Preliminary Agreement Reached on Bailout Loans for Big Three

By Brendan Moore

12.10.2008

House Democrats and the Bush Administration have reached agreement in principle on emergency loans in the short-term for the Detroit automakers, it was announced late Tuesday night.

The agreement would quickly provide billions in rescue money to the battered Detroit auto manufacturers, but not with out a heavy cost to pay in terms of government-dictated terms, government ownership in the companies themselves and federal oversight of the car companies in the near future. The potential degree of corporate control and oversight of the auto companies by the federal government being currently advocated by some members of Congress would even surpass the level of control exercised by governments in countries where auto manufacturers were nationalized in the past, i.e., France and the vehicle manufacturer Renault.

Although the magnitude of financial assistance to the American auto industry is completely dwarfed by the recent cash infusions to the financial services industry, the auto companies will be put on a very short leash in terms of the many conditions they will face in how they get the money and what they can use it for going forward. Compare this to the bailout of the large financial institutions, which were more or less given carte blanche in what they did after disbursement of the funds.

The relief plan, if it is passed by Congress, will be overseen by a “car czar” appointed by lawmakers. The premise at work here is that the czar will hammer out a viable restructuring plan by gathering together suppliers, labor unions, management, creditors, etc. and gaining agreement regarding a turnaround strategy. If there is no agreement, the czar could rule by royal fiat and force his or her own decision upon all the parties, even if that decision is to declare bankruptcy, or, break up the company and sell it off to the highest bidders. And if the czar believes that one of the car companies is not trying hard enough, then the czar could request that the government “call” the loan, effectively delivering a death sentence to that manufacturer.

Of the Big Three, only Ford is taking a pass on the emergency funding, saying it has enough liquidity for now, and needs only a line of credit available to it for the future in the instance of business conditions worsening. From our current understanding of the relief terms, that means that GM and Chrysler would be subject to the described conditions and terms of the loan package in terms of government oversight, and Ford would not be subject to that oversight until/if they tapped their credit line.

Republican lawmakers have already expressed concerns that the car czar will not have enough power to really force dramatic change upon the Big Three.

“It’s structured to fail,” stated Sen. Judd Gregg (R., N.H.) of the proposed bill. Gregg advocates that the czar have absolute command over the domestic auto industry. Without this unquestioned command, Sen. Gregg says “the auto czar becomes a little Caesar, without much authority to accomplish much.”

Both Republican and Democratic lawmakers have made public statements recently that changes in senior management will be required before any federal money is provided to the auto companies, but there was no mention of that requirement yesterday evening.

The House could vote on the agreement as early as today. If it passes in the House, it then goes to the Senate, which will be a tougher battle for passage.

There are already names being floated for the post of car czar, among them former Federal Reserve Chairman Paul Volcker.

COPYRIGHT Autosavant – All Rights Reserved

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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