Today's Other Bailout: $25B for Auto Makers

In Washington these days, an 11-figure expenditure barely attracts notice.

With Congress preoccupied with the massive, $700 billion bailout plan for the financial industry, General Motors (GM), Ford (F), and Chrysler have finally secured Part One of their own federal rescue plan. A bill set to be passed by Congress and signed by President Bush as early as this weekend — separate from the controversial Wall Street bailout plan — includes $25 billion in loans for the beleaguered Detroit automakers and several of their suppliers. "It seemed like a lot when we first started pushing this," says Democratic Sen. Debbie Stabenow of Michigan, one of the bill's sponsors. "Suddenly, it seems so small."

But please don't call it a "bailout" — Detroit is too proud for that. Exact details will come later, but the loans would probably amount to at least $5 billion for each of the Detroit 3, plus smaller amounts for suppliers. That would allow them to borrow money at interest rates as low as 4 percent — a steep discount compared with the double-digit rates they're paying now. Over several years, the automakers could save hundreds of millions in financing costs. Plus, they'll have five years before they have to start repaying the loans.

It might seem like a stealth rescue, but the plan has been in the works for at least 18 months. Approval for the loans was first included in last year's Energy Independence Act. Earlier this year, the automakers sought a first installment of loans totaling about $6 billion. But the nationwide credit crunch severely crimped their ability to borrow, and besides, next to bailouts like $200 billion for Fannie Mae and Freddie Mac, a mere $6 billion started to seem unduly modest. So Detroit raised the ante to $25 billion, the most allowed under current law.

Some details of the program:

It's much bigger than the Chrysler bailout of 1980. Back then, the government gave Chrysler a $1.5 billion loan guarantee to stave off a bankruptcy filing. That's equivalent to about $4 billion today — less than the amount each of the Detroit 3 is likely to get this time around.

There are few strings attached. The 1980 plan also included a long list of rules Chrysler had to abide by in order to get the money (including, get this, "an energy savings plan focusing on the national need to lessen U.S. dependence on petroleum"). The current legislation requires only that the money be used to retool old assembly lines and develop advanced, fuel-efficient technology. Since the automakers are already spending billions to do that, they could easily shift money around and use the low-interest funds to effectively support almost any project.

It props up a private company. In 1980, Chrysler was a public company, just as GM and Ford are today. But last year a private equity firm, Cerberus Capital Management, bought Chrysler, taking the firm private. And there's little or no precedent for the government aiding a private company that has no stockholders among the public. "I'd draw a line between public and private," says Kathryn Rudie Harrigan, a strategy professor at Columbia Business School. "I understand there are a lot of jobs at stake, but the taxpayer can only carry so much."

Detroit desperately needs the help. Many analysts expect all three domestic car companies to face a life-threatening crisis if the U.S. car market, down about 20 percent so far this year, stays in the doldrums. GM and Ford could start to run out of cash by the second half of 2009, a precursor to declaring bankruptcy. Chrysler's finances are now private, but its sales are down even more than at Ford and GM, and it may be starting to bleed its corporate parent, Cerberus.

The idea behind the loans is to buy time while the Detroit 3 revamp their lineups, develop new hybrids and other fuel-sippers, and convert old SUV plants into factories turning out hot cars able to compete with those from Toyota (TM) and Honda (HMC). "I think they're on the verge of really turning the page," says Stabenow. But Detroit has fallen mightily. Consumers reeling from $4 gas have fled the big trucks and SUVs that the manufacturers milked for two decades, and Detroit's smaller cars tend to rate poorly compared with competitors. The domestics' U.S. market share is now about 48 percent, a staggering fall of nearly 20 points since the start of the decade. Fitch Ratings expects GM and Ford to produce about 1.3 million fewer cars this year than in 2007. Even cheap loans will do little to help erase years of red ink. "Even if they had positive cash flow," says Mark Oline of Fitch, "it's going to take some time to make a dent in their debt load."

There's more aid coming. This year's $25 billion is just a down payment. The automakers now plan to ask the government for another $25 billion in loans next year. It's just spare change, after all.

Comments

[CLH:]

The nations only banker is Uncle Sam (similar to the system of China (which seems to work at least for a while). It worries me that these auto companies are close to bankrupcy. Who will pay the loan when these companies go under. I would rather the gov. would buy mortages which are worth many times what the gov . will pay for them.

