GM CEO Wagoner Forced Out By Obama Administration
Originally Posted to the Wall Street Journal

The Obama administration used the threat of withholding more bailout money to force out General Motors Corp. Chief Executive Rick Wagoner and administer harsh medicine to Chrysler LLC, marking one of the most dramatic government interventions in private industry since the economic crisis began last year.

The administration's auto team announced the departure of Mr. Wagoner on Sunday. In a summary of its findings, the task force added that it doesn't believe Chrysler is viable as a stand-alone company and suggested that the best chance for success for both GM and Chrysler "may well require utilizing the bankruptcy code in a quick and surgical way."

The move also indicates that the Treasury Department intends to wade more deeply than most observers expected into the affairs of the country's largest and oldest car company.

After more than a month of analysis, the administration's auto task force determined that neither company had put forward viable plans to restructure and survive. The verdict was gloomier for Chrysler. The government said it would provide Chrysler with capital for 30 days to cut a workable arrangement with Fiat SpA, the Italian auto maker that has a tentative alliance with Chrysler.

If the two reach a definitive alliance agreement, the government would consider investing as much as $6 billion more in Chrysler. If the talks fail, the company would be allowed to collapse.

Despite the grim view of Chrysler, the task force said it had no intention of replacing CEO Robert Nardelli. Unlike Mr. Wagoner, who had been at the helm of GM since 2000, Mr. Nardelli is considered an auto-industry outsider who has only been in charge at Chrysler since the company was acquired by Cerberus Capital Management LP in 2007.

In addition to pushing out Mr. Wagoner, the task force said GM is in the process of replacing the majority of its directors. Kent Kresa, a longtime director, will serve as interim chairman. Mr. Wagoner will be replaced as CEO by Chief Operating Officer Frederick "Fritz" Henderson.

The administration said it would provide the company sufficient working capital for 60 more days, during which a revamped GM board and top management has to put forward a much more rigorous restructuring plan than it submitted last month.

"The administration is prepared to stand by GM throughout this process to ensure that GM emerges with a fresh start and a promising future," according to term sheets released by the White House Monday morning.

Administration officials made it clear that an expedited and heavily supervised bankruptcy reorganization was still very much a possibility for both companies. One official, speaking of GM, compared such a proceeding with a "quick rinse" that could rid the company of much of its debt and contractual obligations.

The clearest losers appear to be the thousands of bondholders and lenders to both GM and Chrysler. In both cases, administration officials said that the companies were burdened by inordinate amounts of debt that would have to be scrubbed. Chrysler's survival, the administration said, would require "extinguishing the vast majority" of the company's secured debt and all of its unsecured debt and equity.

To assure consumers reluctant to buy GM or Chrysler cars, the government plans to take the unusual step of guaranteeing all warrantees on new cars from either company. These guarantees would lapse back to the companies once they return to health.

Mr. Wagoner had managed the company through some of its most difficult moments. The company hasn't logged a profit since 2004, reporting losses since then of $82 billion. It nearly ran out of money at the end of 2008 before the Treasury Department provided emergency loans. GM's stock was trading above $70 when Mr. Wagoner took over as CEO in June of 2000. The shares closed last week at $3.62, placing the company's market capitalization at $2.21 billion. In Monday-morning trading on the New York Stock Exchange, GM shares were down 89 cents, or 25%, to $2.73.

Mr. Wagoner's tenure came amid extraordinary challenges that weren't entirely of his own making--including costly retiree benefits and union contracts that predate him, and the recent deep recession. Yet GM by most measures performed worse than other auto companies. Among the key decisions that hurt the company: a huge bet on trucks and sport-utility vehicles that piled up on dealers' lots unsold as high gasoline prices drove Americans to look for more fuel economy offered by rival companies.

Mr. Wagoner was asked to step down on Friday by Steven Rattner, the investment banker picked last month by the administration to lead the Treasury Department's auto-industry task force. Mr. Rattner broke the news to Mr. Wagoner in person at his office at the Treasury, according to an administration official. Afterward, Mr. Rattner met one-on-one with Mr. Henderson, who will fill in as GM's CEO.

"On Friday I was in Washington for a meeting with administration officials," Mr. Wagoner said in a statement released by GM. "In the course of that meeting, they requested that I 'step aside' as CEO of GM, and so I have."

GM spokesman Steve Harris declined to comment.

In a statement released by GM Sunday night, Mr. Kresa said: "The Board has recognized for some time that the Company's restructuring will likely cause a significant change in the stockholders of the Company and create the need for new directors with additional skills and experience."

Plan for Viability

President Obama plans Monday to lay out the administration's interim conclusions on the companies' viability and the many steps that need to be taken to return the companies to health. The president will hold off on granting the companies the $21.6 billion in new loans they requested last month.

