/ 18 November 2008

US takes first step in bailing out car industry

United States Senate Democrats took the first step towards bailing out the nation’s crippled auto industry on Monday by proposing a $25-billion loan programme, a plan that faces stiff political headwinds with millions of jobs potentially riding on the outcome.

With the year’s congressional calendar down to a few days, lawmakers and the Bush administration sparred over the best way to extend help to General Motors, Ford Motor and Chrysler.

”We’re surprised that Senate Democrats would propose a bailout that fails to require automakers to make the hard decisions needed to restructure and become viable,” White House spokesperson Dana Perino said.

The Senate Bill would, however, impose conditions. The government would take warrants for shares in exchange for aid, which would come with limits on executive compensation and a prohibition on the payment of dividends.

Car makers would also have to submit plans on how they intend to remain competitive, pummelled by plunging sales, little access to credit and a weakening economy.

Executives from the three companies are expected to amplify their calls for help at congressional hearings beginning on Tuesday.

Carl Levin of Michigan, the plan’s chief advocate in the Senate, said the proposal to amend the Treasury Department’s existing $700-billion rescue plan for financial services firms is the most efficient way to help auto manufacturers.

House Democratic leaders, led by House Financial Services Committee chairperson Barney Frank, released a draft of almost identical legislation later on Monday.

But the White House and many Republicans favour amending another law — one approved in September to extend car makers $25-billion in technology loans to retool factories and make more fuel efficient cars.

Market fears
A rescue package for US automakers could avert another stock-market plunge like the one seen after Lehman Brothers’ collapse in September.

”The reason people think failure could be cataclysmic is that there are so many companies that are tied to the auto industry,” said Marc Pado, US market strategist at Cantor Fitzgerald in San Francisco.

The Senate proposal comes as GM said it would delay incentive payments to its US dealers by two weeks in an effort to ”gain some cash liquidity” for the fourth quarter.

The payments for dealer incentives, which are made on a weekly basis, will be delayed from November 28 until December 11, GM spokesperson Pete Ternes said.

Liquidity is the key concern for the automakers as their remaining cash reserves dwindle.

”If General Motors is unable to solidify government aid this week and is forced to wait for the next administration, we would become more concerned about working capital-related liquidity risks …,” Citigroup autos analyst Itay Michaeli said in a note to clients on Monday.

The companies and their allies in Congress argue a bailout is justified on grounds they back one in 10 US jobs.

GM, Chrysler and Ford employ close to 250 000 people in the United States and supporters claim they touch more than four million other jobs including suppliers, dealers, car haulers and rental companies.

Many parts suppliers and dealers have agreements with transplanted automakers as well, potentially interrupting the business of competitors to the Big Three in the short term.

A potential threat to the integrated supplier network prompted Japan’s Honda Motor Co Ltd to support an aid package for its U.S. rivals. — Reuters