Federal Loans to Auto Companies Now Look Certain, But DOE Says It May Take 18 Months to Disburse the Funds

By Brendan Moore

09.26.2008

The USD $25 billion loan package to the U.S. automakers and parts suppliers passed the House Wednesday and will arrive in the Senate within the next few days, where easy passage is forecasted. The White House has already indicated that it will sign the bill when it hits the President’s desk.

The auto industry loan proposal is merely a sidebar to the massive $700 billion federal bailout package for Wall Street currently being wrangled over in Congress, and thus has not garnered a lot of attention from the public in the last few days. The automakers and Washington would like to keep it that way and get it passed without a lot of contentious debate.

The auto industry loan is, at least ostensibly, to help the car companies retool their plants in order to make more fuel-efficient cars like hybrids and EVs and meet the new fuel economy rules recently put into play. The current language of the loan program requires that the money be used to retool or retrofit only plants that are at least 20 years old and that the refurbished plant will be used to manufacture vehicles (cars or trucks) that produce an approximate 25% improvement in fuel economy over similar models in their class at the time of the loan.

The auto industry did a great job of pushing the loan package through, but they have not been able to get the terms of the loans modified to make those terms less restrictive. The Big Three (GM, Ford and Chrysler LLC) are all facing a tremendous cash crunch and would like more leeway in how they spend the money loaned to them. Even if the terms remained the same, industry analysts believe the cash infusion would mitigate a lot of Detroit’s immediate cash flow issues, but the auto companies don’t want to be tied down to a particular part of their business getting the money, and other areas that are just as needy getting nothing.

Which brings us to the second part of this story; the part where the DOE (U.S. Department of Energy), the federal administrator of the loan package, says that it cannot possibly meet the bill’s 60-day rule for determining the terms and rules of the loan package, and instead may take as long as 18 months just to get that written up and codified.

DOE spokeswoman Healy Baumgardner stated yesterday at a news conference that the agency had “significant doubts about whether distribution of loans by January 2009 is realistic. Because there are a number of legal and administrative requirements with which the department must comply, such as the National Environmental Policy Act, we anticipate it could take at least six to 18 months or more” before loans are granted. You can do the math and figure out that 18 months from now is the first quarter of 2010, which means that the automakers wouldn’t get most of the proceeds disbursed from the loan until second quarter 2010.

Since the language of the bill called for a 60-day period in order to develop the loan terms, the automakers thought they would start to see that money before the end of this year.

Michigan lawmakers, in particular, were incensed. John Dingell, Democratic congressman from Dearborn, and a long-time advocate for the auto industry, said that the DOE was “making excuses for its own anticipated failures,” adding that “I hope this statement is not a sign of continued indifference to the U.S. auto industry on the part of the Bush administration in its waning days.”

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Author: Brendan Moore

Brendan Moore is a Principal Consultant with Cedar Point Consulting , a management consulting practice based in the Washington, DC area. He also manages Autosavant Consulting, a separate practice within Cedar Point Consulting. where he advises businesses connected to the auto industry. Cedar Point Consulting can be found at http://www.cedarpointconsulting.com.

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