The auto bailout

The White House caved in this morning when President Bush announced a plan to bail out the auto industry.

Chrysler, for one, turned up the heat on Mr. Bush by announcing all of its plants would close for a month.

In a statement a few minutes ago, Bush said in normal times “this is the price failed companies must pay.” But he said allowing the auto industry to collapse “is not an appropriate course of action.” He said bankruptcy is not an option because American consumers won’t buy cars from a bankrupt automakers.

Under the plan, autoworker pay and wages must be “competitive” by the end of next year. The federal government will grant billions of dollars in “loans.”

Automakers are getting 3 months to put reorganization plans into effect. If it can’t be accomplished outside of bankruptcy, the federal money will give the companies more resources to organize bankruptcy proceedings. Retirement plans will also have to be cut back.

CNBC referred to the loan as the “bridge to Obama” loan. It also noted that the private company that owns Chrysler — Cerberus Capital Management LP — isn’t putting any money into the deal.

Republicans who scuttled legislation in Congress on an auto bailout last week “shot themselves in the foot,” says John Harwood, CNBC’s chief Washington correspondent. “The situation that we’re left with now is instead of having the force of law, the terms of these loans can immediately be changed by Barack Obama when he takes office.” He says even the White House thought the Republicans were posturing last week.

  • Bob Moffitt

    I think this was a good move, albiet a little delayed.

  • I’m hungry

    Taxpayers to the rescue!

    Sigh…..

  • Alison

    Why should we think 3 months is going to be enough time? I haven’t heard anyone say this recession is going to be over by then. People aren’t going to be headed back to work in mass numbers in 3 months. People will still be worried about being laid off in 3 months. Therefore, people will not be rushing out to buy cars in 3 months. Not from American auotmakers. Not from foreign automakers. Not from bankrupt automakers. Not from solvent automakers (are there going to be any?).

    This plan is truly a bridge to Obama, who will have to come up with something better than “or we’re taking the money back in 3 months”. While the automakers did plenty to get themselves into this mess, the fact that they won’t be in a better position in 3 months is out of their hands now.

  • Bonnie

    Three months, owners have little to no ” skin in the game “. Their going to spend their time building themselves a getaway vehicle.

  • http://erikhare.wordpress.com/ Erik Hare

    On the one hand, keeping the automakers open will help prevent a real Depression, which is the goal here. You don’t see the Fed cut rates to zero (more or less) without a real sense of panic.

    On the other, I don’t see the long term plan being worked out by anyone. Granted, that’s President Obama’s job and perhaps it should be left to him. I’ve heard a few details of his plan and it sounds good. But it’s hard to have the real confidence that’s needed to stave off Depression when there isn’t a real sense that we’ll all still be here next year at this time.

  • bsimon

    I tend to think a managed bankruptcy is probably the best course (as in, ‘least bad’) for the auto industry at this point. The ‘bridge’ loan is a way for the automakers to buy a little time in ordering their respective bankruptcies. The best hope for a company like Ford is that a company like Chrysler goes under first – if people stop buying Dodge Trucks, for instance, the F series trucks should gain market share. GM is so enormous, by comparison, that no sane person wants to see them enter bankruptcy in a disorganized fashion.

    So, on the poll I put ‘no’ I don’t think taxpayers should subsidize auto mfrs. But I do think the bridge loan is a good idea, I just don’t view it as a subsidy, because we should get the money back.

  • http://minnpics.blogspot.com Sornie

    I don’t honestly see GM or especially Chrysler fixing their own mess in three months. A lot of companies and (and organizations) are going to and should take hits because it’s more than a company that led to this problem. It’s going to be a huge correction and this next year will test plenty of companies that haven’t become lean, flexible and innovative. It’s been nice knowing you, Chrysler.

  • Alison

    I’m confused about the ‘Noone is going to buy a car from a company in bankruptcy” statement, as if the company itself was required to fix the vehicles. Are mechanics across this country going to magically have all knowledge of how to fix a Grand Caravan be suddenly wiped from their memories? Have the factories been offering a lot of technical support to the people in the garage up to this point? If there’s still a market for repair parts, someone will make them, even if the model is no longer rolling off the line. And mechanics will keep fixing the cars brought to them, even if the manufacturer no longer exists in its current state.

  • bsimon

    Alison, while what you say is all true, I think you’re overlooking part of the allure of a new car purchase: factory warranties. If you’re buying a new car, how much value do you put on the factory warranty – and does the chance of the seller not existing in 12 to 24 months change you decision? For some people, the answer will be yes.

  • Alison

    Good point.