WASHINGTON — Last week’s announcement that President Bush would lend $17.4 billion in federal funds to General Motors Corp. and Chrysler LLC came as some relief to a beleaguered industry but left many serious questions unanswered for both the automakers and their dealers.
The terms of the bailout call for $13.4 billion in loans over the next few weeks and $4 billion more before March. However, the terms are nonbinding and did not resolve issues such as new agreements with suppliers and the OEMs’ unionized workforce.
Public opinion continues to vary over what the Bush Administration called a decision between not undermining the private enterprise system and government’s responsibility to safeguard the broader health and stability of the U.S. economy.
“I for one am very grateful to see this loan be approved by President Bush,” said Julie Horns, business manager for Continental Chrysler Jeep, Countryside, Ill. “I was very disturbed though, according to polls, that most Americans were not in favor of any loans for the automakers.”
Horns said she was most disgusted with the media coverage and the use of the word “bailout” to describe the loan automakers were requesting. Others, however, thought the word usage was the perfect way to describe what manufacturers needed.
“Bankruptcy should be the path that the domestics take to not only financially reorganize while receiving creditor protection, but to also break the stranglehold the United Auto Workers exerts,” said Marv Eleazer, F&I manager for Langdale Ford in Valdosta, Ga. “Then they will be competitive.”
Last Friday, the day the Bush Administration announced its financing assistance to facilitate the restructuring of the Chrysler LLC and General Motors, the American Bankruptcy Institute (ABI) released results from a quick poll among ABI members and members of the public. The results, however, differed significantly from the outcome of a CNN poll released on Monday.
According to the ABI Quick Poll, 86 percent of respondents agreed that a chapter 11 filing is better for taxpayers and companies than a government bailout. Additionally, 65 percent “strongly agreed” and 21 percent “somewhat agreed” with the actions taken. Only 10 percent said bankruptcy was not the best option.
In the CNN/Opinion Research poll, 63 percent of Americans said they supported the government’s automaker bailout. However, 70 percent of respondents said Washington should let the companies enter bankruptcy if the companies ask the government for more money.
“Most Americans are skeptical about what happens when large companies get government money,” Edward Neiger, found of creditors law firm Neiger LLP, said in the CNN article.
In another survey conducted by Rasmussen Reports, 49 percent of those surveyed were apposed to Bush’s decision to extend $17.4 billion in emergency taxpayer-backed loans. Thirty-eight percent, however, were in favor of the move.
The Bush Administration said the decision to tap the Troubled Asset Relief Program (TARP) to help the domestic auto makers involved the fundamental questions about the proper role of government. However, he said the current state of the auto industry and the economy – as well as the repercussions if such a collapse should occur -- put into question whether the companies could come out of chapter 11 bankruptcy.
“Some argue the wisest path is to allow the auto companies to reorganize through Chapter 11 provisions of our bankruptcy laws – and provide federal loans to keep them operating while they try to restructure under the supervision of a bankruptcy court,” he said. “My economic advisors believe that such a collapse would deal an unacceptably painful blow to hardworking Americans far beyond the auto industry. It would worsen a weak job market and exacerbate the financial crisis. It would send our suffering economy into a deeper and longer recession.”
According to the plan, the automakers will have three months to put in place plans to restructure into viable companies. If restructuring cannot be accomplished outside of bankruptcy, the loans will provide time for companies to make the legal and financial preparations necessary for an orderly Chapter 11 process, Bush said.
Chrysler and General Motors will get $13.4 billion in short-term financing from the TARP. An additional $4 billion would be made available in February. In the event that firms have not attained viability by March 31, 2009, all funds will be returned to the Treasury Department.
Other terms and conditions established by the Treasury will mirror those supported by Congress, including warrants for non-voting stock, limits on executive compensation, government access to each companies’ books and records, compliance with Federal fuel efficiency and emissions requirements, and more.
Additionally, both companies must reduce unsecured debt by two-thirds via a debt for equity exchange, make one-half of Voluntary Employee Beneficiary Association payment in the form of stock, eliminate the jobs bank, and negotiate works rules and wages so they are competitive with transplant manufacturers by Dec. 31.
“The United States is home to 74% of our employees and over 3,300 dealers in communities across this country,” read a statement from Bob Nardelli, chairman and CEO Chrysler LLC. “Of every dollar we spend, 78 percent is spent here at home. On behalf of the 1 million people who depend on Chrysler for their livelihoods, thank you for investing in Chrysler, and America.”
In a statement released by General Motors on Friday, the company said the financial assistance will allow the manufacturer to accelerate the completion of its restructuring plan, which will lead to a leaner, strong company.
“We appreciate the President extending a financial bridge at this most critical time for the U.S. auto industry and our nation’s economy,” General Motors said in a statement. “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.”
Even Ford Motor Co. welcomed the news. It is currently asking for access to a line of credit of up to $9 billion in bridge financing, but reiterated that it hopes to complete its transformation without accessing a government bailout.
“As we told Congress, Ford is in a different position. We do not face a near-term liquidity issue, and we are not seeking short-term financial assistance from the government,” said Alan Mulally, president and CEO of Ford. “But all of us at Ford appreciate the prudent step the administration has taken to address the near-term liquidity issues of GM and Chrysler. The U.S. auto industry is highly interdependent, and a failure of one of our competitors would have a ripple effect that could jeopardize millions of jobs and further damage the already weakened economy.”
According to the Bush Administration, the direct costs of the automakers failing and laying off workers in the near term would result in a more than 1 percent reduction in real GDP growth and about 1.1 million workers losing their jobs, including works from auto suppliers and dealers.
For Eric James Judson, the news of the financial assistance plan’s passage meant he and his Paddock Chevrolet dealership, Kenmore, N.Y., have another day to fight on.
“The actions by the president are good news for GM, but this news is only the first of many hurdles for GM to overcome in the near future,” he said. “The other shoe waiting to drop is the securing of bank holding status for GMAC, whose collapse threatens a significant portion of the dealer body.
“It is certainly difficult to see the glass as half full under the current circumstances, but at least they can take some comfort in still have a glass to try and fill.”