Auto Maker Bankruptcy Looms

By JOHN D. STOLL and MONICA LANGLEY

Troubled U.S. auto makers and union representatives dug in late Monday for all-night cost-cutting negotiations as the government advanced its point person on auto restructuring, a former investment banker with a record for demanding harsh concessions from manufacturers, unions and investors alike.

General Motors Corp. and Chrysler LLC are required to submit recovery plans to the government on Tuesday as part of their agreement to receive billions of dollars in federal loans. As the government's auto-industry task force began to take shape ahead of the deadline, President Barack Obama's administration appeared to be turning up the pressure on GM and Chrysler to carry out tough restructuring measures, possibly through the use of the bankruptcy court.

Ron Bloom

The administration stepped back over the weekend from naming a "car czar," as it had planned, to oversee the restructuring. But according to people familiar with the task force, it named former Lazard Freres & Co. investment banker Ron Bloom a key adviser. Mr. Bloom, who made a name advising U.S. steelworkers to accept major concessions in several bankruptcy cases, is expected to take the task force's lead role, a senior U.S. Treasury official says.

People who know Mr. Bloom expect him to be tough on the auto makers, the United Auto Workers and other parties involved in their restructuring.

"The management of the Big Three are probably not going to like what Ron Bloom has to say; the UAW is not going to like what Ron Bloom has to say; and certainly the stockholders and creditors will not like what he has to say," said Michael Psaros, a co-founder of private-equity group KPS Capital Partners, who has worked with Mr. Bloom in and out of bankruptcy courts. He adds that Mr. Bloom has "repeatedly shown an ability to transform struggling companies into profitable going concerns."

Under the terms of their federal loans, GM and Chrysler are supposed to submit plans to the Treasury Department on Tuesday to show how they are using taxpayer dollars to become viable. These are supposed to include agreements with the UAW on labor-cost reductions and deals with bondholders and other creditors for reducing their debt. Those talks have bogged down as all sides awaited the naming of a car czar to oversee the process.

On Monday, GM's bondholder committee delivered a "framework" for a new debt structure, one person close to the committee said. Late Monday afternoon, talks between the UAW and both GM and Chrysler were also making some progress as the parties hammered out cost-reduction details. But people familiar with the talks said significant differences remain between the sides.

The car companies must submit their proposals by 5 p.m. Tuesday to James Lambright, chief investment officer for the Troubled Asset Relief Program.

The government could seek tougher concessions from the auto industry because conditions have worsened since the loans were offered in December. "With the economy in this precarious situation, no one wants to put the automakers into bankruptcy, but can this much restructuring be accomplished without bankruptcy?" said one auto adviser. Ultimately, the government will have to decide how much to subsidize the auto industry, he added. "That's a critical decision that only the president can make."

Details of the government's task force emerged over the weekend but its final composition remains unclear. It will be led jointly by Treasury Secretary Timothy Geithner and Lawrence Summers, who heads the National Economic Council, and will be responsible for managing the $17.4 billion in federal loan agreements between the auto makers and the U.S. government.

Mr. Bloom, 53 years old, was named as an adviser to the Treasury and will report to Messrs. Geithner and Summers. Also named to the task force was Diana Farrell, deputy director of the National Economic Council. Ms. Farrell was formerly a director with McKinsey & Co. She did not respond to requests for comment.

People familiar with the panel say it could also include Steven Rattner, a New York financial executive who was strongly considered for the car czar role.

White House spokesman Robert Gibbs said naming a team brings in "a broader array of people" who have expertise and "can deal with the many challenges" the industry is going to face in the next several months.

GM so far has accepted $13.4 billion in loans and Chrysler $4 billion. GM is expected to tell the government it needs several billion more or it may have to file for bankruptcy protection. Chrysler has said it hopes to get $3 billion in additional loans.

The Obama administration has told GM to address the possibility that it will eventually file for bankruptcy protection, Rep. Sander Levin, a Michigan Democrat, said Monday. "They've been asked to address the issue of bankruptcy in their plan but not to have that as an alternative plan," Mr. Levin said in a phone interview. "That's my understanding."

A GM spokesman declined to comment on a bankruptcy plan. People familiar with the matter have said the auto maker has been preparing detailed bankruptcy plans and has softened its previous view that such a filing was not an option for the company.

David Axelrod, a senior adviser to President Obama, declined to rule out government-backed bankruptcy. "We're going to need a major restructuring of these companies," he said on NBC's "Meet the Press." "How that restructuring comes is something that has to be determined."

Mr. Bloom, a Harvard Business School graduate who spent 10 years at investment banks before joining a team advising the steelworkers union, is seen as one of the chief architects of a consolidation of the steel industry that has involved about 35 bankruptcies over several decades. He's known as a blunt communicator. The voicemail greeting on his office and cellphone is simply, "Hi, it's Ron, you know the drill."

Late Monday, Mr. Bloom declined by email to comment.

In a 2006 speech at a corporate turnaround conference in Scottsdale, Ariz., he described his approach to restructuring as "dentist-chair bargaining," in which the patient "grabs the dentist by the b -- and says, 'Now let's not hurt each other.'"

Under Mr. Bloom's guidance, the United Steelworkers gave up pay, job security and benefits in a bid to help the industry recover. In some cases, thousands of steelworker jobs were lost when union leadership agreed to large-scale reductions in restructured companies. Mr. Bloom also negotiated benefits for union members and retirees that kicked in once reconfigured steel companies became profitable.

Such solutions could also come into play at the automakers. Wilbur Ross, a billionaire investor who worked closely with Mr. Bloom in restructuring the steel industry, credits him with being tough on companies without being destructive. He "probably saved the jobs of 100,000 steelworkers," Mr. Ross said, while also saying Mr. Bloom "negotiated a totally different contract that simplified work rules" and other union provisions.

Alan Reuther, the UAW's legislative director, said the union doesn't believe Mr. Bloom's appointment increases the chances that auto makers will seek bankruptcy protection. Mr. Reuther lauded the choice of Mr. Bloom, calling him a "very bright, talented person with a lot of experience about restructuring."

People familiar with the matter said Mr. Bloom is expected to lean heavily on the NEC's Ms. Farrell, as well as Centerbridge Capital's Stephen Girsky, a key adviser for United Auto Workers President Ron Gettelfinger.

The Obama administration decided to name a task force after concluding that identifying and recruiting a car czar was a nearly impossible task, say officials and finance executives.

"Whoever did the job would be politically assassinated," said one administration official. "The car czar became a political hot potato. A smart New York guy wasn't one of theirs [from the Big Three]. And a Detroit guy wasn't acceptable to environmental and energy interests. No one person would be politically acceptable."

A leading contender to be the car czar was Mr. Rattner, a prominent New York Democrat and the founder of private-equity firm Quadrangle. Initially conflict-of-interest questions arose because Quadrangle had borrowed from Chrysler's majority owner, Cerberus Capital Management LP, an administration official said. That was resolved but Mr. Rattner had concerns about deserting his business for a politically charged assignment, an adviser said.

Write to John D. Stoll at john.stoll@wsj.com and Monica Langley at monica.langley@wsj.com