President George W. Bush today introduced a $17.4 billion rescue plan aimed at rescuing the American automotive industry. The move is meant to give Chrysler LLC and General Motors the opportunity to continue payroll, continue supplier relations, and dodge bankruptcy.
In a statement, the president indicated that it is his responsibility to, "shield the American people from a harsh economic blow at a vulnerable time."
The bailout is split into two payments of $13.4 billion now with $4 billion available in February, if necessary. All of the money will come from the Troubled Assets Relief Program (TARP), a $700 billion fund set up to assist financial institutions crippled by the ongoing economic crisis.
Included in the package are provisions to allow the government to block any transaction over $100 million, giving the government the ability to block a merger and to prevent the transfer of jobs overseas. A provision limiting executive compensation and barring the use of corporate jets is also written into the terms. The government also receives the right to acquire non-voting stock at a premium price from any company taking a loan.
Although the president acknowledged this as a move he would never make under normal circumstances, Bush said the addition of over a half-million new unemployment cases and a current recession in the U.S. made this a particularly tumultuous time. He previously indicated that he did not believe the economy could stand another major blow at this time.
"If we were to allow the free market to take its course now it would almost certainly lead to disorderly bankruptcy and liquidation for the automakers,” he said. “These are not ordinary circumstances.”
A conservative politician who has never had the support of major labor unions, President Bush said the laborers, management, executives, and all other stakeholders must make the necessary "concessions" to keep the operations running. Chrysler and GM could still file for bankruptcy after March 31 if they are not on the road to recovery.
This squarely places the automotive industry's problems in the hands of President-elect Barack Obama should the quick-fix not take hold. Obama takes office on January 20, and it will be his administration which will decide if Chrysler and GM are viable.
Under terms of the loan agreement, if the next administration does not believe the companies are viable they can call for the immediate repayment of any outstanding Treasury loans. As the government's loans must be taken at a priority above any current debt, calling in the loans would likely force either of the companies into bankruptcy.
Thus, it will be President-elect Obama's duty to convince the public, which is not in favor of an auto industry bailout, that Chrysler and GM will become profitable in the immediate future. However, if his team believes the industry to still be tailspinning, then they will have to deal with the fallout of nearly 2 million lost jobs. Obama had the support of most unions going into the November election, but now he may be faced with convincing those workers to give back gains they have received through contract negotiations.
Bush's bailout is not that much different than the package the Senate refused to pass last week. The White House deal also requires companies to have a "positive net present value" (NPV) by March 31, as well as proof of their return to stability. Chrysler and GM should also write down at least two-thirds of their debt, and unions should accept wage cuts, but the next administration could decide to dismiss those clauses.
NPV is the difference between cash coming in and cash going out, with all figures adjusted for inflation.
Chrysler LLC head Bob Nardelli said, “These requirements will require consideration from all constituents, requiring commitment first in principal, leading to implementation this coming year. Chrysler is committed to meeting these requirements.”
The full terms of the loan can be seen after the jump.