With election round the corner.Key Midwest swing states Michigan,Ohio,Indiana, in play. This is perfect timing. This is as good as passed.
Auto industry seeks $50 billion in loans; McCain offers some support
By JUSTIN HYDE • FREE PRESS WASHINGTON STAFF • August 22, 2008
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WASHINGTON – Detroit automakers, the UAW and their allies on Capitol Hill will launch an all-out blitz over the next few weeks for up to $50 billion in government loans over the next three years -- money the companies say would help them survive one of their darkest periods.
The proposal, which is already being labeled a bailout by opponents, faces a gantlet of obstacles to passing before Congress recesses next month. But the automakers say getting the loans will be their big push in Washington this fall, and will speed the production of fuel-efficient vehicles that could reduce U.S. dependence on oil – a cause some executives compare to retooling plants for World War II.
“It’s a top priority for us,” said Ziad Ojakli, Ford Motor Co.’s group vice president for government and community relations. “The market has shifted dramatically and the companies are transforming to keep pace. But what we need to do to complete the transformation is to have access to capital.”
If successful, the plan would dwarf the Chrysler bailout of 1979, where the government backed $1.2 billion in loans to keep Chrysler out of bankruptcy, and the $15 billion aid package for airlines following Sept. 11. Automakers and their allies contend the new program isn’t a bailout, but the same kind of financial shelter from a global credit storm that the federal government has built for Wall Street investment banks and home mortgage firms.
One big step for the automakers came this afternoon, when Republican presidential hopeful John McCain said he would support funding some of the loans the Detroit automakers and their suppliers seek. Noting that Congress had approved $25 billion in such loans last year but failed to fund them, McCain said the automakers deserved some of the same support the government had offered to Wall Street.
"Our auto companies are rising to the challenge building the next generation of American cars, but are doing so in times when credit conditions cripple the funding for the facilities and technologies to take the steps to the future," McCain said in a statement provided to the Free Press.
"I believe we should fund it (the loan program) and take action that will assist Detroit and its suppliers in making it through this difficult time of transition.”
With Democratic rival Barack Obama already supporting such a plan, McCain’s support was seen as essential to winning support from Congressional Republicans and the Bush administration.
“If he (McCain) decides to support it, I think we have a good chance of getting it passed,” said Democratic Sen. Carl Levin, who has been pressing the issue for years. “Either way, it’s going to come up.”
While the UAW hit McCain earlier this week over the plan, Obama’s campaign has been somewhat restrained in touting its position. McCain’s allies warn that painting the program as a Democratic idea will only raise the opposition in Congress.
“This is too important to politicize,” said Rep. Mike Rogers, R-Brighton. “If we don’t make it overly partisan, we might be able to get some of this money.”
The details of the proposal are still under construction, but automakers want the loans to cover a broader range of costs than a plan passed in last year’s energy bill. That program approved $25 billion in loans, but only for 30% of the retooling costs to build “advanced technology” vehicles, defined as models offering 25% better fuel economy than competitors. Automakers say that standard rules out most of their new products, leaving hybrids and little else.
To make $50 billion available would cost the government about $7.5 billion in borrowing costs and reserves against defaults over three years – double the cost of the original $25 billion plan. Other government loan programs frequently charge companies some of those costs.
What makes the push so urgent is the unique combination of a quivering national economy, terrible auto sales and high gas prices. All three Detroit automakers have consigned themselves to massive losses next year, with hopes for a turnaround pegged to the recovery of the economy in 2010 and their turnover of retiree health care costs to the UAW.
To get to 2010, they’ll have to start retooling several plants now to build smaller, more efficient models. GM just announced it would spend $500 million to revamp the Lordstown, Ohio, plant and its suppliers for the Chevrolet Cruze. Ford and Chrysler have made similar pledges, including revamping truck plants to build smaller vehicles.
While Wall Street believes Ford’s $26.6 billion can survive through 2010, it has doubts about GM, even after the automaker’s recent $15 billion cash-raising plan. On Wednesday, Lehman Brothers analyst Brian Johnson estimated GM would need at least $7.3 billion to get through 2009; if the economy worsens, that could rise to $12.2 billion.
Due to their weak finances, Detroit automakers can borrow money today only at extremely high interest rates – close to the average 13% that consumers pay on credit cards. If funded, the government loans would provide money at interest rates just above what the U.S. Treasury pays to borrow – roughly 4% to 5%. That could save the automakers hundreds of millions of dollars.
It’s not just Congress that has to act for the auto industry aid to start flowing. The U.S. Department of Energy will be responsible for writing the detailed rules for making the loans, and so far hasn’t started the process despite urging from Michigan’s congressional delegation, including House Energy and Commerce Chairman John Dingell.
“The scope and pace of the economic and market conditions add an element of urgency to all of our plans. We need the policy making to move with equal urgency,” said GM spokesman Greg Martin. “Here’s a golden moment when the government’s priorities match those of the auto industry and the consumer.”
Opponents of the plan say government aid to industries often does little to cure what caused a company’s weakness in the first place. Several members of Congress are wary of opening the U.S. Treasury to any flailing industry that suffers a force majeure.
Peter Morici, an economist at the University of Maryland, said the aid to airlines following Sept. 11 didn’t prevent most major carriers from declaring bankruptcy, and that any government assistance would essentially be rewarding the automakers and the UAW for bad decisions.
Detroit automakers “are doing this retooling anyway,” he said. “It’s not really going to change the fundamentals there. It’s just going to be a cash transfer to these companies, and I’m not sure it’s warranted.” |
