U.S. Treasury Ready to Prevent Failure of Automakers (Update3)

Dec. 12 (Bloomberg) — The Bush administration dropped its opposition to using the $700 billion bank bailout fund to provide financing for U.S. automakers, after the Senate yesterday failed to approve emergency loans.

The administration’s willingness to give short-term help to General Motors Corp. and Chrysler LLC eased the concern of at least some investors that the companies will collapse and worsen what’s already the longest recession since the early 1980s. Stocks pared their declines.

“Congress has really punted the ball over to the White House,” John Bogle, 79, founder of the $80.6 billion Vanguard 500 Index Fund, said in a Bloomberg Television interview. “That will give them temporary stopgap aid. I do not think General Motors is going to go out of business.”

The economy’s accelerated decline prompted the reversal from the White House, which had insisted money from the Troubled Asset Relief Program be used only for financial firms. GM needs $11 billion to pay bills by the end of the month, and Ford Motor Co. Chief Executive Officer Alan Mulally last week predicted his company could be dragged into bankruptcy by a GM failure.

“Because Congress failed to act, we will stand ready to prevent an imminent failure until Congress reconvenes and acts to address the long-term viability of the industry,” Treasury spokeswoman Brookly McLaughlin said in an e-mailed statement.

$15 Billion Remaining

Treasury Secretary Henry Paulson had until today resisted calls to use the TARP to aid the automakers. The Treasury has committed all but about $15 billion of the first half of the funds since the plan was enacted Oct. 3.

Neither the Treasury nor the White House’s statements today indicated whether the TARP funds would come with terms or concessions. Paulson repeatedly insisted that any injection of funds needs a plan ensuring “viability” for the automakers.

“The intent of the TARP was to deal with financial institutions and major systemic issues and getting lending going in capital institutions,” Paulson said in a Nov. 13 Bloomberg Television interview. “Congress, I believe, should address the question of the auto industry.”

While the Treasury’s one-sentence statement doesn’t mention the TARP, White House spokeswoman Dana Perino said earlier in a separate statement that the Bush administration is considering using some of the program to keep the auto companies afloat.

‘Other Options’

“Under normal economic conditions we would prefer that markets determine the ultimate fate of private firms,” Perino said. “However, given the current weakened state of the U.S. economy, we will consider other options if necessary –including use of the TARP program — to prevent a collapse of troubled automakers.”

Emergency loans for GM and closely held Chrysler were rejected late yesterday in the Senate after talks failed over Republicans’ demands that union workers accept a cut in wages next year. Ford said this week it doesn’t intend to seek loans from the emergency fund.

Senator Bob Corker, a Tennessee Republican involved in failed efforts to forge a compromise last night, said providing TARP money without union commitments to restructure and wage concessions would make it “less likely” that the companies become more competitive. Such a move would put “good money after bad,” Corker said in a Bloomberg Television interview.

GM Chief Executive Officer Rick Wagoner told Congress last week, and has said repeatedly, that the Detroit-based automaker is trying to avoid bankruptcy at all costs. Lead director George Fisher said last week that GM considered and rejected the option and it was “way down the list” of alternatives.

Month-End Bills

Still, GM also has said it will lack the minimum $11 billion needed to pay bills by the end of this month, raising the prospect of bankruptcy should it fail to win a cash infusion. GM reported having $16.2 billion as of Sept. 30.

An attempt to restructure GM in bankruptcy would end up as liquidation, because sales would plummet as buyers flock to solvent car companies, Wagoner has said.

Chrysler has said it will run out of money early next year. It ended the third quarter with $6.1 billion in cash and needs at least $3 billion on hand to operate, Chief Executive Officer Robert Nardelli told Congress on Nov. 18.

Pressure was mounting on GM and Chrysler this week before the congressional failure as both faced demands from a small number of parts makers for payments in advance because of the bankruptcy concerns, people familiar with the matter said.

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