2008 Sep 24 11:00 PM

[The World's...:]

Uncle Bush I need a loan. Can you please bail me out? 5 Years to start paying? US = Rooms to Go. Get the loan now and pay in 2013.

2008 Sep 24 11:07 PM

[the details:]

It's about $80 taken out of my pocket, another $240 from my wife + 2. You're paying it too. The executives of the 3 deserve large bonuses for their fantastic $25B gift to their share holders. They're still using red ink, but hey --- we could pay them handsomely from the loan money. After all, easy come, easy go.

2008 Sep 25 12:12 AM

[Poor and Un...:]

I work in a coal mine and we dig the coal with hand. If the company could get $10 billion in federal money - they will be able to buy robotic diggers and pay me $100 / hr instead of $25 - I am making now.

It is unfair that the Chinese mine workers get paid so little to dig the coal.

2008 Sep 25 12:24 AM

[slider:]

It will be pay back time someday and Katie, bar the door. The market will get the pound of flesh it deserves for this mismanagement of our economy.

2008 Sep 25 01:30 AM

[bbzz24:]

'And there's little or no precedent for the government aiding a private company that has no stockholders among the public.'

But the company has Tony Snow, ex Treasury secretary, as a partner. This is a reward for public service.

2008 Sep 25 05:51 AM

[sumosama:]

Say it with me now.... A LOAN funded by CONGRESS!

2008 Sep 25 12:52 PM

[auntiris:]

I'm delighted. The big 3 need the boost to compete and putting energy efficient/hybrid cars on the road WILL provide a catalyst for oil prices to drop. The more we do domestically to be less dependent on foreign energy sources the better. We've got to start somewhere -- and Detroit needs the work. Thank you Uncle Sam. Besides, all the other countries govts help their industries...why can't we? The "rules" of accounting and financial engagement are like the "rules" of war --- needing a 21st century update just like we discovered fighting in Iraq and Afghanistan. They don't fight by the same rules we do; how can we compete globally financially if the foreign interests are killing us with our own outdated rules? Thank you Uncle Sam.

2008 Sep 25 01:58 PM

[kris23:]

eh whats another 25 billion these days anyway? its about time though these companies chuck the suv's and get green. no way these companies could continue they way they were when everything around them is so drastically changing.

2008 Sep 25 02:14 PM

[Joey:]

Having worked for GM, I have never seen a company waste more money than them. When they have parties, they cost over $500,000 hiring speakers that cost $100,000 and making everyone stay in a hotel for over $200 a day. That's one party and they have about ten of them a year. Next, they pay people $300,000 a year for a job that they could hire someone for $110,000 a year. They overpay their 22,000 white collar salaried employees all the time and they do half the work of any other company. At 5:00 p.m.., the place is empty. When some big shot from Detroit comes in, they do a massive cleanup of the office and tell everyone to stay at their desks all day and pretend to look busy. Did I mention that GM is almost all white men too that says the word "yes" as often as they breathe? Also, watching and playing video games is an everyday occurrence.

2008 Sep 28 10:29 AM

[H.J. Huneycutt:]

This is ridiculous, particularly the money for Chrysler. Cerberus knew what it was getting into when it bought them. Not to mention the fact that Daimler AG still owns about 20% of the equity, so we're subsidizing a major German company, as well.

It's really a stretch to call Chrysler part of the "Big 3" any more, any way. In reality, it's behind not only Ford and GM, but also Honda, Toyota, Nissan, Hyundai, VW, and maybe some others as well.

Why not let one or two of the Big 3 go under so the remaining one or two have a shot at surviving in the long-run?

2008 Sep 28 06:38 PM

[td02131:]

It pays to be Republican. Reduce taxes, sell the line that taxes hurt the economy, fight welfare (except the corporate variety), fight healthcare and send jobs oversees. When your growing wealth plateaus at 460% get more money from the government. It's responsible spending after all, politicians that gave it to the corporations will get a huge chunk of it back in donations - you scratch my back and I'll scratch yours. Keep the people distracted with race, religion, sex and drugs - that's what really matters. All for one and one for all.

2008 Oct 04 02:40 PM

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