The CEOs of Detroit's Big Three automakers began their journeys back to Michigan on Dec. 5 in cars, rather than corporate planes, after two days of draining testimony before both houses of Congress, with no more than hope that lawmakers will pass legislation next week granting taxpayer loans to keep them out of bankruptcy.
According to lawmakers and auto executives, though, the CEOs may as well keep driving west—passing the northward turn for Detroit and going on to Chicago to make their case for longer-term help directly to President-elect Barack Obama. "We'll be lucky to get enough money to last us until the end of January, I think, from Congress, and then we are at Obama's mercy," said one fatigued auto industry lobbyist.
Congress, if the leadership of both houses believes it has sufficient votes, will meet on Dec. 8 to consider legislation that many believe will not top $10 billion, far short of the $34 billion (BusinessWeek.com, 12/3/08) the automakers asked for, and the $100 billion some analysts believe is required. General Motors (GM) told Congress it needs an emergency $4 billion by Jan. 1 to keep its operating cash above the danger point. Chrysler is looking for $4 billion to $7 billion. Ford Motor (F) said it will not be in financial danger in 2009 unless one of its rivals fails and causes a chain reaction of failures among auto suppliers.
Washington's "Game of Chicken"
Many members of Congress, from both parties, have been cool to supporting a broad-based auto industry bailout, reading frustration and skepticism in their constituents' e-mails and phone calls. Many voters oppose a bailout for Detroit after the Wall Street bailout has yielded little or no economic recovery, especially in the credit markets. "Politically, no one wants to own this bailout after the Wall Street debacle," said one Capitol Hill legislative aide.
But a government report that said the U.S. lost 533,000 jobs in November alone, with more expected in December, seems to have spooked even Southern Republicans who have opposed a Detroit bailout, and who were not enthusiastic about the $700 billion Wall Street package. "We must recognize that a failure of GM or Chrysler would have a detrimental effect in America especially at a time when the economy is under such stress," said Representative Spencer Bachus (R-Ala.), who said he would support a limited loan package to "allow the domestic auto industry to return to solvency and profitability, but then only if there is a reasonable expectation of success."
The Center for Automotive Research, in Ann Arbor, Mich., has estimated that some 3 million jobs could be thrown into jeopardy from even one automaker going into insolvency, because of the large number of financially fragile suppliers that would also fail. Those estimates were backed this week by Moody's Economy.com (MCO) and the acting U.S. Comptroller General. For that reason, there is what's been described in the hearings this week as a "game of chicken" going on between Congress and the White House over which will act to provide bridge financing to keep the recession from becoming something even worse.
The two days of hearings were markedly different (BusinessWeek.com, 11/19/08) from last month's two-day appearance. Then, lawmakers rebuked the CEOs (BusinessWeek.com, 11/20/08) dozens of times for flying to Washington in private jets to solicit money and for offering few details on how the money would be spent, or whether it would keep them out of bankruptcy for a week or a year. This week each company filed reports in excess of 100 pages and drove to Washington. And members of Congress made fewer overheated speeches and asked more questions.
At the House Financial Services Committee hearing Friday, a day after a hearing before the Senate Banking Committee, even frequent critics of Detroit urged caution. "I strongly believe we need a viable U.S. auto industry," said David Friedman of the Union of Concerned Scientists, who is often withering about carmakers' over-reliance on gas-guzzling SUVs. Friedman said Congress should look upon the opportunity "as an investment, not a bailout," and use their power as chief creditor after granting loans as a cudgel to require the companies to meet tougher fuel-efficiency and emissions standards.
There are still some experts advocating that the companies reorganize under Chapter 11 bankruptcy. Professor Edward Altman, an influential finance expert at New York University's Stern School of Business, recommended to the House committee that the federal government act as debtor-in-possession financier to the automakers in a Chapter 11 filing. Altman estimated it will take $70 billion just to save GM, and that extensive restructuring to ensure the companies' success wouldn't occur outside of bankruptcy court. He brushed aside worries that consumers will abandon a bankrupt car company. "Government participation will blunt consumer fears and take away the surprise and uncertainty around the companies now," said Altman. On Dec. 5, The Wall Street Journal (NWS) reported that Chrysler has engaged a leading bankruptcy law firm to start advising the company.
The automakers have warned Congress not to consider Chapter 11 because of the loss of customer confidence that would bring. In the last few months the companies have already seen sales fall more precipitously than the industry has, in part they say, because of all the media attention on possible bankruptcy. A Chapter 11 filing, GM CEO Rick Wagoner warned, "will turn into liquidation very quickly."