Congress Offers Big Three Automakers Help, Makes Demands in Exchange

By Ucilia Wang

The U.S. government, which is getting comfortable playing Santa Claus, plans to stuff the stockings of beleaguered American automakers with $25 billion worth of loans.

Beset by unwise business decisions and troubles getting loans on their own during the credit crunch, the three major American carmakers have been asking for emergency loans from the government to get through the year.

They might get their wish (even if they have been naughty, not nice). Both the U.S. Senate and House of Representatives proposed legislation Monday to provide the loans that lawmakers say are necessary to save jobs and prop up the ailing auto industry.

While the Senate and House proposed different versions of the bailout plan, they both would divert $25 billion from the $700 billion package that Congress passed in a hurry in October to rescue the faltering financial market (see Lawmakers Approve Energy Tax Credits, Bailout).

If lawmakers work out their differences to pass a bailout plan, then it will be the second time in recent months that lawmakers have attempted to help the ailing auto industry.

In September, Congress approved a $25 billion loan guarantee program to help carmakers retool their plants to make more energy-efficient cars. Tesla Motors, a startup electric carmaker with its own fund-raising troubles, plans to apply for the loan (see Tesla CEO Denies Bankruptcy Rumors, Seek $25M and Cash-Strapped Tesla Raises $40M, Loses Lawsuit).

The Big Three have since argued that the $25 billion approved in September wouldn't come soon enough to keep them from crashing and burning. The loan guarantee program is to start in January and be administered by the U.S. Department of Energy, which typically carries out a lengthy process for approving loan guarantees.

Less than two weeks ago, GM reported a third-quarter operating loss of $4.2 billion and a monthly cash burn rate of $2.3 billion. The company has been discussing a possible merger with Chrysler, which also has its own ambitious plans for building electric cars (see Chrysler Eyes 2010 for Launch of One of Three Electric Cars).

Despite the desperation, however, the cash-poor GM has insisted that it still will launch the Chevy Volt, a plug-in hybrid, in November 2010. GM has drummed up lots of publicity for the Volt, touting it as a shiny example of its engineering prowess and ability to compete with a slew of European and Asian carmakers in the emerging electric car market.

Passing a new $25 billion bailout plan will be tough. The White House and many Republicans already oppose the idea, saying the government has done its share of using taxpayers' money to help out the automakers. Besides, the $700 billion package is meant to help banks and mortgage lenders, not automakers.

President Bush favors amending the $25 billion loan guarantee program passed in September to make the money available sooner, but only to companies that "make the difficult choices and do the restructuring necessary to become viable without additional taxpayer subsidies," said White House spokeswoman Dana Perino in a statement.

The Senate and the House introduced separate $25 billion plans on Monday. Senate Majority Leader Harry Reid, D-Nev., introduced the proposal to offer money through low-cost loans. The proposal is attached to two bills, an economic stimulus package and another measure to extend unemployment benefits.

House Financial Services Committee Chairman Barney Frank, D-Mass., followed suit hours later to introduce a similar bill. Although the Senate and House bills are alike, the House version makes more demands on carmakers to show they can turn their operations around and to allow government more oversight of their businesses.

Here are the highlights of Frank's bill:

• The Treasury would make the loans no earlier than Dec. 1 and require car companies applying for loans to submit a short-term plan on how to spend the money. The plan also must contain steps for developing a long-term restructuring plan that includes repaying the loan with interest.
• The long-term restructuring plan, due March 31, 2009, must include measures to improve car fuel efficiency and to get out of debt. If the plan is deemed unacceptable, then the Treasury can ask for its money back sooner.
• Car companies cannot award bonuses to employees making more than $200,000 per year while the companies hold the loans. Also, no golden parachutes will be allowed.
• The Treasury must get warrants worth at least 20 percent of the loan's value from each loan recipient.
• Loan recipients cannot pay dividends while their loans are outstanding.
• Companies must alert the government of any asset sale, investment, contract or other agreement that exceeds $25 million. The government can stop any of these deals from taking place if they affect the loan recipients' ability to pay back the money.
• The loans would last seven years and come with an interest rate of 5 percent for the first five years and 9 percent after that.

Comments

[maelstrom:]

Enough to make a sane person puke

2008 Nov 18 12:09 PM

[GEN X:]

Hopefully this doesn't have the same effect as TARP... but somehow - for some CRAZY reason - I think it will!!

2008 Nov 18 12:17 PM

[DeltaHotel:]

Absolutely sickening - bailout after bailout after bailout for the incompetent fatcat crooks who couldn't manage their businesses properly.
When is this disgusting ineptiude from the Treasury going to stop?
How many more billions are US taxpayers going to see thrown into the byzantine bailout blackhole?
Since the beginning of October (only just 6 weeks ago) countries across the globe have given out over $5 TRILLION (yes TRILLION!!!) worth of "bailout money" to bankrupt countries, crooked corporations and greedy fatcats, yet who gets NOTHING - the decent, hardworking taxpayer who is about to have their home repossessed, has been made redundant and cannot support their family.
And that's what we call "capitalism"............. God help us all.

2008 Nov 18 12:19 PM

[Haigh:]

Taking money from the productive sector and spending it on the incompetent sector is indicative of the long-term committment of congress to the decline in America's standard of living.

