Republicans to Detroit: Drop dead

Image: Chevrolet salesman Philip Jordan
Chevrolet salesman Philip Jordan helps car shoppers in downtown Los Angeles. With car sales slumping, U.S. automakers are looking for a bailout form the U.S. government to survive.Ric Francis / AP file
/ Source: Business Week

Democrats may have been the big victors on Election Day. But the Republicans still in charge in the White House and representing a possibly immovable minority in the Senate may keep the U.S. auto industry from getting the help it needs before Barack Obama is inaugurated as President in January.

To convince wary Republicans to go along with a rescue package, a House bill being crafted would give the government stock warrants, an equity stake in the automakers. It also has a provision that would put taxpayers at or near the head of the line for debt repayment when the companies recover.

Without at least $15 billion in loans, General Motors, say insiders, could face bankruptcy next year. The total loan package sought by Democrats for automakers and their suppliers could be as high as $50 billion, a number floated by aides to President-elect Obama.

GM’s CEO G. Richard Wagoner Jr. said Thursday, Nov. 13, in an interview with Automotive News that he is willing to accept just about any condition on the loans he has heard expressed by political leaders.

“Whether that’s stock warrants, restrictions on executive compensation and golden parachutes, we've said we're very willing to accept those,” Wagoner said. In announcing GM’s fifth straight quarterly loss last week, Wagoner said GM may run out of cash to operate before mid-2009.

Chrysler CEO Robert Nardelli said Thursday that he doubted his company could survive without government loans.

“It would be very difficult to make it through this unprecedented downturn” without help, he said at a conference in Palm Desert, Calif. At the same time, said Nardelli, the automaker “cannot assume we are going to get financial assistance” and may have to close two more assembly plants.

The House and Senate committees overseeing the financial-services industries have called hearings on Nov. 18-19 that will involve testimony from the CEOs of GM, Ford, and Chrysler, as well as other authorities from the auto industry. Last week, hearings were considered unnecessary. But there is so much mounting GOP opposition to auto industry loans that Representative Barney Frank (D-Mass.) and Senator Chris Dodd (D-Conn.), the chairmen of the House finance and Senate banking committees, respectively, changed course.

Questions for the group are expected to focus on the following:

  • How did GM get to the point of near-bankruptcy?
  • What kinds of guarantees can you offer Congress that your companies will be viable after a possible infusion of loans?
  • How sure are you that you will be able to pay it back? How real is the threat of more than a million jobs going away if GM files for Chapter 11?
  • Why are you so top-heavy in trucks and SUVs, when Toyota and Honda are not?
  • How specifically will you use the liquidity?

To GM and Chrysler:

  • Will you use the money in 2009 to help achieve a merger of your two companies? If so, why is it necessary?
  • Will you commit to significant restrictions on executive compensation as a condition of these loans?

Government auto czar
President-elect Obama, who is widely known to favor loans to the auto companies, has floated, through aides, the idea of conditions that would be enforced by a government "czar."

Such an enforcer is almost guaranteed because of the way banks that have received billions from the $700 billion Troubled Asset Relief Program (TARP) have behaved. Most haven't been lending or extending credit, which was the intended purpose of the money. The banks have either been sitting on the money or are using it to acquire smaller banks, as well as to pay executive bonuses and even stock dividends. "That legislation did not have enough carrots and sticks" to achieve the intended purpose, Senator Charles Schumer (D-N.Y.) told reporters Wednesday.

For all the Democratic support to help the auto companies, the opposition by Republicans is just as strident. Senator Richard Shelby (R-Ala.), a member of the Senate Banking, Housing, & Urban Affairs Committee, said: "The financial straits that the Big Three find themselves is not the product of our current economic downturn, but instead is the legacy of the uncompetitive structure of its manufacturing and labor force." He added: "I do not support the use of U.S. taxpayer dollars to reward the mismanagement of Detroit-based auto manufacturers in such a way that allows them to continue and compound their ongoing mistakes."

In Alabama, Asian and European auto companies have set up manufacturing in recent years. Once decimated by the loss of textile jobs, Alabama has attracted assembly plants from Mercedes-Benz, Hyundai, and Honda, as well as a roster of supplier companies feeding those plants. Foreign auto companies are attracted to the Southeast, where the United Auto Workers have no presence, rather than acquiring empty plants in the North that were organized by the union.

Fellow Alabama Republican Senator Jeff Sessions also opposes helping the auto industry. "Once we cross the divide from financial institutions to individual corporations, truly, where would you draw the line?"

The GOP opposition goes further than regional agendas. House Minority Leader John Boehner (R-Ohio) also bashed the prospect of government aid to the auto companies even though Ohio—already with some of the highest rates of unemployment and housing foreclosure in the country—is home to several auto assembly and parts plants.

White House Press Secretary Dana Perino seemed to pile on Thursday. The auto companies made business decisions "over the years that have led to this situation, but we have gone as far as we can with the authority Congress has given in order to help industries."

Senator Dodd said Thursday there are currently not enough Republican Senate votes for helping the auto industry.

The Bush Administration has never been very warm to the auto industry, despite the President choosing Andrew Card, the former chief lobbyist for the industry, as his first Chief of Staff. According to one automaker lobbyist who asked not to be identified because of the current negotiations: "I think Bush's economic team was hoping the automakers would get weak enough to bust the UAW … It's no secret that they have no love of organized labor."

The viability question
The automakers, especially GM and Chrysler, have a steep hill to climb in hearings next week. They will have to go to the Capitol armed with evidence that government loans would be a worthwhile bridge to a healthy auto industry, and not throwing good money after bad. GM is burning nearly $2 billion a month as its cash flow from auto sales is insufficient to cover its costs. Ford and Chrysler are in bad shape, too, though Ford has more cash reserves than GM.

Increasingly, the word "viability" is creeping into the discussions on Capitol Hill. "The companies will have to show they are viable with the loans … We don't want a situation where they are coming back six months later for more," says Senator Schumer. House Speaker Nancy Pelosi (D-Calif.) has also repeatedly used the word "viable" in the last week in discussing her support for loans. Treasury Secretary Henry Paulson said Wednesday: "Any solution has got to be leading to long-term viability" for auto companies.

Boosters of aid to the auto companies say that if the companies can demonstrate viability, they have a chance. "When the economy turns upward, these companies are positioned to make huge profits because of all the restructuring they have done," says David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich. "I don't think this is well-understood in Washington," he added.

Detroit automakers have at least one more chance to get the message across next week.