President George W. Bush gave the U.S. automakers $17.4 billion in emergency rescue loans, but the fate of the industry is in the hands of President-elect Barack Obama.
Simply letting the carmakers collapse was not an option amid a recession, housing slump and financial credit crunch, Bush said in announcing the short-term loans and demanding tough concessions from the automakers and their employees.
"By giving the auto companies a chance to restructure, we will shield the American people from a harsh economic blow at a vulnerable time," the president said in his Saturday radio address. "And we will give American workers an opportunity to show the world once again that they can meet challenges with ingenuity and determination, and emerge stronger than before."
Detroit’s Big Three cheered the action and vowed to rebuild their once-mighty industry, though they acknowledged it would be tough to fight their way back from the brink of bankruptcy. If the carmakers fail to prove viability — a positive cash flow and ability to make good on the loans — by March 31, they will be required to repay the government loans.
That’s something they would find all but impossible to do.
Bush said the loans will give automakers three months to institute plans to restructure into viable companies "which we believe they are capable of doing." He said if restructuring cannot be done outside bankruptcy, the loans will provide time for companies to make the legal and financial preparations needed for an "orderly" Chapter 11 bankruptcy.
"This restructuring will require meaningful concessions from all involved in the auto industry — management, labor unions, creditors, bondholders, dealers and suppliers," he said. "If a company fails to come up with a viable plan by March 31, it will be required to repay its federal loans. Taken together, these conditions send a clear message to everyone involved in American automakers: The time to make the hard decisions to become viable is now — or the only option will be bankruptcy."
The autoworkers union complained the deal was too harsh on its members, while Bush’s fellow Republicans in Congress said it was simply bad business to bail out the industry using money from the $700 billion rescue program for financial institutions.
Obama, who takes office a month from Saturday, praised the administration action but warned, "The auto companies must not squander this chance to reform bad management practices and begin the long-term restructuring that is absolutely necessary to save this critical industry and the millions of American jobs that depend on it."
Obama will be free to reopen the arrangement from the government’s side if he chooses, and the head of the United Auto Workers said the union would be appealing to the new president and the strongly Democratic new Congress on that subject. Obama was noncommittal on possible changes but said he would "make sure that when we see a final restructuring package that it’s not just workers who are bearing the brunt."
Some $13.4 billion of the rescue money will be available this month and next — $9.4 billion for General Motors Corp. and $4 billion for Chrysler LLC, the two auto giants that have said they could be facing bankruptcy soon without government help. GM is slated to receive the remaining $4 billion in loans after more money is released from the financial rescue account. Ford Motor Co. says it doesn’t need federal cash now but would be badly damaged if one or both of the other two went under.
Under terms of the loans, the government will have the option of becoming a stockholder in the companies, much as it has with major banks, in effect partially nationalizing the industry. Bush said the companies’ workers should agree to wage and work rules that are competitive with foreign automakers by the end of next year.
And he called for elimination of a "jobs bank" program — negotiated by the United Auto Workers and the companies — under which laid-off workers can receive about 95 percent of their pay and benefits for years. Early this month, the UAW agreed to suspend the program.
The deal also calls for two-thirds of the automakers’ debts to be converted to stock in the companies.
Also, Chrysler, GM and Ford were to pay billions into UAW-administered trust funds that will pay health care bills for hundreds of thousands of retirees starting on Jan. 1, 2010. The trusts, called Voluntary Employees Beneficiary Associations, were to last at least 80 years.