The $17.4 Billion Dollar Bailout

Thesis: Some have even asked the question as to why is the Federal Government giving Gm and Chrysler a 17. 4 Billion dollar bailout when so many people are losing their homes? An emergency loan prevented bankruptcy for two Detroit automakers today, in a 17. 4 billion dollar package given to General Motors and Chrysler, the Washington Post reported today. The Post notes that this is only the beginning of a financial bailout for the troubled automakers, and required significant union concessions and promises of restructuring on the part of the corporations:

But while Bush demanded deep cuts in union wages and benefits and broad corporate restructuring as conditions for the loans, analysts say that the overhaul of the auto industry will require more negotiations, more time and more federal money. “The auto bailout saga does not end here,” Itay Michaeli, a Citigroup analyst, said in a report. The administration yesterday said it would give GM and Chrysler $13. 4 billion immediately and another $4 billion in February if Congress approves and the companies meet targets for extracting concessions from unions and bondholders.

The federal assistance will come from the $700 billion Troubled Asset Relief Program and could be exchanged later by the government for as much as a 20 percent stake in the companies. Ford has rejected such aid for the present. The George W. Bush administration has granted GM and Chrysler a total of $17. 4 billion bailout money. Ford stated that it does not need low0interes funds at this moment. The $17. 4 billion relief fund will be split in two payments – $13. 4 billion will come in December and January with a further $4 billion coming in February.

The money for GM and Chrysler will come from the Troubled Assets Relief Program (TARP). TARP is a $700 billion fund set up by the U. S. government just for these kind of situations, when an important company finds itself in trouble because of economic crisis. President Bush said he took this decision because the U. S. economy can’t manage the number of job lost in the case GM and Chrysler would file for bankruptcy. GM Press Release: We appreciate the President extending a financial bridge at this most critical time for the U. S. auto industry and our nation’s economy.

This action helps to preserve many jobs, and supports the continued operation of GM and the many suppliers, dealers and small businesses across the country that depends on us. This will allow us to accelerate the completion of our aggressive restructuring plan for long-term, sustainable success. It will lead to a leaner, stronger General Motors, a GM that is: *dedicated to great products, exciting design, and world-class quality *fully committed to leading in energy-saving vehicles and technologies, *responsive to the needs of our customers, our stakeholders and the communities we live in and serve.

We know we have much work in front of us to accomplish our plan. It is our intention to continue to be transparent as we execute our plan, and we will provide regular updates on our progress. We again thank the Administration for this important support of our industry at this challenging time, and we look forward to proving what American ingenuity can achieve. Chrysler Press Release: Chrysler LLC Chairman and CEO Bob Nardelli said on behalf of the men and women of Chrysler and its extended enterprise, that he would like to thank the Administration and Treasury for their confidence in the Company.

”A letter of intent was signed which outlines the specific requirements that must be achieved,” said Nardelli. “These requirements will require consideration from all constituents, requiring commitment first in principal, leading to implementation this coming year. Chrysler is committed to meeting these requirements. ” Nardelli said the Company would remain focused on its challenge and this initial injection of working capital would help bridge the liquidity crisis the industry is facing and assist in helping return Chrysler to profitability. President George W.

Bush stepped in Friday to keep America’s auto industry afloat, announcing a $17. 4 billion bailout for GM and Chrysler, with the terms of the loans requiring that the firms radically restructure and show they can become profitable soon. “If we were to allow the free market to take its course now, it would almost certainly lead to disorderly bankruptcy,” Bush said at the White House, in remarks carried live by the national broadcast networks. “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. The question is how we can best give it a chance to succeed.

” Bush said that “bankruptcy now would lead to a disorderly liquidation of American auto companies. ” “My economic advisers believe that such a collapse would deal an unacceptably painful blow to hardworking Americans far beyond the auto industry. It would worsen a weak job market and exacerbate the financial crisis,” he said. “It could send our suffering economy into a deeper and longer recession. ” The money will come from the Wall Street bailout passed by Congress, a reversal for the White House. President-elect Barack Obama and Democrats had long advocated that course, and Bush had resisted it. Of the total, $13.

4 billion will be paid out in December and January, administration officials told reporters in a briefing. The last $4 billion is contingent on release of the second installment of the Wall Street bailout funds by Congress. * As it happens — in a source for some potential confusion — this breakdown also corresponds with how the money will be divided between GM and Chrysler, the two major recipients. Treasury estimates GM will require about $13. 4 billion in loans; Chrysler $4 billion. Both companies will share in the first $13. 4 billion paid out in December and January. GM will need the last $4 billion as well.

The government gets a stake in each company, and can call in the loans on March 31 if the firms cannot prove “viability” by then. The manufacturers do not have to be profitable immediately but have to be “profitable soon,” a senior administration official said. The structure largely follows the pattern of legislation that failed in Congress last week in the Senate because of Republican opposition. Bush made no mention of this fight, but in stepping in as he is, the president risks angering conservatives in his party but the administration felt it had no choice given the fragile state of the economy.

In doing so, Treasury decided not to be tied to the initial bill in Congress that provided only $14 billion in loans. That was always viewed as inadequate to get to March 31, and the administration opted to go with more realistic numbers. In doing so, however, it sets up a ticklish situation for Democrats in the new Congress. With the auto bailout, Treasury will have tapped out all of the first $350 billion from the financial markets rescue fund by late January. That means Democrats must deal with releasing the second $350 billion even as Obama will be trying to rally support for a large economic stimulus bill.

On the Republican side, the real dividing point between the administration and bailout critics in Congress has had more to do with the conditions imposed on the loans — not the aid itself. These differences came to a head in the Senate over the question of how to treat the United Auto Workers, and what pressure should be put on the union to bring down wage levels to match those paid to non-UAW workers at US plants operated by Honda or Toyota for example. Senate Republican conservatives insisted that the UAW agree to specific wage adjustments by a date certain in 2009.

When the union rejected this demand as political, Republicans killed the bill. The White House agreed that wage concessions would be needed but thought the better test should be the viability of the companies — not some fixed formula imposed on management and the union. There was real discomfort in the administration with what many saw as a regional, anti-union slant as Republicans from the South — where non-UAW, foreign owned plants are more common — demanded concessions that jeopardized aid to an industry so vital to much of the Midwest. Thus the loan agreements drafted by Treasury take a more flexible approach.

There are “Restructuring Targets” to be met in the companies’ recovery plans, including moving to a more competitive wage structure by the end of 2009. But there is also some leeway if alternative savings can be found. The restructuring report due March 31 “shall identify any deviations from the Restructuring Targets and explain the rationale for these deviations, including an explanation of why such deviations do not jeopardize the Borrower’s long-term viability. ” In explaining his decision Friday, Bush said holding back “would leave the next president to confront the demise of a major American industry in his first days of office.