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Auto industry needs bailout to tide it over
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A proposal for $25 billion in loans from the U.S. Treasury Department to Detroit's Big Three automakers is the center of attention for the lame duck session of Congress.
General Motors Corp. (GM), Ford Motor Co. and Chrysler LLC are rapidly bleeding red ink due to a double whammy this year, cutting jobs and closing plants. First, a spike in gasoline prices turned consumer demand away from previously profitable gas-guzzling trucks and SUVs. Then the financial meltdown dried up the consumer credit needed to buy cars, which are big ticket items. As a result, sales at the Big Three have plummeted, with GM in danger of bankruptcy and the other two in poor financial shape.
In September, $25 billion in loans from the U.S. Energy Department was approved to enable the Big Three to retool to produce more fuel-efficient models. But the Energy Department has been slow in providing these funds, and the new fuel-efficient models are not expected to be ready for the showroom until 2010.
For these reasons, the Big Three want $25 billion from the $700 billion financial industry bailout to tide them over until the economy improves, the new fuel-efficient models can be sold to consumers, and savings from a 2007 contract with the United Auto Workers (UAW) kick in.
An auto industry collapse would have devastating economic effects, for some three million jobs are directly or indirectly tied to the industry. Michigan, home of the Big Three and many of its suppliers, would feel the brunt of it, but ripple effects would likely reach all over the country in some form. If GM were to seek reorganization in a Chapter 11 bankruptcy, it would likely scare off consumers, who couldn't trust resale value and warranty protection, and suppliers, who would fear not being paid. A chain reaction of supplier bankruptcies could follow.
The bailout is supported by the Michigan congressional delegation and most Democrats, while most Republican oppose it. The lame duck Bush Administration has been cool to the proposal, with Treasury Secretary Henry Paulson refusing to use his authority under the Emergency Economic Stabilization Act to provide the bailout loans under the Troubled Asset Relief Program (TARP).
If the bailout proposal is defeated during the lame duck session, it appears certain to be brought up again in January, when Barack Obama becomes president and Democrats return to Congress with increased majorities. Obama, who has said the auto industry is the backbone of American manufacturing, supports the bailout, which would likely include the government acquiring ownership stakes in the Big Three and limiting executive pay. His economic advisory team includes two prominent Michigan politicians, Gov. Jennifer Granholm and former House Minority Whip David Bonior, both strong supporters of the bailout. Once Obama takes office, the Treasury Department can provide the bailout money without new legislation.
