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Bailout debate simmers as GM pares output

DETROIT/WASHINGTON (Reuters) - Detroit automakers began work on the turnaround plans demanded by Congress in return for a possible $25 billion rescue as General Motors Corp said it will cut production more deeply and drop two of its controversial corporate jets.

Leaders of the U.S. automotive industry testify at a hearing held by the House Financial Services Committee on Capitol Hill in Washington November 19, 2008. From left are General Motors CEO Richard Wagoner, Chrysler Chairman and CEO Robert Nardelli and Ford president and CEO Alan Mulally. REUTERS/Kevin Lamarque

Pushed to the brink of failure by a plunge in auto sales, GM said on Friday it would idle five North American plants for more time to cut production and keep inventories.

The top U.S. automaker also said it would return two of its leased corporate jets amid intense criticism this week over GM executives’ deluxe arrangements for traveling to Washington to plead for a federal bailout.

GM is still leasing three corporate jets.

Congressional leaders agreed on Thursday to give Detroit automakers until next month to make their case for a rescue but demanded that GM, Chrysler LLC and Ford Motor Co show they have business plans that can keep them out of bankruptcy.

House Speaker Nancy Pelosi said she and Senate Majority Leader Harry Reid, the leaders of the Democratic majority, were sending a letter to the CEOs of the Detroit Three detailing what the high-stakes turnaround plans need to show.

“It will be up to them how they respond,” Pelosi told reporters in Washington.

The restructuring plans will have to show how management and labor are making concessions in order to clinch the government rescue portrayed by automakers as the only alternative to bankruptcy and massive job losses.

“Everybody has to participate in ensuring the viability of the auto industry,” Pelosi said.

She added: “This isn’t to be life support for three months, it’s about viability for a long time to come,” she said.

Democratic leaders threw down the blunt ultimatum to Detroit after failing to persuade the White House and congressional Republicans to support using some of a $700 billion financial rescue plan for an autos bailout.

Analysts said GM, Ford and Chrysler now have to demonstrate that investors, creditors, management and the United Auto Workers union would share in the sacrifice and cautioned that the window for a bailout was closing fast.

“Can the U.S. automakers provide a convincing plan?” Deutsche Bank analyst Rod Lache asked in a note to clients. “Based on the risks involved, we are not willing to place strong odds on the potential for a bailout before January.”

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That could put the decision on whether and how to save Detroit with the administration of President-elect Barack Obama, who supports a bailout hinging on industry reform but has managed to steer clear of the bruising political debate.

A spokesman for Obama’s transition team said on Friday that the incoming administration was not exploring the possibility of having the government support a prepackaged bankruptcy filing for the automakers, an alternative some analysts have urged as a way for GM and Chrysler to shed excess production capacity, brands, workers and dealers.


A political dilemma for lawmakers is that the cost will be high in terms of lost jobs and benefits under the kind of sweeping restructuring needed to ensure the viability of the automakers, analysts said.

“To make them viable again requires that automakers make decisions that are very unpalatable to a lot of people,” said Erich Merkle, a consultant at Crowe Horwath, describing across the board layoffs of hourly and salaried workers.

The path to viability “basically is going to be firing their constituents and cutting back the retiree benefits their constituents rely on,” Merkle said.

“The money will come, I’m very confident it will come, but will it come before one of them files for bankruptcy or after?”

Deutsche Bank’s Lache, who has a price target of zero on GM stock, said a successful restructuring for the automaker would mean “shrinking to a defendable core” by cutting weaker brands and shuttering factories.

It will also mean lower wages for UAW-represented workers and restructuring GM’s balance sheet by forcing creditors to swap out of secured debt at as little as 25 cents on the dollar plus stock warrants, he said.

Barclays analyst Brian Johnson kept his $1 price target on GM shares on Friday and said a federal bailout at this point would have more impact on shares of auto parts suppliers.

“While a bailout would lift a cloud over parts names, we believe GM equity has little value,” Johnson said in a note for clients.

Citibank analyst Itay Michaeli said GM would have to race to come up with a new restructuring plan that could include changes to its planned payments into a health care trust negotiated with the UAW and possibly a debt exchange for creditors.

“The burden of proof may not be so simple for GM, in our view,” Michaeli said of the requirement that GM show it can be a viable company.


The U.S. auto bailout has been caught up in partisan politics from the start although lawmakers from both sides have been unflinching in their criticism of the industry.

Democrats have generally sought to promote the interests of organized labor and environmental groups, while Republicans have been feeling the heat from constituents concerned about the mounting cost of government bailouts.

Many Democrats in Congress are angry with the auto industry for having fought efforts to increase fuel-efficiency standards for years.

Republicans, meanwhile, have been reeling from the backlash in the November 4 election against the $700 billion bailout that they earlier approved for banks despite complaints it amounted to a blank check for Wall Street.

A lightning rod for controversy during testimony this week by the Detroit CEOs was their use of corporate jets to fly to Washington to plead their case for the bailout.

GM spokesman Tom Wilkinson said GM decided to return two leased corporate jets because of a “really aggressive cutback in travel.”

Wilkinson said the decision to return the leased jets was made before this week’s hearings. In September, GM returned two other of the seven jets it had been using, he said.

“There is a perception issue,” Wilkinson said. “We need to be very sensitive to that going forward.”

GM Chief Executive Rick Wagoner and Ford Chief Executive Alan Mulally are required by their companies to fly by private aircraft for security reasons.

The policy for Bob Nardelli, who heads private Chrysler, is not required to be disclosed. Chrysler is owned by private equity firm Cerberus Capital Management LLC.

Reporting by Poornima Gupta and Soyoung Kim in Detroit; Jeff Mason in Chicago and Kevin Krolicki in Los Angeles, editing by Matthew Lewis