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Aid in Hand, Clock Ticks for Detroit
With $17.4 Billion, a Mandate: Restructure by March or Go Bankrupt

By Steven Mufson, David Cho and Cecilia Kang
Washington Post Staff Writers
Saturday, December 20, 2008

President Bush put the government into the daunting role of industrial oversight yesterday by grudgingly throwing a $17.4 billion lifeline to General Motors and Chrysler, a politically sensitive mission that President-elect Barack Obama will soon inherit.

The emergency loans mark the first time the administration has extended its bailout to companies outside the financial sector and will head off imminent bankruptcy for the ailing Detroit automakers, which have said they lack enough cash to make major payments due to suppliers by the beginning of January.

But while Bush demanded deep cuts in union wages and benefits and broad corporate restructuring as conditions for the loans, analysts say that the overhaul of the auto industry will require more negotiations, more time and more federal money. "The auto bailout saga does not end here," Itay Michaeli, a Citigroup analyst, said in a report.

The administration yesterday said it would give GM and Chrysler $13.4 billion immediately and another $4 billion in February if Congress approves and the companies meet targets for extracting concessions from unions and bondholders. The federal assistance will come from the $700 billion Troubled Asset Relief Program and could be exchanged later by the government for as much as a 20 percent stake in the companies.

Bush decided to go ahead with the bailout Thursday afternoon, White House sources said, triggering an all-night flurry of activity at the Treasury Department. Officials sent documents to company lawyers and financial experts in Detroit at 2:30 a.m. Friday; top GM executives said they did not sign the papers until four minutes before the president went on television to announce the deal. Even then, some details were unresolved, a White House spokesman said later.

"If we were to allow the free market to take its course now, it would almost certainly lead to disorderly bankruptcy and liquidation for the automakers," Bush said in the televised message from the White House. "Under ordinary economic circumstances, I would say this is the price that failed companies must pay -- and I would not favor intervening to prevent the automakers from going out of business. But these are not ordinary circumstances. In the midst of a financial crisis and a recession, allowing the U.S. auto industry to collapse is not a responsible course of action."

In a news conference, GM chief executive G. Richard Wagoner Jr. said the loans would let the company develop "a blueprint for a new General Motors. . . . Our company helped build this country." Chrysler chief executive Robert L. Nardelli said in a news release that the company was "committed to meeting these requirements" and thanked the administration "for their confidence in the company."

Ford, the other member of Detroit's Big Three automakers, has said it does not need federal aid for now, but its executives have argued that a collapse of any of the companies could bring down the entire industry.

The terms dictated by the White House will take weeks if not months to be put into effect. The documents talk of ambitious "restructuring targets" that the companies should make their "best efforts to achieve" to avoid having the government call in the loans.

"This essentially does two things," said one person close to the negotiations between the government and the carmakers who spoke on condition of anonymity. "The first thing is it provides enough liquidity to forestall a bankruptcy filing. And the second thing it does is lateral the ball to Obama."

Transition officials for Obama described the Bush administration's effort as a "framework." They did not offer opinions on specific aspects of the deal because they were still reviewing the terms. Yet they noted that because the aid came by executive decision rather than through a law passed by Congress, Obama can alter terms once he takes office.

The White House restructuring targets ask much of GM and Chrysler stakeholders and require them to justify any failure to take these actions:

· End bonus payments for the firms' top 25 executives.

· For bondholders, swap two-thirds of GM's $32 billion of bonds for equity stakes currently worth a fraction the bonds' depressed values.

· Slash workers' wages to the levels of nonunion employees at Nissan Motor, Toyota Motor or American Honda Motor.

· Eliminate union-negotiated benefits that pay laid-off workers for up to two years.

· Auto companies should use newly issued stock instead of cash to pay half of the billions of dollars owed to the underfunded health care plan for retired UAW members.

The plan would all but wipe out value for existing shareholders and lead to a new ownership structure. Depending on the outcome of negotiations, the government could end up with a 20 percent stake and unions with 25 percent. Bondholders would own almost half.

