You could liken the Obama Administration’s new, dramatic US car industry policy to a whack in the head with a blunt object.

After months of smaller hits, it has needed one almighty blow to get shrinking giants General Motors and Chrysler to wake up and see where their self interest lies. Not in perpetuating the model that has broken and brought both to the edge of collapse, but striking out in a new direction, courtesy of some hardball policy from President Obama.

And it has taken the monstering from within and without the US in recent weeks to get the Obama-istas to understand what is needed, and probably the increased self-confidence from the general acceptance of the bank revamp plan.

For American industry and business leaders it is this: the Administration has made it clear it is prepared to sacrifice two of the most famous brands of the country’s most iconic industry to fix it up.

For financial and other markets, which fell sharply overnight, it’s a new reality. More volatility, instability to contend with and more doubts about banks and other big companies with inherent problems, and no easy touches left in Washington.

If Chrysler doesn’t reach agreement with Fiat, cut its debt, reduce loans and do a sound deal with its unions in the next 30 days, Government aid will stop and it will drop into bankruptcy. If GM doesn’t do roughly the same in the next 60 days (it will be funded by the Government in the meantime), it too will disappear into bankruptcy.

Chrysler will not survive a brush with bankruptcy, GM will, but it won’t emerge in its current form.

The Obama Administration has shaken off its ‘nice guy’ image and imposed a brutal restructuring on the American car industry;

Ford is outside the aid net, but it too knows that if it gets into trouble, it will have to cut, and cut deep. The Obama plan gives it an incentive to slash and burn to stay alive.

The way the Administration demanded and got the head of GM chairman and CEO for the past eight years, Rick Wagoner, sends a message to the rest of US business, that if you go begging to the Government, prepare to lose a few bodies along the way.

It’s what the Bush Administration should have done last year when it started handing out the money to banks and to the car companies: it’s what Obama and his lot should have done at Citigroup and Bank of America when they got new capital injections and guarantees earlier this year.

The process hurts like hell, concentrates the mind and the only way to get rid of it is to do what the Government wants, and what taxpayers want to see.

Stupid stories on some US business websites have likened what happened to GM’s CEO as “socialism”. It’s not; it’s a bit of commercial Darwinism, if you like. It’s what businesses all over the world fear, paying a public price for failure, instead of being rewarded.

Sure you can argue about whether more money should be poured into the bottomless pits in Detroit, but we now know that by the end of May, the US will either have a new car company in Chrysler/Fiat, and a radically reshaped GM, or two leading names in bankruptcy and more pain to come.

It should be a handy warning to all those banks now going through their stress tests (which they have criticised and laughed at).

Already Chrysler has let it be known that it and Fiat are moving closer, claiming to have agreed to an alliance as demanded. Read the detail here, it’s nowhere near that yet. Already there are stories that GM’s bondholders support the government. There will be more of these stories as both companies struggle towards some tough and wrenching decisions.

If the Obama Administration flinches in any way, it’s goodnight Barack and hello mendicants.

The Government and US business cannot afford any backward steps from the President now that he has struck his course. If they do something similar to a big bank, watch the others take some tough medicine and reveal tens of billions in new losses.

The Financial Times’ Lex column summed up the new situation in its usual savvy way:

Someone in the Obama administration seems finally to have read a copy of Negotiating for Dummies and realised there should have been a bad cop, not just a good one, as Detroit tried wringing concessions from lenders and employees. As long as a sympathetic, pro-labour White House and congressional leadership seemed willing to paper over cracks with taxpayer cash, it is no shock General Motors and Chrysler’s restructuring plans were timid, but a pleasant surprise they were rejected. The Obama administration has belatedly grown a backbone, possibly letting Chrysler go bust in a month if it can not link up with Fiat. GM is more viable, but not without more government cash.

Peter Fray

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