Bush throws lifeline to U.S. auto industry
By Jeremy Pelofsky and John Crawley
President George W. Bush announced $17.4 billion (£11.6 billion) in emergency loans to faltering U.S. carmakers on Friday in a dramatic step to stave off collapse of the industry and save hundreds of thousands of jobs from falling victim to a deep recession.
Bush, seeking to bolster his legacy and bucking some fellow Republicans who would prefer the car industry to deal with its problems without government aid, said it would be irresponsible in a time of economic crisis to let carmakers die.
The government will offer up to $17.4 billion in loans to the U.S. automakers, reeling from a slump in consumer demand, and expects General Motors and Chrysler LLC to access the money immediately.
Ford, the other firm in Detroit's storied Big Three, said its liquidity is adequate for now and it did not need a loan at this point.
"If we were to allow the free market to take its course now, it would almost certainly lead to disorderly bankruptcy and liquidation for the carmakers," Bush said, warning that to do nothing would deepen and prolong the U.S. recession.
U.S. stocks rose on the news of the lifeline to the sector, with GM shares jumping 11.2 percent.
Some $13.4 billion of the total package will be made available in December and January from a $700 billion Wall Street bailout fund that was originally designed to rescue struggling financial institutions.
Bush attached a string of conditions to the three-year loans. He set a deadline of March 31 for the companies to prove they can restructure enough to ensure their survival or else the loans will be called back.
The White House said that if the auto industry were to collapse, it could reduce U.S. economic growth by more than 1 percent, put about 1.1 million workers out of jobs and cost some $13 billion in new unemployment claims.
Democratic President-elect Barack Obama, who takes over from Bush on January 20, welcomed the loan move as a necessary step. Obama has been calling for short-term loans to the sector based on steps towards long-term viability.
But other Democrats assailed a condition that would require labour unions to bring wages and benefits to levels competitive with foreign manufacturers operating in the United States by the end of 2009.
"An unfair assault," said Massachusetts Democratic Rep. Barney Frank.
The United Auto Workers union also called the conditions "unfair" and said it would work with the incoming Obama administration to ensure they are removed.
Some Republicans opposed to bailing out Detroit were dismayed.
"I find it unacceptable that we would leave the American taxpayer with a tab of tens of billions of dollars while failing to receive any serious concessions from the industry," said Arizona Republican Sen. John McCain, who lost the presidential election to Obama on November 4.
GM's CEO, Rick Wagoner, said the company would now focus on fully implementing its restructuring plan and was confident of meeting the government's requirements.
Chrysler, widely seen as the weakest of the Big Three, said concessions would happen quickly and it would continue to undertake "significant cost reductions."
Ford, while not seeking an immediate loan under the program, has said it would like a line of credit from the government only to be used if its finances worsen significantly in 2009.
Analysts noted the carmakers' woes were far from over.
"It's a lifeline, but it doesn't get them completely out of the woods. It takes them (GM and Chrysler) forward until March. Basically the next administration has to deal with it." said Erich Merkle, an analyst with Crowe Horwath in Michigan, of the loan package news.
The White House moved on its own after Republicans in the Democratic-controlled U.S. Congress stalled a deal last week. That plan followed weeks of negotiations that included desperate pleas on Capitol Hill from the auto chiefs.
The loan conditions included limits on executive compensation and a requirement. Auto companies must pay back all their loans to the government, and show that their firms can earn a profit and achieve a positive net worth. The carmakers would also have to provide warrants for non-voting stocks.
WALL ST BAILOUT FUNDS
Bush announced the loan program just weeks before leaving office with low popularity ratings, an economy in recession and the country fighting two wars.
Both GM and Chrysler have said a bankruptcy filing is not an option they would chose because of the risk that it would drive more consumers away from their brands. Both have idled plants and laid off thousands of workers across North America.
The carmakers have warned that a bankruptcy filing by one could topple suppliers and endanger the remaining two companies because of the overlap in their key parts suppliers.
The Treasury said the move to help the carmakers had effectively exhausted the initial $350 billion of the Wall Street bailout funds approved by Congress and that it now needs to access the rest of the $700 billion.
The remaining $4 billion in autos aid is contingent on the administration seeking the second half of the Troubled Asset Relief Program, an administration official said.
The loans would have an interest rate of at least 5 pct but could rise to 10 pct if the carmakers default, officials said.
No carmakers have been spared in the global sales slump.
Following the U.S. government plan, Canadian Prime Minister Stephen Harper was set to announce an aid package for his country's auto industry on Saturday. That aid could amount to several billion dollars.
Japan's Toyota could report its first annual parent-only operating loss in 71 years in the year to end-March, and may issue a profit warning at a scheduled year-end news conference on Monday, Japanese media reported.
Toyota, which declined to comment on the reports, last saw an operating loss in its first year of operation in 1937/38.
Carmakers everywhere are under huge pressure to cut costs as a global recession and tight credit strangle demand, and Japanese carmakers are feeling the pinch from a strong yen.
In perhaps the strongest protest since the dollar soared to a 13-year high recently, Honda CEO Takeo Fukui warned a strong yen would cripple Japanese industry and trigger mass layoffs, forcing the carmaker to shift production offshore if it persisted.
Cerberus Capital Management, the private equity firm that bought 80 percent of Chrysler from Daimler AG, has retained advisors to study a range of options for the No. 3 U.S. carmaker, including selling off its most valuable assets, including its Jeep brand and its minivan line.