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Detroit "Rocked" City

Written By Brian Hicks

Posted March 30, 2009

It’s a bad day to be in Detroit. GM and Chrysler are on the verge of bankruptcy. And Richard Wagoner Jr. was just given the heave-ho.

Yep, President Obama just outlined his latest version of tough love for Detroit automakers, extending lifelines but also threatening the companies with a very real risk of bankruptcy if they can’t turn things around.

The Administration is giving GM 60 days to negotiate further cuts from the UAW, reduce unsecured debt, and provide a plan that’ll work, according to reports. And they’re giving Chrysler 30 days to make a deal to give a minority stake to Fiat, or it “will be cut of.”

It made today’s message very clear:

“President Obama won’t throw money at two companies that have been lurching from crisis to crisis and losing ground to the Japanese and Koreans for years. They have to cut deep and show that they will be able to thrive,” according to BusinessWeek.

Here’s more from that article:

“In GM’s case, the government wants a clean slate before it gives the company a substantially larger loan package. President Obama forced the resignation of GM Chairman and CEO G. Richard Wagoner Jr., giving his handpicked successor Frederick “Fritz” Henderson the CEO job. GM director and former Northrop Grumman CEO Kent Kresa will become chairman of the board. GM will also have to replace more than half of its board, Treasury officials said.”

But it won’t stop there.

“Treasury officials say that GM’s updated viability plan, which was submitted on Feb. 17, had rosy projections for market share and pricing. GM said it could hold 19% share in the U.S. by 2014, but its market share is under 19% in the last two months. Every lost point of market share means $2 billion in lost cash flow. GM’s plan also relies on improved pricing on its cars, but Treasury officials think that will be tough to get given the economy.”

But then there’s debt burden.

“GM owes the United Auto Workers $20 billion to start a union-led trust fund that will pay for retiree health-care benefits. The Bush Administration wanted the UAW to take $10 billion in cash and the rest in stock. That may still happen, but Treasury officials think that GM needs to reduce its retiree costs. GM and the Treasury Dept. are negotiating deeper concessions from the UAW on retiree benefits.”

And should that fail within the 60 days, “the Treasury Dept. may force the company into a quick form of bankruptcy. Treasury officials have called it a surgical process in which GM would go in and shed some obligations to creditors and the union quickly. One senior Administration official called it a “quick rinse.” GM would be out of bankruptcy as fast as 30 days with less debt and the ability to make a profit at lower sales levels. “