The US Bail Out Plan of Auto Industry: GM and Chrysler
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In addressing the current financial recession that stemmed from the sub prime mortgage crisis in the US sometime in 2007, the congress enacted the Troubled Asset Relief Program (TARP) program (Emergency Economic Stabilization Act of 2008) to allow the federal government through its Treasury Department to purchase troubled assets (i.e. securities, debts that are feared of not being paid) and equity from financial institutions and other collapsing industry in order to enhance their liquidity and reinforce their finances. (Joint Committee on Taxation, 2008)
The major beneficiaries of the program are financial institutions like Citigroup, Bank of America, AIG, and JP Morgan Chase, among others that are most hit by the mortgage crisis as well as the auto industry especially General Motors (GM), Ford and Chrysler, which were subsequently affected by the financial crisis that pushed them in the brink of a looming bankruptcy. Earlier on, a debate ensued whether the bail out plans for the auto industry will come from TARP funds as supported by Democrats or the Energy Department loan as argued by Republicans. The latter is supposed to be allotted for retooling auto manufacturers for their fuel-efficiency programs. Because of the urgency of situation and perceived disastrous economic consequences of disorderly bankruptcy in the industry (the industry significantly contributes to the nation’s gross domestic product and provides employment to many citizens), a bailout plan for the auto industry with TARP funds finally pushed through in December of 2008.
The Bail Out
The government provided a total of $17.4 billion from TARP funds in low interest loans to stave off the bankruptcy of the GM and Chrysler as follows: 13.4 billion ($4 billion on December 2008 and $5.4 billion on Jan 2009) for GM and $4 billion for Chrysler. This is approximately half of the amount that automakers were originally requesting. However, an additional $4 billion in loans was authorized subject to congressional approval and upon the submission of restructuring plans by the said automakers. This excludes the $6 billion for General Motors Acceptance Corporation (GMAC) and $1.5 billion for Chrysler Financial provided by the government as of January 2009. The goal of the Bail out was to provide cash for the operations of the automakers and allow them to make auto loans available for their customers.
Terms and conditions set by Congress were attached to the loans which included restructuring targets, payment arrangements, and restrictions in executive compensation and in the use of corporate jets. The summary of the conditions was based on the Term Sheet for Automotive Plan (US Department of Treasury, 2008). Carmakers are required to undertake as follows:
- Provide warrants for non-voting stock;
- Restrict executive salary and bonuses (including use of jets);
- Prioritize debt owed to the government;
- Permit government to inspect their books/ records;
- Abide by emissions requirements;
- Fulfill fuel efficiency requirements and;
- Restrain from issuing dividends until government debt is paid.
Additional Targets set by the Treasury department and subject to further congressional negotiations include the following:
- Trim down its debts via a debt-for-equity exchange (creditors will cancel a portion of their debt in exchange for equity of the company e.g. stock);
- Pay half of their obligations to the Voluntary Employee Benefit Association (VEBA) in the form of stocks;
- Abolish the company’s job banks, a union contract between automakers and Union Workers that ensures the latter’s payroll even if they weren’t on the assembly line. (Proctor, 2008)
- Discuss and bargain wages and work rules that are viable and comparable with transplant auto manufacturers (e.g. Toyota, Honda, and Nissan)
- Submit restructuring plans and progress reports on a regular basis to the Secretary of the Treasury (Henry Paulson), who will oversee how the loaned funds are effectively used and how the government stipulations are successfully complied with.
General Motors agreed to give the federal government guarantees for stock and pledged pay the loan by 2012. It also tried to decrease its debt by $30 billion through the debt equity exchange, reduce health-care benefits paid of its retired employees and cut down its overall operations by streamline its number of car models (dispensing others like Saab, Saturn and Hummer) and bringing down the number of employees by half.
Chrysler set up the Chrysler Financial through another loan from the government to support car buyers availing for car loans. The company slashed bonuses to its executive officials by 40%. Aside from the bridge loan of $4 billion from the Tarp Fund, it requested another $6 billion loan from the Energy Department loan for its energy efficiency programs (production of hybrid, battery-powered and electric vehicles), which it wants to pursue in collaboration with the government.
Many analysts who opposed the bail out argued that the insolvency of car manufacturers was their own making for their failure to upgrade themselves in the energy efficient age that made them globally uncompetitive. On the other hand, supporters believed that the bail out is necessary to bring back and reinvigorate the US auto industry’s viability and competitiveness. On April 2009, Chrysler filed for bankruptcy which was shortly followed by General Motors in June 2009. Questions and debates whether the bail out plan could effectively curb the both companies’ closures was finally answered. However, while the bail out did not save GM and Chrysler completely, viability programs were set by the government to provide new fresh starts for both. (US Department of Treasury, 2009) For the former, a promising spin off GM Company will subsist. It will be a smaller yet a more competitive and efficient General Motors. On the other hand, the latter is pursuing partnership with Fiat to boost its renewed efforts for producing fuel efficient vehicles.
Proctor, D. (2008). Auto industry’s ‘Job Banks’ program means unemployed workers keep getting paid. Business Examiner> November 28, 2008. Retrieved from: http://www.examiner.com/x-288-Business-Examiner~y2008m11d28-Auto-industrys-Job-Banks-program-means-unemployed-workers-keep-getting-paid
US Department of Treasury (2008). Treasury Releases Term Sheet for Automotive Plan
Chrysler Term Sheet and Appendix and General Motors Term Sheet and Appendix. December 19, 2008. HP-1333. Retrieved from http://www.treasury.gov/press/releases/reports/chrysler%20final%20term%20&%20appendix.pdf and
US Department of Treasury (2009). Obama Administration New Path to Viability for GM & Chrysler. March 30, 2009. Retrieved from: http://www.treas.gov/initiatives/eesa/AIFP/fact-sheet.pdf
US Joint Committee on Taxation, Cch Editorial Staff, (2008). Emergency Economic Stabilization Act of 2008: Text of H.R. 1424, as Signed by the President on October 3, 2008: and JCT Technical Explanation of H.R. CCH