Friday, December 19, 2008

Federal Loans Approved To U.S. Automobile Manufacturers


From The New York Times:

Bush Approves $17.4 Billion Auto Bailout

Published: December 19, 2008

WASHINGTON — President Bush on Friday announced $13.4 billion in emergency loans to prevent the collapse of General Motors and Chrysler, and another $4 billion available for the hobbled automakers in February with the entire bailout conditioned on the companies undertaking sweeping reorganizations to show that they can return to profitability.

The loans, as G.M. and Chrysler teeter on the brink of insolvency, essentially throws the companies a lifeline from the taxpayers that will keep them afloat until March 31. At that point, the Obama administration will determine if the automakers are meeting the conditions of the loans and will continue to receive government aid or must repay the loans and face bankruptcy proceedings.

Mr. Bush made his announcement a week after Senate Republicans blocked legislation to aid the automakers that had been negotiated by the White House and Congressional Democrats, and the loan package announced by the president includes roughly the identical requirements in that bill, which had been approved by the House.

Mr. Bush, in a televised speech before the opening of the markets, said that under other circumstances he would have let the companies fail, as punishment for bad business decisions. But given the economic downturn, he said the government had no choice but to step in.

“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” Mr. Bush said.

He said that bankruptcy was not a workable alternative. “Chapter 11 is unlikely to work for the American automakers at this time,” Mr. Bush said, noting that consumers would be unlikely to purchase cars from a bankrupt manufacturer.

The loan deal also requires the companies to quickly reduce their debt by two-thirds, mostly through debt-for-equity swaps, and to reach an agreement with the United Auto Workers union to cut wages and benefits so they are competitive with those of employees of foreign-based automakers working in the United States.

The debt reduction and the cuts in wages were central components of proposal by Senator Bob Corker, Republican of Tennessee, who tried to salvage the bailout legislation.

Those talks had deadlocked on a demand by Republicans that the wage cuts take effect by a set date in 2009, while the union had pressed for a deadline in 2011 after its current contract expires.

The plan announced on Friday by Mr. Bush offered a compromise between those positions, by making the requirements non-binding, allowing the automakers to reach different arrangements with the union, provided that they explain how those alternative plans will keep them on a path toward financial viability.

To gain access to the emergency loans, G.M. and Chrysler must agree to a range of concessions, including limits on executive pay and the elimination of their private corporate jets.

Under the plan, Mr. Bush essentially handed off to President-elect Barack Obama what will become one of the first, most difficult calls of his presidency: a political and economic judgment about whether G.M. and Chrysler are financially viable. Ford is not seeking immediate government help.

If, by March 30, the two companies cannot meet that standard — and clearly they could not meet it today — the $13.5 billion in Treasury loans would be “called” for immediate repayment, with the government placed in priority, ahead of all other creditors.

To avoid that fate, the companies will need to complete negotiations with the unions, the creditors, the suppliers and the dealers by March 30. Any judgment on the accords they reach with those groups will inevitably be both economic and political.

Mr. Obama and his economic team will have to make a convincing, public case that the wage cuts, plant closings and creditor agreements so change the landscape of the industry that the carmakers can turn profitable in short order.

But Mr. Obama will be under tremendous political pressure as well, because if his new team concludes that the automakers have not struck the right deals, it would mean a move to bankruptcy court, and likely widespread layoffs that would ripple far beyond the companies themselves.

Mr. Obama was elected partly with the enthusiastic support of the unions, who liked his talk of protecting jobs by renegotiating trade agreements. Now, in his first months, he will be asking them to give back gains they have negotiated over decades.

Because the bailout legislation failed in Congress, senior administration officials said that the loan package would essentially take the form of a contract between the government and the automakers. Officials said they expected those contract agreements would be signed by the end of the day.

In recent days, G.M. and Chrysler have found themselves in an increasingly precarious financial position, with some industry experts predicting that they could not survive through the month without government aid.

