Moving toward auto bailout

WASHINGTON – The Bush administration on Friday moved to pull Detroit’s automakers back from the brink, saying it would drop its opposition to tapping the $700 billion financial industry rescue package to help General Motors and Chrysler survive through year’s end.

The White House said it would explore all financing options, including drawing on the Treasury’s Troubled Asset Relief Program, which until now has been used exclusively to aid banks and other financial firms. The automakers and some members of Congress were also hoping that the Federal Reserve would make a loan to aid the firms and preserve tens of thousands of jobs. But the Fed has strongly resisted such entreaties and has said it would be “extremely reluctant” to lend to the companies.

“We need these loans, and we’re not particularly fussy about how we get the loans or where they come from,” said GM board member George Fisher, retired chief executive of Eastman Kodak.

The White House announcement set off new rounds of negotiations over the terms of federal aid, such as whether the Treasury would require management changes and how big an equity stake the government would demand in return for the use of taxpayer funds.

General Motors and Chrysler say they need the money to avoid running out of cash before the end of the year and to avert a domino effect that would threaten the viability of a variety of smaller companies that supply parts to the big manufacturers.

The moves follow the Thursday night breakdown of talks in the Senate, where most Republicans had demanded that the United Auto Workers make wage concessions that would bring members’ pay down to the level of nonunionized workers at foreign-owned automobile plants.

Even as it said it would step up to aid auto companies, the Bush administration expressed its reluctance to do so.

“Under normal economic conditions, we would prefer that markets determine the ultimate fate of private firms,” said White House spokeswoman Dana Perino. “However, given the current weakened state of the U.S. economy, we will consider other options if necessary – including use of TARP – to prevent a collapse of troubled automakers. A precipitous collapse of this industry would have a severe impact on our economy, and it would be irresponsible to further weaken and destabilize our economy at this time.”

New signs of the industry’s deterioration appeared Friday.

GM said it would idle about 30 percent of its North American production during the first quarter, lowering output by about 250,000 vehicles. Honda said that it would slash North American production by 119,000 vehicles and that its production would finish the year down 12 percent from 2007.

The automakers’ suppliers said they were already suffering from the industry slowdown.

“Our warehouse used to be full of huge coils of steel waiting to be processed,” said Wes Smith, president of E&E Manufacturing, an auto supplier in Michigan. “Now it’s empty. We have no orders. No one is buying vehicles right now.”

Smith’s initial budget forecast $100 million in sales for the year. Now, he said, he’ll be lucky to break $70 million. His work force has dropped from 550 employees to 305.

The big auto companies, analysts said, are due to pay most suppliers Jan. 2 – before Congress returns. Some suppliers said unpaid bills were already piling up.

Meanwhile, GMAC, which provides financing for most GM dealers and many GM customers, remains locked in negotiations with its investors over a restructuring plan.

GMAC set a deadline of 5 p.m. Friday to persuade investors to participate in its plan to become a bank holding company, allowing it to access money from sources including the Treasury Department. Analysts said the company could be forced to file for bankruptcy protection if it does not succeed.

The deadline passed without immediate comment from the investors or the company.

President-elect Barack Obama said that the condition of the economy makes aid to the auto companies necessary.

“I share the frustration of so many about the decades of mismanagement in this industry that has helped deliver the current crisis. Those bad practices cannot be rewarded or continued,” Obama said in a statement. “But I also know that millions of American jobs rely directly or indirectly on a viable auto industry, and that the beginnings of reform are at hand.”

Many lawmakers and analysts fear that tapping the Treasury’s TARP to rescue the auto companies could open the way for other aid requests from ailing companies outside the financial sector.

“Whatever one thinks of TARP, this clearly establishes a precedent for an industrial company to get money,” said Brian Johnson, an automobile analyst at Barclays Capital. Still, he added, “not many chief executives will want to go through what the auto company CEOs went through,” testifying before angry members of Congress.

Senate Banking Committee Chairman Christopher Dodd, D-Conn., on Friday raised the prospect of Federal Reserve lending to help tide the automakers over. A Fed rescue would also help avoid a clash between the Bush administration and Congress over the release of the next installment of TARP, which Dodd opposes.

“The Fed could conclude that the systemic effects of letting GM go under are too great,” said one person familiar with negotiations over the fate of GM and Chrysler.

A Fed loan, however, would have its own issues. Unlike Treasury funds, it would have to be made against sound collateral. GM said it has more than $20 billion in unattached assets, including trademarks, U.S. real estate, intellectual property and ownership stakes in foreign subsidiaries. But placing a value on GM assets at this point would be a difficult and somewhat arbitrary exercise, conceded the source familiar with the negotiations. The person spoke on the condition of anonymity because the negotiations are not public.