Obama's tough auto stance may include bankruptcy

By Kevin Krolicki and John Crawley

WASHINGTON (Reuters) - President Barack Obama ordered General Motors Corp and Chrysler LLC to accelerate their survival efforts and brace for possible bankruptcy, saying neither company had done enough to justify the taxpayer money they were seeking.

Obama, describing the industry as a pillar of the economy, nevertheless gave GM and Chrysler a little more time and money to wring further concessions from workers, creditors and other stakeholders.

"We cannot, we must not, and we will not let our auto industry simply vanish," Obama said in White House remarks on Monday that were partly overshadowed by his decision to force out GM CEO Rick Wagoner.

U.S. stock indexes tumbled on the harsher-than-expected government stance, which could push GM and Chrysler closer to a bankruptcy court restructuring that could threaten equity holders and force deeper losses on creditors.

A committee representing GM bondholders planned to meet later on Monday to discuss a debt restructuring plan according to a source familiar with the situation.

With about $28 billion in debt to bondholders, the GM offer would translate into $2.2 billion in cash, $4.3 billion in debt and an additional stock-based payout in a recapitalized company that would all but wipe out current stockholders.

The Obama administration is giving GM 60 days to rework its survival plan. The new CEO of the biggest U.S. automaker said a court-supervised restructuring in bankruptcy might be necessary.

Chrysler's operation would be funded for the next 30 days as it works to complete an alliance with Italy's Fiat SpA, considered the No. 3 U.S. maker's best chance of surviving.

A source familiar with the negotiations said Fiat's stake in Chrysler could start as low as 20 percent.

GM had sought more than $16 billion in new aid after getting $13.4 billion in December, while Chrysler wanted $5 billion on top of $4 billion at the end of 2008.

GM shares closed 25 percent lower on Monday while stock of Ford Motor Co, which has not sought a bailout, closed down 2.8 percent. Chrysler is privately held by Cerberus Capital Management.

BANKRUPTCY OPTION

Jared Bernstein, a member of the government's autos task force, told Reuters Financial Television that a process that splits off the "bad" assets of GM or Chrysler, and sends those through a court-supervised bankruptcy, is a possibility, but U.S. officials have not determined yet to pursue that option.

"I don't think we're at that level of analysis until we see the kinds of changes and adjustments, concessions that are going to be made over the next 60 days," Bernstein said.

With U.S. auto sales near 30-year lows, Obama moved to reassure would-be car-buyers, saying the government would stand behind the warranties of GM and Chrysler. He also offered his support for a tax credit incentive of up to $5,000 to trade in older and less fuel-efficient vehicles.