By Kevin Krolicki and John Crawley
WASHINGTON (Reuters) - President Barack Obama ordered General Motors and Chrysler to accelerate their turnaround efforts and brace for possible bankruptcy, saying bailout funds will be limited and poor decision-making will not be excused.
"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. "It is a pillar of our economy that has held up the dreams of millions of our people."
Obama is promising only to fund Chrysler's operations for the next 30 days as it works to complete an alliance with Italy's Fiat SpA.
GM would get 60 days to rework its plans and its new CEO said a court-supervised restructuring might be necessary.
GM had sought more than $16 billion in new aid, while Chrysler wanted $5 billion.
The U.S. auto industry, including cash-strapped dealers and suppliers, has cut 400,000 jobs over the past year while losing billions of dollars.
The three major U.S. stock indexes were down nearly 4 percent on the harsher-than-expected medicine, which could push GM and Chrysler closer to a bankruptcy court restructuring that could threaten equity holders and force deeper losses on creditors.
GM shares lost about 30 percent while stock of Ford Motor Co, which has not sought a bailout, was off 3.5 percent. Chrysler is privately held by Cerberus Capital Management.
"Consumers have been losing confidence in both GM and Chrysler, and they've got to get this thing resolved quickly now or the whole thing just keeps sinking," said Brad Coulter, a restructuring adviser at O'Keefe & Associates in Detroit.
PLANS REJECTED
Obama's task force on autos rejected turnaround plans submitted by both GM and Chrysler following their December bailout of $17.4 billion. The bailout required the companies to reach new concessions and lay out a case for survival.
"While Chrysler and GM are very different companies with very different paths forward, both need a fresh start to implement the restructuring plans they develop. That may mean using our bankruptcy code as a mechanism to help them restructure quickly and emerge stronger," Obama said.
The Obama administration did not say how much working capital the government would extend GM and Chrysler, but GM has said it needs $2 billion just for April.
The U.S. government team raced to get the auto announcement made before Obama heads to Europe for eight days of meetings surrounding the G20 conference.
In steps intended to lift U.S. auto sales from nearly 30-year lows, Obama also offered his support for a tax credit modeled on programs in Germany and elsewhere that would give consumers a deduction of up to $5,000 to trade in older and less fuel-efficient vehicles.
Separately, Canada said current plans set out by the Canadian branches of GM and Chrysler did not go far enough to make them viable, but it offered $3.2 billion in bridge loans to tide the companies over while they restructure.
Chrysler said on Monday it had reached agreement on a framework for an alliance with Fiat, the centerpiece of the task force's priority for the smallest of the once vaunted Big Three carmakers, deemed unable to stand on its own.
The next step for Chrysler is trying to reach cost-saving deals with creditors and the United Auto Workers (UAW), which could yield a $6 billion government investment if all restructuring and alliance pieces fall into place.
"I want to personally assure all of our customers, dealers, suppliers and employees that Chrysler will operate 'business as usual' over the next 30 days." Chrysler CEO Bob Nardelli said in a statement.
Fiat Chief Executive Sergio Marchionne said that the talks with the Obama administration have been "tough but fair" and deal will make Chrysler stronger and preserve U.S. jobs.
NEW GM CEO
GM's new chief executive, Fritz Henderson said the company would address elusive concession agreements with bondholders and the UAW, conditions crucial elements of its 60-day window extended by the government to prove viability.
"Our strong preference is to complete this restructuring out of court," Henderson said. "However, GM will take whatever steps are necessary to successfully restructure the company, which could include a court-supervised process."
Wagoner and the top automaker's board had long argued that bankruptcy by any of the major automakers would threaten thousands of jobs, including suppliers, and could lead to a GM liquidation.
Wagoner, who had presided over the company's rapid decline in the past five years and had run the automaker since 2000, was forced out at the request of the Obama auto task force, headed by former investment banker Steve Rattner. A majority of GM's board will also be replaced.
Wagoner's departure follows criticism of the Obama administration for not blocking bonuses to executives at American International Group Inc.
OTHER MOVES
Europe's No. 2 carmaker by sales, PSA Peugeot Citroen, ousted CEO Christian Streiff, replacing him with former Corus head Philippe Varin from June 1. PSA Peugeot Citroen shares fell 7.7 percent in Europe.
PSA Chairman Thierry Peugeot said in a statement the exceptional difficulties faced by the industry warranted a change in management, but Streiff defended himself, saying his policies had equipped the group to weather the storm.
The senior labor leader of GM's German brand Opel, being spun off with the UK's Vauxhall and seeking investors and government support, said the move was overdue.
Russia's Avtovaz bucked the trend, its shares surging after Prime Minister Vladimir Putin pledged 20 billion rubles in aid, while Spain's plan to grant subsidies for green cars won approval from the European Commission.
(Additional reporting by Walden Siew, Poornima Gupta and David Bailey in Detroit; Jeff Mason in Washington, John McCrank in Ottawa; Helen Massy-Beresford and Estelle Shirbon in Paris; Gilles Castonguay in Milan and Angelika Gruber in Berlin)
(Editing by Patrick Fitzgibbons and Tim Dobbyn)