Emergency Loan Approved for U.S. Automakers

President Bush announced this morning the decision to help U.S. automakers General Motors Corp. and Chrysler, LLC with an emergency loan to give them an opportunity to bring their businesses back to profitability. Ford Motor Company is not taking out a government loan at the moment; Ford CEO Alan Mullaly said that they have enough money to get through the ongoing recession.

Bush said that under normal economic circumstances he would allow the automakers to fail as a result of their poor business decisions. He said, "But these are not ordinary circumstances. 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. Some argue the wisest path is to allow the auto companies to reorganize through Chapter 11 provisions of our bankruptcy laws -- and provide federal loans to keep them operating while they try to restructure under the supervision of a bankruptcy court. But given the current state of the auto industry and the economy, Chapter 11 is unlikely to work for American automakers at this time."

Bush worried that a collapse of the U.S. auto industry would spread far and wide through the American economy and cause further problems in the difficult job market. He said that it would be tough for the automakers to recover if they had to file a "disorderly" bankruptcy since prospective car buyers would be hesitant to purchase vehicles from a company that may not be around long enough to service their vehicle or make good on an auto warranty.

Bush said, "Additionally, the financial crisis brought the auto companies to the brink of bankruptcy much faster than they could have anticipated -- and they have not made the legal and financial preparations necessary to carry out an orderly bankruptcy proceeding that could lead to a successful restructuring."

U.S. automakers have been struggling for years, but the financial crisis proved to be the final blow to their balance sheets as consumers pull back on spending, and even those that may have purchased are finding it difficult to get an auto loan in the tight credit market.

Bush also expressed concern that letting the auto industry fail would "leave the next President to confront the demise of a major American industry in his first days of office."

In a separate statement, President-elect Barack Obama said of the automaker rescue, "Today's actions are a necessary step to help avoid a collapse in our auto industry that would have a devastating consequences for our economy and our workers."

The money will be available for the automakers on December 29, 2008. Chrysler will receive $4 billion. General Motors will receive $4 billion initially, then another $5.4 billion in January and $4 billion more in February.

Under conditions of the loan, Chrysler and GM will have to report regularly to a "Presidential Designee". The two automakers also agreed to a strict spending policy on company expenses such as holiday parties, corporate travel, the hosting or sponsorship of events, and acquiring leases or real estate.

Automakers have three months, by March 31, 2009, to develop plans to prove to the government that they can restructure into viable companies, become profitable, and achieve a positive net worth. If they can't do that, the government loans will have to be paid back immediately, and the automakers will have no choice but to file Chapter 11 bankruptcy with the U.S. government as the first pay priority.

Bush stated, "This restructuring will require meaningful concessions from all involved in the auto industry -- management, labor unions, creditors, bondholders, dealers, and suppliers.

Bush said, "In particular, automakers must meet conditions that experts agree are necessary for long-term viability -- including putting their retirement plans on a sustainable footing, persuading bondholders to convert their debt into capital the companies need to address immediate financial shortfalls, and making their compensation competitive with foreign automakers who have major operations in the United States.

"The automakers and unions must understand what is at stake, and make hard decisions necessary to reform, These conditions send a clear message to everyone involved in the future of American automakers: The time to make the hard decisions to become viable is now -- or the only option will be bankruptcy.

"The actions I'm announcing today represent a step that we wish were not necessary. But given the situation, it is the most effective and responsible way to address this challenge facing our nation. By giving the auto companies a chance to restructure, we will shield the American people from a harsh economic blow at a vulnerable time. And we will give American workers an opportunity to show the world once again they can meet challenges with ingenuity and determination, and bounce back from tough times, and emerge stronger than before."

Those that oppose the auto industry bailout are especially upset that taxpayer money earmarked to help the financial system is being used for a different purpose. Bush said the funds will have to come from the financial rescue plan approved earlier this fall due to Congress' inability to pass a separate rescue for the ailing automakers.

Treasury Secretary Henry Paulson said in a statement, "Treasury will make these loans using authority provided for the Troubled Asset Relief Program. While the purpose of this program and the enabling legislation is to stabilize our financial sector, the authority allows us to take this action. Absent Congressional action, no other authorities existed to stave off a disorderly bankruptcy of one or more auto companies."



Sources:
The White House
U.S. Department of the Treasury
Wall Street Journal
FoxNEWS