Business

Big three bailout, auto industry bailout
Charles Dharapak/AP

Bush Gives Automakers New Hope With Bailout Package

December 19, 2008 10:25 AM
by Josh Katz
A week after the Senate shot down the plan to bail out the auto industry, President Bush has announced that the government will provide the companies with funding.

Bush Promises Funding to Automakers

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On Friday, President George W. Bush announced that the U.S. government will provide General Motors and Chrysler $13.4 billion in emergency funding. Also, an additional $4 billion will be available for the car companies in February, according to The New York Times.

The companies will be required to revamp their organizational structure as a requirement for the funding. President Bush’s government loan has essentially the same stipulations as the bailout package that the House of Representative approved last week, but the Senate rejected.

“These are not ordinary circumstances, in the midst of a financial crisis and a recession allowing the U.S. auto industry to collapse is not a responsible action,” Bush said.

The money will come from the $700 billion Troubled Asset Relief Program (TARP) instead of from the $25 billion fund meant to assist the carmakers in the production of more environmentally friendly vehicles, The Guardian reports.

Bush said that the government could not let the automakers go into bankruptcy, arguing that consumers would not purchase vehicles from companies in such a state.

The bailout forces the companies to swiftly cut their debt commitments by two-thirds, “mostly through debt-for-equity swaps, and to reach an agreement with the United Auto Workers union to cut wages and benefits so they are competitive with those of employees of foreign-based automakers working in the United States,” according to the Times.

GM and Chrysler must also reduce compensation for executives, among other requirements.

Bush’s plan will make President-elect Barack Obama decide by March 30 if the automakers are making sufficient advancements to stay financially afloat. If Obama does not see improvement, the car companies would have to repay the $13.5 billion immediately, and the government would take precedence over other creditors.

Background: November bailout attempts fail

On Dec. 18, the Senate decided to scrap the $14 billion automaker bailout plan in a procedural vote, prompting fears that GM and Chrysler would be forced to declare bankruptcy within weeks, according to Bloomberg.

The U.S. House of Representatives passed a $14 billion bailout bill for the auto industry
the day before by a vote of 237-170, the San Francisco Chronicle reported.

The $14 billion would have come out of money from the Energy Independence and Security Act, which was first meant to aid the industry’s production of fuel-efficient vehicles. Democrats had initially wanted to reach into the Treasury Department's $700 billion Troubled Asset Relief Program, or TARP, for auto industry funding rather than the energy act but the Bush administration opposed such a measure, CNN Money writes.

The bill said that if the automakers demonstrated a certain level of progress in the future, the government could dispense another $80 billion to $90 billion in long-term loans.

But a number of Senate Republicans did not feel that the bill was strong enough to influence Detroit to change its ways.

Sen. John Ensign, R-Nev., said the plan means that the government is “picking the winners and losers instead of the market. … We’re just going down further and further and further towards socializing our economy,” Business Week reports.

An ABC survey indicated that 56 percent of Americans opposed an auto industry bailout.

Chrysler said it would be “down to its minimum cash requirement by the New Year,” according to BusinessWeek. General Motors said it would go insolvent in January if it did not receive $4 billion right away. Ford said it could stay afloat until at least 2010 if total U.S. auto sales reach a certain number.

The Ann Arbor, Mich.-based Center for Automotive Research indicated “that 1 in every 10 jobs is directly or indirectly affected by the automobile industry and the failure of the three Detroit automakers could result in the loss of 3 million jobs in the first year,” according to the Detroit Free Press.

GM CEO Rick Wagoner rejected the idea of declaring bankruptcy because of the “far-reaching negative effect it would have on the company, workers, dealers and suppliers,” AP quoted him as saying.

Out of the Big Three, Ford is unquestionably in the best condition. According to Time magazine, the CEOs of GM and Chrysler made it clear that without the loans, they’re not going to survive until 2010, sparing bankruptcy.