Bush said the federal loans, which will carry an interest rate of 3 percent above a standard interbank lending rate, were necessary to avoid a "disorderly" collapse of an industry that supports hundreds of thousands of jobs. He also said they were designed to give the companies "a brief window" to restructure "outside of bankruptcy" and prove they are financially viable.

If that is not done by March 31, Bush said, the government will call its loans and let the companies declare bankruptcy or fail. The deadline and other restrictions "send a clear signal to everyone involved," he said. "The time to make the hard decisions to become viable is now -- or the only option will be bankruptcy."

Obama called Bush's action a "necessary step . . . to help avoid a collapse of our auto industry that would have had devastating consequences for our economy and our workers."

Speaking at a news conference in Chicago to announce his latest Cabinet selections, he said: "There are going to be some painful steps that have to be taken. I just want to make sure that when we see a final restructuring package that it's not just the workers who are bearing the brunt of that restructuring."

Many stakeholders are hoping that Obama will alter aspects of the loan terms.

"While we appreciate that President Bush has taken the emergency action needed to help America's auto companies weather the current financial crisis, we are disappointed that he has added unfair conditions singling out workers," Ron Gettelfinger, president of the United Auto Workers, said in a statement. He said "We will work with the Obama administration and the new Congress to ensure that these unfair conditions are removed."

Steven Fader, chief executive of Mile One, which owns 65 dealerships and employs 3,500 people in the Mid-Atlantic region, said Bush's plan is a "good first step," but he expects that the plan "will be amplified by the new administration."

More money could be coming for the automakers. A spokesman for Canadian prime minister Stephen Harper said his government would announce a bailout package for GM and Chrysler on Saturday. Officials were negotiating the package Friday. Canada previously had promised to provide aid worth about 20 percent of any U.S. help.

In New York, Cerberus Capital Management, the private buyout firm that owns Chrysler, announced plans to hand over $2 billion in equity in the company's automotive operations to labor and creditors as part of its loan agreement with the U.S. government. "Cerberus believes that concessions by all relevant constituencies will be required to facilitate a full restructuring and recapitalization of Chrysler," the firm said in a statement.

Analysts said the danger was not over for the Detroit carmakers. "It's clear that the bankruptcy risk is not off the table," said Gregg Lemos Stein, associate director and auto analyst at Standard & Poor's. "It's been pushed back for at least a couple of months. But there are a number of potential threats out there that could cause these companies to seek a bankruptcy as early as the end of first quarter."

Senate Republicans, who a week earlier blocked a bill to provide rescue money from funds appropriated earlier to promote advanced technology for carmakers, condemned Bush's decision to move ahead with the bailout.

"Instead of pursuing the more responsible course to ensure that these companies restructure through Chapter 11 bankruptcy, the president chose to stick the taxpayer with the tab as he walks out the door," said Sen. Richard C. Shelby (R-Ala.). "I believe it is a shameful attempt by the president to protect his own legacy. The taxpayer will surely remember him for it."

Senate Majority Leader Harry M. Reid (D-Nev.) said he was pleased that the administration's plan "incorporates most of the terms of the agreement struck with Congress last week." He also noted that "important decisions will be left to the next administration to make or oversee."

Automobile dealership groups said that the White House plan, though providing only short-term relief, will help bring reluctant consumers back to car lots.

"Dealers and our customers have been living in a period of uncertainty, and that hasn't done anything to help the economy when consumer confidence was already at an all-time low," said Annette Sykora, the chairwoman of the National Automobile Dealers Association and owner of two Ford dealerships in west Texas.

Sykora said that fears that GM or Chrysler could go bankrupt had discouraged consumers worried about obtaining spare parts and fulfilling warranties in the future. That, she added, contributed to weak sales last month, the worst in 26 years.

Even with rescue loans, uncertainty surrounds the future of ailing brands owned by U.S. manufacturers. At a news conference, GM's president Frederick "Fritz" Henderson said the company hasn't decided whether it would sell the Saturn brand but it is still seeking to sell its Hummer and Saab brands.

Staff writer Dan Eggen and staff researcher Lucy Shackleford contributed to this report.

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