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Tuesday, February 27, 2024

Should Congress bail out the auto industry?

Senate Democrats took the first step toward bailing out the nation's crippled auto industry on Monday by proposing a $25 billion loan program, a plan that faces stiff political headwinds with millions of jobs potentially riding on the outcome.

With the year's congressional calendar down to a few days, lawmakers and the Bush administration sparred over the best way to extend help to General Motors Corp, Ford Motor Co and Chrysler LLC.


Senate Democrats took the first step toward bailing out the nation’s crippled auto industry on Monday by proposing a $25 billion loan program, a plan that faces stiff political headwinds with millions of jobs potentially riding on the outcome.

With the year’s congressional calendar down to a few days, lawmakers and the Bush administration sparred over the best way to extend help to General Motors Corp, Ford Motor Co and Chrysler LLC.

"We’re surprised that Senate Democrats would propose a bailout that fails to require automakers to make the hard decisions needed to restructure and become viable," White House spokeswoman Dana Perino said.

The Senate bill would, however, impose conditions. The government would take warrants for shares in exchange for aid, which would come with limits on executive compensation and a prohibition on the payment of dividends.

Automakers would also have to submit plans on how they intend to remain competitive, pummeled by plunging sales, little access to credit and a weakening economy.

Executives from the three companies are expected to amplify their calls for help at congressional hearings beginning on Tuesday.

Carl Levin of Michigan, the plan’s chief advocate in the Senate, said the proposal to amend the Treasury Department’s existing $700 billion rescue plan for financial services firms is the most efficient way to help auto manufacturers.

House Democratic leaders, led by House Financial Services Committee Chairman Barney Frank, released a draft of almost identical legislation later on Monday.

But the White House and many Republicans favor amending another law — one approved in September to extend automakers $25 billion in technology loans to retool factories and make more fuel efficient cars.


A rescue package for U.S. automakers could avert another stock market plunge like the one seen after Lehman Brothers’ collapse in September.

"The reason people think failure could be cataclysmic is that there are so many companies that are tied to the auto industry," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co in San Francisco.

The Senate proposal comes as GM said it would delay incentive payments to its U.S. dealers by two weeks in an effort to "gain some cash liquidity" for the fourth quarter.

The payments for dealer incentives, which are made on a weekly basis, will be delayed from November 28 until December 11, GM spokesman Pete Ternes said.

Liquidity is the key concern for the automakers as their remaining cash reserves dwindle.

"If General Motors is unable to solidify government aid this week and is forced to wait for the next administration, we would become more concerned about working capital related liquidity risks… ," Citigroup autos analyst Itay Michaeli said in a note to clients on Monday.

The companies and their allies in Congress argue a bailout is justified on grounds they back one in 10 U.S. jobs.

GM, Chrysler and Ford employ close to 250,000 people in the United States and supporters claim they touch more than 4 million other jobs including suppliers, dealers, car haulers and rental companies.

Many parts suppliers and dealers have agreements with transplanted automakers as well, potentially interrupting the business of competitors to the Big Three in the short term.

A potential threat to the integrated supplier network prompted Japan’s Honda Motor Co Ltd to support an aid package for its U.S. rivals.


But segments of the public disagree that a rescue is in order. In interviews, Americans said the planned rescue was unfair and would make it harder to reform the U.S. automakers.

"They need to restructure. If they get bailed out they are not going to do it," said Eric Smith, a paint contractor interviewed in Chamblee, Georgia, on the outskirts of Atlanta.

U.S. automakers say they are urgently trying to overhaul their businesses to meet a global demand for fuel efficient products, like better performing gasoline engines, electric cars and more hybrids.

But industry executives say they may never get there unless the bailout is approved. They add that the shock of any collapse will shake the economy.

If the auto industry comes under severe pressure, GM Chief Executive Rick Wagoner said in a television interview on Sunday, "the impact on the whole U.S. economy will be devastating."

All three companies have rejected reorganizing under bankruptcy protection.

