They’ve done it, the Detroit boys have managed to secure federal emergency loans to execute their plans to stay afloat. Initially their request for money was rejected by the US Senate, but the Bush administration has decided to take money from the US$700 billion that was allocated to bail out their failed banks.
The amount to be given to GM and Chrysler (Ford doesn’t need the money apparently as they build cars that people actually want to buy, thanks to their extensive European involvement) totals up to US$17.4 billion. US$4 billion will go to Chrysler this month and GM will get the same this month, with the remaining US$5.4 billion set to fall into their hands next year pending the release of the other half of the US$700 billion by the congress.
George Bush says the bailout was because he and the American people did not want the indigenous auto companies to fail, and he also did no want to hand over the administration over to Barack Obama next year with the auto industry in shambles.
The two companies have until March 31st 2009 to become “financially viable”, otherwise the loan will be recalled and all funds are to be returned to the U.S. Treasury. In this case, financially viable is defined to be “having a positive net value, taking into account all current and future costs, and can fully repay the loan.”
Other terms and conditions include: firms must provide warrants for non-voting stock, firms must accept limits on executive pay and eliminate perks such as corporate jets, debt owned to the government would be placed at higher priority than other debts to the extent permitted by law, firms must allow the government to examine their accounting books and records, firms must report any transaction greater than US$100 million and the government has the power to block any of these transactions greater than US$100 million, firms must comply with Federal fuel efficiency and emissions requirements, and firms must not issue new dividends while in debt with the government.
Ford, the healther of the Detroit 3, is still asking for a US$9 billion government line of credit in case conditions worsen or one of the other Detroit 3 fails. But they do not need any money immediately at the moment, unlike as claimed by GM and Chrysler.
Canada has also extended help to the Canadian arms of GM and Chrysler. The Canadian government will provide C$2.7 billion while the Ontario state government will top up another C$1.3 billion for a total of C$4 billion. Of this total, C$3 billion will go to GM while C$1 billion will go to Chrysler. Canadian production capacity represents 20% of total North American auto production capacity, but this aid amount only represents 16% of all total aid offered by North American governments.
So far the response from the industry have been mixed, but the positive ones so far are only coming from pro-Detroit government officials and GM dealers and other industry-related people who stand to benefit from the loan. Standard and Poor equity analyst Efraim Levy expects GM to quickly blow the billions they are getting and then request another multi-billion dollar loan on March 31st 2009. Jerry Webman, chief economist at Oppenheimer Funds said this bail-out is much like the government infusing the blood in on arm while it’s bleeding out the other arm in attempt to keep them alive.