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Auto Bailout Accord Nearly Reached

Speaker of the House Nancy Pelosi's change of heart could lead to a lifeline for Detroit

Detroit automakers hoping for a government lifeline got it Friday night when Speaker of the House Nancy Pelosi said she would support a $15 billion loan from a fund already approved by Congress aimed at retooling factories to make fuel-efficient vehicles over the next several years.

Pelosi had been against the measure, bolstered by environmental advocacy groups. Opponents were concerned that automakers would use the money for normal operations and not deliver on requirements to develop vehicles that are at least 25% more fuel-efficient than the ones they market today.

But with job losses mounting in the U.S., many members of Congress are feeling pressure not to let the automakers go bankrupt even though most of their constituents do not favor a bailout for Detroit.

Cascading Bankruptcies Possible

Estimates are that if one automaker went into insolvency, it would cause a cascade of bankruptcies in the auto sector that could cost up to 3 million jobs. The U.S. lost more than 500,000 jobs in November alone.

The funds that would be tapped for the car companies were appropriated in the 2007 energy bill, and were meant to be disbursed by the Energy Dept. over time as each automaker qualified for the loans. "We will not permit any funds to be borrowed from the advanced technology program unless there is a guarantee that those funds will be replenished in a matter of weeks," said Pelosi (D-Calif.). How that would be accomplished is still under debate.

It was clear on Friday, after two days of hearings in front of the Senate Banking Committee and House Financial Committee, that Congress did not have the votes to appropriate new funding for a Detroit bailout, especially during a lame-duck session.

Encountering "Bailout Fatigue"

Over the last month, Congress, the public, and the media have been highly critical of the way the Treasury Dept. has overseen payouts to commercial and investment banks from the $700 billion Wall Street bailout package Congress passed in October. Representative Barney Frank (D-Mass.), chairman of the House Financial Services committee, said the public has "bailout fatigue."

Despite the intent of the package, which was to loosen lending to businesses and consumers, the credit markets remain tight. Banks have used the money for other functions, such as dividend payments, salaries, and even, in some cases, executive bonuses.

The automakers came to Washington asking for $34 billion, on top of the $25 billion loan package that was part of the energy bill. General Motors (GM) said it needed $4 billion by the end of the year to avert a financial meltdown, and Chrysler requested $7 billion, saying it would be at the minimum cash levels it needs to survive by the New Year. Chrysler on Friday retained a law-firm that specializes in Chapter 11 bankruptcy.

Vote Likely This Week

Ford (F), in a better cash position, said it could likely weather the recession in 2009 without loans, though it asked for a $9 billion line of credit as an emergency fund. Executives with knowledge of the negotiations on Friday said Ford would probably not tap the loan money Congress is likely to approve next week.

Originally, Congress said it would meet Monday to vote on a bill if one came together. The vote will now take place later in the week, assuming the language of the bill is worked out to Pelosi's liking.

Chairman of the Senate Banking Committee Christopher Dodd (D-Conn.) has maintained that the Bush White House and Treasury have had the power to release funds from the $700 billion Wall Street fund. That assertion was backed up by the Federal Comptroller last week during hearings. But the White House has argued that the bill can

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