Should Congress bail out the Big Three? Here’s what lawmakers are considering and what’s at stake.
NEW YORK (CNNMoney.com) — For more than a century, the U.S. auto industry has been at the center of the American industrial economy. Events over the next month could determine if that remains the case.
This week, Congress will consider whether to cough up billions of dollars to bail out the troubled companies.
There are loud advocates with strong arguments on both sides.
Proponents of a bailout say that the industry is a victim of the global financial crisis. Wall Street has been bailed out, so why not Detroit?
They say millions of jobs could be lost and more than $100 billion in wages sliced out of an already-fragile U.S. economy.
“It would be a travesty for the irresponsible, reckless behavior of Wall Street to result in the sweeping away of the American automobile industry,” said Mike Jackson, CEO of Autonation, the nation’s largest auto dealership group. “If indeed it came to bankruptcy, it’s going to make what happened with Lehman Brothers and all the consequences of that a nice day.”
On the other side are those who feel just as strongly that the automakers’ problems are their own doing, born of bad business decisions, uncompetitive labor agreements and vehicles that Americans have decided are second-rate.
They say a bailout will only postpone the inevitable, and that the failure of one or more of the companies is necessary if the economy is to work properly.
“The Big Three’s financial straits are not the product of our current economic downturn, but instead are the legacy of the uncompetitive structure of their manufacturing and labor force,” said Sen. Richard Shelby, R-Ala., the ranking member of the Senate Banking Committee. “I do not support the use of U.S taxpayer dollars to reward the mismanagement of Detroit-based auto manufacturers.”
Indeed, opposition to a bailout is widespread. GM and the other Detroit automakers are trying to win support from an American public that has largely turned their back on them. Sales by the U.S. companies account for only 47% of domestic sales this year, according to sales tracker Autodata.
Whatever Congress decides, it’ll have to act fast. General Motors (GM, Fortune 500) has warned that by the end of the year it will have run down down its cash close to the minimum amount needed to operate. The status of Ford Motor (F, Fortune 500) and Chrysler LLC aren’t as precarious, but both have joined their larger rival and the United Auto Workers union in asking for help for the industry.
What’s on the table
An automaker rescue will be at the top of the lame-duck session of Congress. The Senate Banking Committee will hold a hearing on the issue on Tuesday and the House Financial Services Committee on Wednesday.
The battle lines are clear.
House Speaker Nancy Pelosi, D-Calif, and Senate Majority Leader Harry Reid, D-Nev., have said they want the government to help the companies and that the funding should come out of the $700 billion bailout plan passed by Congress last month.
The Bush administration, led by Treasury Secretary Henry Paulson, has steadfastly resisted calls to use the bailout funds for the automakers. The White House wants to use money from a $25 billion loan program aimed at helping automakers convert production to more fuel-efficient vehicles.
“We want to see legislation passed at this week’s lame-duck session that uses existing funds intended for the automakers that will help them become viable for the long run,” White House spokeswoman Dana Perino said Saturday. “We need to conserve the [$700 billion bailout] money for its intended purpose, stabilizing and strengthening our financial system.”
GM executives say the $25 billion loan money would come with enough strings attached to it that they are not sure it can be used to solve their cash crisis.
It’s unclear how the issue will play out on Capitol Hill. The current Congress is a holdover – it’s not the one that will be made up of lawmakers that won in a Democratic landslide on Nov. 4. President-elect Barack Obama has voiced his support for the automakers, but he has not signaled specifically how he thinks such help should take shape.
And GOP opposition to a bailout is strong. Republican House members defeated the Wall Street bailout on its first vote in September, despite strong support from Republican leadership and the Bush administration. Even some leading Democrats who back help for the automakers sounded pessimistic about chances for an aid package.
“I’m not sure the votes are there next week,” said Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee.
What happens if there’s no bailout
General Motors has the most at stake. There seems little doubt that GM will file for bankruptcy without a large cash infusion by the end of the year. The company ended the third quarter with about $16 billion on hand, but it needs $11 billion to $14 billion to continue normal operations. It burned through $7 billion in the third quarter.
What happens after a bankruptcy is a topic of debate.
GM executives, while refusing to discuss the chance of a bankruptcy filing, say that buyers would be unwilling to buy from a bankrupt automaker because of fears about resale value and warranties.
The company, along with credit analysts, has also questioned whether it could get financing to reorganize while in bankruptcy.
If GM were unable to pay its bills, it could be forced to liquidate and sell off assets rather than reorganize. And if it can’t pay its creditors, auto parts suppliers would suffer and many would likely fail.
“The domino effect would be immense,” said Deborah Thorn, a bankruptcy attorney who represents auto parts makers. “You can’t afford to produce parts if you’re not being paid.”
And because the automakers have so much overlap in their supplier base, a closure at one parts maker could cause GM rivals to shut plants as well.
The Center for Automotive Research, an Ann Arbor, Mich., think tank pushing for a bailout, estimates a loss of nearly 2.5 million jobs if just half of the Big Three manufacturing capacity were shuttered – a possible scenario if GM files for protection.
About 240,000 of those job losses would be at the automakers, while 800,000 would be at various suppliers and dealerships. The other 1.4 million job losses would be at businesses that rely on automaker spending.
For example, the Big Three have made deep cuts in their advertising budgets. That is already fueling media industry layoffs. Reduced spending by auto company employees who lose their jobs would hurt stores and other businesses in cities where plants are located.
But some bailout critics argue that bankruptcy is the best solution. They believe that despite tight credit markets, GM should be able to find the financing it needs to stay in business, even after a bankruptcy. They say that consumers could be convinced to buy a car from a bankrupt company as long as the warranty is backed by a third party.
And they point out that other companies, such as airlines and steelmakers, have survived bankruptcy.
Still, bankruptcy would be tough. It would mean shedding numerous brands and probably thousands of dealerships, and entail closing plants and laying off tens of thousands of hourly workers.
The advocates of a bailout insist that the risk of failure is too great – that even the best case scenario for bankruptcy would be too great a shock to the struggling U.S. economy. The critics of federal help say a bailout would be throwing good money after bad – something the government can’t afford to do after already promising close to a trillion dollars for other bailouts. Stay tuned.
By Chris Isidore, CNNMoney.com senior writer
Last Updated: November 17, 2008: 7:54 AM ET
Source: CNN Money