GM, Chrysler and Ford Motor Co. have been pushed to the edge of bankruptcy and local business and housing markets in areas dependent on these "Big Three" face disaster—especially already ailing Detroit. The U.S. Treasury Department has rejected any bailout to industrial companies, and a Congress-approved $25 billion loan program may be the last hope of these companies and the local economies that they support. Read the following article from Money Morning.
The U.S. Treasury Department has rejected General Motors Corp.’s request of $10 billion in assistance for its potential merger with Chrysler LLC after the Bush Administration decided it didn’t want to broaden its $700 billion financial rescue program to include industrial companies—or to play a role in a GM-Chrysler merger that could cost the U.S. economy tens of thousands of jobs, The New York Times reported yesterday (Monday).
Instead of direct financing assistance, it looks like the Bush Administration will speed up a $25 billion loan program that was approved by Congress in September and that’s aimed at helping automakers develop more-fuel-efficient vehicles. The program is administered by the U.S. Department of Energy. The administration is also believed to have asked the U.S. Commerce Department to explore other ways that aid could be brought to the automakers—without expanding the scope of the bailout package.
The so-called "Big Three" automakers—GM, Chrysler and Ford Motor Co.—are in need of government assistance after being pushed to the brink of bankruptcy: Foreign competition and a slumping economy have combined to push vehicle sales down to their lowest level in 15 years.
GM has been in talks with Cerberus Capital Management LP about buying Chrysler since September. But potential investors in the deal have been hesitant to back the merger without the safety net of federal assistance, or a government guarantee of some sort. GM’s inability to secure financing at a time when credit is hard to come by and auto sales are in decline has left the No. 1 U.S. automaker with few options other than appealing to the government.
GM spokesman Greg Martin said in late October that the company had asked the Treasury Department to broaden recently passed legislation, intended to bolster banks and financial institutions, to include auto companies.
In fact, General Motors Chairman G. Richard "Rick" Wagoner Jr. reportedly went right to Treasury Secretary Henry M. "Hank" Paulson Jr. and lobbied for the government to provide emergency financial aid to the Big Three via the $700 billion bailout plan.
Badly in Need of a Bailout
GM desperately needs some sort of outside funding, as the company lost $18.8 billion in the first six months of the year, and is hemorrhaging about $1 billion in cash each month. That has raised the prospect of bankruptcy for the company. GM had $21 billion as of June, but a merger with Chrysler would give the company access to another $12 billion in cash.
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Cerberus bought Chrysler from former parent Daimler AG last year for an estimated $7.4 billion. But the new owner hasn’t proven anymore adept at arresting Chrysler’s financial and market-share declines. Chrysler, perennially the smallest of the Big Three, has seen its sales fall by 25 percent—almost double the 12.8 percent overall decline in U.S. auto sales. Chrysler has been hurt because its fleet of pickup trucks, minivans, sport utility vehicles and high-performance cars include a number of gas guzzlers—popular for their performance when fuel prices are low, but an albatross to market when oil prices were at record highs.
Cerberus had buyout discussions with the Japanese automaker Nissan Motor Co. Ltd.—and Nissan’s French partner, Renault SA—about recruiting Chrysler into its international auto alliance. But Chrysler has apparently decided to focus exclusively on the potential for a deal with General Motors.
Just how deep the Big Three’s problems actually are will become very clear this week: Sales figures for October will be released this week as part of the third-quarter earnings reports that Ford and GM are scheduled to release.
Industry sales fell 26.6 percent, but many analysts believe that October could be even worse. Edmunds.com, a well-known auto-industry researcher, is predicting a sales decline of roughly 30 percent, The Times reported.
Should any of Detroit’s Big Three go bankrupt the consequences for the U.S. economy would be both deep and long lasting. Together, the companies employ more than 200,000 Americans, and support millions more U.S. workers indirectly through suppliers and dealerships. And that doesn’t count the estimated 1 million Americans—including many retired autoworkers—who rely upon the U.S. auto companies for pension and healthcare benefits. Many of those retirees already saw their benefits suffer severe cutbacks as the carmakers struggled to find cost-savings. Any new cutbacks would undoubtedly affect them, too.
The unemployment rate hit 6.1 percent in September and continues to rise. Some analysts anticipate the jobless rate could climb as high as 8.5 percent to 10 percent next year. With a jobless rate that reached 8.7 percent in September, the state of Michigan has the highest unemployment rate in the country.
Alternative Energy is No Longer an Alternative
If bailout money isn’t an option, the first step for automakers is to get the Energy Department to expedite the release of the $25 billion in low-interest loans for GM, Chrysler and the Ford Motor Co.
The loan program is viewed as key to the U.S. auto industry’s future—allowing the three U.S. carmakers to use government money to develop fleets of new, more-fuel-efficient cars and trucks, new hybrid technologies, and new powerplants to run these new vehicles. By doing that, the automakers could then take the money from the corporate coffers that would otherwise have been used for this hybrid research and development and redirect it for use modernizing plants and developing new, more-competitive production techniques.
"The auto companies are clearly running out of cash, and badly in need of more liquidity," David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich., told The Times. "Releasing the $25 billion in loans is a necessary first step."
Like the U.S. defense industry, the U.S. auto industry has always enjoyed strong political support. And the current period is no exception. Elected officials in states with a heavy automotive employment base are rallying around the Big Three. Just last week, the governors of Michigan, Ohio, New York, Kentucky, Delaware and South Dakota wrote a letter to Treasury Secretary Paulson and U.S. Federal Reserve Chairman Ben S. Bernanke, urging "immediate action" to assist the foundering industry.
"While all sectors of the economy are experiencing difficult times, the automotive industry is particularly challenged," the letter said. "As a result, the financial well-being of other major industries and millions of American citizens are at risk."
But with the presidential election set for today (Tuesday), it’s unclear if some of the Bush Administration’s reluctance to add the auto industry to the bailout plan is part of a concern about setting a precedent that could open the door to other industries—further boosting the rescue plan’s ultimate cost—or if the administration is seeking to avoid making any decisions that could subsequently conflict with the goals of the incoming president. For instance, the Democratic nominee, U.S. Sen. Barack Obama, D-Ill., has said in recent days that he supports increasing aid to the troubled auto companies, while Republican hopeful John McCain, R-Ariz., has not said whether he would support auto-sector aid beyond the $25 billion, The Times reported.
And, as Money Morning has reported, President George Bush realizes that some decisions about how the bailout will be administered will have to be left to the next president.
This article has been reposted from Money Morning. You can view the article on Money Morning’s investment news website here.