could force its liquidation.
Fiat was not immediately available for comment.
The autos panel rejected a claim by Cerberus that Chrysler could be viable on its own, citing its relatively small size, weak product line-up and declining U.S. market share.
If Chrysler can complete a tie-up with Fiat and cost-saving deals with creditors and its major union, the Treasury would consider investing up to another $6 billion, officials said.
U.S. officials said there had been progress in recent negotiations involving the task force. Fiat had agreed to take less than the 35 percent stake in Chrysler the two companies had first negotiated, the senior official said.
Meanwhile, Henderson, a key architect of GM's now-rejected turnaround plan, was charged with working with U.S. officials and advisers to develop a more aggressive restructuring.
We believe our approach to GM is starting with a clean sheet of paper, the senior official said.
GM bondholders, the official said, could have to take less than the 33-cent-on-the-dollar payout they have been offered and should abandon hope of a government guarantee.
The Obama administration had also not ruled out a quick bankruptcy process for either GM or Chrysler, he said.
Wagoner had been outspoken in his opposition to a Chapter 11 reorganization, saying it would drive away consumers and probably lead to GM's liquidation.
GM had asked for more than $16 billion in new government loans, while Chrysler wanted $5 billion to ride out the weakest market for new cars in almost 30 years.
GM has lost about $82 billion since 2005 when its problems began to mount in the U.S. market. GM stock has also lost about 95 percent of its value since Wagoner took over as CEO. Although he inherited many of the company's deeper problems, his critics say he failed to act fast enough to resolve them.
(Additional reporting by Jui Chakravorty Das in New York; Kevin Krolicki and David Bailey in Detroit; David Alexander and Thomas Ferraro in Washington; Estelle Shirbon in Paris; Gilles Castonguay in Milan and Angelika Gruber in Berlin; Editing by Lincoln Feast and David Holmes)