2008 Nov 18 12:37 PM

[jod:]

At Last Honesty !!!



www.forbes.com/2008/11...

2008 Nov 18 12:45 PM

[AlexS:]

With a burn rate of $2.3 billion a month, the latest loan will last until about a year before the Volt is scheduled to launch. Will there be another $25 billion bailout next year to get to the Volt, and another the following year to tide them over until the Volt starts to make money, which it probably won't? That would make $100 billion in all, or about $40 a share for two stocks (not counting Chrysler) that are trading in the range of $1-3 dollars a share.

Congress' motto: No price is too high that it can't be paid with taxpayers' money.

2008 Nov 18 12:56 PM

[stretcho44:]

It will be interesting to see who sold the Credit Default Swaps for GM. The data on dtcc.com/products/deri... shows that there is a $3.3/b net position on GM defaults documented through DTCC. DTCC thinks that they have 70% of the market for CDS so $3.3b losses for those writing the CDS will be close.

2008 Nov 18 02:16 PM

[ridgerunner:]

I don't understand why the average taxpayer who makes maybe $15 to $30 dollars per hour would object to supporting the $80 per hour UAW workers. Are they really that skilled? Wake up----the fatcats are only apart of the problem. The UAW is the biggest problem.............

2008 Nov 18 02:18 PM

[lytle:]

I agree with riggerunner! Along with the fat pigs in the auto industry lets look at what the UAW has managed. I don't see how the autoworkers in Detroit are so much more skilled to be entitled to the kind of pay they make compared to the average U.S. worker.

I think that over the past years the big three have simply caved in to the UAW to prevent strikes and the loss of company income that would ensue.

Where are any provisions in the Congress' conditions concerning the Detroit payscale? I certainly approve of the conditions concerning the fat cats and their bonuses but how about the $70 per hour average wage of their production emplyees. How about if the UAW scales back so they make somewhere near what the rest of us in the country make. They want me and the rest of us peons to subsidise with our taxes their lush income.

2008 Nov 18 04:10 PM

[sumosama:]

Suppose I am a highly talented turn around artist. Suppose I am offered a key position at any of the big 3. I earn over 200k per year. I am told however that no matter how successful I am, I will not get a bonus. Also, if there are factors beyond my control that lead to failure (worsening economy, tighter credit, ...), I cannot receive a severance package.

Great way to attract and retain the best and brightest! THIS is class warfare. How dare someone earn 2 or 3 times what a factory worker earns with OT!!!

2008 Nov 19 01:49 PM

[uaw worker:]

I dont know were you people get theat the uaw worker gets $70 Ive been an employee for 16 years and i make $28.71 an hour thers no way my insurance cost the company $42 hr. its about $7000 a year in total. I would be mad too if I had the wrong facts like I see going around.


On Nov 18 04:10 PM lytle wrote:

> I agree with riggerunner! Along with the fat pigs in the auto industry
> lets look at what the UAW has managed. I don't see how the autoworkers
> in Detroit are so much more skilled to be entitled to the kind of
> pay they make compared to the average U.S. worker.
>
> I think that over the past years the big three have simply caved
> in to the UAW to prevent strikes and the loss of company income that
> would ensue.
>
> Where are any provisions in the Congress' conditions concerning the
> Detroit payscale? I certainly approve of the conditions concerning
> the fat cats and their bonuses but how about the $70 per hour average
> wage of their production emplyees. How about if the UAW scales back
> so they make somewhere near what the rest of us in the country make.
> They want me and the rest of us peons to subsidise with our taxes
> their lush income.

2008 Nov 29 06:34 PM

[uaw worker:]

The UAW has gave back over 2 billion in consessions plus we went back 15 years in pay scale you hire in at less than $14 hr. this talk about the UAW worker making $70-$80 hr. is false tap pay is $28 hr. plus health care and that is around $7-$8 thousand a year. The cost of are wage is around 1% of the cost of a car. Nobody talks about the car sale of all auto companies down 40% or more even foriegn cars that & not making cars that people want to buy is the problem not the people who are bulding them. We buy the cars we make.

2008 Nov 29 06:47 PM

[lytle:]

My earlier comments were incorrect.

My information about wages from articles in the newsmedia was misleading as is a large part of the information the media publishes.

From what I've found out in the meanwhile is that the payscale for autoworkers is between $14 and $33 per hour. Of course that is from the media also but it sounds more reasonalble. Apparently the $73 per hour I have seen quoted in the newspapers includes benifits. That seems like a lot of benifits!

I'm not down on the union worker although I sure think things like the job bank where a laid off employee gets 95 percent of his wages while laid off, and some of the modern day retirement packages are a little much. Also, I need to point out that the union negotiated with the automakers for the terms that are in place and they agreed. What would you expect a worker to say to better wages or benifits for himself ... No?

If I'm down on anyone it's the newsmedia! Anything sensational will do for them whether it's misleading, wrong, or what. They slant the news and suck people like me into believing incorrect information.

Maybe the UAW workers will have to make some wage concessions for congress to aprove some money for the industry; I don't know. We'll find out.

2008 Dec 05 02:16 AM

[lytle:]

I need to add to my above that I sure hope something is worked out. I may not be related to it but I SURE DO NOT WANT TO SEE THE DETROIT AUTO INDUSTRY FOLD!

2008 Dec 05 02:24 AM