White House Signals that TARP Money Might Be Used for Bailout

By Chris Haak

12.12.2008

President Bush, probably (and fortunately) eager to avoid the black eye on his administration’s legacy should GM and Chrysler declare bankruptcy and eventually fold, has changed his position in light of the failure to pass the Detroit rescue package in the Senate last night.  Until today, Bush had been opposed to using some of the $700 billion in TARP (Troubled Asset Relieve Program) money – intended originally to purchase troubled assets from financial institutions, but actually used for the government to take a stake in financial institutions – to fund the immediate cash needs of Chrysler and GM.  Treasury Secretary Henry Paulson had previously indicated that he was not in favor of using TARP funds on the auto industry, but since his boss is now coming out in favor of doing so, “in light of Congress’ inaction,” Paulson would probably do what he’s told to do.  In fact, the Treasury Department issued a press release that said, “Because Congress failed to act, we will stand ready to prevent an imminent failure until Congress reconvenes and acts to address the long-term viability of the industry.”

White House spokeswoman Dana Perino said something that many proponents of the bridge loans have been saying all along; setting aside ideological differences, bankruptcy will tank the economy:  “Given the current weakened state of the U.S. economy, we will consider other options if necessary — including use of the TARP program — to prevent a collapse of troubled automakers.  A precipitous collapse of this industry would have a severe impact on our economy, and it would be irresponsible to further weaken and destabilize our economy at this time.”

GM, which had been obviously disappointed in the failure of the previous bill in the Senate, expressed gratitude and optimism that the White House was working to deal with the issues on its own.  In fact, CNN reported today that White House officials threatened Senate Republicans last night with the prospect of being forced to use TARP money to help the automakers if the bill failed to pass the Senate.  TARP is already a hot topic among members of Congress, who are frustrated with the way the money has been used and that many banks are using it to bolster their balance sheets without being any more willing to lend money to consumers or businesses.  Of the first tranche of $350 billion approved by Congress, all but $15 billion has been allocated to financial institutions, which conveniently allows enough money to fund the short term loans for Detroit.  Secretary Paulson is hoping to not need to tap the second $350 billion, punting the decision on how much to pay out and how to do it to his successor, Timothy Geithner.

Financial institutions that accept TARP money must also accept certain conditions on the use of the money, as well as certain executive compensation and other limits.  It is not yet clear what conditions would be attached to the money if it were to be provided to the Big Three (or GM and Chrysler alone at this point), but my guess is that the Treasury Department would impose similar conditions to those at least in the proposed House bill.

Once the 111th Congress is sworn in on January 6, Democrats will have a larger majority in both the House (where the rescue plan already had plenty of votes) and the Senate (where the House proposal was put to a procedural vote, which was to determine if there was enough support to advance the bill further; that vote was 52-35 with 42 Democrats and 10 Republicans voting “yes” and 3 Democrats and 32 Republicans voting “no.”  There will be at least seven additional Democratic Senators after January 6, so it’s entirely likely that not only will the companies be back in Washington asking for money again, but that their request will be met more favorably.

Probably because of suddenly less-bleak prospects for a bailout, GM’s stock was down only about 5% in midday trading, and the Dow Jones Industrial Average was down only about 1%.  I’m glad that this part of my market predictions from earlier today were incorrect.  Stay tuned for the latest news on this very dynamic subject.

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Author: Chris Haak

Chris is Autosavant's Managing Editor. He has a lifelong love of everything automotive, having grown up as the son of a car dealer. A married father of two sons, Chris is also in the process of indoctrinating them into the world of cars and trucks.

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3 Comments

  1. I don’t know what Bush’s legacy has to do with this, since GM died, oh, probably in 1980 or so. They’ve been on life support all along, only GM’s execs were both clueless and in denial.

    The X-cars perhaps signaled the beginning of the end, when GM could no longer dictate to the market, but be dictated to. The X-cars were a rushed response; GM was caught completely out of sync and out of touch. The Cadillac Cimarron –need I say more?– proof that the boneheads didn’t know what their brands represented and, therefore, how to best burnish them.

    More proof of how NOT to run a car company: that classic Lincoln ad where the befuddled GM owner could tell his car from a Buick or an Olds or a Caddy. All the bean-counters know is to keep the factories cranking, never mind the end product –and guess who’s been running GM? Certainly not the engineers.

    I’m against the bailout, just as I was against the bailout of the banks and Wall Street. It’s a hard position to take, as I realize that potentially several million jobs are at stake, but history tells us that companies, markets and industries come AND go. America used to have three major commercial airplane makers; now we’re down to one. IBM used to be Number One but the world changed and now Google is Number One.

    America continues to be a large automobile market and this is more than enough incentive for new companies (both domestic and foreign) to come in to fill the void left behind when GM bites the dust. That said, bankruptcy, while stigmatizing, ought to be viewed as a prime opportunity for GM.

    Whoever replaces Rick Wagoner –and he should have been canned years ago– can take this opportunity to completely blow up the works and start from scratch. Embrace bankruptcy, I say, use it as a nuclear weapon to completely transform the company. Two words: Hyundai Excel. If that company can make it all the way back from that POS, so can GM.

  2. Bush’s legacy has everything to do with this. He doesn’t want to be Herbert Hoover – politics aside for a moment, he is presiding over a period of severe recession, an unpopular war, and a sense that the country is heading in the wrong direction. He doesn’t want things to get worse over the next five weeks; he doesn’t want blood on his hands.

    The X-Cars and Cimarron are perfect examples of GM’s boneheaded moves in the 1970s, 80s, and 90s that got them to this point. They don’t make cars like that anymore; while their lineup still needs a lot of improvement (there are still only a few GM cars that I’d buy myself, but the CTS I bought a few months ago was one of them), they have some pretty good products right now.

    Saturn – or at least the way Saturn turned out, with the company basically learning nothing from the experience and throwing billions upon billions into it, would be another great example of these terrible decisions. History will not be kind to GM and its labor and management for the countless opportunities lost and money wasted.

    Agreed that Wagoner needs to be shown the door. Most of the problems were not his making, but he’s had more than enough opportunity to fix them during his tenure. Funny how Mulally has Ford in better shape after just two years in charge than Wagoner has been able to do with GM after almost a decade in the corner office.

    I’m not in favor of the bailout for nostalgic reasons or anything else other than what effect bankruptcy would have on the whole supply chain, and indeed the entire Midwest. Michigan would probably be in a depression, not just a recession. I don’t live there, but I don’t want to see that happen to anyone.

    Finally, while Hyundai has no doubt gained in stature significantly, they still are not a first tier brand with Honda, Nissan, and Toyota. I have purchased products from each of the latter three companies over the past five years, but I still wouldn’t buy a Hyundai, in large part because of the name. And while I haven’t driven the Genesis yet, it seems to be a heck of a car, but it’s still a Hyundai.

  3. James – I just happened to notice that none other than Dick Cheney mentioned Bush’s legacy in a reason to fund the loans from TARP. From today’s WSJ online:

    “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 Mr. 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.”

    http://online.wsj.com/article/SB122909133751001705.html

    They don’t call us Autosavant for nothing. 🙂

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