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Tuesday, March 31, 2009

Obama Promotes Backing Big 3 Car Warranties

Government to Back Car Warranties to Boost Sales
Monday, March 30, 2009

In an effort to boost sales and calm consumer fears, the Obama Administration unveiled a new warranty program Monday morning backing the warranties on new vehicles purchased from domestic auto manufacturers.

"Your warranty will be safe. In fact, it will be safer than it's ever been. Because starting today, the United States government will stand behind your warranty," President Obama said in a press conference Monday.

Both General Motors (GM) and Chrysler have agreed to participate in the plan. Despite being eligible, Ford (F), which has not accepted any government assistance, has not opted into the program.

The guarantees will be available on warranties issued by the participating American auto makers during the companies' restructuring period.

Under the new Warrantee Commitment Program, the Treasury will work together with auto makers to cover 125% of the estimated warranty costs. Auto makers will provide 15% of the estimated costs, while the Treasury supplies 110%.

Consumers who purchase a GM or Chrysler vehicle during the restructuring period are eligible for the warrantee. The White House has not provided an estimated cost of the program.

Auto sales have been falling off a cliff recently as consumers curb their spending. In February, auto sales plummeted more than 41%. GM led the Big Three with a 53% drop in sales from the same time a year before. Ford posting a 48% drop, while Chrysler weighed in with 44% decrease.

Many fear that if GM or Chrysler were to file for bankruptcy, sales would drop even because consumers are leery to buy from a bankrupted company.

“However, no matter what the outcome, consumers should have confidence that if they buy new cars from either company their warranties will be honored,” the task force said in a statement.

Despite the backstop from Uncle Sam, questions regarding Detroit’s survival still linger.

Also on Monday, the White House rejected the plans GM and Chrysler submitted in February, saying they did not establish a credible path to viability.

GM was seeking more than $16 billion in fresh capital, while Chrysler was asking for $5 billion. GM has three months to rework its plans and Chrysler gets funding for 30 days as it works to complete a partnership with Italy's Fiat.

The task force, which was created by the Obama Administration instead of one “car czar,” also asked GM CEO Rick Wagoner to step down. Fritz Henderson, the company's chief operating officer, will fill the CEO spot.

“On Friday I was in Washington for a meeting with administration officials. In the course of that meeting, they requested that I “step aside” as CEO of GM, and so I have,” Wagoner said in a statement.


My Thoughts

I think that the warranty plan could be good. It could do for the car industry what the FDIC has done for the bank industry. However, it should only be a last resort backup like the FDIC.

Although, it strikes me as odd that the people that will hold the record for the biggest deficit spending in one year ever is the one telling this two companies that their recovery plan isn't good enough. After all, Obama never ran any sort of business at all. He has no track record for business success. Where does he get off telling them that it isn't good enough? They should be making the same demands for the UAW if their going to go after GM and Chrysler.

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