Both companies had enlisted teams of bankruptcy lawyers to prepare for a collapse. And they have announced drastic cutbacks, including an extension of the normal holiday-season idling of factories, with some operations to be suspended for a month or more.

Other automakers, including Honda and Ford, have announced cutbacks in production as the entire industry deals with the economic downturn and a plunging demand for cars among consumers.

Ford, which is in better financial condition that G.M. and Chrysler, has said that it does not intend to tap the emergency government aid.

Ford, in a statement, applauded the move by the White House.

“We do not face a near-term liquidity issue, and we are not seeking short-term financial assistance from the government,” Ford’s chief executive, Alan Mulally said.

“But all of us at Ford appreciate the prudent step the administration has taken.” Mr. Mulally added: The U.S. auto industry is highly interdependent and a failure of one of our competitors would have a ripple effect that could jeopardize millions of jobs and further damage the already weakened U.S. economy.”

While the legislation that failed in Congress would have provided $14 billion in federally subsidized loans using money that had already been appropriated to help the automakers retool to make advanced fuel efficient vehicles, the loans announced by Mr. Bush will be financed by the Treasury’s $700 billion financial system stabilization program.

The additional $4 billion in loans available for the auto industry in February will be contingent on Congress releasing to the Treasury the second half of that bailout fund.

And while the legislation would have created a new position within the executive branch to oversee the automakers, a so-called “car czar” Mr. Bush said on Friday that while he remains in office, the emergency loan program will be supervised by the Treasury secretary, Henry M. Paulson Jr.

In a statement, G.M. reacted with a mixture of gratitude and relief.

“We appreciate the president extending a financial bridge at this most critical time for the U.S. auto industry and our nation’s economy,” Greg Martin, a company spokesman, said. “This action helps to preserve many jobs, and supports the continued operation of G.M. and the many suppliers, dealers and small businesses across the country that depend on us.”

In his statement, Mr. Martin said that the emergency loans would allow G.M. “to accelerate the completion of our aggressive restructuring plan for long-term sustainable success.” He added: “It will lead to a leaner, stronger General Motors.”

In a statement to employees, Robert Nardelli, the chief executive of Chrysler, said the company would hold up its end of the bargain.

“As outlined in our submission to Congress, we intend to be accountable for this loan, including meeting the specific requirements set forth by the government, and will continue to implement our plan for long-term viability,” Mr. Nardelli said. “The receipt of this loan means Chrysler can continue to pursue its vision to build the fuel-efficient, high-quality cars and trucks people want to buy, will enjoy driving and will want to buy again.”

Both G.M. and Chrysler stock rose sharply after the opening and Mr. Bush’s announcement helped send the broader markets higher as well.

But some critics of a taxpayer-financed rescue of the auto industry have warned that the money will just be wasted on companies who are suffering not because of the recent economic downturn but because of decades of failed business decisions.

A number of Republican Senators who had opposed the auto rescue legislation wrote to Mr. Bush in recent days urging him not to tap the Treasury’s financial stabilization program to help G.M. and Chrysler.

Mr. Bush chided the Congress for failing to approve the auto rescue legislation, but he did not note that it was his fellow Republicans in the Senate who were responsible for scuttling the bill in what amounted to a sharp rebuke to the White House in the waning days of his administration.

The decision to use the Treasury’s $700 billion financial system stabilization fund was also a major turnabout for Mr. Bush, who for weeks had insisted that the Treasury program should not be used to help the automakers.

In the end, it was clear, however, that Mr. Bush did not want G.M. or Chrysler, both American icons, to go down on his watch.

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There is always an easy solution to every human problem—neat, plausible, and wrong.
Henry Louis Mencken (1880–1956)
“The Divine Afflatus,” A Mencken Chrestomathy, chapter 25, p. 443 (1949)
... and one could add "not all human problems really are."
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- O. Henry
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Tracking Interest Rates

Tracking Interest Rates


SEARCH BLOG: FEDERAL RESERVE for full versions... or use the Blog Archive pulldown menu.

