The White House unveiled a $17.4 billion bailout plan for U.S. automakers Friday, eliciting sighs of relief from the companies, which are currently teetering on the brink of bankruptcy.
"We appreciate the president extending a financial bridge at this most critical time for the U.S. auto industry and our nation's economy," said Greg Martin, General Motors spokesman. "This action helps to preserve many jobs and supports the continued operation of GM and the many suppliers, dealers and small businesses across the country that depend on us."
The plan provides GM and DaimlerChrysler with $13.4 billion in short-term loans plus another $4 billion in February, contingent on a number of conditions and restructuring requirements, including eliminating executive perks such as corporate jets; allowing the government to inspect their financial records; complying with already existing federal fuel efficiency standards; and reporting any transaction of $100 million or more, which the government can block.
The bailout also lays out non-binding targets that the administration would like the companies to achieve. These include controversial provisions related to employees, such as eliminating the union jobs bank, which provides compensation and benefits to many laid-off workers, and cutting wages to equal those of foreign manufacturers with U.S. plants by the end of 2009.
The money for the bailout comes from the Troubled Asset Relief Program, a $700 billion bundle authorized by Congress earlier this fall. Congress handed over $350 billion of the TARP money to the Treasury Department in October, most of which already has been allocated to banks on Wall Street. What's left will now go to GM and Chrysler.
By March 31, 2009, the companies must prove their financial viability -- meaning they are able to repay the bailout loans and have achieved a net positive value -- or the government funds will be returned to the Treasury.
However, the administration will not dictate a specific restructuring plan to the companies, Joel Kaplan, White House deputy chief of staff for policy, said at a news conference Friday.
"We're not going to tell the manufacturers what structure they need to be viable," Kaplan said. "We're just going to say, 'If you want taxpayer assistance, you'll have to prove you're (financially) viable.'"
That means the White House will not be pushing GM and Chrysler toward a merger, Kaplan said, which has been a rumored possibility, although GM denied earlier this week that the company was re-engaging in talks on the subject with Chrysler.
Today's announcement came one week after Congress failed to pass a $14 billion auto bailout plan. Last Friday the Senate fell eight votes short of the 60 required to end a Republican filibuster on the bill. The White House plan closely resembles the one proposed in Congress, reaping statements of general acceptance from a number of policymakers, including Senate Majority Leader Harry Reid, D-Nev., who stressed the importance of placing conditions on the funds given to automakers.
"I am pleased that the administration's latest offer incorporates most of the terms of the agreement struck with Congress last week," Reid said. "We are sending the auto executives who brought us to this point the clear message that if they do not soon find a way to become viable, they will lose government support."
Congress's inability to overcome a bipartisan gridlock forced the administration to act, said Treasury Secretary Henry Paulson. Because the administration is acting without money specifically authorized for the plan, it will have to pull the money from the TARP, even though the fund was not originally designated to help Detroit.
"While the purpose of (the TARP) and the enabling legislation is to stabilize our financial sector, the authority allows us to take this action," Paulson said. "Absent congressional action, no other authorities existed to stave off a disorderly bankruptcy of one or more auto companies."
But today's plan does nothing to really solve the problem, according to some economists, including Peter Morici, professor at the University of Maryland.
"This is a meaningless agreement, and it just bunts the problem to the Obama administration," Morici told United Press International.
This will politicize the process, Morici said, as the incoming administration will have to decide whether the companies continue to receive the loans come March -- a sticky situation as the United Auto Workers union heavily supported Obama's presidential campaign, launching $3 million in ads broadcast toward the end of the race in four pivotal states.
"The Obama administration will feel pressure to repay its campaign debts," Morici said.
From all perspectives, a managed Chapter 11 bankruptcy would have been a better path to take, he said.
But bankruptcy would have sealed the automakers' fate, President Bush said Friday during his speech announcing the bailout.
"Given the current state of the auto industry and the economy, Chapter 11 is unlikely to work for American automakers at this time," Bush said. "American consumers understand why: If you hear that a car company is suddenly going into bankruptcy, you worry that parts and servicing will not be available, and you question the value of your warranty."
That means fewer consumers would buy cars, making it difficult for the companies to make a comeback, Bush said.
Under ordinary circumstances, Bush said he would have left the decision of the automakers' future up to the market.
"But these are not ordinary circumstances," he said. "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."