Gary Rumf and Susan Parker work on Chevy Cobalt parts at the GM metal fabricating plant in Parma, Ohio, on Friday. Workers are being called upon to make concessions for the restructuring. (Jason Miller / Associated Press)
WASHINGTON -- President George W. Bush on Friday approved $17.4 billion in short-term loans for General Motors Corp. and Chrysler LLC, offering them a desperately needed lifeline and ushering in a sweeping restructuring that will remake the domestic auto industry over the next 100 days.
The bailout -- using the remaining funds from the first half of the $700 billion Wall Street rescue -- gives the automakers three months to take painful restructuring steps or face bankruptcy.
"In the midst of a financial crisis and a recession, allowing the U.S. auto industry to collapse is not a responsible course of action," Bush said in announcing the aid from the White House Roosevelt Room.
He rejected the idea of bankruptcy for the struggling companies, a strategy some Republicans had urged, saying the economic impact would be too great in terms of lost jobs and unemployment costs.
The rescue plan gives the automakers much-needed time, while leaving many key decisions to President-elect Barack Obama, who takes office Jan. 20. Obama will have broad authority to rewrite the conditions and terms as he sees fit and will likely face calls to provide additional money.
Obama praised the bailout plan, but issued a warning to automakers. They "must not squander this chance to reform bad management practices and begin the long-term restructuring that is absolutely required," he said. "I do want to emphasize to the Big Three automakers and their executives that the American people's patience is running out."
The loans offer a glimmer of hope for two automakers on the brink of collapse, and mark a turning point for an industry that since 2004 has lost more than $100 billion, shed tens of thousands of jobs and closed dozens of plants.
"No one here is celebrating, but everyone is relieved," said Rep. Thaddeus McCotter, R-Livonia. "We are going to grit our teeth and get on with the pain and prove the doubters wrong."
The bailout calls for GM to receive up to $13.4 billion: $4 billion on Dec. 29, $5.4 billion on Jan. 16 and $4 billion in February, assuming Congress approves spending the second $350 billion of the Wall Street rescue fund. Chrysler will get $4 billion on Dec. 29.
The plan requires the automakers to meet strict conditions and demands sacrifices of their key constituencies, including debt holders, dealers, suppliers and the United Auto Workers. All will have to grant steep concessions to break the automakers' cycle of losses.The federal government will become the owner of a large chunk of GM and Chrysler and will have veto power for any transaction over $100 million. There will be limits on executive compensation, and the automakers cannot use the loan money to pay dividends to shareholders. A federal overseer will effectively function as a "car czar."
The companies will be required to show by March 31 that they are viable and have a "positive net present value" -- or the loans could be called back for repayment -- a step that would lead to bankruptcy. Treasury officials in the Obama administration will have some latitude in assessing whether the companies have met that requirement.
The loan terms also outline concession targets rather than specific requirements, including reducing debts by two-thirds via a debt-for-equity exchange, requiring the UAW to accept half of the payments the automakers owe to a union health care trust in stock rather than cash, and ensuring that work rules and wages are competitive with foreign automakers by the end of 2009. The targets are not legally binding, which means they can be negotiated.
White House Deputy Chief of Staff Joel Kaplan said the automakers must move quickly. "We were not interested in providing money to companies that are not willing to do the hard things needed to become viable. ... There's no time to waste, and the American public expect them to get to work."
The decision to grant the aid capped nearly two months of debate in Washington on the fate of Detroit's Big Three and followed a week of deliberations by the Treasury Department -- which did not give the automakers the proposed loan terms until 2:30 a.m. Friday. The sides worked all night to reach a deal.
GOP remains unhappy
Many Republicans objected to the loan plan.
"By declining to take the responsible approach, Washington has failed both autoworkers and taxpayers," said House Republican Leader John Boehner. Former Republican presidential candidate Sen. John McCain said he regrets "the president's decision to give away over $17 billion to the domestic automakers."
The loan conditions largely mirror those included in a deal struck between congressional Democrats and the White House that was approved by the House on Dec. 10, but blocked by Senate Republicans last week.
Michigan Gov. Jennifer Granholm called the loans "a lifeline." It's "not enough money to complete the job but it is enough money to get them into the next administration," she said.
Laurence B. Deitch, automotive restructuring expert with the law firm Bodman LLP, said the bailout is essential -- but not the complete answer. "Long term, the answer will really be if sales can get moving again. The credit crisis and the backlog of vehicles is a real problem," he said.
Aaron Bragman and Rebecca Lindland, automotive analysts with IHS Global Insight, called the loans a "Band-Aid for the auto industry."
"The amount of money being loaned to the automakers is insufficient to see the automakers through what is shaping up to be a worst-case sales scenario in 2009," they said in a report. "It is a $17.4 billion football that the Bush administration is punting to the incoming Obama administration."
They said Ford Motor Co., too, although not getting aid through this plan, will eventually need government money because of the bleak outlook for sales. Global Insight reduced its sales forecast for next year to between 10 million and 10.5 million vehicles, down from 11.3 million.
A lot of work to do
GM had faced collapse as early as the first week of January when large supplier bills come due, while Chrysler warned it could have collapsed early next year.
"We know we have a lot of work in front of us to accomplish this plan," GM CEO Rick Wagoner said.
Chrysler CEO Robert Nardelli said, "We intend to be accountable for this loan."
Ford did not seek an immediate loan but applauded the deal because it supports the overall industry. "A failure of one of our competitors would have a ripple effect that could jeopardize millions of jobs and further damage the already weakened U.S. economy," Ford CEO Alan Mulally said.
UAW President Ron Gettelfinger was pleased, but said the loan terms "unfairly singled out workers for concessions." He said the union would work with the Obama administration to remove the conditions the UAW opposes.
With the money, GM and Chrysler now must execute the aggressive restructuring plans they submitted to Congress this month as part of their request for aid. GM's plan includes killing, shrinking or selling four brands, cutting as many as 31,000 more workers, closing nine factories and slashing its dealer ranks at least 25 percent.
Chrysler's plan also calls for more deep cuts affecting all stakeholders. Cerberus Capital Management LP, Chrysler's parent company, said it would give Chrysler's unions and creditors equity in exchange for concessions and would tap $2 billion in proceeds from Chrysler Financial to backstop the federal loan to Chrysler.
Like Gettelfinger, Sen. Debbie Stabenow, D-Lansing, criticized some of the language in the terms that suggested workers may end up taking a disproportionate share of the concessions.
Still, she praised the bailout plan, calling it "tough but fair."
"In the end, the president kept his word and did the right thing," Stabenow said.
Wall Street, however, will take some convincing that the financial aid will be enough to put GM and Chrysler on a path to profitability. Fitch Ratings cut GM and Chrysler's debt rating three notches on Friday to the lowest level above default, warning that the threat of bankruptcy remains. Still, GM and Ford shares rose Friday.
You can reach David Shepardson at (202) 662-8735.