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Bush throws lifeline to Big 3

2008-12-22 08:58

Washington - President George W. Bush announced $17.4 billion in emergency loans to faltering US 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 US automakers, reeling from a slump in consumer demand, and expects General Motors and Chrysler LLC to access the money immediately. The White House said the loan agreements had been signed.

Ford Motor Co, 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 automakers," Bush said, warning that to do nothing would deepen and prolong the US recession.

U.S. stocks rose on the news of the lifeline to the sector, with GM shares jumping 10.9%.

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 and set a deadline of March 31 for the companies to prove they can restructure enough to ensure their survival or have the loans called back.

Democratic President-elect Barack Obama, who takes over from Bush on January 20 and so will inherit the handling of the deal, welcomed the loan move as a necessary step. But he said he wanted to make sure workers do not bear the brunt of the restructuring.

"My top priority in this administration is to create 2.5 million new jobs and I want some of those jobs to be in the auto industry," Obama said at a news conference.

Obama has been calling for short-term loans to the sector based on steps toward long-term viability.

Labour terms

Other Democrats and the main auto labour union assailed the deal as unfair, saying workers were going to have to concede too much.

One provision in the loan terms on worker pay brought protests from the United Auto Workers union, and then a change in wording by the US Treasury. The Treasury altered the wording of the terms for automakers to seek reductions in wages and benefits to levels "competitive with" Japanese rivals.

Under wording released earlier in the day, the Treasury said it would require reductions to levels "equal to" average compensation paid per hour and employee by Toyota Motor Corp, Nissan Motor Co and Honda Motor Corp in the United States.

The change was described as a correction of a grammatical error by a Treasury spokeswoman.

GM's CEO, Rick Wagoner, said the company would now focus on fully implementing its restructuring plan and was confident of meeting the governnment's requirements.

Chrysler, widely seen as the weakest of the Big Three, said concessions would happen quickly and it would continue to undertake "signficant cost reductions."

Private equity firm Cerberus said in a statement it would use the first $2 billion of proceeds from Chrysler's auto financing arm Chrysler Financial to backstop the government loan allocated to its struggling Chrysler car making unit.

Ford, while not seeking an immediate loan under the programme, 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 automakers' 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.

Dire picture

Some Republicans opposed to bailing out Detroit were dismayed at the loan package.

"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 Repubican Sen. John McCain, who lost the presidential election to Obama on November 4.

The White House presented a dire picture if it did not act, saying that if the auto industry were to collapse, it could reduce US economic growth by more than 1%, put about 1.1 million workers out of jobs and cost some $13 billion in new unemployment claims.

The White House moved on its own after Republicans in the Democratic-controlled US 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. 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 automakers would also have to provide warrants for non-voting stocks.

Wall Street bailout funds

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. Both have idled plants and laid off thousands of workers across North America.

A bankruptcy filing by one company 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 automakers 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% but could rise to 10% if the carmakers default, officials said.

In a ripple from the US autos slump, Mexican conglomerate Alfa said on Friday it was temporarily halting production at its nine auto parts plants in Mexico that supply US carmakers.

No automakers have been spared in the global sales slump.

Japan's Toyota Motor Corp 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.

Japan's carmakers are also feeling the pinch from a strong yen.

In perhaps the strongest protest since the dollar soared to a 13-year high recently, Honda Motor Co CEO Takeo Fukui warned a strong yen would cripple Japanese industry and trigger mass layoffs, forcing the automaker to shift production offshore if it persisted.


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