After much wheeling and dealing, the U.S. government finally went ahead and decided to aid the troubled auto industry. Treasury Secretary Henry Paulson released a statement on Friday, saying Congress will need to release the remainder of the TARP (Troubled Asset Relief Program) funds to help the ailing industry. This is the full text:
“Today, we have acted to support General Motors and Chrysler, with the requirement that they move quickly to develop and adopt acceptable plans for long term viability. This step will prevent significant disruption to our economy, while putting the companies on a path to the significant restructuring necessary to achieve long-term viability. At the same time, we are including loan provisions to protect the taxpayers to the maximum extent possible.
Treasury will make these loans using authority provided for the Troubled Asset Relief Program. While the purpose of this program and the enabling legislation is to stabilize our financial sector, the authority allows us to take this action. Absent Congressional action, no other authorities existed to stave off a disorderly bankruptcy of one or more auto companies.
As a result of this decision, Treasury effectively has allocated the first $350 billion from the TARP. The actual disbursement of this amount is subject to approval of bank capital applications, many of which remain with the regulators and will not reach Treasury for review until early next year. Disbursement is also subject to finalizing the structure for the Federal Reserve-Treasury consumer credit program (TALF). In the very short-term, the allocated but not yet disbursed TARP balances, in conjunction with the powers of the Federal Reserve and the FDIC, give me confidence that we have the necessary resources to address a significant financial market event. It is clear, however, that Congress will need to release the remainder of the TARP to support financial market stability. I will discuss that process with the congressional leadership and the President-elect’s transition team in the near future.”
Citing imminent danger to the national economy, President Bush ordered an emergency bailout of the U.S. auto industry Friday, offering $17.4 billion in rescue loans and demanding tough concessions from the deeply troubled carmakers and their workers.
Detroit’s Big Three cheered the action and vowed to rebuild their once-mighty industry, though they acknowledged the road would be anything but smooth as they fight their way back from the brink of bankruptcy.
Some $13.4 billion of the rescue money will be available this month and next—$9.4 billion of it for General Motors Corp. and $4 billion for Chrysler LLC, the two auto giants that have said they could be facing bankruptcy soon without government help. GM is slated to receive the remaining $4 billion in loans after more money is released from the financial rescue account. Ford Motor Co. says it doesn’t need federal cash now but would be badly damaged if one or both of the other two went under.
Under terms of the loans, the government will have the option of becoming a stockholder in the companies, much as it has with major banks, in effect partially nationalizing the industry. Bush said the companies’ workers should agree to wage and work rules that are competitive with foreign automakers by the end of next year.
And he called for elimination of a “jobs bank” program—negotiated by the United Auto Workers and the companies—under which laid-off workers can receive about 95 percent of their pay and benefits for years. Early this month, the UAW agreed to suspend the programm, but they are reluctant to “kill” the program completely.
I don’t think this aid will solve the problem. It’s putting good money into bad money. The real solution is to guide these companies into an orderly bankrupcy (Chapter 11 debt protection). With the debt shield, the Big 3 will have to design a long term viable strategy competitive enough to deal with the Korean and Japanese companies.
Currently, there are too many car makers making too many cars. Manufacturing volumes must be trimmed down according to the demand of a deep recession economy. Detroit’s labor costs are too high. They are 30 to 40 percent higher than non-union auto plants. The UAW has agreed to suspend—but not kill— a Jobs Bank Program than provides workers nearly their full pay if they get laid. This program need to be elliminated completely.
Last but not least, the car-industry should better focus on overcapacity, inflexible labor, excess dealerships and overall bloat. This is the way I see it. Detroit has to bite the bullet now, there is no tomorrow. Good Day.
Source: Bailout approved: Automakers to get $17.4B – Yahoo! Finance
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