GM Sinks Stocks As Obama Pans Auto Plan

Bankruptcy is still on the table, as a new 60-day deadline looms.

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As General Motors goes so goes the market, at least today. With the clock started on a new 60-day deadline for Detroit the threat of bankruptcy in the auto sector remains a distinct possibility. Meanwhile, the decision by the Obama Administration to force out GM chief executive Rick Wagoner sets an aggressive new precedent for intervention at the highest levels of companies accepting bailout cash. All major indices are off roughly 3.5 percent in afternoon trade. GM shares opened down more than 20 percent.

[See: Why Booting Wagoner Won’t Solve GM’s Woes]

Obama pledged the auto sector bailout would not resemble an "unending flow of taxpayer dollars" and said the government has "no interest in running GM." But after today that reality looks more likely, not less, given the sizeable hurdles automakers will face over the next two months. GM and Chrysler could face a "surgical" structured bankruptcy unless GM comes up with an acceptable continuity plan and Chrysler completes its pairing with Fiat within 30 days. Even then, GM bondholders and unions will likely face mounting pressures. Those groups are facing lots of renewed heat from White House car czar Steve Rattner, who is reportedly taking a much harder line in light of continued stark weakness in auto sales. Also, remember GM has $1 billion worth of convertible debt due June 1. Failure to meet any of the above obligations would likely trigger Detroit's most-feared "B" word.

Today's other shift is the administration's tougher methods for dealing with bailout recipients: Wagoner is out at GM after the government asked him to step aside Friday, and a large-scale board shake-up is in the works. The ouster of Wagoner will ripple through boardrooms at all the companies being bailed out by the Obama Administration (see: bank stocks, which are sinking today on those fears as well as weekend comments by Treasury Secretary Tim Geithner that banks will likely need "large amounts" of additional help from the government). The move is a sizeable expansion of the government's active presence at companies on its dole.

For consumers, there's a bit of good news in the form of government incentives for new car buyers. In his speech, President Obama said the federal government would back auto warranties and let buyers deduct  sales and excise taxes, plus new incentives for buying new cleaner models. Obama's statement is here.

[See: 3 Ways Consumers Win In Obama's Auto Bailout]

Analysts remained skeptical of the auto sectors ability to avoid bankruptcy by at least one of the Big Three. From Merrill Lynch:

We continue to believe the day of reckoning for the U.S. automotive industry is rapidly approaching, which we expect will culminate in the “Big Bang” and include the recapitalization, restructuring, and/or extinction of at least one of the Detroit Three.


  • Kirk Shinkle

    Kirk Shinkle is a senior editor for U.S. News Money and manages the Best Funds portal. Follow him on Twitter @KirkS or email him at kshinkle@usnews.com.

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