Yes, Detroit, there is a Santa Claus
Ending months of roller-coaster negotiations, President Bush moved Friday to extend $13.4 billion in loans to troubled U.S. auto makers, with another $4 billion likely available in February.
Bush, saying failure of the companies was not an option, cited the need to avoid “disorderly liquidation” during an already troubled economic period.
The deal could help General Motors Corp. and closely held Chrysler LLC avoid bankruptcy. The administration said the funds are contingent on the companies showing they’re financially viable and competitive by the end of March — otherwise they must pay back the loans in full.
GM’s stock rallied on the news, closing up 83 cents, or 23%, at $4.49. Shares of Ford Motor Co. – which isn’t facing as dire circumstances and wasn’t included in the new package — rose 11 cents to $2.95. Parts suppliers’ stocks also got a boost.
The loans will be allocated from the $350 billion Troubled Assets Relief Program being managed by the Treasury Department, subject to approval of bank capital applications.
At the White House, Bush said that under normal circumstances, he would let the free market decide the fate of the automakers.
But “given the current state of automakers and the economy, a bankruptcy would not work best at this time … Consumers won’t buy cars from bankrupt automakers, because, warranty values will be questioned,” Bush said.
Allowing the automakers “to collapse now would not be the responsible way to go,” and could lead to chaotic bankruptcies that would be “painful to workers far beyond the automakers,” he said.
The government instead must “safeguard the broader health of the economy,” Bush said.
Under the terms of the loan, Paulson will be the “president’s designee,” until the end of the Bush administration. At that time President-elect Barack Obama will have to appoint a replacement.
Indeed, since the plan isn’t legislation, Obama will be able to alter any of its provisions, a Treasury official said.
Obama supported Bush’s action.
“The auto companies must not squander this chance to reform bad management practices and begin the long-term restructuring that is absolutely required to save this critical industry and the millions of American jobs that depend on it,” Obama said in a written statement.
Paulson will be responsible for reviewing the automakers’ restructuring plans and conditions. The companies are required to provide weekly status reports detailing their “13-week rolling cash forecast.”
GM and Chrysler, in addition to the oversight, agreed not to pay any bonuses or incentive compensation to the 25 most-highly paid employees. Further, wages for auto workers must be cut to match the compensation of foreign auto company plants in the United States.
Automakers and the UAW must submit a term sheet on labor modifications by Feb. 17.
Works rules must also be competitive with these foreign firms and all payments to idled workers, other than customary severance, pay must end.
Regarding employee benefit accounts, at least one-half of future contributions must be in the form of stock of the companies.
The companies also agreed to convert two-thirds of their public debt into equity, and they must give prompt notice to the government of any asset sale or investment in excess of $100 million. The government will have the right to prohibit any of these transactions.
They also have to institute strict expense policies.
In addition, there is no requirement on private equity firm Cerberus Capital Management, which owns an 80% stake in the car company, the official said.
By March 31, the companies must submit a report on “any deviations” to the restructuring targets and “why such deviations do not jeopardize” the company’s long-term viability.
Words of thanks
Auto makers Ford, GM and Chrysler quickly extended their gratitude in separate statements, though Ford added it was not seeking government assistance.
“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,” GM said in its statement. It added it will seek to be transparent as it executes its plan and will provide regular updates.
Under the term sheet, GM will receive $4 billion on the closing date of Dec. 29 and another $5.4 billion on Jan. 16. An additional $4 billion to be released on Feb. 17 is contingent on Congressional action.
Chrysler said it would receive $4 billion from the TARP program on Dec. 29.
“As outlined in our submission to Congress, we intend to be accountable for this loan, including meeting the specific requirements set forth by the government, and will continue to implement our plan for long-term viability,” Chrysler Chief Executive Bob Nardelli wrote in an open letter.
House Financial Services Committee Chairman Rep. Barney Frank, D-Mass., is examining the White House automotive bailout package to see if any of the conditions he had sought in legislation are included.
Committee spokesman Steve Adamske said Frank hopes the Treasury will comply with a measure contemplated in congressional legislation that would require a presidential designee to be informed of any asset sale, investment or other transaction of more than $100 million made by a participating auto company.