Bush extends aid to carmakers
In reluctantly tossing a $17.4-billion government lifeline to General Motors Corp. and Chrysler on Friday, President Bush ensured that the automakers would not fail in the coming weeks -- sparing the economy and his own legacy another potentially devastating blow. But Bush’s action leaves most of the tough decisions about the the U.S. auto industry’s future to President-elect Barack Obama.
The conditions Bush attached to the emergency loans, such as requiring trade unions to accept wages and benefits comparable to those at U.S. factories run by foreign automakers, were largely nonbinding and thus subject to change by the next president.
That could mean a far different future for American automakers than many analysts have been predicting.
Obama has consistently echoed Bush’s call for major restructuring by U.S. automakers to assure their long-term viability in a changing global marketplace.
With his strong environmental and pro-labor stances, however, Obama may have a much different view from his predecessor of what constitutes viability. For example, in his energy plan Obama has called for not just keeping Detroit alive but making it a world leader in fuel-efficient, environmentally friendly vehicles.
“This is clearly a temporary measure,” said Mark Oline, an analyst with credit rating firm Fitch Ratings. “We expect the agreement will be significantly reworked once the new Congress and the new administration take office.”
Detroit automakers have begun shifting production from gas-guzzling trucks to smaller, fuel-efficient cars and investing in technology to produce hybrid and electric vehicles. But those changes have been slow in coming, and the recession and credit crunch have hammered Detroit’s already financially weakened Big Three.
GM and Chrysler have said they needed a total of $14 billion by March 31 or they could face bankruptcy. Ford said it did not need short-term funding but warned that a failure of one or both competitors could endanger it as well.
In an indication of what may lie ahead, the United Auto Workers union and some Democratic lawmakers Friday were already calling on Obama to change some conditions.
Obama called the bailout a “necessary step” and warned GM and Chrysler executives not to squander the chance to remake their companies because “the American people’s patience is running out.”
But Obama, speaking at a news conference in which he stressed the importance of increasing wages throughout the economy, said workers shouldn’t be the only auto industry stakeholders asked to take “painful steps.”
“I just want to make sure that when we see a final restructuring package, that it’s not just workers who are bearing the brunt of that restructuring,” Obama said.
Bush’s announcement Friday morning ended a monthlong drama that saw the chiefs of Detroit’s Big Three trek to Washington twice to ask Congress for emergency loans for their companies and the 3 million people whose jobs directly or indirectly rely on them -- only to be rebuffed.
“There is too great a risk that bankruptcy now would lead to a disorderly collapse of the auto companies,” Bush said. “My economic advisors believe that would deal an unacceptably painful blow to hardworking Americans far beyond the auto industry . . . and send our suffering economy into a deeper and longer recession.”
GM Chief Executive Rick Wagoner and other GM executives provided few new details of how they would restructure their company beyond the plan they submitted to Congress this month. That plan included eliminating or selling GM’s Saab and Saturn brands, shrinking the Pontiac division to a handful of niche models, laying off thousands of workers and cutting the GM sales network by about 2,000 dealers.
“We know we have a lot of work in front of us to accomplish this plan,” Wagoner said Friday at a news conference in Detroit. “We look forward to proving what American ingenuity can achieve.”
GM stock shot up 23% on Friday to $4.49. Chrysler is privately held. Its chief executive, Robert Nardelli, said the company was committed to meeting the bailout requirements.
News of the rescue drew praise from auto dealers, who were worried that a bankruptcy filing would scare away customers and worsen the already bleak sales outlook.
“When you have the government declaring its confidence and commitment to U.S. auto manufacturers, it helps reassure the American public that domestic automakers will be around for the long term,” said Annette Sykora, head of the National Automobile Dealers Assn., which represents 19,700 dealers nationwide. “This sends a clear message: Consumers can now consider any car from any manufacturer with confidence.”
The plan announced by the White House is similar to one crafted with congressional Democratic leaders this month. The legislation was blocked largely by strong opposition from Senate Republicans, who argued that bankruptcy was the only way to force U.S. auto companies to make major changes.
The plan proposed in Congress would have taken the loan money from an existing $25-billion fund to help automakers retool their factories to produce more fuel-efficient vehicles. With Bush unable to use that fund for a bailout without congressional approval, he agreed to Democratic demands to use money from the $700-billion financial rescue fund. Several Republicans sharply criticized Bush for that decision Friday.
Under the White House plan, the Treasury Department will provide $13.4 billion in short-term loans to GM and Chrysler from the first half of the $700-billion fund. An additional $4 billion would be available Feb. 17, assuming Congress approves the second half. GM will get about $9 billion of the initial allocation, while Chrysler will receive $4 billion.
GM and Chrysler must achieve long-term financial viability by March 31, the White House said, or they would have to repay the loans immediately. The key to financial viability is for the companies to deliver restructuring plans by Feb. 17 showing they can achieve a “positive net present value.”
The term is used in corporate budgeting to assess investments. It means the cash coming into a company must be greater than the cash flowing out, taking future debt obligations into account.
But the precise parameters of that calculation were unclear Friday. Documents released by the Treasury Department said the net present value must be calculated “using reasonable assumptions and taking into account all existing and projected future costs.”
A Treasury official could not say what time frame would be used to make the calculations.
“It’s a very odd way of determining whether the company is viable and whether they’re making progress or not,” said Shelly Lombard, a debt analyst at Gimme Credit.
Other conditions include a ban on stock dividends, limits on executive compensation, compliance with federal fuel-efficiency standards and the provision of warrants to the government to purchase nonvoting stock equal to 20% of the loan amount.
Aside from the executive compensation and stock warrant conditions, which are required for money disbursed from the financial sector rescue fund, Obama could revise the other conditions and restructuring targets, Bush administration officials acknowledged.
Nevertheless, the White House set out several restructuring aims for the companies. Among them are reducing their debt by two-thirds by swapping it for equity; eliminating a jobs bank that pays laid-off workers; making wages and benefits competitive with U.S. workers for Toyota, Honda and other foreign automakers; and requiring the UAW to take at least half of future payments into a retiree benefit trust in the form of company stock.
Persuading creditors to exchange their bonds for stock won’t be easy, analysts said. Some issues of GM bonds, for example, are currently trading for less than 20 cents on the dollar, but the company’s woeful stock -- it is down more than 80% since the beginning of the year -- isn’t a very attractive alternative. If the companies end up in bankruptcy, stockholders probably would be wiped out.
Even with the emergency federal loans, the bankruptcy risk for all three companies remained “very high,” said Gregg Lemos-Stein, a credit analyst with Standard & Poor’s Corp.
“These loans help near-term liquidity,” he said. “But they do nothing to help the very weak demand for vehicles in the U.S.”
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Maura Reynolds in our Washington bureau contributed to this report.
jim.puzzanghera @latimes.com
