Will Bush's auto bailout work? We'll know by March

McClatchy NewspapersDecember 19, 2008 

WASHINGTON — President George W. Bush's decision to provide up to $17.4 billion in short-term loans should help General Motors and Chrysler avoid a short-term cash crisis, but it will force them to dramatically change how they operate — or face bankruptcy.

Bush offered targets for the companies Friday, but not requirements, meaning that tough negotiations lie ahead among labor and auto company executives and officials in the incoming Obama administration. Even if they reach agreement, the fates of the Big Three automakers — including Ford, which says it doesn't need immediate help — could well be out of their control.

They need an end, or at least a thawing, to the deep credit freeze that's prevented consumers from obtaining car loans. Car loans usually are packaged together and sold into a secondary market, a process called securitization, and these secondary markets have virtually disappeared, paralyzing all sorts of lending across the U.S. economy.

"The automakers will hemorrhage red ink until auto lending and leasing revives. Without credit, vehicle sales will at best remain at their current 10 million unit annual sales pace," said Mark Zandi, the chief economist at forecaster Moody's Economy.com.

"The Big Three share of these sales is less than 5 million units. Their break-even sales rate is closer to 7 million units."

A conflicted Bush announced the aid package Friday after days of deliberating over how to help the struggling companies.

"This is a difficult situation that involves fundamental questions about the proper role of government," he said. While government has a responsibility "not to undermine the private enterprise system," it also must "safeguard the broader health and stability of our economy."

The president will provide carmakers with $13.4 billion now and another $4 billion in February if necessary. The money will come from the Troubled Asset Relief Program, which Congress approved in October to help ailing financial institutions.

General Motors will get $4 billion immediately and another $5.4 billion on Jan. 16. Chrysler will get $4 billion right away. The remaining $4 billion is to go to GM on Feb. 17, once restructuring plans are presented and Congress agrees.

President-elect Barack Obama, whose advisers were consulted on the package, issued a statement saying that Bush's actions were a "necessary step" and warned at a Chicago news conference that "people's patience is running out, and they (the carmakers) should seize on this opportunity . . . to come up with a plan that is sustainable."

He didn't say whether he endorsed the specific goals that Bush spelled out in an eight-minute statement in the Roosevelt Room.

The president strongly suggested — but didn't specifically require — that the companies revamp their operations largely along the lines that congressional majorities endorsed last week before talks to craft legislation collapsed.

He said that companies should show positive net value by March 31, and automakers "must meet conditions" that include putting their retirement plans "on a sustainable footing," convincing bondholders to convert debt into capital that companies need for immediate use and bringing worker compensation in line with that of foreign-based automakers that have major U.S. operations.

The last point made congressional compromise talks implode last week. Senate Republican negotiators demanded that the United Auto Workers accept the same compensation as non-union autoworkers by the end of 2009; the union and Democrats wanted a 2011 target. A White House fact sheet Friday said that negotiators should aim for Dec. 31, 2009.

Many Democrats and the UAW were optimistic Friday that they could negotiate terms to keep the carmakers in business.

"This will keep the doors of America's factories open," UAW President Ron Gettelfinger said.

House Speaker Nancy Pelosi, D-Calif., and House Financial Services Committee Chairman Barney Frank, D-Mass., took a tougher line, saying that provisions affecting workers troubled them. Frank dubbed the Bush plan "an unfair assault on working men and women which could require them to accept a disproportionately large reduction in what is currently legally owed to them."

While the labor issue is likely to be the most publicized controversy, other serious questions loom. One is how the carmakers' "viability" will be judged and managed. Bush didn't appoint a "car czar," instead leaving management to Treasury Secretary Henry Paulson. Obama could name someone other than his treasury secretary to oversee the bailout.

Obama, whose administration will have the authority to renegotiate the loan terms, also will have to face difficult choices about how to restructure three very different companies.

"At the end of the day, all three companies are structurally so different," said Rebecca Lindland, the director of automotive research at forecaster IHS Global Insight, and all three face different challenges. "GM is the only truly publicly held company," she said.

Criticism is growing that the private equity firm Cerberus Capital Management, which owns Chrysler and is headed by former Bush administration Treasury Secretary John Snow, has money that it could tap.

The new administration also must assess the impact of potential aid to the carmakers' financing arms. The Fed and the Treasury expect to have a program soon in which the government purchases bundled car loans in hopes that this will help thaw the frozen secondary market.

Analysts were virtually certain that at the end of March, even if they're declared "viable," carmakers will need more government aid; earlier this month, they were seeking $34 billion. Ford wanted a $9 billion line of credit.

"The question is, by the end of March, will the argument that we're throwing good money after bad still be considered legitimate?" Lindland asked. "We'll know the answer to that at the end of the first quarter of 2009."

(Margaret Talev contributed to this article.)

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