Christmas Comes Early for the Auto Industry

December 19th, 2008 | by alexis |

The debate of whether to bail out the auto industry seems to be coming to a close. President Bush announced this morning that he intends to enact a rescue plan for General Motors and Chrysler LLC that will make $13.4 billion in federal loans available to the two struggling automotive companies.

Wondering where those billions will be coming from? The money will be pulled from the $700 billion fund put aside in October to bailout Wall Street firms and banks, and is expected to be made available to GM and Chrysler almost immediately.

The U.S. Treasury has now allocated roughly $350 billion of the $700 billion bailout fund that’s aimed at helping get the economy back on track. Any other loans the Treasury seeks to hand out from now on will need to be passed through Congress again for approval.

GM stands to receive $9.4 billion of the $13.4 billion total, with the other $4 billion going to Chrysler, however the money is by no means a hand out.  The loans do have established deadlines for payback and strict guidelines for how they are used.

Technically, the loans apply for three years, but GM and Chrysler will have to pay the money back in full within 30 days if “the firms do not show themselves to be viable” in the eyes of the Presidential appointee, Treasury Secretary Henry Paulson. The job of overseeing the auto industry bailout use will then be up to Barack Obama or an appointee once he’s inaugurated.

Both companies must submit plans detailing how they plan to reemerge as profitable businesses by February 17, though they need not be profitable at this point. The proposed “Car Czar” will not step into action just yet, but many of the loan’s terms draw extreme similarities to the ones set in the auto bailout legislation that was voted down by the Senate last week. In addition, GM and Chrysler execs will need to agree to limit their compensation and eliminate unnecessary corporate perks.

Experts anticipate both companies having to renegotiate agreements with unions and creditors in order to make this lifeline a success. The government has made it known that it wants the Auto Workers union to agree to wages and work rules comparable to those at non-union plants operated by Asian auto manufacturers by the end of the year. This is clearly going to have to be a group effort or it risks to be another misuse of tax-payer backed funds.

The Bush administration also expects GM and Chrysler to use their stock to pay for 50% of the funds needed to cover future retiree health expenses. These expenses will be paid by union-controlled trust funds beginning in 2010.

In a statement from the White House, President Bush attributed his decision to help bailout the auto industry to the current state of the economy and credit markets. “Government has a responsibility to safeguard the broader health and stability of our economy,” the President said. “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.”

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  1. 3 Responses to “Christmas Comes Early for the Auto Industry”

  2. By Allen on Dec 22, 2008 | Reply

    Well I’m not at all happy that Bush put into action the auto-bailout, but I am glad that he established some terms of return. It would have been a terrible idea to just give Chrysler and GM all that money and let them run hay-wire with it, the way they have been in the past. Also, have you noticed that seems to be what’s going on with the banking bailout? http://www.bloomberg.com/apps/news?pid=20601087&sid=aatlky_cH.tY&refer=world

  3. By Shazia on Jan 1, 2009 | Reply

    Work of Auto Industry is very lovely and important. Uses of this blog is very important.

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