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$17.4 billion auto bailout has strings attached

Ailing U.S. automakers and their workers accepted huge concessions Friday  in return for a $17.4 billion federal rescue package meant to buy them time to survive.
/ Source: msnbc.com news services

Ailing U.S. automakers and their workers accepted huge concessions Friday, potentially including a partial nationalization, in return for a $17.4 billion federal rescue package meant to buy them time to survive.

President George W. Bush outlined a plan that would hand $13.4 billion this month and next to General Motors Corp. and Chrysler LLC. Both companies have said they soon might be unable to pay their bills without federal help.

GM would get $9.4 billion and Chrysler $4 billion. Ford Motor Co. has said it does not need immediate help.

An additional $4 billion could be available in February, but that is contingent on whether Congress approves a request made by Treasury Secretary Henry Paulson Friday for the $350 billion second half of the financial bailout fund. Tapping the fund for the auto industry basically exhausts the first half of the $700 billion total, he said.

President-elect Barack Obama, who takes office on Jan. 20, warned the auto industry that Americans did not have infinite patience.

The auto rescue package demands concessions similar to those outlined in a bailout plan that was approved by the House but rejected by the Senate a week ago. It would give the automakers three months to come up with restructuring plans to become viable companies.

If they fail to produce a plan by March 31, the automakers will be required to repay the loans, which they would find very difficult.

"The time to make hard decisions to become viable is now, or the only option will be bankruptcy," Bush said. "The automakers and unions must understand what is at stake and make hard decisions necessary to reform."

GM CEO Rick Wagoner said the automaker has significant work ahead, but he said he is confident GM will work with stakeholders to make the company viable.

Wagoner said at a news conference that the federal loans are a blueprint for the century-old automaker's next 100 years.

Wagoner has come under sharp criticism for his management of the nation's largest automaker in this crisis. When asked at the news conference if he would step down, he replied: "Absolutely not."

The president of the United Auto Workers union, Ron Gettelfinger, said, "This will keep the doors of America's factories open, keep Americans working and prevent the devastating economic consequences for millions of Americans and thousands of businesses that would have resulted from a liquidation of operations by one or more auto companies."

Gettelfinger said in a statement that the union is reviewing the plan and will make "shared sacrifices" with management. But he noted that UAW members have already made substantial sacrifices to help make the domestic auto companies more competitive.

"While we appreciate that President Bush has taken the emergency action needed to help America's auto companies weather the current financial crisis, we are disappointed that he has added unfair conditions singling out workers," said Gettelfinger. "These conditions were not included in the bipartisan legislation endorsed by the White House, which passed the House of Representatives and which won support from a majority of senators."

In announcing the plan, Bush said the companies' workers should agree to wage and work rules that are competitive with foreign automakers by the end of next year.

And he called for elimination of a "jobs bank" program — negotiated by the UAW and the companies — under which laid-off workers receive unemployment benefits and supplemental pay from their companies for 48 weeks. If they remain laid off beyond that, they move to a jobs bank in which the company provides about 95 percent of their pay and benefits. Until the most recent contract, people could remain in the jobs bank for years. Early this month, the UAW agreed to suspend the program.

Under the White House plan, the government will have the option of becoming a stockholder in the companies, much as it has with major banks, in effect partially nationalizing the industry. GM and Chrysler must provide the government with stock warrants giving it the option to buy  stock in the two companies at a specific price.

In addition, the automakers would be required to agree to limits on executive pay and eliminate some perks such as corporate jets.

The plan retains the idea of a "car czar" to make sure the auto companies are keeping their promises and moving toward long-term viability.

The short-term overseer will be Paulson. But the White House deputy chief of staff, Joel Kaplan, said that if the Obama team wants someone else installed to bridge the administrations, Bush is open to that.

Allowing the U.S. auto industry to collapse in the middle of what is already a severe recession is not a responsible course of action, Bush said.

