WASHINGTON — The government will give General Motors Corp. and Chrysler LLC up to $17.4 billion in short-term loans, money that should help them avoid immediate bankruptcy but forces them to undergo dramatic restructuring, President Bush announced Friday morning.
“Allowing the auto companies to collapse is not a responsible course of action,” Bush said Friday in a statement.
Bush will provide carmakers $13.4 billion now and an additional $4 billion in February if necessary. The funds would come from the Troubled Asset Relief Program, or TARP, approved in October by Congress to help ailing financial institutions.
Treasury Secretary Henry Paulson has opposed use of TARP funds for purposes outside the banking system. But Bush said he was faced with the unpleasant choice of government intervention in the marketplace or letting a carmaker fail amid a deep recession and risk deeper economic woes that would be left to his successor.
The funds amount to a Band-Aid and should be enough to keep GM and Chrysler operating until March. If the companies cannot show financial viability by the end of that month, they will have to return the money.
In the meantime, they will have to revamp their operations largely along lines approved by members of Congress last week, before talks to craft legislation collapsed. Those talks aimed at creating a car czar to oversee the industry, and this post is not included in the Bush plan.
His plan requires carmakers to show positive net value by March 31 and strive to reduce two-thirds of their debt.
Detroit’s Big Three also must get their wage structure with the United Auto Workers union competitive with foreign-owned carmakers who manufacture in the United States by the end of 2009.
That last point was a sticky issue in the failed congressional talks, when Senate Republicans demanded that the UAW accept the same wage structure as foreign-owned competitors by the end of 2009.
Bush backed them up on that in his plan.
Democratic backers wanted to wait until 2011 to phase in parity, while GOP negotiators wanted it done next year. The move amounts to tearing up a collective bargaining agreement, and seriously weakens the UAW’s future negotiating position.
Senate Banking Committee Chairman Christopher Dodd, D-Conn., has been a vocal foe of forcing parity next year — and protesting that lawmakers should not be in effect conducting labor negotiations. Under Bush’s terms, though, Friday’s terms can be renegotiated with the Obama administration, which takes office Jan. 20.
“It’s a difficult situation that involves fundamental questions about the role of government,” Bush acknowledged in an eight-minute statement from the Roosevelt Room.
He’s been conflicted about the extent to which Washington should intervene in the operations of a private company, but concluded “government has a responsibility to safeguard the broader health and stability of our economy.”
For all its immediate impact, the automakers won’t recover on the basis of this bridge alone. They need an end, or at least a thawing, in the deep credit freeze that has prevented consumers from obtaining car loans. Car loans are normally packaged together and sold into a secondary market, a process called securitization, and these secondary markets have virtually gone away, 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, chief economist at forecaster Moody’s Economy.com and a witness during the recent congressional hearings. “The Big 3 share of these sales is less than 5 million units. Their break-even sales rate is closer to 7 million units. “
Under Bush’s plan, which would go into effect immediately, many of the provisions negotiated by congressional lawmakers last week would take effect. There would be limits on executive pay, government would have to approve major expenditures, dividends would be limited and bondholders will have to agree to take losses. The government can veto any expenditure above $100 million.
Bush did not address what would happen if a company was unable to repay the loans by March 31, but suggested his plan in effect gave the companies three months to prepare for bankruptcy.
The White House is said to have been considering allowing companies to file some form of bankruptcy, but Bush rejected the notion Friday, saying it was “unlikely to work for American automakers at this time.”
Consumers, he said, understand that buying a car from a bankrupt company means, among other things, “you question the value of your warranty.” Bush suggested that if the carmakers cannot get their finances in order and are forced to enter bankruptcy, they will have had time to prepare and can enter Chapter 11, which allows them to reorganize, instead of Chapter 7, which would take them to liquidation. That move would spill over across the supply chain and be felt nationwide in sundry industries tied to auto manufacturing.