General Motors Corp. and Chrysler LLC will get $13.4 billion in emergency government loans in exchange for substantially restructuring their businesses, President George W. Bush announced.
Another $4 billion will be available to GM in February provided Congress releases the second half of the $700 billion Troubled Asset Relief Program fund originally set up to bail out financial institutions. The automakers have until March 31 to meet the conditions of the loans, including demonstrating they have a plan to become profitable, or be forced to repay.
Winning the assistance is a reprieve for GM, the biggest U.S. automaker, and No. 3 Chrysler after they said they would run out of operating funds as soon as this month. Bush is stepping in after Senate Republicans’ refusal last week to take up a House- approved rescue raised the prospect that the companies would fail, costing millions of jobs.
“These are not ordinary circumstances,” Bush said at the White House today. “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 United Auto Workers are “disappointed” that Bush added “unfair conditions singling out workers,” the union’s president, Ronald Gettelfinger, said in a statement.
“We will work with the Obama administration and the new Congress to ensure that these unfair conditions are removed,” Gettelfinger said.
‘Necessary Step’
President-elect Barack Obama endorsed the plan, calling it a “necessary step” to avoid a major blow to the economy.
“The auto companies must not squander this chance to reform bad management practices and begin the long-term restructuring that is absolutely required to save this critical industry,” Obama said in a statement.
GM is reeling from almost $73 billion in losses since 2004 and a 22 percent slump in U.S. sales this year, while the drop at Auburn Hills, Michigan-based Chrysler is 28 percent, the steepest among the major automakers.
The package is intended for GM and Chrysler initially. Ford Motor Co., the second-biggest U.S. automaker, has said it can continue operating without aid for now.
The loan term is three years. Of the initial $13.4 billion, GM would get $9.4 billion and Chrysler $4 billion, said Joel Kaplan, Bush’s deputy chief of staff.
Debt Priority
Under the terms of the plan, the government’s debt would have priority over any other creditors. The automakers also must provide warrants for non-voting stock, accept limits on executive pay, and give the government access to financial records.
No dividends may be issued until the loans are repaid. In addition, the automakers must cut their debt by two-thirds in an equity exchange.
For workers, GM and Chrysler would be required to make half of the payments to a union retirement fund in equity and eliminate a program that pays union workers when they don’t have work. Unions and management would have to negotiate a plan to have compensation and work rules in place by Dec. 31, 2009, that will make the U.S. companies competitive with foreign automakers. The requirements could be modified by negotiations with the union and debt holders.
GM shares rose 40 cents, or 11 percent, to $4.06 at 12:46 a.m. in New York Stock Exchange composite trading. Ford gained 5 cents, or 1.8 percent, to $2.89. Before today, the companies’ shares had tumbled 85 percent and 58 percent this year.
Cerberus
Cerberus Capital Management LP, the New York-based buyout firm that owns Chrysler, said today it will hand over equity in the company’s automotive operations to labor and creditors as part of the loan agreement. “Concessions by all relevant constituencies” are needed to restructure Chrysler, Cerberus said in an e-mailed statement.
Democratic Senator Carl Levin of Michigan said the plan “gives the industry breathing room.” In a conference call with reporters, he said Bush was wise to set the automakers’ restructuring targets “as non-binding goals which are subject to negotiations.”
Republican Senator John McCain of Arizona, his party’s presidential nominee this year, said he regretted that the president decided to “give away” $17 billion to the automakers “while failing to receive any serious concessions from the industry.”
The conditions are largely those set out in the legislation passed by the House and blocked in the Senate.
‘Huge Amount of Work’
“We’ve got a huge amount of work to do over the next 90 days and beyond,” GM Chief Executive Officer Rick Wagoner said at a Detroit news conference.
“Chrysler is committed to meeting these requirements,” the company’s chief executive officer, Bob Nardelli, said in a statement.
The government rejected letting the companies go bankrupt, as had been urged by some lawmakers opposed to a bailout.
Bankruptcy would “worsen a weak job market and exacerbate the financial crisis,” Bush said. “It could send our suffering economy into a deeper and longer recession.”
The terms of the loans represent a major challenge for the automakers, Maryann Keller, an independent auto analyst and consultant in Greenwich, Connecticut, said in a Bloomberg Television interview.
“The restructuring they’re going to have to go through will be huge,” Keller said. “I can’t see a way for GM to operate properly with the capital structure they have.”
Kaplan said representatives of Obama, who takes office Jan. 20, have been kept informed of the administration’s actions.
‘Car Czar’
The Treasury secretary would in effect be a “car czar,” making sure the automakers meet deadlines and having the authority to revoke the loans, Kaplan said. The Bush administration didn’t want to designate an independent overseer with a month left in office.
Kaplan, asked if Chrysler should merge with GM, sidestepped the question.
“We are not going to tell the manufacturers what the right structure is for them to be viable; we’re just going to tell them that if you want taxpayers’ assistance, you’re going to have to make those decisions, and you’re going to have to prove it,” he said.
Treasury will need to go to Congress to get the remaining $350 billion in TARP funds released, including the $4 billion in additional loans to the automakers, Kaplan said. That may be left for Obama’s administration, he said.
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