Bloomberg

IF AMERICA'S two beleaguered carmakers, General Motors (GM) and Chrysler, had harboured the hope that Barack Obama would prove a soft touch, any such illusion has been robustly dispelled. When the news leaked on March 29th that Rick Wagoner, GM's chief executive for nine years, had been told to step down by the president's auto task-force in favour of his number two, Fritz Henderson (pictured), there was little doubt that more unpleasant medicine was on the way. So it proved.

The next day the task-force gave its analysis of the “viability plans” the two firms had submitted in February as a condition of the $17.4 billion emergency-loan package agreed on December 31st ($13.4 billion for GM, $4 billion for the much smaller Chrysler). Its verdict on both plans was damning; its threat that bankruptcy, albeit of a “quick and surgical kind”, could still be the best option, was unambiguous.

Although GM was given some credit for restructuring its business in recent years, the task-force concluded that progress had been far too slow, and that something much more thorough than GM's management and key stakeholders seemed willing to contemplate was needed. Furthermore, the assumptions on which GM was basing its plans were a good deal too rosy and left uncomfortably little margin for error.

The task-force identified six areas where it found GM to be over-optimistic or in denial: domestic market share, which it expects to contract by only 0.3 percentage points a year after 30 years of falling by 0.7 points; pricing in a collapsing market which still doubts the quality of GM's products; the drag of underperforming dealers; the consequences of the failure of GM's European arm to secure outside investment or government support; a weakening product mix as consumer tastes and tighter fuel-economy rules eat into sales of high-margin trucks and sport-utility vehicles; and legacy health-care and pension liabilities that will reach $6 billion a year by 2013, forcing GM to maximise volume rather than return on investment.

But GM can take one quite substantial crumb of comfort from this otherwise bleak assessment: Mr Obama's team reckons that if it can shove the company, its unions and its bondholders into taking more drastic and painful action, a healthy business could yet emerge. GM has started making some good, desirable cars in efficient, flexible factories. Critically, GM also has the scale, technology and reach that a capital-intensive, highly competitive global industry demands.

None of this, unfortunately, applies to Chrysler. On just about every count, the task-force sees Chrysler as a basket-case. Saddled with out-of-date factories, over-reliance on the North American market and unfashionable trucks, a poor reputation for quality, a dearth of new models in the pipeline and insufficient resources to fund future power-train development, Chrysler is too weak and too small to survive on its own.

Chrysler's only hope, Mr Obama said on March 30th, is to consummate the deal it has been discussing since January with Fiat. The Italian firm would supply it with “cutting-edge technology” in the form of fuel-efficient engines, small-car platforms and factory automation. In return, Fiat had expected a 35% stake in Chrysler, a strong base from which to buy the rest of the company should it so wish, as well as a manufacturing and distribution base in America. In negotiations held in March between Steven Rattner, the investment banker who leads the task-force, and Sergio Marchionne, Fiat's boss, Fiat agreed to scale back its initial stake to 20% and not to increase it beyond 49% until Chrysler had repaid American taxpayers in full.

Chrysler now has until the end of April to get the deal done. Meanwhile the government will continue to supply it with working capital. Mr Obama says he will “consider” lending the firm a further $6 billion if it can construct a credible plan with Fiat. But can it? Mr Marchionne is adamant that Fiat will not put any of its own much-needed cash at risk, and the Fiat team that has been carrying out due diligence on Chrysler thinks it will be two years before the American firm will feel real benefit from the partnership. Given that Chrysler has spent most, if not all, of the $4 billion it received in January, it is hard to see how $6 billion will take it through to 2011.

The government says that if Chrysler is to survive alongside Fiat it will require “at a minimum…extinguishing the vast majority of Chrysler's outstanding secured debt [about $9 billion] and all its unsecured debt and equity.” Cerberus Capital Management, the private-equity firm that acquired an 80% stake in Chrysler in August 2007, seems resigned to surrendering its equity, and the banks that hold unsecured debt are also in a weak position. But the senior debt holders may decide that they will fare better if Chrysler files for bankruptcy and they can make a grab for whatever sellable assets are left.

The outlines of GM's future are not much clearer, but at least it seems to have one. “We cannot, we must not, and we will not let our auto industry simply vanish,” Mr Obama said this week. That does not, however, mean that GM will necessarily avoid bankruptcy, as Mr Henderson acknowledged. In a marked change of tone from the old regime, of which he was a part, Mr Henderson said he was prepared to do whatever was necessary to reorganise GM—including making a trip to the bankruptcy court if agreements could not be reached with bondholders and the United Auto Workers union to slash more than $50 billion of liabilities.

Mr Obama has given Mr Henderson 60 days (and sufficient working capital) to bang heads together and drive through other changes. Above all, the task-force will want to see evidence that GM can repair its balance-sheet and become capable of generating positive free cashflow in a car market somewhat bigger than today's, but smaller than in the past.

There is, however, a growing belief that the best way to achieve that may be a “quick rinse” bankruptcy reorganisation which separates a new, lean and mean GM from an old GM that holds legacy health-care obligations, dud brands and unwanted factories. Supposedly, the former would swiftly fly free, while the latter would remain in bankruptcy and be slowly wound down. In practice, nothing is likely to be that neat. The only certainty is that even though GM has a new boss, the government is really in control.