Dems to Detroit: No Bankruptcy

But Republicans question whether $25 billion is enough to save the Big Three automakers—and if they can do enough to save themselves

By David Kiley

The chief executives of U.S. automakers struck out with Congress this week. Despite spending more than eight hours testifying on Capitol Hill, they are going home without the $25 billion bailout package they so desperately need. They will get another swing at the money on Dec. 8. But even if they are able to get the votes they need, the money probably isn't enough to save them.

Senate Majority Leader Harry Reid (D-Nev.) and Speaker of the House Nancy Pelosi (D-Calif.) said Thursday, Nov. 20, that General Motors (GM), Ford Motor (F), and Chrysler will have to prove "financial viability" as well as accountability for how the money will be spent and that it can be paid back.

"Until they show us the plan, we cannot show them the money," Pelosi said Thursday.

But the finances of GM and Chrysler in particular are so fragile that many believe the $25 billion would only be a first installment. "What would you do with the money? Where would it go? And if sales don't improve next year, won't you surely be back asking for more?" demanded Representative Donald Manzullo (R-Ill.) at Wednesday's House Financial Services Committee hearing. Senator Richard Shelby (R-Ala.) said Thursday: "It's going to be throwing good money after bad.…I don't believe they [the Big Three] have a business model that works."

Burning Through Cash Fast

GM, for example, reported $16.2 billion in cash at the end of the third quarter. It spent $6 billion of its cash reserves in that quarter, and it's burning about $2 billion a month despite suspending many future product programs to conserve cash. Even if GM's cash burn rate drops in half and it gets $10 billion to $12 billion in loans, it could be close to collapse before the end of next year.

Chrysler CEO Bob Nardelli told Congress he needs $5 billion to $7 billion of the $25 billion on the table. At the end of the third quarter, Chrysler had $6.1 billion in cash, but during that July-September period, it spent $3 billion more than it took in. After an infusion of loans, Chrysler would have about $12 billion. But Chrysler's product lineup is much less competitive than its rivals, with poor quality scores and many more soft-selling SUVs than fuel-efficient cars. Moreover, its traditional buyers have lower credit scores than most, and the company is harder hit than GM or Ford by the credit crunch.

Ford is in better shape. But a failure of either Chrysler or GM—and the suppliers that would be taken down with them, warn many analysts—would likely drive Ford to fail as well.

Specter of Collapse

Dogging all three companies is the bad publicity around them and talk of possible bankruptcy, which turns away a lot of consumers already spooked by the plummeting stock market, huge layoffs, and grim day-to-day economic news. "Until the Congress acts and then President-elect Barack Obama goes out and encourages those who are buying a car to trust Detroit, you are going to see a lot of buyers on the sidelines or going to companies that aren't threatening to go under," says independent marketing consultant Dennis Keene. "Consumers are much more emotional than rational when it comes to a big-ticket item like a car."

Senator Carl Levin (D-Mich.) said Thursday the legislation he hopes to bring to a vote in a lame-duck session next month is a revision of the 2007 energy bill that granted the automakers $25 billion in loans to retool factories to produce more fuel-efficient vehicles. The revision would make loan money available right away that might otherwise take years to draw down. In exchange, the automakers would have to keep to their plans to make those vehicles—and replenish the fund as they pay back the loans.