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The Auto Industry Bailout

Why GM, Ford and Chrysler Needed Loans, and What It Cost the U.S. Taxpayer

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Cars

Poor business decisions meant unsold cars on the lots.

Credit: Bill Pugliano/Getty Images
Presidents George Bush and Barack Obama

Both Presidents Bush and Obama bailed out the automakers.

Credit: Getty Images
Nano

GM should have focused on smaller cars, like this Nano.

Credit: Tata Motors

In November 2008, the three major U.S. auto industry companies -- GM, Chrysler and Ford -- asked the government for a $50 billion bailout to avoid bankruptcy. The Big 3 stated that their demise would trigger three million layoffs within a year, plunging the economy further into recessionFord didn't really need the funds, but asked to be included so it wouldn't suffer by competing with subsidized companies. Congress initially refused, saying that the automakers needed to fine tune their request. It didn't help the three CEOs flew to Washington in big corporate jets.

The Big Three came back in December 2008 with a request for $35 billion. Congress 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. Congress 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 bailout funds, instead of the $25 billion available from an Energy Department energy-efficient loan program. President Bush and Treasury Secretary Hank Paulson ultimately agreed to the bailout. 

Five years later, the government had spent $80 billion on the automotive industry bailout. However, it's recovered $54.6 billion as of the end of October 2013. In return, more than 340,000 jobs were created by GM and Chrysler since June 2009, when they emerged from bankruptcy. (Source: U.S. Treasury, Financial Stability in the Auto Industry)

Auto Bailout Specifics

In January 2009, the Federal government used $23.4 billion of the TARP funds to create the Automotive Industry Finance Program. Its first loans provided operating cash for GM and Chrysler. These funds made auto loans available for car buyers :

  • $13.4 billion for General Motors.
  • $6 billion for GMAC.
  • $4 billion for Chrysler

Ford Credit  used funds from the Term Asset-Backed Securities Loan Facility (TALF), a government program for auto, student and other consumer loans. (Source: AP, Timeline)

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.

GM's Bailout

In return for the initial loan, GM agreed to give the government warrants for common stock, preferred stock, and a promise to repay the loan in 2012, when it anticipated it would 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 by 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)

GM borrowed another $2 billion in April, and $4 billion in May to stay afloat. On June 1, 2009, GM entered bankruptcy, with $82 billion in assets and $172.8 billion in liabilities. The government lent GM another $30 billion to fund operations during its reorganization, and guarantee its extended warranties, in return for a 60% stake. GM's unions, creditors and the Canadian governments owned the rest. GM closed a dozen facilities and cut more than 20,000 jobs. Stockholders lost all their investment, while bondholders received new stock worth much less than the bonds' values.(Source: Propublica, General Motors Bailout; Reuters, GM Bailout Timeline)

GM emerged on July 10 2009 as two separate companies. Old GM kept the liabilities, while New GM kept the assets, and was able to move forward as a profitable company. New GM only has four brands: Chevrolet, Cadillac, GMC and Buick. Saab was sold, while Saturn and Hummer were discontinued.  New GM kept $17 billion in debt, the contract with unions, and its underfunded pension funds. (Source: CNN, GM bankruptcy: End of an era, June 2, 2009;  Forbes, How GM Was Really Saved, October 30, 2013)

On November 17, 2010, Treasury announced it would sell half its ownership in GM to allow an initial public offering on the stock market of $33 a share. (Source: U.S. Treasury, Treasury Announces Pricing of Public Offering)

In total, Treasury spent $51.03 billion in GM bailouts, but it wound up only costing $10.4 billion. In November 2013, the U.S. Treasury announced it would sell its remaining 31.1 million shares. It had already gotten back $37.2 billion by selling its ownership in GM. (WSJ, U.S. to Sell Rest of GM Stake by Year-End, November 22, 2013)

The $6 billion loan to GMAC helped it become a bank holding company, later called Ally Financial.  including two-thirds of its ownership in  financial services arm GMAC. Now called Ally Financial Inc., it's still mostly owned by the government. To date, Treasury has recovered nearly 40% ($6.21 billion) of $16.3 billion invested in Ally through repayments and other income. Treasury continues to monitor Ally Financial’s performance and evaluate options to exit its investment, which consists of 74 percent of Ally common equity and $5.9 billion of mandatory convertible preferred stock.

Chrysler's Bailout

On January 16, 2009, Treasury approved a $1.5 billion loan for Chrysler Financial, set up for that 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 got  0% financing for five years on some models.

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. (Source: Washington Post, U.S. Expands Aid to Auto Industry, January 19, 2009)

On April 30 2009, Chrysler filed for bankruptcy. Treasury Secretary Tim Geithner lent $6 billion to Chrysler to funds operation while in bankruptcy. It emerged as a new company partly owned (58.5%) by automaker Fiat SpA of Italy. The rest is owned by the United Auto Workers Retiree Medical Benefits Trust.

In May 2011, Chrysler repaid $11.2 billion of its outstanding $12.5 billion in TARP loans six years ahead of schedule.  Total cost to taxpayers from the bailout was $1.3 billion.

In 2013, Chrysler and Fiat CEO Sergio Marchionne announced plans to take Chrysler public on the New York Stock Exchange. This would allow Fiat to purchase the rest of Chrysler, and merge the two into a more competitive global automaker. It may be listed under the ticker symbol "CGC" as early as the first quarter 2014. Chrysler market capitalization would be between $9 - $12 billion. (Source: WSJ, Chrysler Delays IPO Until Next Year, November 26, 2013)

Ford's Bailout Proposal

Ford 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.

Additional Auto Industry Bailouts

On March 19, 2009, Treasury approved $5 billion in loans to auto suppliers.

Why the Bailout Was Needed

By December 2008, auto sales were 37% lower than 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. Economy

At 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. Article updated November 27, 2013

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