Posted 12/19/2008
The White House prevented the auto industry from going on cinder blocks and perhaps being sold for parts Friday by announcing a package of $17.4 billion in loans to sustain it through early next year.
The loans would go to General Motors (GM) and Chrysler, which have both said they face bankruptcy in weeks without assistance.
Ford (F), the other member of Detroit's Big Three, is not as cash-strapped as the other two and has opted not to take these loans.
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The funds will come from the Troubled Assets Relief Program, a move the White House had previously resisted until Dec. 12.
President Bush said his preference would have been to allow the automakers to go into bankruptcy "but these are not ordinary circumstances."
"There is too great a risk that bankruptcy now would lead to a disorderly liquidation of American auto companies," Bush said. "My economic advisors believe that such a collapse would deal an unacceptably painful blow to hardworking Americans far beyond the auto industry."
The Bush administration attached a number of conditions to the aid, but doesn't require truly fundamental reforms in terms of labor costs or debt restructuring that could make GM and Chrysler more viable.
The announcement effectively punts any long-term decisions about how the federal government should be involved in efforts to revitalize the domestic car industry to the incoming Obama administration.
"They just made sure that nothing happens before Bush leaves office," said Daniel Clifton, Washington policy analyst for Strategas Research Partners. "The last thing George Bush wants is the bankruptcy of GM around the holidays as the last major event of his presidency."
Obama called Bush's loan plan "a necessary step" to save the industry. An Obama official told Reuters the president-elect was informed of the Bush administration's deliberations on the loan package but did not take part.
The Big Three cheered the plan.
"We again thank the administration for this important support of our industry at this challenging time, and we look forward to proving what American ingenuity will achieve," GM said in an official statement.
Business lobbies like the Chamber of Commerce and the National Association of Manufacturers offered similar praise.
United Auto Workers President Ron Gettelfinger applauded it but signaled he would fight any effort to get the union to renegotiate its contracts with the automakers.
Democrats offered tepid applause. Senate Majority Leader Harry Reid, D-Nev., said he was "pleased" that the administration's plan included most of a Democratic-backed bill.
Republicans and conservatives lamented that the deal didn't do more to force the Big Three to restructure.
"The best solution would have been definite terms, within a finite time period, committed to law, that protected taxpayers," said Sen. Bob Corker, R-Tenn.
Corker led GOP efforts to cut a deal in the Senate, which broke down after the UAW rejected a 2009 date for reworking pay and benefits.
It'll Get Better, Right?
Dave Cole, chairman of the Ann Arbor-based Center for Automotive Research, says that despite the loans, the domestic industry's survival is dependent on whether credit markets and car sales improve.
The loan deal "is a bridge until we get a little stability in the economy," Cole said.
Shikha Dalmia, senior analyst for the free-market Reason Foundation, said that's a problem. There's little evidence that auto sales will revive any time soon.
"I think this is tantamount to throwing good money after bad," Dalmia said. "The auto market right now is so frozen that these companies don't have a prayer of coming back even if they get their cost structures and labor costs in line."
Bush's plan is closely modeled after the proposal that passed the House earlier this month. It would require Chrysler and GM to become financially viable by March 31, or face having the loans revoked. Financial viability is defined in this case as having a "positive net present value."
But if GM and Chrysler aren't viable next spring, they likely wouldn't be able to repay the loan without a forced liquidation, which would be economically devastating and politically unthinkable.
The automakers would have to agree to caps on executive compensation, sell off corporate jets and halt paying dividends.
It would also let the federal government audit them and give it veto power over company transactions of more than $100 million.
The administration's plan proposes but doesn't require automakers to cut their debts by two-thirds via a debt-for-equity swap.
'Unfair' Labor Demands
It also suggests the companies eliminate a jobs bank that pays employees even after they are laid off and make wages and work rules competitive with foreign manufacturers operating in the U.S.
UAW's Gettelfinger bristled at even suggesting this. "(W)e are disappointed that (Bush) has added unfair conditions singling out workers," he said in a statement.
That shouldn't worry Gettelfinger. Reason's Dalmia said another problem with the loan package is that it is "too easily undone" and the Bush administration has only a month left. Barack Obama is not bound by any of the terms so he can simply rewrite them as he sees fit.
"Chances are these companies are going to come back in March and ask for more money. With a Democratic Congress and a sympathetic president, I think they'll get it," Dalmia said.
The once-dominant U.S. auto industry has suffered for decades from loss of market share and high labor costs. The automakers were paying about $70 an hour to cover salaries and benefits, including legacy costs, when the financial crisis hit this fall — making credit harder to obtain and hurting sales.
The Big Three chief executive officers and UAW came to Washington in November to request loans but faced a skeptical, bailout-weary Congress. It didn't help that the CEOs initially flew in on corporate jets to plead poverty and then upped their aid request from $25 billion to $34 billion in a week. Talks stretched into December but no deal was reached, making Bush the Big Three's last hope.
Using TARP to aid automakers will essentially drain the first half of the $700 billion fund. That prompted Treasury Secretary Henry Paulson on Friday to ask Congress to release the other $350 billion.
Copyright 2000-2008 Investor's Business Daily, Inc.
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