In January 2009, the Federal government used $24.9 billion of the $700 billion bank bailout fund to rescue two of the Big 3 :
- $17.4 billion for General Motors and Chrysler.
- $6 billion for GMAC.
- $1.5 billion for Chrysler Financial.
Many opposed the bailout, saying U.S. automakers brought their near-bankruptcy on themselves by not retooling for an energy efficient era, reducing their competitiveness in the global market.
Auto Bailout SpecificsThe auto bailout proposal from the Big 3 auto companies totaled $34 billion in government loans. In return, the companies promised to fast-track development of energy-efficient vehicles, and consolidate operations. GM and Ford agreed to streamline the number of brands they produced. They also won agreements from the UAW union to delay contributions to a health trust fund for retirees and reduce payments to laid-off workers. The three CEO's agreed to work for $1 a year and sell their corporate jets. preferred stock, and a promise to repay the loan in 2012, when it anticipates it will again break even. GM pledged to cut its debt by $30 billion by converting debt ownership for equity. It agreed that union health-care benefits would be paid to retirees in 2010. It promised to sell its Saab, Saturn and Hummer divisions, reducing the number of models for sale to 40. It would reduce employment from 96,000 to 45,000 by 2012. (Source: Bloomberg, Chrysler Financial to Get $1.5 Billion to Aid Car Sales, January 19, 2009)
Chrysler's BailoutChrysler's $1.5 billion EESA loan was made to a new financing corporation, Chrysler Financial, set up for the purpose. The interest rate for the loans was 1 point above LIBOR. In addition, Chrysler Financial promised to pay the government $75 million in notes and reduce executive bonuses by 40%. As a result, car buyers will get 0% financing for five years on some models.(Source: Washington Post, U.S. Expands Aid to Auto Industry, January 19, 2009)
Chrysler received $4 of the $7 billion bridge loan it originally requested. It also asked for $6 billion from the Energy Department to retool for more energy efficient vehicles. In return, Chrysler's owner Cerberus vowed to convert its debt to equity. Chrysler wanted the Big 3 to partner with the Federal government in a joint venture to develop alternative energy vehicles. Chrysler pledged to debut an electric vehicle in 2010, ramping up to 500,000 by 2013.
Ford's Bailout ProposalFord requested a $9 billion line-of-credit from the government, and a $5 billion loan from the Energy Department. Ford pledged to accelerate development of both hybrid and battery-powered vehicles, retool plants to increase production of smaller cars, close dealerships, and sell Volvo. Ford is in better shape than GM or Chrysler because it had already mortgaged its assets in 2006 to raise $24.5 billion. Although Ford didn't need, and didn't receive any funds, it also didn't want its competition to get the upper hand thanks to the government bailout.
Congressional PlanCongress first explored whether a planned bankruptcy reorganization was the best alternative for the companies, but realized that would take too long to implement. Congress was divided on whether to use the $700 billion EESA funds, instead of the $25 billion available from an Energy Department energy-efficient loan program.
Why the Bailout Was NeededIn December 2008, auto sales had dropped 37% compared to a year earlier. This was 400,000 fewer vehicles, or the equivalent of two factories' annual output. GM and Chrysler had the worst decline, while Ford's loss was about the same as industry leaders Honda and Toyota.
However, many in Congress accused the auto-makers of not operating competitively for years. The companies delayed making alternative energy vehicles, instead reaping profits from sales of SUV's and Hummers. When sales declined in 2006, they launched 0% financing plans to lure buyers. Union members were paid $70 per hour, on average, while new hires made $26 per hour. GM had twice as many brands as needed, and twice as many dealerships, thanks to state franchise regulations. For them, the bailout was needed to restore the U.S. auto industry to global competitiveness. (Source: WSJ.com, Big Three Seek $34 Billion Aid, December 3, 2008; Bloomberg, UAW Offers Cuts, December 3, 2008; The Economist, Back AgainDecember 3, 2008))
The Impact of the Big 3 Automakers on the U.S. EconomyAt the time of the bailout, the auto industry contributed 3.6%, or $500 billion, to total U.S. GDP output. A 30% decline in auto sales translated directly into a 1% decrease in economic output. Automobile and parts manufacturing employed 1.091 million workers in April 2006, its peak. Three years later, that number had plummeted 43% to 624,000 workers (June 2009). Dealerships laid off 16% of their workforce, from a peak of 1.926 million (September 2005) to 1.612 million five years later (February 2010). (Source: BLS, Nonfarm Payroll by Establishment (Table B-1 History)
These figures included foreign-owned as well as the Big 3 auto makers. At the time of the bailout, many analysts felt that Chrysler would go bankrupt, even with a bailout, and Ford didn't really need it. Therefore, the main impact from the bailout was to save jobs at GM. However, the economic slowdown caused GM to slash its employment and production, whether it received a bailout or not. Furthermore, once the recession was over, Toyota and Honda would continue to increase their U.S. factories, providing jobs for U.S. auto workers.