Obama Puts Foot Down on Automakers

Updated from 12:46 p.m. EDT

President Barack Obama pledged Monday to restore the U.S. auto industry to its former glory, but said General Motors ( GM) and Chrysler may have to file bankruptcy in order to get there.

To allay consumers' "nagging doubts" about the two companies' futures, Obama said that starting today, the federal government will stand behind the warranties on their cars.

The ultimate solution "may mean using our bankruptcy code ... as a tool that with the backing of the U.S. government can make it easier for GM and Chrysler to quickly clear away old debts that are weighing them down so they can get back on their feet," Obama said.

"What I'm not talking about is a process where a company is broken up, sold off and no longer exists," he said. Nor, he said, would a company be "stuck in court for years, unable to get out."

It seemed clear that the administration will use the threat of bankruptcy to ensure it gets deep concessions from unions, bondholders, suppliers and dealers. In particular, bondholders have resisted the solution backed by the federal government, which seeks to swap equity for two thirds of the debt they hold.

Trading on bankruptcy fears, shares in GM closed down 25% or 92 cents at $2.70. Shares in Ford ( F) were down 8 cents to $2.76

Obama outlined ambitious restructuring schedules, saying GM has 60 days to devise a viable operating plan while Chrysler has 30 days to make a deal with Fiat that is acceptable for taxpayers. The government will provide operating capital during those periods.

Obama said "GM has made a good faith effort to restructure over the past several months (but) the plan they put forward in its present form is not strong enough." He said the forced resignation of CEO Rick Wagoner is recognition that it will take new vision and new direction to create a GM of the future."

GM said it is "fully committed to successfully completing the reinvention of GM." In a prepared statement, CEO Fritz Henderson said that: "Over the next 60 days, we will work around the clock, with all parties, to meet the aggressive requirements that have been set by the Task Force, and to make the fundamental and lasting changes necessary to reinvent GM for the long-term.

"The administration has made it clear that it expects GM to expand and accelerate its restructuring efforts," Henderson said. "I want the American people to know that we understand and accept this guidance."

As for Chrysler, Obama said the government will lend up to $6 billion if Chrysler and Fiat can make a deal "that upholds the interest of American taxpayers." He said the money would have to be repaid before Fiat could take a majority stake in Chrysler.

In a prepared statement, Chrysler CEO Bob Nardelli also welcomed the government's backing.

"Chrysler has consistently said that the alliance with Fiat enhances its business model that expands its global competitiveness," he said. "We appreciate the willingness of the Task Force, along with industry and financial experts, to consult closely with us in order to achieve this significant step."

Nardelli said Chrysler officials have met weekly with the task force since submitting their viability plan on Feb. 17.

Additionally, the administration is working with auto finance companies to increase the flow of credit to consumers and dealers; the IRS will allow buyers of new cars to deduct sales and excise taxes for purchases between Feb. 16 and the end of the year, and the administration is working on a plan to provide credit to consumers who turn in old cars to buy new ones.

Also, Obama named Ed Montgomery, a former deputy labor secretary, to a new post, director of recovery for auto communities and workers, that will support autoworkers and families.

Obama displayed the depth of his personal commitment to autoworkers, saying: "I will fight for you. You are the reason I am here today. I got my start working for working families in the shadows of a shuttered steel plant.

"We cannot and must not and we will not let our auto industry simply vanish," he said. "It's an emblem of Americans' spirit. ... It's a pillar of our economy that has held up the dreams of millions of our people, but we cannot continue to excuse poor decisions."