Emergency Loan of $13.4 Billion for GM, Chrysler

123jump.com Staff
19 Dec, 2008
New York City

President Bush offered emergency loan of $13.4 billion to General Motors and Chrysler and additional $4 billion may be released after March of next year if two auto companies provide a restructuring plan. The decision lifted stocks of the companies and stock market indexes but tough road lies ahead.

[R]1:20PM New York – White House agrees to offer emergency loan of $13.4 billion to General Motors and Chrysler.[/R]

U.S. stocks rallied after President Bush announced $13.4 billion bailout plan for General Motors and Chrysler. The emergency loan will allow two auto companies to pay their bills and give time to negotiate with various stakeholders a restructuring plan.

The loans are immediately due if automakers fail to present viability plans by the end of March of next year. And if approved, the Treasury will release additional $4 billion next year.

The government will get non-voting warrants in the companies and will have a veto power on all decisions that involve more than $100 million.

President Bush in a statement before the opening of financial markets laid out his reasons and conditions for the emergency loans. He stressed that under normal economic environment auto companies will have to pay for their mistakes through bankruptcy courts but these are difficult times.

Bush went on to say, “Given the current state of the auto industry and the economy, Chapter 11 is unlikely to work for American automakers at this time.”

President said that a disorderly bankruptcy will lead to more troubles times for the industry, chaos for consumers and more pain for the retirees. He noted, “It would worsen a weak job market and exacerbate the financial crisis. It could send our suffering economy into a deeper and longer recession. And it would leave the next President to confront the demise of a major American industry in his first days of office.”

The money for the loans will be taken from the infamous TARP funds controlled by Treasury Secretary Henry Paulson. Secretary Paulson played a key role in negotiating with automakers and will be responsible in approving restructuring plan. In the past, Mr. Paulson has been reluctant to release any funds to the companies and he has been under fire from Congress in what most Congressmen feel for his ‘bait and switch’ approach in how he disbursed TARP funds.

Emergency loans to automakers will give 105 days to General Motors and Chrysler to negotiate with suppliers, employees, debts and share holders and with dealers to prepare a viability plan. The next 100 days will be rocky for the companies as they face declining sales, high fixed costs, complicated state franchise laws and hardened union demands.

The Federal emergency loan conditions require a two third reduction in debt or an exchange of equity, unions to match their wages and benefits to that at foreign automakers and the elimination of job banks. The management is also required to give up their excessive bonuses and executives to limit their pays and give their corporate jets.

Autoworkers union had agreed to a wage reduction in 2011 and Senate Republicans are demanding wage cuts beginning in 2009. The White House plan left door open for the union to negotiate with companies. At present President Bush has asked Treasury Secretary Paulson to play a role of ‘auto czar’ and negotiate with auto companies and evaluate their viability plans.

President Bush is in a delicate situation in dealing with auto companies, auto industry and economic climate. With less than 35 days left for his administration, President Bush will not like to see two auto giants to fail under his watch but at the time do not want to appear to bail out companies that have not been competitive in the last two decades. Bush, with today’s decision essentially passed on the fate of GM and Chrysler to the next president Obama.

General Motors is clearly not out of the woods with the emergency loans from the White House. The company has lost more than $73 billion in the last decade and continues to lose its market share in the U.S. The company has shut plants and fired employees in the last three years but the management always appears to be several steps behind the market.

Sales at General Motors in first eleven months of this year dropped 22% and in November plunged 41%, at Chrysler sales declined 28% in the same period and plunged 48% in latest month. Sales trend for the December month are no better than in November.

General Motors, Chrysler and Ford continue to project optimistic industry sales and forecast market share expectations that are not sustainable.

For the year 2009 the three auto companies are projecting industry sales of at least 12 million vehicles, however industry sales are more likely to be near 10 million. General Motors, Ford and Chrysler have been wrong for more than ten years in projecting theirs and industry sales and keep excess capacity at hand. This excess production capacity and labor staff has proven to be corrosive for the company and eaten away precious cash.

In today’s trading, General Motors ((GM)) rose 42 cents to $4.08 and Ford Motor Company ((F)) increased 7 cents to $2.91.