In remarks Sunday, Mr. Obama said that he intends to extract "a set of sacrifices from all parties involved--management, labor, shareholders, creditors, suppliers, dealers." The industry, he said on CBS's "Face the Nation," must "take serious restructuring steps now in order to preserve a brighter future down the road." The two companies "are not there yet," he added.

Mr. Wagoner's removal shows that the sacrifices could cut deep. The departure of the company's top executive promises to further shake up a company that has already been through considerable change over the past six months. The 56-year-old executive had been scrambling to craft a strategy aimed at maintaining leadership in the global sales chase with Toyota Motor Corp. and making big profits in emerging markets.

But Mr. Wagoner's plans came crashing down in the second half of 2008 as the company ran short of cash and was forced to ask the government for billions of dollars in aid. At the same time, his executive team started dismantling several parts of the company, including a plan to shed several brands, slow the pace of new-product introductions and sell stakes in international operations.

Industry's Outlook

The president's auto task force has spent more than a month digging into the restructuring plans that GM and Chrysler submitted last month. The team has struggled to make two determinations: when will the steep plunge in car sales end and what will the market look like once it revives.

GM has based its revival plans on the U.S. market rebounding to sales of 14.3 million vehicles a year in 2011, up from a rate of about nine million vehicles so far this year. Many analysts now consider GM's short-term forecasts to be overly optimistic.

The two companies received a total of $17.4 billion in government loans in December and have requested another dose to keep them going through this year. Of the $21.6 billion, GM is seeking $16.6 billion more, while Chrysler has asked for $5 billion more.

Among challenges the administration faced leading up to this weekend's decision, foremost were the efforts to draw steep concessions from the United Auto Workers union and from the bondholders.

Attempts to solidify deals with the UAW and bondholders were slowed by disagreements by both parties over how exactly the other party needed to budge. The UAW, for instance, insists it already made health-care concessions in 2005 and 2007, and argues that the bondholders have never been asked to concede anything.

"I don't see how the UAW will do anything until they see what the bondholders will give up," one person involved in the negotiations on behalf of the UAW said Sunday.

Bondholder Factor

The bondholders have said that they are willing to make concessions, but they have wanted to see the union make further cuts. The fact GM raised most of the unsecured debt to fund union health-care and pension costs is also seen as a reason why the union needs to take bigger steps.

With Mr. Obama potentially holding off on new loans until concessions are made, analysts said GM likely has enough cash on hand to weather at least another month before its need for more government aid becomes urgent. Chrysler may need another infusion of cash sooner. Ford Motor Co. hasn't sought federal assistance.

Both GM and Chrysler are negotiating with the UAW to accept a range of cost-cutting measures, including greatly reduced work forces, lower wages and a revamped health-care fund for retirees.

The U.S. auto industry has been reeling from a plunge in car sales over the last six months. Sales in February were down about 40% over the same month last year. The drop has sent shock waves through the hundreds of smaller parts companies that supply the big auto makers. To keep the sector afloat, the administration recently announced a $5 billion financing facility to help suppliers cover their expenses.

"We think we can have a successful U.S. auto industry," President Obama said on Sunday. "But it's got to be one that's realistically designed to weather this storm and to emerge--at the other end--much more lean, mean and competitive than it currently is."

Treasury Secretary Timothy Geithner, who is nominally in charge of overseeing the auto bailout, said on Sunday the government was prepared to lend more money "if we believe it's going to provide the basis for a stronger industry in the future that's not going to rely on government support."

The original December loans were given under the agreement that all sides would strike a compromise deal by March 31, but the administration is taking advantage of a clause allowing all sides another month to negotiate. "It was unrealistic to renegotiate a new labor agreement and the unsecured debt in so short a time," said Sean McAlinden, chief economist with the Center for Automotive Research, in Ann Arbor, Mich. "That has never happened before."

GM and Chrysler are meant to submit by Tuesday assessments of where their restructuring efforts are heading. In February, both companies put forward plans for paring their operations, reducing their work forces and eliminating vehicle models.

GM and representatives for its bondholders remained in talks over the weekend about a deal that would force these investors to turn in at least two-thirds of the value of the debt they hold in exchange for equity and new debt.

This arrangement would force GM to issue significantly more stock than what is currently being traded in the market. In addition, the government is being asked to guarantee the new debt with federal default insurance in order to entice bondholders who otherwise wouldn't be interested in participating in the swap.

If GM can't eventually forge a deal with the ad hoc committee representing the bondholders, the company may be forced to issue a debt-for-equity swap without the blessing of some of its biggest and most influential unsecured investors. This would heighten the possibility of the company eventually needing to file for Chapter 11 bankruptcy protection.