U.S. Treasury Ready to Prevent Failure of Automakers (Update7)

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 is already the longest recession since the early 1980s. Stocks pared their losses.

“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 $4 billion from the government by the end of the month to pay its bills, and Ford Motor Co. Chief Executive Officer Alan Mulally isn’t asking for any federal aid now and 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.

Stock Prices

Stocks in the U.S. and Europe rebounded somewhat after the announcement, Treasury notes declined and the dollar recouped some of its losses. The Standard & Poor’s 500 Index was down 11.01 points, or 1.25 percent, at 862.67 at 11:58 a.m. in New York. Before the announcement, S&P futures tumbled 4 percent.

GM shares fell 3 cents, or 0.7 percent, to $4.09 at 1:17 p.m. in New York Stock Exchange composite trading. Ford rose 12 cents, or 4.1 percent, to $3.02.

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 must include 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.”

‘Other Options’

While the Treasury’s one-sentence statement didn’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.

“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.”

Chrysler was “pleased” to see the White House decision to consider TARP, Chief Executive Officer Robert Nardelli said in an e-mail to employees today.

GM ‘Encouraged’

GM, in a statement, said it was “encouraged” and will work with the administration “on possible solutions that could prevent further damage to our nation’s economy and also allow us to embark on an aggressive restructuring plan for long-term viability.” Ford had no comment.

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.

UAW President Ronald Gettelfinger said today the union reached a tentative agreement last night with Corker, only to have it rejected by other members of his party in the Senate.

‘Tear Down’

Republicans “wanted to tear down any agreement we came up with,” Gettelfinger said at a news conference in Detroit.

Corker, speaking with reporters today, said talks with the UAW broke down because the union wouldn’t agree to a deadline for worker wage cuts.

“I basically pleaded with them to give me something,” Corker said. “So that is where it broke down.” He said his plan would have gotten 90 votes in the Senate.

House Speaker Nancy Pelosi, in a letter to President George W. Bush, said providing funds to the automakers “is the right decision” and urged him to require the same “tough accountability and shared sacrifice” from all sides in the industry as were set in a bill passed by her chamber.

Senate Majority Leader Harry Reid blamed last night’s failed vote on “stubborn Republicans” and said he was encouraged the Bush administration is considering emergency loans to the carmakers.

Connecticut Democrat Christopher Dodd, who negotiated with Corker, said on Bloomberg Television the Bush administration should announce plans today to aid the automakers because car dealers and suppliers can’t get credit from local banks.

‘Hurting Today’

“They’re hurting today,” Dodd said. “We need an announcement today out of the White House.”

The National Auto Dealers Association, Original Equipment Suppliers Association and the Motor & Equipment Manufacturers Association, in a joint statement, also urged Bush to rescue the automakers to avoid a “catastrophe.”

The U.S. auto supply industry, already weakened by cutbacks at GM, Ford and Chrysler, may face additional failures if the automakers are allowed to slip into bankruptcy, also risking the production of healthy automakers such as Toyota Motor Corp. and Honda Motor Co., according to a study by auto forecaster CSM Worldwide quoted in the statement.

About 58 percent of GM’s suppliers, 59 percent of Chrysler’s and 65 percent of Ford’s parts makers also supply the Asian automakers, Northville, Michigan-based CSM said. Employment in the U.S. supply industry fell to 590,000 workers through June, a loss of 130,000 workers already this year, the groups said.

GM Chief Executive

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.

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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