Democratic congressional leaders have said they were ready to push through legislation to aid the US auto industry when they return to Washington for a so-called ‘lame duck’ session next week.
“Next week, during the lame-duck session of congress, we are determined to pass legislation that will save the jobs of millions of workers whose livelihoods are on the line,” majority leader Harry Reid said in a statement cited by The New York Times (NYT ) – and seen as setting the scene for a final showdown with outgoing Republican president George Bush.
His call for the session, the first since the election, came shortly after house of respresentatives speaker Nancy Pelosi said congress and the [Bush] administration “must take immediate action” to stave off a possible collapse of the American industry.
So far, automakers have secured a $25bn low-interest loan to develop fuel-efficient vehicles but that won’t kick in until next year. With cash piles at GM (especially), Ford and Chrysler running lower daily, the automakers want another $25bn as soon as possible or a slice of the $700bn so far offered primarily to financial institutions.
According to the paper, Pelosi stopped short of saying congress would adopt legislation to provide emergency financial aid to the automakers, giving the US treasury the option of using money from that $700bn bailout programme instead.
But with the White House insisting that be reserved for financial institutions, the option seemed unlikely, leading a senior Democratic official to say Democrats would try to force Bush’s hand, the NYT added.
Congressional aides told the paper that Democrats, should they move ahead with emergency legislation, would have to decide whether to put forward a stand-alone measure for the auto industry or include the aid in a wider economic stimulus measure.
A wider package likely would include extended unemployment benefits, aid to strapped states and cities, new money for health care and food stamps and possibly money for public works — all programmes Bush so far has resisted.
Reflecting its dire straits, GM shares fell an additional 13% on Tuesday to $2.92, the lowest point since 1943 after the automaker on Monday warned shareholders that it might not be able to continue as a “going concern.”
Democratic president-elect Barack Obama on Monday also urged Bush to help the car companies when he visited the man he will succeed on 20 January at The White House .
“In order to prevent the failure of one or more of the major American automobile manufacturers,” Pelosi said in her statement, “which would have a devastating impact on our economy, particularly on the men and women who work in that industry, congress and the Bush administration must take immediate action.”
“I am confident Congress can consider emergency assistance legislation next week during a lame-duck session, and I hope the Bush administration would support it.”
An anonynous senior Democratic official told the New Yoirk Times Pelosi had decided to challenge Bush to work with the Democrats or veto aid to the teetering auto companies — and take the blame if one fails.
The White House so far has said the $700bn would be better spent easing the credit crunch at the heart of the economic crisis.
Deputy White House press secretary Tony Fratto told the paper congress might better focus its efforts by easing restrictions on the $25bn plant retooling loans approved in September.
In her statement, Pelosi said: “Emergency assistance to the automobile industry would be conditioned on executive compensation restrictions, a prohibition on golden parachutes, rigorous independent oversight and other taxpayer protections to ensure that any companies that benefit from this assistance, and not the taxpayers, bear the full burden of repaying any costs that are incurred.”
Meanwhile, General Motors’ CEO Rick Wagoner has insisted the automaker is in such dire financial straights that it needs to line up a federal aid package before Obama takes office.
“This is an issue that needs to be addressed urgently,” Wagoner told a US auto trade paper, adding that now is the time to “overshoot, not undershoot” the level of assistance.
GM is willing to offer the government preferred stock, speed the introduction of fuel-efficient vehicles and set limits on executive compensation in exchange for financial aid, Wagoner reportedly said, adding it would not be “a very smart move” for him to resign.
“It’s not clear to me what purpose would be served” Wagoner said. “I think our job is to make sure we have the best management team to run GM.”
The aid-to-automakers issue made several leading US news channels on Tuesday night with support from commentators and panellists somewhat divided.
Meanwhile, BusinessWeek magazine said in its online edition on Wednesday that the spectre of a Chapter 11 (bankruptcy protection) reorganisation “was circling GM’s downtown Detroit headquarters like vultures”.
“The third-quarter results made it clear that, without government intervention, GM is headed for bankruptcy,” Gimme Credit auto analyst Shelly Lombard told BusinessWeek.
Bankruptcy lawyers have told the magazine the automaker could benefit from a prepackaged bankruptcy, which would be a reorganisation that is worked out among creditors before the case ever gets to a bankruptcy court judge.
“It would be messy but ultimately could help the company restructure itself a lot faster,” Mark Bane, a partner at New York law firm Ropes & Gray, told BusinessWeek.
The magazine said the biggest obstacle to any bankruptcy was the lack of availability of debtor-in-possession (DIP) financing – liquidity normally provided by banks and private equity firms that a company in bankruptcy needs to reorganise itself.
GM North America president Troy Clarke last week said obtaining DIP financing would be “practically impossible” given the state of the credit markets and the size of GM’s obligations.
“But that’s where the government could come in,” lawyer Bane told BusinessWeek, “providing the liquidity GM would need to massively reorganise under Chapter 11.”
The worst-case scenario for GM, most experts reportedly said, was a spontaneous Chapter 11, like the one filed by US electronics retailer Circuit City on 10 November. A prepackaged filing could be set up to make sure that the vast majority GM suppliers would continue to get paid on time.
But Grant Thornton partner Kimberly Rodriguez told BusinessWeek that bankruptcy was a “last resort” – in better times GM and Ford have provided liquidity to its biggest suppliers who would have otherwise been forced into Chapter 11, which is very messy and destructive.
“The government could play that same role for GM, and it will be a lot more orderly,” Rodriguez told the magazine.