February 3, 2006
Go back to 1999-2000 and see what the Fed did. They are following the same pattern for 2005-06. If it ain't broke, the Fed will fix it... and good!
August 29, 2006 The Federal Reserve always acts on old information... and is the only cause of U.S. recessions.
December 5, 2006 Last spring I wrote about what I saw to be a sharp downturn in the economy in the "rustbelt" states, particularly Michigan.
March 28, 2007
The Federal Reserve sees no need to cut interest rates in the light of adverse recent economic data, Ben Bernanke said on Wednesday.
The Fed chairman said ”to date, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing in core inflation”.

July 21, 2007 My guess is that if there is an interest rate change, a cut is more likely than an increase. The key variables to be watching at this point are real estate prices and the inventory of unsold homes.
August 11, 2007 I suspect that within 6 months the Federal Reserve will be forced to lower interest rates before housing becomes a black hole.
September 11, 2007 It only means that the overall process has flaws guaranteeing it will be slow in responding to changes in the economy... and tend to over-react as a result.
September 18, 2007 I think a 4% rate is really what is needed to turn the economy back on the right course. The rate may not get there, but more cuts will be needed with employment rates down and foreclosure rates up.
October 25, 2007 How long will it be before I will be able to write: "The Federal Reserve lowered its lending rate to 4% in response to the collapse of the U.S. housing market and massive numbers of foreclosures that threaten the banking and mortgage sectors."
"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," he said.

"Uncertainties about the economic outlook are unusually high right now," he said. "These uncertainties require flexible and pragmatic policymaking -- nimble is the adjective I used a few weeks ago."

December 11, 2007 Somehow the Fed misses the obvious.
[Image from:]
December 13, 2007 [from The Christian Science Monitor]
"The odds of a recession are now above 50 percent," says Mark Zandi, chief economist at Moody's "We are right on the edge of a recession in part because of the Fed's reluctance to reduce interest rates more aggressively." [see my comments of September 11]
January 7, 2008 The real problem now is that consumers can't rescue the economy and manufacturing, which is already weakening, will continue to weaken. We've gutted the forces that could avoid a downturn. The question is not whether there will be a recession, but can it be dampened sufficiently so that it is very short.
January 11, 2008 This is death by a thousand cuts.
January 13, 2008 [N.Y. Times]
“The question is not whether we will have a recession, but how deep and prolonged it will be,” said David Rosenberg, the chief North American economist at Merrill Lynch. “Even if the Fed’s moves are going to work, it will not show up until the later part of 2008 or 2009.
January 17, 2008 A few days ago, Anna Schwartz, nonagenarian economist, implicated the Federal Reserve as the cause of the present lending crisis [from the Telegraph - UK]:
The high priestess of US monetarism - a revered figure at the Fed - says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. "The new group at the Fed is not equal to the problem that faces it," she says, daring to utter a thought that fellow critics mostly utter sotto voce.
January 22, 2008 The cut has become infected and a limb is in danger. Ben Bernanke is panicking and the Fed has its emergency triage team cutting rates... this time by 3/4%. ...

What should the Federal Reserve do now? Step back... and don't be so anxious to raise rates at the first sign of economic improvement.
Individuals and businesses need stability in their financial cost structures so that they can plan effectively and keep their ships afloat. Wildly fluctuating rates... regardless of what the absolute levels are... create problems. Either too much spending or too much fear. It's just not that difficult to comprehend. Why has it been so difficult for the Fed?

About Me

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Michigan, United States
Air Force (SAC) captain 1968-72. Retired after 35 years of business and logistical planning, including running a small business. Two sons with advanced degrees; one with a business and pre-law degree. Beautiful wife who has put up with me for 4 decades. Education: B.A. (Sociology major; minors in philosopy, English literature, and German) M.S. Operations Management (like a mixture of an MBA with logistical planning)