The Bush administration’s auto bailout package largely follows the playbook laid down by Senate Republicans in requiring General Motors and Chrysler to try to achieve drastic reductions in their debt and labor costs as part of a total restructuring.
The loan contract providing up to $17.4 billion to the companies requires them to try to cut their debt by two-thirds and achieve by the end of next year labor costs and work rules similar to foreign automakers with plants in the United States.
That means that Detroit’s gold-plated health and retirement benefits would have to be downsized quickly to be competitive with the rest of the industry and that workers could not be paid any more for not working under the Big Three’s notorious “jobs bank” program. These were key concessions sought by Senate Republicans in their unsuccessful attempt to rewrite the House bailout package earlier this month.
The deal gives the companies some room to wiggle out of the requirements, however, by designating those changes only as “targets.” If they miss the targets by a March 31 deadline, the companies would be required only to explain how they plan to become viable through other means.
The deal also gives President-elect Barack Obama and any “car czar” that he may appoint discretion to change the playbook when he takes office. The overall goal of the Bush requirements is to make the companies solvent as soon as possible and to lay down plans to remain viable in the future.
While Mr. Obama has said he supports requiring the companies to move quickly toward viability, he could fudge the targets, for example, in the interest of promoting the production of more fuel-efficient cars — another goal he wants to achieve through the restructuring.
Sen. Bob Corker, author of the Senate Republican plan, said it leaves the door open to political maneuvering by the auto companies, unions and Congress next year. Already, he noted, the United Auto Workers has vowed to fight the tough provisions involving wages and benefits.
“We are left to hope that the next administration has the will to enforce the tough concessions necessary to make these companies viable for the long term,” the Tennessee Republican said. “Unfortunately, it is clear that stakeholders are already working to undo those tough concessions.”
While the deal’s strictest provisions could eventually be undone or ignored, the Treasury Department laid down several requirements that are not negotiable, as it did with the banks that obtained funding earlier through its bailout program.
The car companies would have to limit executive compensation, dividends and corporate jet services, while providing Treasury with stock warrants worth 20 percent of the companies’ equity.
Treasury Secretary Henry M. Paulson Jr. said he had to exhaust all of the first $350 billion of authority he was given under the financial bailout program to provide the auto loans. An additional $4 billion of loans would be contingent on the Treasury receiving the second $350 billion installment from Congress next year.
The administration is not necessarily committing itself to asking for the additional funds, however, and indicated that it may leave that to the Obama administration. The Treasury stressed that it has ways it can mobilize the funds to address emergencies between now and when Mr. Obama takes office Jan. 20.
Several Senate Republicans said the plan wasn’t tough enough.
“I find it unacceptable that we would leave the American taxpayer with a tab of tens of billions of dollars while failing to receive any serious concessions from the industry,” said Sen. John McCain, Arizona Republican.
Sen. Judd Gregg, New Hampshire Republican, said he was disappointed that the administration dipped into the bank bailout fund to help Detroit.
“Unfortunately, this decision sets a troublesome new precedent that the next administration may use to expand government control over numerous specific industries that are having troubles during these difficult times,” he said.
“I also question whether General Motors and Chrysler will try take the painful, yet necessary, restructuring measures to ensure that these so-called loans aren’t simply throwing good money after bad.”
While some legislators complained that the plan wasn’t strict enough, some analysts said it is draconian enough that it may not prevent a bankruptcy of one or the other automaker.
Fitch Ratings said the companies will have difficulty coming up with the new equity required under the plan.
“The threat of bankruptcy remains, given the terms of the federal assistance,” Fitch said.
GM Chief Executive Rick Wagoner said the loans would only be enough to keep the company afloat through March, but he was confident that the largest U.S. automaker can use them to avert bankruptcy and become profitable again.
Chrysler’s private owner, Cerberus Capital, said it already is carrying out the restructuring demanded by the White House and plans to forgo any profit under the three-year term of the loans as well as dedicate its equity in the company toward achieving new contracts with workers and creditors.
Cerberus said that it is intent on achieving the goals outlined by the administration, including parity with the labor costs of foreign transplant companies such as Nissan and Honda, which it said are necessary to ensure the company’s “long-term health.”
Unlike GM, Chrysler is not ruling out a bankruptcy filing if it is unable to achieve those radical restructuring goals.
The stock market rallied on news of the bailout, but investors remained skeptical that the companies’ problems are over.
“There’s a lot of skepticism about how much real reform we’re likely to see, particularly at GM, given the parameters under which the loans have been made,” said Alan Gayle, senior investment strategist at RidgeWorth Investments. “There is a lot of skepticism about whether GM is prepared to do what needs to be done.”
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