Detroit bailout?

With carmakers on the rocks, or approaching them fast, a hot topic is whether Washington would bail out a General Motors Corp. or a Ford Motor Co. should the shadow of bankruptcy fall upon them. Would either of the presidential candidates, John McCain or Barack Obama, come to their rescue? 

Well, Detroit isn't  waiting for November to find out. In recent months, the industry has been quietly lobbying Congress to back $25 billion in low-interest loans for auto manufacturers and suppliers. Now the industry, along with the United Auto Workers union, is asking for $25 billion more, and it's doing it with a lot more volume.

The original $25 billion loan package, which would cost the government an estimated $3.75 billion to guarantee, was written into the 2007 energy bill — the same one that imposed the new, more aggressive, fuel economy standards. The aim of the loan program was to help offset the estimated $100-billion cost of improving fuel efficiency in cars to 35 mpg by 2020. But that money has not yet been appropriated by Congress, and the Department of Energy has not yet written final rules on the loan program. Now the industry is amping up the pressure to get those things done.

With automakers reporting huge second-quarter losses — $15.5 billion for GM and $7.8 billion for Ford — Senate Democrats late last month proposed spending $900 million to back $6 billion of the $25 billion in loans to automakers; that proposal is set to come up for a vote next month. But the new plan being pushed by the industry would fully fund the already approved loan guarantees and provide $25 billion more over the next few years.

Complete details of the industry-backed plan should be unveiled after Labor Day, but early details suggest it would be a juicy deal: Interest on the loans would be about 4.5%, less than a third the rate that the credit-challenged carmakers can expect to get on the open market. Moreover, Congress would have the option of deferring all payments for up to five years. Likely backers come from the Michigan delegation, including Rep. John Dingell, a Democrat and chairman of the House Energy and Commerce Committee. 

The car companies would use such loans to pay for expensive retooling of factories as they move to smaller, more fuel-efficient cars in coming years, as well as to develop new technology. The direct loan program requires that the money be applied for use only in plants that are at least 20 years old, according to a Ford spokesman. As a result, the most likely recipients would be American carmakers, although a few foreign companies have plants at least that old in the U.S. That has prompted criticism that the loan plan is a bailout aimed at only three companies.

"This reflects companies that have a long-term commitment to manufacturing in the U.S.," said Bruce Andrews, vice president for government affairs at Ford. He points out that American automakers have never defaulted on a government loan. "It's helpful for us to have access to capital for transformational changes we're making here in the U.S."

The Big Three have faced mounting liquidity concerns of late, with Moody's and Fitch downgrading GM and Ford debt in the last two months based on concerns that they don't have enough cash on hand. Lower-cost loans would be invaluable to the companies as they attempt to bring new, fuel-efficient models to market in coming years.

The candidates seem to be taking a shine to such a proposal. Obama has been a vocal supporter of loans to Detroit, prompting praise from the UAW this week.

McCain has been more reticent, saying in a June visit to a GM plant in Ohio: "Frankly, I just don’t see a scenario where the federal government would come in and bail out any industry in America today.”

But the stump does funny things to a man, and even McCain appears to be coming around, releasing a statement on Friday saying that he believes "we should fund [the loan program] and take action that will assist Detroit and its suppliers in making it through this difficult time of transition.”

So apparently, it's unanimous. Nobody wants to preside over a death rattle from Detroit.

--Ken Bensinger

Photo of Barack Obama and GM Chairman Rick Wagoner meeting in Pittsburgh in June; Keith Srakocic, Associated Press

Comments

[Carolina]

No direct funding to the auto companies!

If the US wants to subsidize high MPG and alternative energy vehicles (CNG, hybrid, etc), additional tax breaks should be made available to consumers who purchase these vehicles. This is a more equitable method of financing the reduction of energy consumption without favoring any manufacturer.

The last thing we need, is more government "investment" in private industry.

[Stephen McCue]

I've watched the Gas guzzling Stupid Urban Vehicles (SUV) market climb over the last 20 years. The main problem was Fuel was too cheap to force Detroit to invest in efficiency. Well welcome to the Club of Fuel payers in the "Rest" of the world. When a Gallon of gas climbs to about $7,00, the rest may open their eyes and thank George for the "Annexed Fuel Station" in Iraq. The gears are smeared with Blood to allow oil to flow. Now the Russians have woke up and realized they are loosing their strong hold on oil reserves as it gets Piped right past them in Georgia to the Black Sea. What’s George going to do before he leave office complete his world Tour and March north?

