WASHINGTON – The White House reversed course Friday and said it would consider using the $700 billion financial-rescue plan to avert a bankruptcy of the Detroit 3 automakers, which could deepen the U.S. recession.
The announcement came hours after negotiations collapsed in Congress over a compromise bailout plan fiercely opposed by Senate Republicans, primarily from Southern states where German and Japanese automakers have transplant auto operations, The Wall Street Journal reported.
That package would have set up $14 billion in loans to the companies and a government-run restructuring process.
The loans to be offered could be more limited than the $14 billion that Congress was contemplating — perhaps closer to $8 billion, one person familiar with the situation said. General Motors Corp. would be a recipient, this person said. GM is hoping President George W. Bush will come through with about $10 billion to keep the company going. It warned Congress it needed at least $4 billion by the end of the month.
It wasn’t clear whether loans would be made available to Chrysler LLC, which is controlled by private equity firm Cerberus Capital Management. Cerberus came in for heavy criticism during the recent debate for not bailing out its own company. Ford Motor Co. has said all along it doesn’t need a short-term lifeline, but could need help if one of its peers keeled over.
The White House’s intervention showed how heavily the question of the president’s legacy is weighing over his last few weeks in office. White House officials worried that the collapse of one or more domestic auto company, perhaps the last crisis Bush will confront as president, could cause a surge in job losses, worsening the current recession.
As early as Wednesday, during a private meeting with senators, Vice President Dick Cheney told lawmakers the Republicans didn’t want to be remembered as the party of Herbert Hoover for allowing a company such as GM to collapse, according to people familiar with the matter.
By signaling that Treasury bailout funds could be an option, the White House made it easier for Republicans to walk away from negotiations, creating an environment in which they could push for deep concessions from the United Auto Workers union. That license contributed to the seesawing negotiations of the past week as Congress veered from agreement to disunity, lawmakers say, with union concessions a major point of disagreement.
For now, the biggest question for the White House is whether it will be able to extract any of the cost-saving concessions it had been seeking from the car companies, their unions and other interested parties. The Bush administration is beginning the process of examining the companies’ books to figure out how much money is needed and intends to obtain protections for taxpayers.
The Detroit 3 directly employ almost 250,000, according to an administration estimate, and also support about one million retirees and their spouses, not counting the vast network of suppliers and dealers whose businesses are intertwined. In all, administration officials estimate that the failure of the U.S. auto makers would cost the economy more than one million jobs and would reduce economic output by more than 1 percent, significantly prolonging the downturn.
“We think that the current weakened state of the economy is such that it could not withstand a body blow like a disorderly bankruptcy in the auto industry,” White House spokeswoman Dana Perino told reporters aboard Air Force One Friday. “We’ll have to take another look at what they [the companies] might need and how we might be able to provide that as a short-term mechanism to help prevent a disorderly bankruptcy that we think could devastate further an already very weak economy.”
GM recently started working with bankruptcy specialists to make contingency plans in case a Chapter 11 filing becomes necessary. It is also trying to cut costs. On Friday, GM said it will temporarily close 20 North American factories in reaction to declining auto sales. It now expects to make 250,000 fewer vehicles in the first quarter compared to the first three months of last year.
On Friday, Chrysler Chief Executive Bob Nardelli implored employees to do all they can to save money to keep the company afloat while it lobbies the Bush administration for emergency loans.
In an email to workers, Nardelli hinted Chrysler is hoping for a better reception when President-elect Barack Obama is in office. “Key members of the incoming administration are aware of the importance of addressing the short-term and long-term viability of our industry and our company,” he wrote.
The failure of Congress to act creates a mess for the administration. The White House must now wade into the muddy task of structuring an auto bailout, which will drain the Treasury’s fast-dwindling supply of funds, while figuring out whether to ask Congress for the second half of the promised financial rescue money. Congress has doled out the rescue funds in installments and would likely return to Washington to debate the matter.
The Treasury wants to avoid a messy political battle with an increasingly hostile Congress. Even the spectacle of a failed effort to block the next $350 billion could spook already fragile financial markets.
The administration said that in the wake of the legislation’s collapse, it would consider “other options” for helping Detroit, including use of the Troubled Asset Relief Program as well as other unspecified possibilities. The White House decision reverses Treasury Secretary Henry Paulson’s longstanding position that the funds be used to help only financial institutions. Treasury officials — and others in the administration — worry about opening TARP to an array of other non-financial companies seeking cash. The line of industries seeking federal funds is growing as state governments, transit agencies, insurers and others clamor for a piece of the pie.
Paulson could potentially circumvent the need to ask for the second installment by diverting some of the $250 billion slated for capital injections, of which Treasury has committed just $161 billion to 53 banks. Treasury has completed 80 percent of the loan applications it’s received from the banks’ primary regulators. While additional applications are likely still pending at the regulators, those are unlikely to eat up a significant portion of the remaining $89 billion.
Democratic congressional leaders had suggested for weeks the White House use TARP money to aid the auto industry. Administration officials instead settled on a strategy that required Congress amend a $25 billion program originally intended to help car makers build environmentally friendly vehicles. One advantage of that strategy was that the retooling program required the companies to be financially viable in order to qualify for the loans, a provision that helped wring concessions from the UAW.
From the beginning, the auto rescue was weighed down by the $700 billion fund that might now save it. Winning additional funds for Detroit was never going to be easy, said Sen. John Thune (R., S.D.), because many lawmakers felt they “got hammered pretty hard” over the $700 billion fund, by constituents who viewed it as a giveaway to the banking industry.
The push for a rescue package gained steam a week ago, when top Democrats and the White House agreed on a compromise. The House approved the plan Wednesday, but the package faltered in the Senate the next day amid strong objections lodged by Republicans. They used the opportunity to demand deep concessions from labor unions, including a commitment to bring wages in line with those at U.S. operations for foreign-based producers such as Toyota Motor Corp. and Nissan Motor Co. The dispute broke apart the talks and spilled onto the Senate floor, where leaders o
