The plan includes taxpayer assistance for GM and Chrysler in return for radical restructuring. Bush announces $17.4 billion auto bailout

President George W. Bush stepped in Friday to keep America's auto industry afloat, announcing a $17.4 billion bailout for GM and Chrysler, with the terms of the loans requiring that the firms radically restructure and show they can become profitable soon.

"If we were to allow the free market to take its course now, it would almost certainly lead to disorderly bankruptcy," Bush said at the White House, in remarks carried live by the national broadcast networks. "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. The question is how we can best give it a chance to succeed."


Bush said that "bankruptcy now would lead to a disorderly liquidation of American auto companies."

"My economic advisers believe that such a collapse would deal an unacceptably painful blow to hardworking Americans far beyond the auto industry. It would worsen a weak job market and exacerbate the financial crisis," he said. "It could send our suffering economy into a deeper and longer recession."

The money will come from the Wall Street bailout passed by Congress, a reversal for the White House. President-elect Barack Obama and Democrats had long advocated that course, and Bush had resisted it.

Of the total, $13.4 billion will be paid out in December and January, administration officials told reporters in a briefing. The last $4 billion is contingent on release of the second installment of the Wall Street bailout funds by Congress.

As it happens — in a source for some potential confusion — this breakdown also corresponds with how the money will be divided between GM and Chrysler, the two major recipients.

Treasury estimates GM will require about $13.4 billion in loans; Chrysler $4 billion. Both companies will share in the first $13.4 billion paid out in December and January. GM will need the last $4 billion as well.

The government gets a stake in each company, and can call in the loans on March 31 if the firms cannot prove "viability" by then. The manufacturers do not have to be profitable immediately but have to be "profitable soon," a senior administration official said.

The structure largely follows the pattern of legislation that failed in Congress last week in the Senate because of Republican opposition. Bush made no mention of this fight, but in stepping in as he is, the president risks angering conservatives in his party but the administration felt it had no choice given the fragile state of the economy.





In doing so, Treasury decided not to be tied to the initial bill in Congress that provided only $14 billion in loans. That was always viewed as inadequate to get to March 31, and the administration opted to go with more realistic numbers.

In doing so, however, it sets up a ticklish situation for Democrats in the new Congress. With the auto bailout, Treasury will have tapped out all of the first $350 billion from the financial markets rescue fund by late January. That means Democrats must deal with releasing the second $350 billion even as Obama will be trying to rally support for a large economic stimulus bill.

On the Republican side, the real dividing point between the administration and bailout critics in Congress has had more to do with the conditions imposed on the loans — not the aid itself.

These differences came to a head in the Senate over the question of how to treat the United Auto Workers, and what pressure should be put on the union to bring down wage levels to match those paid to non-UAW workers at US plants operated by Honda or Toyota for example.

Senate Republican conservatives insisted that the UAW agree to specific wage adjustments by a date certain in 2009. When the union rejected this demand as political, Republicans killed the bill.

The White House agreed that wage concessions would be needed but thought the better test should be the viability of the companies — not some fixed formula imposed on management and the union. There was real discomfort in the administration with what many saw as a regional, anti-union slant as Republicans from the South — where non-UAW, foreign owned plants are more common — demanded concessions that jeopardized aid to an industry so vital to much of the Midwest.

Thus the loan agreements drafted by Treasury take a more flexible approach. There are “Restructuring Targets” to be met in the companies’ recovery plans, including moving to a more competitive wage structure by the end of 2009. But there is also some leeway if alternative savings can be found. The restructuring report due March 31 “shall identify any deviations from the Restructuring Targets and explain the rationale for these deviations, including an explanation of why such deviations do not jeopardize the Borrower’s long-term viability.”

In explaining his decision Friday, Bush said holding back "would leave the next president to confront the demise of a major American industry in his first days of office.

"The more responsible option is to give the auto companies an incentive to restructure outside of bankruptcy and a brief window in which to do it," Bush said. "And that is why my administration worked with Congress on a bill to provide automakers with loans to stave off bankruptcy while they develop plans for viability."

The announcement immediately affects GM and Chrysler, not Ford, administration officials said. Ford, which took a line of credit just before financing dried up, has said it does not need immediate federal assistant to stay in business.

Chrysler issued a statement thanking the administration but saying the terms will require "consideration."

Here are the details of the White House plan:

Fact Sheet: Financing Assistance to Facilitate the Restructuring of Automobile Manufacturers to Attain Financial Viability

Purpose: The terms and conditions of the financing provided by the Treasury Department will facilitate restructuring of our domestic auto industry, prevent disorderly bankruptcies during a time of economic difficulty, and protect the taxpayer by ensuring that only financially viable firms receive financing.

Amount: Auto manufacturers will be provided with $13.4 B in short-term financing from the TARP, with an additional $4 B available in February, contingent upon drawing down the second tranche of TARP funds.

Viability Requirement: The firms must use these funds to become financially viable. Taxpayers will not be asked to provide financing for firms that do not become viable. If the firms have not attained viability by March 31, 2009, the loan will be called and all funds returned to the Treasury.

Definition of Viability: A firm will only be deemed viable if it has a positive net present value, taking into account all current and future costs, and can fully repay the government loan.

Binding Terms and Conditions: The binding terms and conditions established by the Treasury will mirror those that were voted favorably by a majority of both Houses of Congress, including:

— Firms must provide warrants for non-voting stock.

— Firms must accept limits on executive compensation and eliminate perks such as corporate jets.

— Debt owed to the government would be senior to other debts, to the extent permitted by law.

— Firms must allow the government to examine their books and records.

— Firms must report and the government has the power to block any large transactions (> $100 M).

— Firms must comply with applicable Federal fuel efficiency and emissions requirements.

— Firms must not issue new dividends while they owe government debt.

Targets: The terms and conditions established by Treasury will include additional targets that were the subject of Congressional negotiations but did not come to a vote, including:

— Reduce debts by 2/3 via a debt for equity exchange.

— Make one-half of VEBA payments in the form of stock.

— Eliminate the jobs bank.

— Work rules that are competitive with transplant auto manufacturers by 12/31/09.

— Wages that are competitive with those of transplant auto manufacturers by 12/31/09.

These terms and conditions would be non-binding in the sense that negotiations can deviate from the quantitative targets above, providing that the firm reports the reasons for these deviations and makes the business case to achieve long-term viability in spite of the deviations.

In addition, the firm will be required to conclude new agreements with its other major stakeholders, including dealers and suppliers, by March 31, 2009.

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