Yesterday, President Obama and other members of his Administration announced several plans to provide a "new finite path forward" for General Motors (GM) and Chrysler, following the Administration's analysis of the restructuring plans submitted by GM and Chrysler February 17th in accordance with the terms of the loans provided by the U.S. Treasury to the automakers late last year. In particular, the Administration concluded that both companies' plans "did not establish a credible path to viability." Specifically GM's current plan "will not result in a healthy company that is meaningfully cash flow positive in a normalized business environment," given GM's loss of market share, underperforming brands and unsustainable cash needs associated with legacy liabilities. Chrysler's current plan "currently contains a number of assumptions that are unrealistic or overly optimistic" in light of a weak product pipeline, lagging quality scores, and vulnerability to local economic fluctuations resulting from Chrysler's business being heavily weighted to North America.

Acknowledging that the auto industry is a "pillar of the economy," but "not moving in the right direction fast enough to succeed in a very tough environment," the Obama Administration's new plans will provide the following:


GM will receive adequate working capital for a "finite" 60 days, during which time GM, in consultation with Treasury officials and private sector auto industry and restructuring experts, must develop a more aggressive restructuring plan and a credible strategy to implement such plan. Key elements of the plan will include:

(i) Sustaining profitability through meaningful positive free cash flow and investing capital in research and development an capital expenditures sufficient to enhance competitiveness;

(ii) Reducing outstanding debt and existing liabilities;

(iii) Pursing a more aggressive operational restructuring, in particular with respect to headcount, brand, nameplate and retail networks; and

(iv) Developing high fuel-efficiency cars that have broad appeal.


In light of its proposed strategic alliance with FIAT S.p.A., Chrysler will receive only 30 days of "finite" working capital to execute an acceptable partnership with FIAT. If a definitive agreement is reached, the government may consider lending an additional $6 billion. However, if "the partnership has not been concluded within 30 days, and in the absence of another viable partnership, the government will not invest any additional money" in Chrysler. The government has outlined the following additional "hurdles" that a Chrysler/FIAT partnership must overcome

(i) Chrysler must restructure its balance sheet to have a sustainable debt burden;

(ii) Chrysler, FIAT and the UAW need to reach an agreement that includes greater union concessions;

(iii) Chrysler must demonstrate an operating plan that is truly viable, that can generate positive cash flow and that provides for repayment of taxpayer loans on a timely basis

(iv) Any partnership must require not more than $6 billion of post-restructuring loans from the U.S. Treasury;

(v) Chrysler must have a viable, adequately capitalized mechanism to finance the purchase of Chrysler cars by its dealers and customers; and

(vi) Chrysler must develop a credible plan to execute this restructuring.

Warranties Commitment Program

The Administration, in an effort to give consumers who are considering new car purchases "the confidence" that their warranties will be honored, is providing an automatic government-funded protection for all warranties on new vehicle purchases (during the manufacturer's restructuring period) issued by participating domestic auto manufacturers. Any domestic auto manufacturer is eligible to participate in the program. The warranty program, will:

(i) Create a separate account funded with cash contributions by the manufacturer and a loan from the government to pay for repairs covered by the warranty. The cash contributed will be 125% (15% from the auto manufacturer and 110% from Treasury) of the costs projected by the manufacturer to satisfy anticipated claims under the warranty issued on such vehicle. The funding source for Treasury's contribution is not clear, but it may be TARP funds; and

(ii) In the event of failure of a participating auto manufacturer, appoint a program administrator to identify an auto service provider to supply warranty service.

The warranty program comes a week and a half after Treasury announced its Auto Supplier Support Program, which was intended to encourage auto suppliers to continue extending trade terms to the domestic auto makers.

Separately, President Obama appointed Ed Montgomery, former Deputy Labor Secretary, to become Director of Recovery for Auto Communities and Workers. Dr. Montgomery's role will be to work with the Obama Administration, relevant Governors and Congressional leaders to launch new executive and legislative initiatives to support distressed communities affected by the downturn in the auto industry