Opinion & Analysis: What will happen if the auto companies fail?

If the major car companies were to fail, car and truck prices could increase, fewer vehicles will be available and used car owners will struggle to find replacement parts, some experts say. "Vehicles could cost anywhere from 5% to 15% more, maybe even more than that," said Michael Robinet, vice president of global vehicle forecasts for auto consultant CSM Worldwide. Automakers might also be forced to drop many of their buyer incentives, such as cash-back or low financing rates,” according to CNN Money.

If GM were to fall, companies that supply GM with parts and materials will take a huge hit. "The first thing they'll stop making is [replacement] parts," Kimberly Rodriguez, co-leader of global automotive services for accounting firm Grant Thornton, said. "That's the least profitable business they do. If the production suppliers aren't functioning, the 150 million used vehicles out there are going to have trouble."

Even though Ford isn’t experiencing a “cash crisis,” a GM or Chrysler bankruptcy could take a substantial toll on Ford because suppliers would suffer. Asian markets, which are “financially healthy,” would also experience production difficulties, CNN Money reports.

If GM goes bankrupt, a prominent economist indicates that unemployment could rise to 9.5 percent in the U.S., in comparison to last year’s 6.5 percent, sending the country into a “severe recession,” according to Eoin O’Carroll of The Christian Science Monitor. GM employees aren’t limited to the U.S., and the workers would lose their jobs from “Ecuador to Poland to Kenya to Uzbekistan.” But O’Carroll suggests that “Japanese, Korean, and German automakers could step in and make up for the lost jobs.”

Wilbur Ross, who earned billions on investing in troubled steel and textile companies, and is called the “King of Bankruptcy,” also said it would be disastrous for the economy if one of the Big Three filed for Chapter 11. He claimed that if one of the companies went into bankruptcy, the other two and their suppliers would fall as well, because of tightened credit lines from the economic crisis.    

Hedge-fund manager William Ackman and former CEO of General Electric Co. Jack Welch disagree with Ross, claiming bankruptcy could benefit the companies by forcing them to restructure.

Similarly, Ted Reed of TheStreet.com wonders why the automakers think they are entitled to government loans when some airlines accepted bankruptcy and it actually helped them survive. “After all, while ‘bankruptcy is not an option’ has become a mantra for automakers, the legacy airlines expect to post profits in 2009, largely because recent bankruptcies prepared them to deal with the troubled economy,” Reed writes.

Even though GM CEO Rick Wagoner said that "80% of consumers would not consider buying a car from a company in bankruptcy,” Reed contends that Delta used bankruptcy to its advantage by merging with Northwest and “took the opportunity to remake itself.”

A blog entry from the investment site Motley Fool argues that, out of the three companies, Chrysler should not be bailed out. The writer claims that the federal government has given Chrysler money before, and it failed. Furthermore, out of the three companies, Chrysler is privately owned and the U.S. should “Let big, private money succeed or fail of its own merits.” Finally, it might be beneficial to let Chrysler die, the writer notes, because there is an “overcapacity” of producers in the industry right now. “Rather than having congress give away money for all Big Three to limp through this recession, why not just solve the underlying condition by drastically slashing one of the three,” the writer asks.

“Ford could actually prosper” when all is said and done, according to Bill Saporito of Time magazine. Ford still posts a profit, thanks partly to the fact that it doesn’t have a bank bogged down by subprime mortgages, like GM’s GMAC. Ford also maintains credit lines of $10.1 billion. The company is investing more and more in smaller, fuel-efficient cars, and Ford CEO Alan Mulally said, "By the end of 2010, two-thirds of our spending here will be on cars and crossovers—up from one-half today."

Saporito admits that Ford would hurt in the short term if some suppliers fail as a result of a GM or Chrysler collapse, because they often use the same suppliers. “But longer term, customers might flock to a U.S. company that isn't in bankruptcy and thus stands 100% behind its products—and is free to operate without court supervision,” he states.
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