The efforts of the big three automakers - General Motors Corp. (GM), Ford Motor Corp. (F) and Chrysler LLC - to convince the lawmakers of an urgent need for federal aid have reportedly failed, with the Democratic congressional leaders disagreeing with Republicans and the Bush administration over how to provide assistance to the companies.
After two days of testimony before congressional committees, the heads of the major U.S. automakers were unable to win support for a plan by the Democrats to help automakers by using the funds allocated in the $700 billion rescue package, as it did not find favor with the Republicans or the Bush administration. It could be revived when the new president assumes office next year.
Treasury Secretary Henry Paulson, who has led the distribution of the financial relief money, has argued that the $700 billion has been set aside to bolster financial markets and
not for economic stimulus to help non-financial companies.
Meanwhile, many Republicans have opposed bailing out the automakers through any method, arguing that if the business cannot survive it should restructure through bankruptcy.
However, the financing arm for automaker General Motors said Thursday that it has filed an application with U.S. regulators to change its structure to become a bank, a move that could allow it to receive funds from the government's financial relief program. This would not help the company's day-to-day operations in the auto making business, but would make the financing business more stable.
One alternative suggestion for issuing relief to the automakers was to allow the companies to shift loans that had been previously approved to promote fuel efficiency for use in funding day-to-day operations. However, redirecting the fuel-efficiency loans could also face opposition in the House.
There is also criticism from the representatives over the comforts enjoyed by the chiefs of these companies such as hefty pay packets and private jets.
Only two days remain in this lame-duck session of Congress and GM, an American business icon, could run out of cash before a new government came to the rescue of the industry in the next session.
There are reports that GM is resisting suggestions from advisers to file for bankruptcy as it fears that customers will resist dealing with a bankrupt company. Ford also has reportedly weighed the bankruptcy option and feels it is not viable.
GM said on November 7 that it might run short of the minimum cash requirement to pay its bills by year-end and would fall ''significantly'' short of that level by the middle of next year.
GM Chief Executive Officer Richard Wagoner reportedly said automakers would like action before Barack Obama takes over as president because the severity faced by the U.S. market is spreading to global auto markets as well. Reports say Wagoner has the full support of the company's board, despite the failure to win in Washington.
GM said in its website that what happens to the U.S. auto industry matters on Main Street with a loss of nearly 3 million jobs and a drop of about $150.7 billion in personal income in the first year alone. Industry-wide sales have plummeted to a 17-year low.
"One out of every 10 people in America is employed in a service that is related to the U.S. auto industry. If a plant closes, so does its suppliers, the local stores, the hot dog vendors, and the local restaurants," GM said.
Many of the automakers have run advertisements in newspapers and websites seeking public support for their plea for assistance.
The credit crunch has crippled the U.S. auto industry. Carmakers find it hard to get loans to restructure and to produce new models, while suppliers and dealers cannot get loans for routine business.
It was reported Thursday that GM intends to halt its production line in Thailand from mid-December to January and the company's 2,000 Thai employees would have to take a 25% pay cut during the suspension period. The company has offered 258 employees early retirement with 10 months pay, in preparation for a slowdown in 2009.
In order to shore up its precarious liquidity position, GM Tuesday sold its 3% stake in Suzuki Motor Corp. earlier this week for about $231.5 million. Ford has also decided to sell about 20% of its holding in Japan-based Mazda Motor Corp. (MZDAY.PK, MZDAF.PK) for about nearly $540 million.
Meanwhile, the Canadian divisions of all three automakers have reportedly sought government loans or loan guarantees.
The heads of the major U.S. automakers took to Capitol Hill for a second consecutive day Wednesday, once again fielding questions from legislators wondering why they should be bailed out.
Michigan lawmakers also gave testimony on Wednesday as part of a hearing before the House Financial Services Committee, with Democratic Senator Carl Levin warning that a bankruptcy of the American auto industry would be a "disaster for the entire economy." His testimony, along with several other Democratic congressmen mostly from Michigan, made up the first panel before the Committee.
However, ranking Republican member of committee, Alabama's Spencer Bachus, disagreed, saying, "A bailout is not good economics, and it is not the American way…the American way to solve this problem is to not depend on the government for solution."
The CEOs largely repeated testimony delivered Tuesday before the Senate, warning of dire consequences.
"A decision to make government assistance available makes much more sense than taking the tremendous risks to our already-fragile economy that come with inaction," Ford CEO Alan Mulally said in prepared remarks.
He cited the credit crisis as the cause of "unprecedented pressure on our industry," pressure that is not the result of Ford's actions and comes "just at the time when our efforts to restructure Ford have finally begun to bear fruit."
Mulally was echoed by GM CEO Rick Wagoner and Chrysler CEO Robert Nardelli in their pleas for help to battle the financial crisis.
"Our industry ... needs a bridge to span the financial chasm that has opened up before us," Wagoner said in prepared remarks.
Should automakers not receive the assistance, Wagoner offered a bleak scenario for the U.S. economy.
"And what would it mean if the domestic industry were allowed to fail?" he asked. "The societal costs would be catastrophic: Three million jobs lost within the first year, U.S. personal income reduced by $150 billion and a government net tax loss of more than $156 billion over three years, not to mention the broader blow to consumer and business confidence."
In his remarks, Nardelli warned that the liquidity crisis could bring his company's balance sheets into dangerously negative territory that, in the absence of "immediate bridge financing," would put his workers' health care, retirement, and wages themselves at risk.
"We are asking for assistance for one reason: to address the devastating automotive industry recession caused by our nations' financial meltdown, and the current lack of consumer credit, which has resulted in the critical lack of liquidity within our industry," he said.
"Therefore without immediate bridge financing support, Chrysler's liquidity could fall below the level necessary to sustain operations in the ordinary course," he added.
GM stock is trading at $2.51, down $0.28 or 10.04%, on 169,173 shares.
F shares are currently trading at $1.28, up $0.02 or 1.59%, on 244,444 shares.
For comments and feedback: editorial@rttnews.com