auto

Automakers receive $17 billion in Bush bailout

Highlights
  • The long road to bailout
  • Why not bankruptcy?
  • Where to now?

Despite the $17 billion automotive bailout announced by President Bush, car lots across America will likely continue with their anemic business as unusual.

The announcement may help ease the minds of buyers, giving them more confidence that General Motors and Chrysler won't seek bankruptcy protection for now.

But the carmakers aren't completely out of the woods just yet. Sales across the entire industry are down, and the Detroit 3 are still struggling with labor and benefit costs that may spell continued long-term trouble if they can't gain enough concessions from their unions and bond holders.

The administration's aid package was crafted by the White House as part of the $700 billion bailout package already approved to rescue the financial industry after Congress balked at passing a separate auto bailout bill earlier this month.

Initially, General Motors will get $9.4 billion in loans in the next two months, while Chrysler will receive $4 billion. The loans are contingent on a raft of concessions required of bond holders, workers and others. As is, Ford is not part of the bailout plan.

The remainder of the bailout would become available after the automakers file a restructuring plan with the government early next year, and the money will come from the second tranche of the financial industry's aid package.

The long road to bailout 
The administration stepped in on the automakers' bailout after Senate Republicans rejected a similar plan.

The feeling among many conservative lawmakers was that the failed auto legislation didn't accomplish enough to ensure the long-term viability of the industry or extract enough concessions from stakeholders, says John Wolkonowicz, senior automotive analyst North America for IHS Global Insight in Lexington, Mass.

"They felt it didn't give enough clout to negotiate with bond holders or unions," Wolkonowicz says.

But industry watchers say the auto bailout is not likely to prompt a horde of buyers to beat a path to new car lots.

That's because, bailout or no bailout, a slumping national economy has people feeling like they are in no position to buy a new car at the same time that a shattered consumer-credit structure is making it difficult for people who want to buy, to actually close the deal.

Meantime, dealerships across the nation are desperate to stimulate sales at nearly any cost. From buy-one, get-one free sales to huge rebates to drastically slashed prices, dealers are trying every trick they know to drive up traffic.

But, as bad as the auto market is today, it would have been worse if even one Detroit automaker had sought bankruptcy protection, says Dana Johnson, chief economist for Dallas-based bank Comerica Inc.

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Why not bankruptcy? 
Industry observers agree that allowing any major U.S. carmaker to enter bankruptcy could have spelled disaster for the entire automotive industry, and not just for the one or two companies forced to restructure.

"Bankruptcy is not a good option for anyone," says Phil Reed, senior consumer advice editor for the online automotive resource Edmunds.com. "It works for many businesses -- airlines and the Tribune Co., for example. But if you pick up a newspaper, that isn't a long-term relationship."

He said newspaper subscribers don't have to worry about multiyear vehicle warrantees or the availability of spare parts years later.

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