I'm almost ashamed to be an American when I look at the Poor and kicked on the other side of the Statue of Liberty. NO; the world is not flat!! Someone needs to explain this to George, just like a 6 year old, so he can understand the facts.
If what’s coming will be a change, have to wait and see. The constitution at least deters a Dictatorship and tosses the rotten Apples out after 8 years.
In the end, who cares about Return on investment and Shareholders’? They are the ones causing this problem. Thank the Banks in Europe and the US for overinflating Housing cost by pushing Loans and Housing purchases back and forth driving the cost up artificially. Thank RWE (A German Power and Water Company) for creating American Water so you can all die of thirst or Pay the Return on investment for the Share Holders. Thank the Insurance Companies that provide “Service” Illegal non-Billing to elderly to get rid of them. You just don’t send the Bill, when a complaint comes “Oh, It was returned. We’ll send that out right away” What happens is the bill is deleted from the JES Spooler and marked as returned. This eliminates postage, sooner or later you forget to ask and Bingo your insurance is cancelled. This game you may find starts around your 45th Birthday. A very Happy Birthday to you with lack of greetings from your friendly Life Insurance or Auto Insurance Company.
It appears most are short sighted and the Congress, along with most Politicians think from This Morning to Lunch time. As long as they get re-elected they don’t care. Your retirement doesn’t interest them as well. They’ll stuff a nice Government Pension in their Pockets. So enjoy and don’t forget to Compensate a Business that is totally PROFIT orientated, and you are nothing but the Human Resources for profit gains... (Isn’t that a nice political word for system slaves?)

[Tim Hall]

Remember Chrysler in the early 1980's? The government bailed them out and it worked until Iacocca became grandiose with acquisitions of Gulfstream and Snappy Car Rental..

The loans are fine, but the automakers have to stay focused on constant product improvement. Iacocca made two horrible mistakes:

Not tooling up for a V-6 engine

using the K-car platform for far too long

[B Torbik]

GM and Chrysler will be lucky to survive for another 12 months. GM is already bankrupt: $40+ Billion of negative equity on its balance sheet, and over $50+ Billion of losses since 2005. Chrysler's condition is equally dire.

U.S. automakers have been on the Federal dole for years already through absurdly low gas prices. They gladly brought Hummers, Excursions and other gas hogs to the market, which U.S. consumers purchased, even though they couldn't pay for them (except with another home equity loan).

Gas prices should be much higher to recognize that it's costing several hundred BILLION per year to keep troops, aircraft and ships in the Middle East to "secure" the region, i.e., keep the price of oil low. The GAO estimates that the cost of all this is over $5.00/gallon.

Has any of this been paid for? No, we just keep running up the Federal credit card. And GM, Ford and Chrysler are the primary beneficiaries. If anyone cares to remember, the same companies opposed deregulation of U.S. domestic oil prices in the 1970s.

There is no way loans for any U.S. automaker can or should be justified. Further, there is little or no prospect they'd ever be paid back.

[Hugo]

Wow, unbelievable. Maybe the U.S govt. can provide me a loan so I can payoff Cadillac for the Escalade I financed in '06 at a high interest rate. I would also like the option of deferring payment on that deteriorating Escalade because sometimes I need to order bottle service at da club to impress da ladiez.

[George Bishopric]

Toyota rose to power when the Japanese government blocked all imports to Japan, and has benefited enormously from Yen manipulation

Nissan is now an arm of Renault, with it's historic ties to the French government, having once actually been an arm of that government.

Hyundai should have gone broke when the Korean/Asian crisis hit a few years ago, but Korea's government protected it....and Kia, which was absorbed as part of the debacle.

VW is partially controlled by the German government........

China exports car parts to the US, but levies an 18% dutie on imported car parts into China.

If everyone played by the same policy, this "pure capitalist" stuff would fly. As only the US hates itself not to protect its' industrial base, the results are predictable-

The US as an impoverished nation, acting like a colony.

If you think the fate of these Detroit important to your economic future, I have a house to sell you in Merced

[George Bishopric]

That is, if you think it's NOT Important that Detroit's big three remain solvent.

I think the US should, like its' trading partners protect its' own industrial base. Instead, we are demolishing it.

The SUV phenomenon was driven by Consumer tastes, and by government regulation, which incentivised fuel consumption.

You need these companies to be healthy......and if you don't think so, just remember, the only thing we make that people want is weapons......