Posted on 09/24/2008 6:58:14 PM PDT by bruinbirdman
In Washington these days, an 11-figure expenditure barely attracts notice.
With Congress preoccupied with the massive, $700 billion bailout plan for the financial industry, General Motors, Ford, and Chrysler have finally secured Part One of their own federal rescue plan. A bill set to be passed by Congress and signed by President Bush as early as this weekend—separate from the controversial Wall Street bailout plan—includes $25 billion in loans for the beleaguered Detroit automakers and several of their suppliers. "It seemed like a lot when we first started pushing this," says Democratic Sen. Debbie Stabenow of Michigan, one of the bill's sponsors. "Suddenly, it seems so small."
But please don't call it a "bailout"—Detroit is too proud for that. Exact details will come later, but the loans would probably amount to at least $5 billion for each of the Detroit 3, plus smaller amounts for suppliers. That would allow them to borrow money at interest rates as low as 4 percent—a steep discount compared with the double-digit rates they're paying now. Over several years, the automakers could save hundreds of millions in financing costs. Plus, they'll have five years before they have to start repaying the loans.
It might seem like a stealth rescue, but the plan has been in the works for at least 18 months. Approval for the loans was first included in last year's Energy Independence Act. Earlier this year, the automakers sought a first installment of loans totaling about $6 billion. But the nationwide credit crunch severely crimped their ability to borrow, and besides, next to bailouts like $200 billion for Fannie Mae and Freddie Mac, a mere $6 billion started to seem unduly modest. So Detroit raised the ante to $25 billion, the most allowed under current law.
Some details of the program:
It's much bigger than the Chrysler bailout of 1980. Back then, the government gave Chrysler a $1.5 billion loan guarantee to stave off a bankruptcy filing. That's equivalent to about $4 billion today—less than the amount each of the Detroit 3 is likely to get this time around.
There are few strings attached. The 1980 plan also included a long list of rules Chrysler had to abide by in order to get the money (including, get this, "an energy savings plan focusing on the national need to lessen U.S. dependence on petroleum"). The current legislation requires only that the money be used to retool old assembly lines and develop advanced, fuel-efficient technology. Since the automakers are already spending billions to do that, they could easily shift money around and use the low-interest funds to effectively support almost any project.
It props up a private company. In 1980, Chrysler was a public company, just as GM and Ford are today. But last year a private equity firm, Cerberus Capital Management, bought Chrysler, taking the firm private. And there's little or no precedent for the government aiding a private company that has no stockholders among the public. "I'd draw a line between public and private," says Kathryn Rudie Harrigan, a strategy professor at Columbia Business School. "I understand there are a lot of jobs at stake, but the taxpayer can only carry so much."
Detroit desperately needs the help. Many analysts expect all three domestic car companies to face a life-threatening crisis if the U.S. car market, down about 20 percent so far this year, stays in the doldrums. GM and Ford could start to run out of cash by the second half of 2009, a precursor to declaring bankruptcy. Chrysler's finances are now private, but its sales are down even more than at Ford and GM, and it may be starting to bleed its corporate parent, Cerberus.
The idea behind the loans is to buy time while the Detroit 3 revamp their lineups, develop new hybrids and other fuel-sippers, and convert old SUV plants into factories turning out hot cars able to compete with those from Toyota and Honda. "I think they're on the verge of really turning the page," says Stabenow. But Detroit has fallen mightily. Consumers reeling from $4 gas have fled the big trucks and SUVs that the manufacturers milked for two decades, and Detroit's smaller cars tend to rate poorly compared with competitors. The domestics' U.S. market share is now about 48 percent, a staggering fall of nearly 20 points since the start of the decade. Fitch Ratings expects GM and Ford to produce about 1.3 million fewer cars this year than in 2007. Even cheap loans will do little to help erase years of red ink. "Even if they had positive cash flow," says Mark Oline of Fitch, "it's going to take some time to make a dent in their debt load."
There's more aid coming. This year's $25 billion is just a down payment. The automakers now plan to ask the government for another $25 billion in loans next year. It's just spare change, after all.
"Show me just what Mohammed brought that was new, and there you will find things only evil and inhuman, such as his command to spread by the sword the faith he preached." - Manuel II Palelologus
I can’t take it much longer! UGH!!!!!
Handouts for everyone!
Michigan will go DEM, as always; and Detroit will continue to churn out crap cars.
I hope D.C. leaves me enough for ammo for the armed revolution they are inviting.
You can’t really blame the auto industry. It’s hardly a free market any more, what with all the government safety, environmental, labor, and fuel efficiency regulations. The auto industry is pretty much controlled by the federal government already. Sigh!
Alright, this is just blatant graft. There is no argument to be made that not helping Detroit will cause the currency to collapse.
Your point is proven by the fact that autos are selling so well in other countries, especially GM autos. Our regulations, of many industries (except the ones that count-See Fannie and Freddie), will put us in debtors' prison.
Who knows whether these companies could not have obtained funds from the private markets if the f———g Rats and their affirmative action welfare housing bubble had not broken the capital and credit markets.
"Show me just what Mohammed brought that was new, and there you will find things only evil and inhuman, such as his command to spread by the sword the faith he preached." - Manuel II Palelologus
I wonder how soon the tank and aircraft lines will reopen. We’ll probably need Hummers by the tens of thousands when the next war breaks-out just in time to right the economy. /Sarc
whatta joke!
these 3 companies should have planned fuel-efficient cars beginning in 1974.
meanwhile, we’ve had to pay higher prices for inferior cars,
and support their unions.
i resent unions and their influence into american politics.
no more! yesterday i bought a honda. my last vehicle was a 2003 chevrolet.
they do well where there are weaker unions. pumping money into an industry dominated by the UAW is money that will go down the drain
I’m all in favor of blue collar jobs from companies that don’t screw their consumers. The Japanese-run auto companies operating in America without unions provide those jobs, and turn a profit the old fashioned way - by earning the loyalty of their customers!
I can appreciate that. As you said, at least they actually produce something besides paper.
We are France!
We are France!
We are France!
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.