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Obama faces tough decisions on U.S. auto industry

The Obama administration faces difficult choices on the fate of the U.S. auto industry, weighing the cost of pouring billions more into struggling companies against possible bankruptcies that could undermine plans to jump-start the economy.

General Motors Corp. and Chrysler LLC are racing against a Tuesday deadline to submit plans to the government to show how they can repay billions in government loans and return to viability despite a sharp decline in auto sales.

The terms of the federal loans set "targets" for concessions, largely from debt-holders and the United Auto Workers union, but concession talks have made little progress with just a couple days left before the initial deadline.

Negotiations between GM and the UAW broke off Friday night but resumed Sunday, still focusing on exchanging the company's cash payments into a union-run retiree health care trust for GM stock, according to a person briefed on the talks who didn't want to be identified because the bargaining is private. GM and UAW officials declined comment.

GM and Chrysler don't need to have everything nailed down for Tuesday's progress reports, but the companies are expected to detail concessions along with plant closures, the potential elimination of brands and thousands of job cuts.

After Tuesday there will be several weeks of intense negotiations ahead of a March 31 deadline for the final versions of the plans.

Detroit-based GM and Auburn Hills, Mich.-based Chrysler are living off a combined $13.4 billion in government loans. If they don't receive concessions by March 31, they face the prospect of having the loans pulled, followed by bankruptcy proceedings.

Any bankruptcy would be particularly painful with some economists predicting the country could lose 2 million to 3 million jobs this year and the unemployment rate, now 7.6 percent, could swell past 9 percent by the spring of 2010.

In network interviews Sunday, White House senior adviser David Axelrod didn't respond directly when asked if the U.S. economy could withstand a GM bankruptcy. Nor did he directly address a question about whether the Obama administration would let GM go into bankruptcy.

"I'm not going to prejudge anything. I think that there is going to have to be a restructuring of those companies. I'm not going to get into the mode of how that happens. We'll wait and see what they have to say on Tuesday," he told " Fox News Sunday." Executives at the two automakers have said bankruptcy is not an option because consumers would not buy cars from a company that might go out of business.

"How that restructuring comes is something that has to be determined," Axelrod said. "But it's going to be something that's going to require sacrifice not just from the auto workers but also from creditors, from shareholders and the executives who run the company. And everyone's going to have to get together here to build companies that can compete in the future." Harley Shaiken, a University of California- Berkeley labor economist who has studied the automakers, doesn't think the Obama administration would run the risk of bankruptcies given its efforts to create jobs.

"We're clearly on the edge of that abyss right now. Going over it would do irreparable damage not simply to the auto industry but to the manufacturing base in this country," Shaiken said.

Under the GM and Chrysler loan terms, both companies have "targets" to reduce debt and labor costs. One target says the automakers need to convert half of their payments into a health care trust fund for retirees in stock rather than cash, reducing their debt. Another requires the companies to reduce their unsecured debt by two-thirds by persuading investors to swap the debt for equity in the companies.

In 2007 contract talks, the union agreed to take on retiree health care to help the companies remove billions in liabilities from their books. But the contracts only require the company to pay the union 60 percent of the liability, Shaiken said. If half those payments come in risky stock, the trust fund may not have enough money, he said.

According to others briefed on the talks, bargaining has shifted to Ford Motor Co., the healthiest of the Detroit Three and the only one not receiving government loans. Ford is seeking the same concessions as GM and Chrysler so it's not placed at a disadvantage.

Another complication is that Obama has not yet appointed an overseer of the plans -- a so-called "auto czar" -- and many industry officials have said the lack of an administration point-person has slowed the discussions. Steven Rattner, a private equity investor, and Stephen Girsky, a veteran auto industry analyst, have been mentioned as leading contenders to be part of an Obama auto team.

Sen. Carl Levin, D-Mich., said Thursday that he did not expect the reports Tuesday to provide "very specific information because there's no car czar. I do think there will be an outline of directions." Axelrod wouldn't say whether the administration would offer the auto industry more bailout money. GM already has borrowed $9.4 billion to stay in business, and it would receive an addition $4 billion if the Treasury Department approves its viability plan.

Chrysler wants $3 billion more on top of the $4 billion it has already borrowed.

"We need to see what it is that they come up with this week," he said.

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