Dec. 12 (Bloomberg) -- General Motors Corp. and Chrysler LLC, draining cash as sales slump, won a reprieve to stay alive until January as the Bush administration said it might finance an industry rescue with funds set aside for banks.

The White House’s reversal on tapping the Troubled Asset Relief Program for short-term aid came a day after the Senate rejected a short-term loan package for GM and Cerberus Capital Management LP’s Chrysler, pushing the companies toward a bankruptcy they were working to avoid.

Treasury assistance would be “far more attractive for the industry than the very complex legislation that was being prepared,” David Cole, chairman of the Center for Automotive Research, told Bloomberg Television. “This provides some stability.”

GM, the biggest U.S. automaker, and No. 3 Chrysler welcomed the prospect of TARP funds, the details of which weren’t spelled out. GM said it would trim first-quarter output by about 30 percent, a reduction of 250,000 vehicles, as sales slump.

With GM saying it will run out of cash by month’s end and Chrysler forecasting the same outcome by early next year, financing from TARP may help the companies stay in business until the new Congress takes office on Jan. 5.

“Under normal economic conditions we would prefer that markets determine the ultimate fate of private firms,” White House spokeswoman Dana Perino said. “However, given the current weakened state of the U.S. economy, we will consider other options if necessary -- including use of the TARP program -- to prevent a collapse of troubled automakers.”

‘Stand Ready’

The Treasury Department “will stand ready to prevent an imminent failure,” spokeswoman Brookly McLaughlin said in a statement. Secretary Henry Paulson had resisted Congress’s bid to finance an industry rescue with the TARP money, saying the funds were intended only to bolster ailing banks.

GM dropped 18 cents, or 4.4 percent, to $3.94 at 4:01 p.m. in New York Stock Exchange composite trading, and Ford Motor Co. rose 14 cents, or 4.8 percent, to $3.04. GM plummeted as much as 37 percent earlier. Ford tumbled 27 percent.

Senator Christopher Dodd, who leads the Banking Committee, told reporters in Washington he was “very confident” that President George W. Bush would help secure an emergency loan for GM and Chrysler. The Federal Reserve may provide the funds, said Dodd, a Connecticut Democrat.

The White House shift on TARP “encouraged” GM, according to a company statement, while Chrysler Chief Executive Officer Robert Nardelli told employees in an e-mail that the Auburn Hills, Michigan-based company was “pleased.” Ford, which wasn’t seeking short-term loans, had no immediate comment.

Avoiding Bankruptcy

GM CEO Rick Wagoner told Congress last week and has said repeatedly that the Detroit-based automaker is trying to avoid bankruptcy at all costs. An attempt to restructure GM in Chapter 11 would end up as liquidation, because sales would plummet as buyers flock to solvent car companies, Wagoner has said.

Still, GM also has said it will lack the minimum $11 billion needed to pay bills by the end of this month, raising the possibility of bankruptcy should it fail to win a cash infusion. GM reported having $16.2 billion as of Sept. 30.

Chrysler has said it will run out of money early next year. It ended the third quarter with $6.1 billion in cash and needs at least $3 billion on hand to operate, Nardelli told Congress on Nov. 18.

United Auto Workers President Ron Gettelfinger endorsed emergency aid from the TARP program or the Fed, saying the automakers would be liquidated without U.S. assistance.

“We could work for nothing and GM couldn’t limp into January,” he said at the union’s headquarters in Detroit.

Default Risk

Even with a possible new source of funds, GM and Chrysler’s default risk in the coming months “remains very high” Standard & Poor’s credit analyst Robert Schulz said in a statement today. “In addition, we remain concerned about the spillover effects of an automaker failure” on parts suppliers, he said.

GM’s 8.375 percent bonds due in July 2033 lost 2 cents to 15 cents on the dollar, according to Trace, the bond-pricing service of the Financial Industry Regulatory Authority. The yield was 57.6 percent.

Ford’s 7.45 percent bonds due in July 2031 dropped 2.9 cents to 21.5 cents on the dollar, yielding 34.7 percent, Trace data showed.

GM is reeling from almost $73 billion in losses since 2004 and a 22 percent slump in U.S. sales this year. The automaker last month said it lost $4.2 billion in the third quarter.

Chrysler has been battered by a 28 percent plunge in U.S. sales through November, the most among major automakers.

Pressure was mounting on GM and Chrysler this week before Congress’s impasse as both faced demands from a small number of partsmakers for payments in advance because of the bankruptcy concerns, people familiar with the matter said.

Job losses would total 2.5 million to 3.5 million from an automaker failure in 2009, including 1.4 million people in industries not directly tied to manufacturing, according to a Nov. 4 report from the Ann Arbor, Michigan-based Center for Automotive Research, and does studies for government agencies and companies.

GM’s production cutbacks will affect U.S. plants as well as some in Canada, where Ford and Chrysler also are paring output in January to adjust for surplus inventory, Canadian Auto Workers President Ken Lewenza told reporters at a briefing in Toronto.

To contact the reporters on this story: Greg Bensinger in New York at gbensinger1@bloomberg.net; Jeff Green in Washington at jgreen16@bloomberg.net

Last Updated: December 12, 2008 16:22 EST