Bush Announces $17.4 Billion Auto Bailout

Posted: December 19, 2008

Automakers will get a federal bailout after all.  This morning, President Bush announced a $17.4 billion plan to help America's largest carmakers stay afloat in a troubled economy.  The money will be available almost immediately.  The plan requires the companies to restructure and creates a de facto "auto czar" in Treasury Secretary Henry Paulson (and his eventual replacement in the next administration) to oversee automakers' efforts to regain competitiveness.

Reuters reports, "The government will offer up to $17.4 billion in loans to the ailing U.S. automakers and expects General Motors and Chrysler LLC to access the money immediately, a senior administration official said on Friday."  The funds will be drawn from the $700 billion Troubled Asset Relief Program created by Congress in September in an attempt to rescue the struggling financial industry. About $13.4 billion will be available immediately and can be paid to the companies at the discretion of the Treasury Department, with another $4 billion due when the administration draws on the second half of the money - a step which would require Congressional approval.

Bloomberg adds, "The funds would allow GM and Chrysler to keep operating until March."  Ford is not expected to ask for assistance at this time - the company has said it would need federal aid only if a competitor were to fail, disrupting shared supply lines.

In announcing the bailout plan, Bloomberg notes, Bush "rejected letting the companies go bankrupt, as had been urged by some lawmakers opposed to a bailout."  The President told reporters that bankruptcy could "worsen a weak job market and exacerbate the financial crisis," which "could send our suffering economy into a deeper and longer recession."

The companies will be required to submit viability plans to the Treasury Department by March 31, 2009, according to the New York Times.  "At that point, the new Obama administration will determine if the automakers are meeting the conditions of the loans and will continue to receive government aid or must repay the loans and face bankruptcy proceedings."  Accepting the loans would also require automakers to "quickly reduce their debt obligations by two-thirds, mostly through debt-for-equity swaps, and to reach an agreement with the United Auto Workers union to cut wages and benefits so they are competitive with those of employees of foreign-based automakers working in the United States."

The government will take a stake in each company that accepts federal aid, according to Politico, and repaying government loans would take precedence over repaying any other debt.  Among other conditions, the loan agreements would require automakers to "accept limits on executive compensation and eliminate perks such as corporate jets," open all financial records to Treasury department inspection, and grant the government "the power to block" any transaction over $100 million.

A fact sheet issued by the administration (carried here by the Wall Street Journal) detailing bailout terms also sets several "additional targets that were the subject of Congressional negotiations but did not come to a vote."  It is not clear what "targets" means - these steps may not be mandatory - but they appear to involve concessions by the United Auto Workers union that, in past negotiations, the union has always rejected.  These include eliminating the controversial "jobs back" that allows laid off autoworkers to continue receiving a portion of their salaries, and enacting both "work rules" and wages "that are competitive with those of transplant auto manufacturers by 12/31/09."

While awaiting federal aid, the automakers are trying to sell cars as fast as possible with deep discounts.  Research the best car deals available in this market.