The Obama administration, wading deeply into the U.S. auto business, is weighing a plan to fix General Motors Corp. and Chrysler by dividing their "good" and "bad" assets and plunging them into bankruptcy to purge their biggest problems.
Such a move -- barring 11th-hour concessions from bondholders, unions and others -- would mightily transform two companies that have helped define American industrial power over the past century. They also would represent one of the biggest-ever government incursions into private enterprise, a move fraught with political risk and controversy for the fledgling Obama administration as it becomes clear that government involvement in the operations of GM and Chrysler will dwarf that of any other company receiving U.S. aid.
The government would like to see the "good" GM, comprising brands such as Chevrolet and Cadillac, remain an independent company, according to an administration official. The "good" Chrysler would be sold to Fiat SpA, assuming that proposed deal is completed, this person said.
President Barack Obama on Monday warned GM and Chrysler that they couldn't depend on unending taxpayer loans and gave the companies a brief window to craft plans -- 60 days for GM and 30 for Chrysler -- that would justify fresh government support. But he also pledged to do all he could to save the industry.
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"We cannot, we must not, and we will not let our auto industry simply vanish," Mr. Obama said at the White House.
The remarks came a day after the administration announced the ouster of GM Chief Executive Rick Wagoner and rejected the restructuring plans that GM and Chrysler had hoped would lead to another infusion of government cash. The administration is set to remove the majority of GM's board of directors. One senior administration official said the aim was to start GM "with a clean sheet of paper."
GM's stock fell 25% on the news, down 92 cents to $2.70 in 4 p.m. New York Stock Exchange trading.
The administration's interventions struck a new tone of seriousness amid the recent uproar over executive bonuses at financial companies receiving big government loans. With the auto makers, the government has now laid down stringent terms for new support and raised, in the case of Chrysler, the possibility it could be left to collapse.
At the same time, the administration's new plan is sure to ignite a battle over the government's role in the economy, what sacrifices will be required of labor unions, and whether it makes sense for U.S. taxpayers to assist a foreign company, Fiat, in an alliance with a U.S. company, Chrysler.
As part of their proposed pact, Fiat and Chrysler agreed over the weekend to scale down the Italian auto maker's initial stake in Chrysler to 20% as a condition of the Treasury Department's bailout. Fiat earlier this year struck an agreement to take a 35% stake in Chrysler initially, and up to an additional 20% at a later date.
Many hot-button issues remain unresolved, above all the fortunes of about 140,000 members of the United Auto Workers union and the health-care plan for the group's hundreds of thousands of retirees.
President Obama argued Monday that the U.S. auto industry -- and, by default, its largest component, GM -- was unique in its centrality to the U.S. economy. "This industry is, like no other, an emblem of the American spirit," he said. "It is a pillar of our economy." He went on to insist that the government had no intention of running GM.
His auto team's dissection of what ails GM, on the other hand, underscores how deeply the administration plans to plunge into the finer points of the company's business plan. In a five-page analysis of GM's viability, the team critiqued GM's marquee next-generation project, the electric-powered Chevy Volt, as "too expensive to be commercially successful in the short-term." It notes that much work needs to be done to boost the overall fuel-efficiency of GM's fleet of cars and trucks.
With GM, the Obama administration is interested not just in preserving jobs, but in pushing other policy prescriptions, in particular creating a "company of the future" with clean and energy-efficient vehicles, a frequent campaign theme during Mr. Obama's quest for the presidency.
The auto plan came packaged with several new government initiatives whose price tags remain unclear. The government said it would guarantee the warranties for all new GM and Chrysler cars until the two companies return to health. It also plans to speed up government fleet purchases, and to support a congressional bid to offer large tax incentives for new car purchases, with money for the program coming out of the $787 billion stimulus package. Mr. Obama also said that the Internal Revenue Service was creating a new tax benefit for car buyers.
Auto executives and Obama aides said the bankruptcy route isn't preferred or in anyway preordained. The automakers could avoid that outcome if they manage in coming weeks to strike tough bargains with their shareholders, creditors, and the union. But concessions on that front have so far proved largely elusive, giving the bankruptcy option a much higher likelihood of success.
