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Auto Bailout: Part Deux

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GM, Chrysler ask for $20 billion to stay afloat.

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The turnaround plans are in, and it doesn't look good: No more Hummers.

In a scene reminiscent of last year's near-collapse, General Motors (GM) and Chrysler LLC told government officials that, without more than $20 billion in additional rescue money, bankruptcy is their only option. Required to submit restructuring plans under the terms of the first federal bailout, GM and Chrysler outlined a strategy for revitalizing their firms and returning to profitability.

Twenty billion dollars, GM's CEO Rick Waggoner argues, is a paltry sum when compared to the estimated $100 billion the firm would need to make it through a traditional bankruptcy process, according to the Wall Street Journal. Chrysler, for its part, said $24 billion would suffice to skate through bankruptcy proceedings, should Washington fail to produce the requested funds.

In addition to squeezing taxpayers for more cash, the firms announced tens of thousands of layoffs and other cost-cutting measures.

GM plans out phase out its Hummer brand as early as this year, since no buyer emerged for the production facilities that crank out the oversized gas guzzlers. Saturn could be gone by 2011, as could Pontiac, and the company is trying to sell Saab. Five factories will be shut, 47,000 jobs will be cut, and dealerships will be closed as GM tries to rein in its bloated cost structure.

Chrysler is fighting battles of its own, as Congress is becoming increasingly hostile toward the company's majority owner, private-equity firm Cerberus Capital Management. Lawmakers want to see Cerberus pony up cash for its struggling investment before any additional taxpayer funds are put to work.

Progress has been made by GM, Chrysler as well as Ford (F) in negotiations with the powerful United Auto Works union, but there are still outstanding items that need to be resolved before any restructuring can be pushed through.

Earlier this week, President Obama announced that the so-called "car czar" would never be crowned, opting instead to task Treasury Secretary Tim Geithner and Lawrence Summers, chairman of the National Economic Council, with cleaning up Detroit's mess.

And quite a mess it is.

With the economy in free fall and the nearly $1 trillion stimulus package now approved, allowing the automakers to fail could be a severe setback for the Obama administration. On the other hand, growing public discontent over handouts to industries that brought about their own demise makes this a prickly political issue.

Ultimately, Obama may be looking to treat the situation in Detroit as a trial run: The relatively simple task of unwinding 2 cash-starved companies will be child's play compared to fixing the country's ailing financial system.

The nation's biggest banks, Bank of America (BAC), Citigroup (C), JPMorgan (JPM) and Wells Fargo (WFC), continue to reel as losses mount, and the economic crisis deepens. And as Treasury Secretary Geithner muddles along with his bank-rescue package, officials may be biding their time and sharpening their management skills.
No positions in stocks mentioned.

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