As GM and Chrysler warn of imminent bankruptcy, at least a temporary government bailout of the auto industry seems likely
General Motors (GM) and Chrysler are weeks away from perhaps having to file for bankruptcy, according to company and union officials testifying to the Senate on Thursday, Dec. 4. But even amid harsh questioning and skepticism expressed by key members of Congress, there was awareness by the end of the six-hour session that allowing the industry to go belly-up would cost the U.S. government hundreds of billions of dollars and cost the country up to 3 million jobs.
The U.S. automakers are seeking $34 billion in "bridge" loans and lines of credit to help see them through the recession, though some analysts are saying the companies will need much more in a year.
Options in Play
The House Financial Services Committee will hear from the Big Three CEOs and United Auto Workers union on Friday. Congress is scheduled to vote on some kind of measure on Dec. 8. In the next week, the following options will be explored by leading lawmakers and members of President-elect Barack Obama's transition team:
Convince the Bush Administration to release perhaps $5 billion to $8 billion of the Wall Street bailout fund to the automakers to keep them from going bankrupt. Congress can then put together a comprehensive aid package that is tied to strict oversight and government participation in an overhaul that would involve bondholders taking perhaps 66% less than the face value of the automakers' debt, as well as wage concessions from the UAW.
A piece of legislation drafted for vote next week that would give the automakers perhaps $10 billion right away from an approved $25 billion fund to help them retool factories to produce more fuel-efficient vehicles. That would buy time so Congress and the incoming Obama Administration could organize a more sweeping program to save the industry.
Getting a measure through Congress in a lame-duck session is tricky. But looming in the background is the knowledge that the incoming Obama Administration is much more disposed to buttressing Detroit than is the Bush White House or Republicans in Congress.
"We can't allow the U.S. auto industry to vanish," said President-elect Obama on Wednesday.
GM's CEO G. Richard Wagoner Jr. said the company must have government loans; an immediate $4 billion loan, followed by $8 billion after the New Year and then a $6 billion line of credit. While Wagoner said there is no "Plan B," sources at the car companies and on Capitol Hill said GM and Chrysler were working on "emergency plans" that would allow them to last until Obama takes office, when he could more freely help the automakers if the Bush White House does not. "That's the 'nuclear bomb shelter' plan," as one source described it. Such a plan could involve idling plants and deferring payroll for a matter of weeks to preserve cash.
Making the Case
Whether Congress or Obama comes to Detroit's rescue, the industry has to keep working to convince lawmakers and the public it has a plan to recover even after Friday's House hearing. "The industry still has a long way to go to make its case.…It has to prove to the American people that its executives, workers, creditors, and shareholders deserve to come out better than they'd come out of reorganization under Chapter 11 of the bankruptcy code—or even a workout in the shadow of Chapter 11," said Robert Reich, former Labor Secretary and a current member of Obama's transition team.
Reich noted that the auto industry is under much more scrutiny than Wall Street was when it asked for bailout money. "Wall Street hasn't had to make that case because most Americans have no idea what Wall Street did or does, or what the Wall Street bailout is costing them," said Reich, who added that Obama will also be looking for public support if he is going to use some of the Wall Street bailout fund for Detroit.
While Detroit's CEOs were treated better by lawmakers on Thursday than last month, when they were scolded for arriving in three separate private jets, the most popular witness Thursday may have been Dr. Mark Zandi, co-founder and chief economist of Moody's Economy.com (MCO). Zandi whipsawed the committee by first estimating that it will take between $75 billion and $125 billion to keep the three companies from going bankrupt in the next two years. But later, he called the results of not coming to the aid of the companies "cataclysmic" for the U.S. economy, already reeling from a recession and a huge shortage of credit. Asked if the cost to the government in resulting unemployment and Medicaid payouts and pension rescue would be more than the loans being requested, Zandi said, "It's not even in the same universe."
On Wednesday, Senate Majority Leader Harry Reid (D-Nev.) said he did not believe Democrats had the necessary votes to aid the auto industry. But after the hearing Thursday, Senate Banking Committee Chairman Christopher Dodd (D-Conn.) acknowledged he could see an opportunity for compromise. Dodd said Congress wasn't going to write a check for $34 billion without a lot of conditions, but he also felt that many members had been talked out of advocating Chapter 11 bankruptcy. "Between those two poles, I can feel there is a lot of room to work."
Though more Democrats than Republicans support loans to the U.S. auto industry, lawmakers in both parties are under pressure from constituents who are frustrated with the lack of results from the Wall Street bailout. They are extremely skeptical about billions of taxpayer money going to Detroit. "There is no question that the lack of oversight in the Wall Street bailout is bleeding over into this hearing," said Senator Jon Tester (D-Mont.).
Some of the most vocal opposition to the auto industry loans comes from either legislators in states that have benefited from foreign carmakers building plants in those states, or those representing states that have no auto or auto parts manufacturing. "I do not support this idea of a Detroit bailout," said Senator Richard Shelby (R-Ala.). Alabama, which was decimated in the 1980s and 1990s by the loss of textile jobs, is now home to nonunion auto plants operated by Mercedes-Benz (DAI), Honda (HMC), Hyundai (HYMZY), and dozens of supplier companies feeding those factories.
Republican Senator Bob Corker, whose state of Tennessee recently attracted Volkswagen (VOWG) to build a plant there, proposed specific measures to the carmakers and UAW President Ron Gettelfinger that he felt would be necessary to ensure the companies' survival and secure government loans. The freshman senator said he didn't think GM could survive with its current debt load, but that bondholders would accept perhaps 30¢ on the dollar if the union agreed to wages equal to that at foreign-owned auto plants and agreed to take $11 billion to $12 billion of future cash payments owned to their health-care fund in the form of stock.
That kind of sacrifice was endorsed by Senator Charles Schumer (D-N.Y.), who advocates a stopgap loan to ward off bankruptcy and a government czar or trustee to oversee reorganization. "All the stakeholders—management, labor, dealers, and bondholders—have to come to the table."
Perhaps most surprising in the hearing were Senator Corker and Senator Bob Bennett (R-Utah) advocating that the government facilitate the merger of GM and Chrysler as part of any deal to assist the automakers. "It is clear that not all three automakers are going to survive," said Bennett.
The two companies were in merger discussions in August and September (BusinessWeek.com, 10/30/08), but shelved the talks when the credit markets dried up and their financial condition worsened. They were also told by Democrats that lawmakers would not support government loans used for a job-killing merger. Chrysler CEO Robert Nardelli said he did not agree that Chrysler had no future as a stand-alone company, but that he would not stand in the way of a deal if it meant getting the necessary government loans.
Following the marathon hearing, one auto executive said he was encouraged that some Republicans who seemed not to listen at all to their requests for government help last month were "more rational" on Thursday about the impact on the broader economy. "I think we can save the industry in the next month, but it will be a very different-looking Detroit Three in a few months, and probably will be the Detroit Two."
Business Exchange related topics:
U.S. Auto Sales
Mergers and Acquisitions