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

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