By Lori Montgomery and Kendra Marr
Washington Post Staff Writers
Friday, November 21, 2008
With two of Detroit's Big Three automakers teetering on the brink of collapse, congressional leaders yesterday refused to advance a proposal for a federal bailout, saying auto industry executives had failed to persuade lawmakers that they would make good use of the money.
Instead, House Speaker Nancy Pelosi (D-Calif.) and Senate Majority Leader Harry M. Reid (D-Nev.) ordered General Motors, Chrysler and Ford to submit detailed proposals by Dec. 2 explaining how an emergency infusion of government cash could put them on a path to financial health.
"It is all about accountability and viability," Pelosi said at a news conference with Reid and other House and Senate leaders. "Until they show us the plan, we cannot show them the money."
With that, Congress left town for the Thanksgiving holiday. Once the companies submit their plans, hearings will be convened by the same congressional committees that earlier this week heard desperate pleas from the auto executives. If an accord can be reached on an aid package, the House and Senate could reconvene to consider it Dec. 8.
The two-week delay cut short a last-ditch effort to build support for a plan to speed $25 billion in emergency loans to the three companies, infuriating Detroit's allies on Capitol Hill. Sen. Carl M. Levin (D-Mich.) called the decision by Pelosi and Reid "risky and unnecessary," but he stopped short of saying they would be to blame if one of the companies were to fail.
The delay also startled industry analysts, who said General Motors, the largest and weakest of the firms, may not be able to hang on much longer without federal aid. Jerome York, an adviser to former GM board member Kirk Kerkorian, said in a Bloomberg Television interview that the automaker probably has weeks, not months, before it runs out of cash in the face of the steepest drop in auto sales in more than two decades.
In a painful one-two punch, the
auto industry also lost its most powerful defender in Congress yesterday, as House Democrats voted to oust Rep. John D. Dingell (D-Mich.) as chairman of the Energy and Commerce Committee. He will be replaced by Rep. Henry A. Waxman (D-Calif.), a liberal environmentalist unlikely to have much patience with industry complaints about auto emission standards.
As hope for a bailout evaporates, GM has few other options for raising money. It is unable to sell off assets, such as its Hummer division, because potential buyers are hesitant to expand during an economic downturn. And Wall Street isn't interested in investing in the troubled domestic auto industry.
Yesterday, General Motor's financial arm, GMAC Financial Services, applied to become a bank holding company, a move that could make it eligible for funds from the Treasury Department's $700 billion financial rescue package and give it access to emergency loans from the Federal Reserve's discount window. The move is intended to help GMAC improve credit so more people can buy cars, providing more revenue for its parent.
But GM also needs cash fast. If a federal bailout isn't approved by December, slumping auto sales will quickly push the firm into bankruptcy, said Dennis Virag, president of Automotive Consulting Group. A GM bankruptcy could in turn drag down the other car companies, he said, and spark a cascade of bankruptcies throughout the auto industry's chain of suppliers, which employs nearly 5 million people in all 50 states.
Virag predicted that car sales will drop by an additional 30 percent unless Congress or the Bush administration provides a quick infusion of funds.
"Everyone has their eyes on Washington," he said, "especially in the Midwest."
In a statement, GM said it agreed "completely that there must be accountability to U.S. taxpayers for government support"; Chrysler said it was "ready to provide its plans for returning" to profitability; and Ford vowed to deliver a "great plan that will continue [its] transformation into a lean, profitable company."
Ironically, analysts said, Ford was already on its way to retooling three truck plants to build small cars before the economic meltdown. It was aiming to double hybrid production in 2009 and to introduce several of its small, fuel-efficient European cars to North America. The firm surprised Wall Street by turning a profit in the first quarter of this year.
GM was set to roll out the Chevrolet Cruze, a compact car expected to be competitive with the Toyota Corolla and Honda Civic in fuel economy. It plans to launch its highly anticipated plug-in Chevrolet Volt in 2010.
Chrysler has deeper problems, some analysts said. The company is not big enough to compete in North America, nor is it equipped to transform its business with the promise of an electric car. As Chrysler chief executive Robert L. Nardelli told lawmakers this week, his firm is "looking for alliances, partnerships, opportunities to get further synergies across the auto industry."
"This government loan is an attempt to try to make things at Chrysler healthier, so that it can attract a foreign partner," said Aaron Bragman, an auto analyst with Global Insight.
In two congressional hearings -- one Tuesday before the Senate Banking Committee and another Wednesday before the House Financial Services Committee -- Nardelli, GM's G. Richard Wagoner Jr. and Ford's Alan R. Mulally failed to coherently lay out those goals, lawmakers said, or make a compelling case for how federal aid will help achieve them.
"We kept asking: 'What are you going to do with the money?' And they said: 'We're going to save the industry.' And we said: 'Well, how are you going to save the industry?' And they said: 'We're going to spend the money,' " recalled Sen. Robert F. Bennett (R-Utah), who quizzed the executives on Tuesday. "Even those who were very sympathetic walked away from that saying: 'What can I vote for out of this?' "
Rep. Barney Frank (D-Mass.), who chaired Wednesday's hearing in the House, said many lawmakers found it difficult to support a bailout for the auto industry so soon after approving a $700 billion rescue for the financial sector that has failed to calm to the markets. Instead of making more loans, some banks are hoarding the money or using it to buy weaker firms. So when the auto executives provided evasive answers, Frank said, many lawmakers experienced a bad case of déjà vu.
"There's deep skepticism about these things," Frank said. "Many people think we gave too much discretion the last time."
It didn't help that the auto chieftains traveled to Washington in private jets, a symbol of privilege "that doesn't send a good message to the people in Searchlight, Nevada," Reid said of his home town. Nor did it help that they were unable to promise lawmakers "that this government bailout will be its last." Some analysts have said the industry may need $50 billion or more to see it through what is expected to be an extended economic downturn.
Those missteps badly hurt the industry's cause, lawmakers in both parties said, and left congressional leaders without the votes to push a bailout through the House and Senate.
Pelosi and Reid offered little guidance on what they now expect from the automakers. Frank said increasing the production of energy-efficient vehicles will be "central."
Democrats' latest effort hews closely to an approach outlined by President-elect Barack Obama, who has said the automakers should receive government help but with tough conditions.
It's not clear where cash for the automakers would come from. Democrats had proposed carving $25 billion out of the Treasury rescue program, but the White House opposes that idea, saying the money is needed to stabilize the banking system. Administration officials favor modifying an existing $25 billion low-interest loan program aimed at helping the automakers retool their factories and build more fuel-efficient vehicles. But Pelosi has ruled that out, saying the loan program should be used for its original purpose.
Whatever the source of the cash, Sen. Christopher J. Dodd (D-Conn.), who will chair the hearings in the Senate, said $25 billion should be the upper limit when automakers rework their requests.
Dodd said he also wants to explore the idea of a bankruptcy in which the companies work out agreements to restructure with suppliers, lenders and labor, potentially supported by government help.
Bennett, who is close to Senate GOP leaders, said many Republican lawmakers also want a clear explanation of "why bankruptcy isn't an option."
Bob Corker (R-Tenn.), a member of the Senate Banking Committee, said auto executives "hurt themselves tremendously this week."
"They've got to talk with us like adults," he said.
Staff writer Dan Eggen contributed to this report.