WASHINGTON (MarketWatch) - Chastened leaders of the U.S. automobile industry agreed Thursday to accept strong oversight from Washington in return for the immediate government aid they say is needed to keep the industry alive past the new year.

After sending more detailed restructuring plans to Congress earlier this week, top corporate executives from General Motors Corp., Ford Motor Co. and Chrysler LLC and the leader of the United Autoworkers union testified again to the committee Thursday about the companies' request for an urgent bailout totaling $34 billion.

Top senators on the Senate Banking Committee were empathetic but wary of repeating the same mistakes they say they made when they handed hundreds of billions of dollars to banks without any strings attached.

Refusing the auto industry is not an option, said Sen. Chris Dodd, D-Conn., chairman of the committee. Doing nothing would be playing "Russian roulette with the entire economy of the United States."

General Motors GM, -2.37% and Chrysler say they need billions by the end of the year to avoid bankruptcy. GM wants $4 billion immediately and $18 billion overall. Privately owned Chrysler would like $7 billion by the end of the year. The situation at Ford F, -1.34% isn't quite so desperate, but it is requesting $9 billion in loans just in case. Read David Weidner on why Wall Street has given up on Detroit.

Senators from both parties said any assistance given to the struggling automakers must come with strict requirements that the companies reinvent themselves to become viable, profitable companies.

Executives of the three auto companies said they'd be willing to take orders from a government oversight board in exchange for $34 billion they say they need to avoid bankruptcy. They said their companies are commited to fundamentally changing the way they do business.

"It would be very helpful for us, whether it's a board or an individual, to have someone to work with on this, to submit our proposals and then for that person to say, 'OK, don't agree with that. You've got to change this,'" said GM CEO Richard Wagoner. "And if that person was to have strong powers to execute it, that would be fine with us."

Wagoner said his company's plan "creates a blueprint for a new General Motors." Ford CEO Alan R. Mulally said his company will survive 2009 "barring a bankruptcy by one of our domestic competitors or a more severe economic downturn."

What's at stake

According to the industry, as many as 2.5 million jobs across the country could be at stake if one or more of the Big 3 is forced into bankruptcy. The companies say customers wouldn't buy cars from a bankrupt automaker, and that could force hundreds of suppliers to also shut their doors.

The executives will testify at the House Financial Services Committee on Friday.

"I have my doubts" that the Big 3 can change enough to survive, said Sen. Richard Shelby, R-Ala., ranking Republican on the committee. Shelby said he opposed any loans to the auto companies.

"The strength of the American economic system is that it allows us to take risks, to create, to innovate, to grow, to succeed and sometimes to fail," Shelby said.

Auto sales have cratered in recent months. In November, sales fell to the lowest level in 26 years, and most companies reported declines of at least 30% compared with a year ago. See full story.

Dodd said the companies had "done far more" than the banks to prove they deserve the public's money, but said the big question now is: "Will they be back here within weeks seeking more taxpayer assistance?"

Mark Zandi, chief economist for Moody's Economy.com, testified that the companies would need $75 billion to $125 billion over the next two years to avoid bankruptcy. He said allowing any of the Big 3 to fail would be "catastrophic."

The Treasury Department and the Federal Reserve already have the authority they need to keep the industry alive, said Gene Dodaro, acting comptroller general, agreeing with Dodd's opinion that Treasury Secretary Henry Paulson could authorize loans to the carmakers under the existing $700 billion Troubled Asset Relief Program. Dodaro heads the Government Accountability Office, the nonpartisan congressional auditing watchdog.

Paulson disagrees with Dodaro's opinion, and has rejected the automakers' request for TARP funds. Congress could amend the TARP law to force Paulson to lend to the Big 3, or it could appropriate additional funds.

Dodaro said the Federal Reserve also has authority under current law to lend money to the Big Three, if the Fed Board of Governors determined that the need is urgent and that the loans would be repaid. However, the Fed has determined that it cannot lend to the companies because the loans cannot be collateralized as required, the Wall Street Journal reported Thursday.

The Fed made a similar determination with Lehman Bros., which filed for bankruptcy in September.

Economist Zandi urged Congress to provide the $34 billion. "Without any government help, the Big Three will quickly end up in bankruptcy and be effectively liquidated, resulting in hundreds of thousands of layoffs at just the wrong time for the sliding economy," he said.

Keith Wendell, president of Johnston Controls JCI, -1.15% , warned that the bankruptcy of any of the Big 3 would devastate the supply chain. "Should one of the Detroit 3 fail, a significant number of supplier failures would occur and become unmanageable," he said. These companies also supply parts to foreign automakers that assemble cars in the United States.

Stricter oversight urged

Dodaro urged the senators to establish an oversight board over the funds if they decide to grant the automakers' request. The board would oversee structural reforms and protect the taxpayers' interests.

Dodd and Shelby said the Treasury had mismanaged the $700 billion financial bailout and has not protected the taxpayers' interests or required the banks to change the way they do business. Senators said stricter oversight would be essential in either an auto bailout or in disbursement of the second half of the $700 billion for the banks.

Instead of an oversight board, Congress should invest one person with oversight authority, said Sen. Charles Schumer, D-N.Y.

The companies said on Tuesday they'll restructure their companies, shift to more gas-efficient vehicles and eliminate jobs, factories, dealerships and car makes. The union said Wednesday it would concede to reductions in severance pay to laid-off workers and to a delay in funding the trust that will operate the workers' health-care plan. See full story.

"We are willing to do our part," said Ron Gettelfinger, president of the United Auto Workers.

If the executives are persuasive enough during the two days of hearings this week, the House and Senate could schedule a vote next week. Passage in the House seems likely, but the vote in the Senate could be nail-biter, with approval by 60 of 100 senators needed. Read David Callaway on why Congress will say yes.

Two weeks ago, the same industry and union leaders strode into Washington expecting quick approval of the loans. However, House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid told the companies that the lawmakers had no idea about what the companies would do with the money. The executives were told to go back to Detroit and return with a detailed plan.

The Bush administration and congressional leaders have said they favor some assistance to the automakers, but differ over the source of the funds and over the small print.

White House spokeswoman Dana Perino said it was too early to assess the companies' restructuring plans. She said the Bush administration continues to support giving the auto companies access to funds designated for energy efficiency.