"It would worsen a weak job market and exacerbate the financial crisis," Bush said. "It could send our suffering economy into a deeper and longer recession. And it would leave the next president to confront the demise of a major American industry in his first days of office."

At a news conference to announce the final touches to his cabinet, Obama would not say if he'll make any changes to the auto industry loan package announced this morning by the White House.

But Obama warned auto companies that "the American people's patience is running out." He said the automakers should "seize on this opportunity" to come up with a plan to make their companies sustainable.

Obama also said a final restructuring package shouldn't just include concessions from the workers. He says they shouldn't be the ones "taking all the hits." Obama says everyone involved with the auto industry has to be "part of the process."

Obama said his economic team will talk with management and workers to find out how the industry and its jobs can be preserved not just in the short term, but in the years to come.

Bush's plan is designed to keep the auto industry running in the short term, passing the longer-range problem on to the incoming administration of President-elect Barack Obama.

House Republican leader John Boehner called the administration's plan "regrettable." He said that granting loans for automakers was never the intention when Congress passed the $700 billion plan to rescue financial institutions and that the new plan "has failed both autoworkers and taxpayers."

Rep. Jeb Hensarling, R-Texas, chairman of the congressional oversight panel for the Wall Street rescue program, decried the decision, saying a Chapter 11 reorganization, not loans rewarding decades of mismanagement, would have been a better decision.

"Unless union contracts are renegotiated, and unless demand picks up for domestic autos, $14 billion, $34 billion, $74 billion — even $104 billion — will not solve the problem," Hensarling said. "I fear that a devastating precedent has been set that the federal government will now be pressured to bail out every failing company in America — something that taxpayers and future generations cannot afford."

The White House package is the lifeline desperately sought by the automakers, who warned they were running out of money as the economy fell deeper into recession, car loans became scarce and consumers stopped shopping for cars.

The carmakers have announced extended holiday shutdowns. Chrysler is closing all 30 of its North American manufacturing plants for four weeks because of slumping sales; Ford will shut 10 North American assembly plants for an extra week in January, and General Motors will temporarily close 20 factories — many for the entire month of January — to cut vehicle production.

Bush said the automakers have faced serious challenges for many years: burdensome costs, a shrinking share of the market and plunging profits. "In recent months, the global financial crisis has made these challenges even more severe," he said.

"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 automakers," he said.

"Under ordinary economic circumstances, I would say this is the price that failed companies must pay," the president said. "And I would not favor intervening to prevent the automakers from going out of business. But these are not ordinary circumstances.

"In the midst of a financial crisis and a recession, allowing the U.S. auto industry to collapse is not a responsible course of action."

Chrysler CEO Bob Nardelli thanked the administration for its help.

Nardelli said in a statement that the initial injection of capital will help the company get through its cash crisis and help eventually return to profitability. He said Chrysler was committed to meeting the conditions set by Bush in exchange for the money.

Cerberus Capital Management, the private equity firm that bought 80 percent of Chrysler from Daimler AG, said it would invest additional funding to backup the $4 billion loan Chrysler is getting from the government.

But Cerberus said Chrysler's labor costs must be cut to the level of its foreign competitors and its debt restructured.

Ford President and CEO Alan Mulally said his company would not seek the short-term financial assistance but predicted the aid would stabilize the industry.

"The U.S. auto industry is highly interdependent, and a failure of one of our competitors would have a ripple effect that could jeopardize millions of jobs and further damage the already weakened U.S. economy," Mulally said.

Both GM and Chrysler have said a bankruptcy filing is not an option they would choose because of the risk that it would drive more consumers away from their brands.

The Detroit-based automakers have also said a bankruptcy filing by one could topple suppliers and endanger the remaining two companies because of the overlap in their key parts suppliers.

GM and Chrysler have been hard hit by the sudden tightening of credit since September, a development that has made it harder for their dealers to carry inventory and for consumers to find financing.

GM’s sales in the U.S. market dropped 41 percent in November and are down 22 percent so far this year, while Chrysler sales have dropped 28 percent.