For the Senate measure to pass, it must gain support from both Democrats and Republicans in the narrowly divided chamber where 60 votes are needed to overcome any procedural hurdles.

Aides and lawmakers have expressed doubt about the Democratic effort with so little time and White House opposition.

Nevertheless, two prominent Republicans senators signaled they would be willing to consider a plan. Pennsylvania’s Arlen Specter said he was open to supporting the automakers under certain conditions, and Christopher Bond of Missouri, expressed a similar sentiment and said action was needed now.

"I’m pleased to see there seems to be broad support for assisting the auto industry despite disagreements," Bond said.

Bush, whose limousine is made by GM, opposes a bailout using Treasury rescue funds that the administration argues are, by law, intended only for distressed financial services companies.

President-elect Barack Obama, who will be sworn in January 20, has encouraged an aid package, but not a blank check. Obama has said conditions should also include labor, suppliers and lenders so that "we are creating a bridge loan to somewhere, as opposed to a bridge loan to nowhere."

Shares of GM closed up 5.7 percent to $3.18 on the New York Stock Exchange, while Ford slipped 4.4 percent to $1.72. Chrysler is privately held by Cerberus Capital Management LP

(Additional reporting by David Bailey and Soyoung Kim in Detroit, Tom Ferraro and Rick Cowan in Washington, Matthew Bigg in Atlanta, Andrea Hopkins in Greensburg, Indiana and Patrick Fitzgibbons in New York; editing by Mohammad Zargham and Tim Dobbyn)

17 thoughts on “Should Congress bail out the auto industry?”

  1. True. And in the long run Americans will still need to buy cars, and most of those cars will still be made somewhere in the U.S. Maybe not made by some of the ‘big three’ names, but made by U.S. workers with much U.S. content. Let those who can manage effectively run the businesses.

  2. How about the .gov agrees to pay the salaries of all employees below management level for a year or 2, as a loan. Let the Jefes fight like rats on a sinking ship.

    Oh wait, the corporate owned DC Mafia only give money to their rich friends. Never mind.

  3. Thanks, Storky, for your explanation. You are spot on. I am a retired teacher from MI now living in NJ. My teacher salary, as well as the salary of all Michiganders, was based on the salary of auto workers. That was the standard. I think people forget how hard the auto workers had to fight–and die–for the right to unionize, to be able to bargain for decent pay and safe working conditiions. We are aiming our anger at the wrong people. It is the executives and CEOs who are making millions, not the workers. The workers have been taking cuts in benefits and pay for a long time.

    There is one thing that no one has mentioned: foreign auto makers do not have to pay health insurance costs for their workers.If our corporations had any brains (they are considered “persons” under the law),they would realize that universal health care would save them a bundle.

    We are currently bailing out the biggest banks, which are failing due to their own greed and fraudulent practices. The auto companies are guilty of not being innovative enough and making cars that people want (they do not force people to buy Hummers or other SUVs). Their employees are not to blame, but they will suffer the greatest loss if the AU goes under. They and many more millions of workers across the country whose jobs are tied to the AU.

    Some 20 or 30 years ago, MI bailed out Chrysler with teacher pension money. Chrysler recovered and paid back all the money. Will the banks pay back all the taxpayer money we have given them? Don’t hold your breath.

    Full disclosure: Until recently, my husband worked for GMAC-re, GM’s most profitable subsidiary, which had been sold to Cerberus. Now it has been sold again. Fortunately, my husband was re-hired by the new company, but who knows for how long. We will have to pay for our own health insurance for a month–and I have heart problems. My husband has been a loyal employee all his life, working late hours every day–with no extra pay. At age 61, where would he find a comoparable job, or any job at all? We are feeling the pain.

  4. If the corporate humunculus fails, it disappears…but not the manufacturing part. The parts of GM, Ford and Chrysler that are functional and profit-making can be reassembled into a more efficient company.

    The fat, give-a-damn days for the company and the unions are over – but the American car-making factory is still there and just waiting for competent management and a responsible work-force.

    Most sincerely,

    T. J. Flapsaddle

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