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
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.
But the main hurdle is providing Congress with a detailed plan, by Dec. 2 from each automaker, outlining how the money would be spent and how it would keep each company from going bust, as well as guarantees that the money won't be used outside the U.S.
"Symbolic" Sacrifices?
Senator Jon Tester (D-Mont.) said he will be looking for a detailed plan from the automakers that shows how the money will be spent in the U.S., not abroad, and for strict oversight. Tester, unlike many senators at the four-hour Senate Banking Committee hearing Wednesday, sat for the whole session. "But I never heard anything that said they would change their business model to make them a success," he added.
The CEOs repeatedly ran afoul of lawmakers this week who chastised them for flying three separate private jets to Washington to ask Congress for bailout money, and for not doing more to give up their own huge salaries.
As the automakers put together their plans, company sources say more attention will be paid to, as one executive said, "symbolic as well as substantive details."
The Next $25 Billion
The political problem remaining for Democrats is that automakers will likely need more money, which many Capitol Hill staffers and lobbyists say would likely come from an Obama Administration dispensing additional funds from the $700 billion Wall Street bailout legislation. Obama will have to ask Congress for the remaining $350 million of that money in January after he takes office and spell out what portion he plans to allocate to the auto companies. "The job of automakers next month is to convince Republicans to vote for the first $25 billion, and also to give cover to Obama when he has to tell them he's going to spend another $25 billion later on," said one auto industry executive who asked not to be named.
Several industry analysts have warned that Chapter 11 bankruptcy of even one automaker would likely cause a cascade of bankruptcies of one or the other two Detroit automakers and hundreds of suppliers. A loss of 3 million jobs has been forecast.
Many influential Republicans, businesspeople, and pundits have called for the automakers to face Chapter 11 bankruptcy instead of being helped by government loans. The chief reason, they argue, is that it would allow the companies to get out of union contracts that, among other things, require them to pay health benefits of retirees too young to qualify for Medicare. Several members of Congress have cited a New York Times op-ed piece by former Massachusetts Governor Mitt Romney advocating bankruptcy. But Pelosi, echoing Obama and other Democrats, said it's not an option. "We reject those advocating bankruptcy," said Pelosi.
Kiley is a senior correspondent in BusinessWeek's Detroit bureau.
