The U.S. auto industry is struggling, and Detroit’s Big Three automakers—General Motors, Ford and Chrysler—want Congress to help the industry by giving them some of the money from the $700 billion financial bailout. For more on this, read the following article from Money Morning:
Executives from Detroit’s “Big Three” auto companies—General Motors Corp., Ford Motor Co., and Chrysler LLC—Tuesday joined Congressional Democrats on Capitol Hill to make the case for an industry-wide bailout that could spare their troubled companies from totally collapsing. Detroit’s bigwigs have been met with considerable resistance so far, but will continue to make their case today and into the New Year.
Ford, GM and Chrysler are all in danger of folding into bankruptcy after a complete lack of innovation and outmoded business models combined with the current financial crisis and a lack of credit to drain the American icons of profitability.
Ford posted a $2.98 billion operating loss for the quarter ended Sept. 30, while GM reported a $4.2 billion operating loss during that same period. Together, the companies burned through a combined $14.6 billion of cash in the third quarter.
Ford chewed through $7.7 billion in cash taking its reserves down to $18.9 billion from $26.6 billion at the end of the second quarter. If the company continues to burn cash at this rate, Ford will run out of money by April 2009.
GM is even worse off. The nation’s largest automaker said that the amount of cash it has on hand fell to $16.2 billion at the end of September, down from $21 billion at the end of June.
The company said it could run out of cash by the end of the year, and be forced to declare Chapter 11 bankruptcy.
“Even if GM implements the planned operating actions that are substantially within its control, GM’s estimated liquidity during the remainder of 2008 will approach the minimum amount necessary to operate its business,” GM said in a news release.
If any, or all, of Detroit’s Big Three fail to acquire the financing they need going forward, the consequences for the U.S. labor market—and for the economy—could be devastating.
All told, the three automakers employ more than 200,000 people and support millions more U.S. workers indirectly through suppliers and dealerships. Their collapse could ultimately cost the economy more than 2 million jobs total. And that doesn’t count the estimated 1 million Americans—including many retired autoworkers—who rely on the U.S. auto companies for pension and healthcare benefits.
"The industry is so interdependent," Ford Chief Executive Alan Mulally told CNBC. "We’re nearly 10% of the U.S. GDP, and if one of the automobile manufacturers gets into serious trouble, it has tremendous implications for the entire industry."
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Mulally was one of three CEOs—GM’s Richard Wagoner and Chrysler’s Robert (Bob) Nardelli being the other two—lobbying lawmakers for financial assistance over the past month. All three yesterday appeared before the Senate Banking Committee, in the hopes of building on the marginal support they currently have.
“This is about much more than just Detroit,” GM’s Wagoner told the Senate. “It’s about saving the U.S. economy from a catastrophic collapse.”
Today, Mulally, Nardelli, and Wagoner will make their case to the House Financial Services Committee.
Policymakers Take Sides
Washington is deeply divided over whether to loan the automakers taxpayer money at a time when the U.S. budget deficit is spiraling out of control. (The U.S. budget deficit hit a record-high $237.2 billion in October—the first month of a new fiscal year. That’s four times larger than the October 2007 deficit of $56.8 billion.)
The White House and its Congressional supporters argue that the U.S. auto companies are victims of their own ineptitude and stubbornness and have long been spoiled by Democrats all too eager to accommodate their union lobbies.
“The fact is [the U.S. auto companies are] in trouble for reasons that relate to their own decisions rather than a lot of consumers out there who have gotten caught up in this credit crunch, in effect, through no fault of their own,” Sen. Jon Kyl (R-Ariz) said.
For years, Ford and GM fought tougher regulations of fuel efficiency and chose to promote gas-guzzling sports utility vehicles and pick-up trucks instead of pursuing hybrid technology and alternative fuels.
GM has spent $95 million on lobbying over the past decade, and $10 million so far this year, according to OpenSecrets.org—a Web site that tracks political contributions. Ford has spent $5.7 million on lobbying this year and $80.6 million over the past decade, according to the Web site.
However, many Democrats say that the United States can’t afford not to bail out the auto giants given the precarious state of the economy. Most analysts believe the U.S. economy has entered into a deep and painful recession that could take years to emerge from.
“We’re seeing a potential meltdown in the auto industry with consequences that could impact directly upon millions of American workers and cause further devastation to our economy,” said Senate Majority Leader Harry Reid (D-Nev.).
Dems Determined to Push Bailout
Reid has proposed a $100 billion economic stimulus plan that would include $25 billion in loans for the auto industry as well as $13.5 billion for roads, mass transit and other public infrastructure; money for financially ailing state governments; more jobless benefits; and added food stamp assistance, the New York Times reported.
The plan will need about 60 votes to avoid being bogged down in a senate debate. That means at least 10 Republicans would have to vote in favor of the bill even if all Democrats supported the measure. That seems unlikely. There’s also no guarantee that President George W. Bush wouldn’t just veto the bill anyway.
Should that piece of legislation fail, which it almost surely will, Democrats say they will propose a separate plan to divert $25 billion of the $700 billion approved earlier for the financial industry to the automakers.
In return for the loans taxpayers would receive stock warrants, and automakers would have to accept limits on executive pay and ban dividend payouts. They would also have to use the money to build more fuel-efficient vehicles. The loans would be for 10 years at 5 percent interest for the first five years and 9 percent interest for the remaining five years.
Of course, U.S. Treasury Secretary Henry M. Paulson and President Bush have made it clear that they are staunchly opposed to diverting bailout money meant for use in the financial sector to the auto industry. They would prefer the auto companies simply make do with the $25 billion in loans cleared by Congress earlier this year to make the industry more fuel efficient.
“We want the automakers to succeed and we support using an existing program to help them do so,” said White House spokeswoman Dana Perino. “There’s not an appetite in Congress, or in the administration, to open up the… funding for individual industries, because once you start down that road, it’s a slippery slope to other industries that might say that they need help.
With sufficient strength in Congress, the Republicans may be able to stall the Democrats and keep Ford, GM and Chrysler on the hook for now, but come January the landscape will change considerably.
President-elect Barack Obama will be moving to the White House on January 20, and as Reid pointed out, he’ll be bring a stronger Democratic majority with him.
“If ever there were a time for bipartisan solutions, this is it,” Reid said. “Senators have a choice to make: We could wait until January—when we have a new Congress and a new president—or we could start solving this crisis now.”
This article has been reposted from Money Morning. You can view the article on Money Morning’s investment news website here.