"We have significant challenges ahead of us, and a very tight timeline," said new GM Chief Executive Fritz Henderson. In a conference call with reporters, Mr. Henderson acknowledged that bankruptcy was very much a possibility. "There are ways to do this out of court, but we're getting ready to do in court if necessary," he said.
GM and Chrysler have had bankruptcy attorneys devising plans to split their companies in two for several months. Mr. Obama's task force has told the companies the administration prefers this route as a way to reorganize the two auto makers, rather than the prolonged out-of-court process that has so far frustrated administration officials, people familiar with the discussions said.
GM looks increasingly like it will in fact be forced into filing for bankruptcy protection, sometime in mid-to-late May, and that the surviving "new GM" would retain select brands and some international operations, said several people familiar with the situation. Stakes in this new GM could be given to creditors and UAW members. It is also possible the new company could be sold whole or in parts to investors.
A key ingredient in acting on this plan is getting the UAW to agree to an entirely new labor contract, including major reductions in health-care benefits, according to several people involved in the matter. "That's the No.1 wild card here," one of these people said Monday.
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The Journal's John Stoll says that with billions in taxpayer money on the line, the Obama administration needs to work closely with GM to forge a more dramatic restructuring.
Under this plan, the "good" GM wouldn't be expected to hold the tens of billions of dollars in retiree and health care obligations that hurt the auto maker in recent decades. Instead, those obligations would be transferred to an "old GM," made up of less-desirable brands such as Hummer and Saturn, and underperforming plants and other assets.
This part of GM would likely sit in bankruptcy much longer while a buyer is sought for the parts or it is wound down. Proceeds from the sale of old GM would go back to pay claims to various creditors, including the GM retirees.
"That is the plan, to the extent it comports with the bankruptcy laws," said one person familiar with the matter.
On the first day in bankruptcy, people familiar with the matter say, GM would transfer the valued assets to new GM. Then it would launch a marketing and advertising campaign to herald the new company, aiming to comfort consumers about warranties on new and existing vehicles, the resale value of their vehicles and the ability to buy replacement parts.
Mr. Wagoner had participated in the plan's development, along with Mr. Henderson, turnaround veteran Jay Alix and prominent bankruptcy attorney Martin Bienenstock. GM also has veteran bankruptcy lawyer Harvey Miller working for it to help the company prepare for a possible bankruptcy filing.
At Chrysler, bankruptcy would be used to force new labor contracts and rework debt deals with secured creditors. People working on Chrysler's behalf say the approach is risky, because the company is still unsure it could survive even a short-term bankruptcy. Bankruptcy might be pursued in order to meet the Obama administration's demand that Chrysler's creditors agree to huge reductions in their expected recoveries on Chrysler debt.
The "new GM" would have a less-burdened balance sheet than GM currently has. But one debt that would stay with new GM is the $20 billion or so the federal government has lent to it, say these people.
Shares in the new GM likely would be held by the old GM. It could sell them in an initial public offering or offer them to large investors, such as private-equity funds. If a new labor agreement can be reached with the UAW, its retiree health-care fund would likely get either some shares or proceeds from the sale of the stock. Other creditors would also get proceeds.
GM and Chrysler's bankruptcy financing, called debtor-in-possession, would have to be funded by the government at a cost of tens of billions of dollars, say people familiar with the matter.
The administration's plans to pay hardball with both companies and to dive deep into GM drew praise from some quarters on Capitol Hill, but also sparked charges of overreach.
Republican Sen. Bob Corker of Tennessee, a frequent critic of the auto companies, said in a statement that the White House will now "be deciding which plants will survive and which won't" -- decisions he said were best left to a bankruptcy court.
Democratic Rep. John Dingell of Michigan praised the package, but voiced one worry: "I have some concern that if these companies get into bankruptcy, how do they get out? I'm an old bankruptcy lawyer, and bankruptcies have a life of their own."
—Monica Langley contributed to this article.Write to Jeffrey McCracken at jeff.mccracken@wsj.com, John D. Stoll at john.stoll@wsj.com and Neil King Jr. at neil.king@wsj.com
