Settle Down, Obama's Not the New GM Honcho
Wall Street needs to take a deep breath and count to 10.
Wall Street needs to take a deep breath and count to 10. President Obama isn't going to grab the wheel and run the Detroit auto companies out of the Oval Office and the forced exit of General Motors honcho Rick Wagoner isn't the beginning of open season on CEOs.
You'd think the feds had dispatched an armored division to secure GM and Chrysler headquarters the way the market tanked after Obama announced his plans to keep GM and Chrysler afloat. But the president is pushing Uncle Sam's nose -- and then some -- under Detroit's tent for good reason. The situation is that precarious.
Obama backed away from a shotgun GM-Chrysler marriage because Chrysler would collapse before it ever made it to the altar without an infusion of tens of billions of federal dollars. The White House had little choice but to try to cajole Fiat, another on-and-off suitor of Chrysler, into a merger. It's giving Fiat and Chrysler a month to finalize plans while promising federal money to help ensure the union works.
That's not a odd couple as some might think. Fiat has jumped light years in dependability from the era when customers joked that the name stood for "fix it again, Tony." Fiat offers Chrysler and its beleaguered dealers help, fast, with world-class fuel-efficient cars such as the Bravo, the Cinquecento and the MiTo. The Italian automaker covets the Chrysler 300's rear-wheel drive platform to power a new Alpha Romeo and could mop up the European market selling crossover SUVs using the guts of the new Jeep Grand Cherokee.
Having dismissed GM's latest plan to gain solid footing as anemic, Obama gave GM 60 more days to come up with something else -- while working much more closely with the administration on the details. "It will take perhaps months and not weeks to figure out how to take the best elements of this behemoth and create a leaner, more competitive company with fewer brands and dealers," says Aaron Bragman, an auto analyst with IHS Global Insight, a business consultancy. Swept away are likely to be the storied Buick, Pontiac and GMC names, leaving GM to focus on Chevrolet and Cadillac.
There's no way Wagoner could have been kept on after he submitted his trim-at-the-edges reorganization plan. At least one head had to roll so that Obama can sell what will be one of his toughest political gambits to date. Part of his strategy will be to persuade people that Detroit's problem was being too timid and hidebound to compete effectively.
What exactly will Obama be selling? All signs point to a pre-packaged bankruptcy for GM and probably for Chrysler. This will wipe out bond and common stock holders, negate state franchise laws that keep marginal new car dealers in business and leave auto workers with IOUs, rather than cash, for their future health care coverage.
Obama tipped his hand to that likely strategy with a statement that the U.S. would protect warrantees of new vehicles sold by GM and Chrysler. The other shoe is now poised to drop within the next month or two.