‘Viability’ is key to the White House bailout of the auto industry

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If there’s one key word in the White House’s announcement of a $17.4 billion rescue package for Detroit automakers, it may be “viable.”

To get badly needed money now, GM and Chrysler under the terms of the deal have to agree to use the money to become financially viable by March 31, 2009. (Ford has said it does not need immediate help.)

For months, administration officials publicly have admonished troubled auto firms that they must “become viable” or “show viability.” This fall, the White House made sure that regulations for the Department of Energy’s loan program to develop more fuel-efficient vehicles included a whole viability section.

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It’s not clear whether the Obama administration’s hands will be tied by its predecessor here. But to the Bush team, “viable” is a synonym for “drastic reform,” which in turn would include big concessions from workers, management, bondholders, and other stakeholders in the industry.

“If a company fails to come up with a viable plan by March 31st, it will be required to repay its federal loans,” said Bush on December 19.

The White House package is the lifeline that the traditional US-headquartered auto industry has sought with increasing desperation for months. Without it, GM and Chrysler likely would have been forced to declare bankruptcy before the end of the year. Ford has enough cash to soldier on, but has warned that it would be gravely hurt by the demise of its domestic competitors.

Extensive holiday shutdowns have shown the depth of the industry’s problems. Plants often close for two weeks at the holidays, but Chrysler has announced that all 30 of its North American plants will be shuttered for at least a month due to low sales. Ford’s North American plants will be closed for an extra week in January. GM will close 20 plants, some for all of January, to trim its stock of unsold cars.

In announcing the auto rescue during a brief morning appearance, President Bush said that it is his belief that during normal times bankruptcy would be the best way for the auto firms to make the changes they need to continue in business. But these are not normal times, he said.

“In the midst of a financial crisis and a recession, allowing the U.S. auto industry to collapse is not a responsible course of action,” said Bush.

About $9.4 billion will be available for GM immediately, if it signs a contract agreeing to the administration’s viability conditions. Chrysler will get an immediate $4 billion infusion. Further funds, up to the $17.4 billion total, would come after the start of the New Year.

The money will come from the Treasury Department’s $700 billion financial rescue fund, the Troubled Asset Recovery Program (TARP). Secretary of the Treasury Henry Paulson said on December 19 that Congress now must release the second half of the $700 billion, because the first $350 billion has all been committed.

Not everyone in Congress applauded the move. Sen. Judd Gregg (R) of New Hampshire, one of the architects of the TARP bailout plan, said using fund money for auto firms instead of financial institutions is a “troubling” precedent.

“I also question whether General Motors and Chrysler will truly take the painful, yet necessary restructuring measures to ensure that these so-called loans aren’t simply throwing good money after bad,” said Sen. Gregg.

Under terms of the auto bailout, “viability” is defined as showing a positive net present value, taking into account all current and future costs, plus the ability to repay the government’s loans, according to a White House fact sheet. That’s the condition that GM and Chrysler are supposed to meet by March 31.

The bailout also sets targets for auto firm fiscal actions, including a two-thirds reduction in debt, accomplished by swapping debt for equity in the companies; the elimination of the controversial jobs bank, in which union workers awaiting a new assignment were paid for little work; and establishment of work rules and wages competitive with those of “transplant” auto firms run by foreign manufacturers in the US.

Auto firms that take the government’s money don’t have to meet these targets if they can report the reasons why, and make “the business case [that they will] achieve long-term viability in spite of the deviations,” says the fact sheet.

In essence, the Bush administration may just have handed off the problem of the failing auto firms to President-elect Obama, who will be the one determining on March 31 whether GM and Chrysler have met these conditions.

It remains to be seen whether Mr. Obama, who won with strong union support, will push for the United Auto Workers to make deep concessions.

However, on December 19 Obama praised the White House move.

“Today’s actions are a necessary step to help avoid a collapse in our auto industry that would have devastating consequences for our economy and our workers,” said Obama from his transition headquarters in Chicago. “With the short-term assistance provided by this package, the auto companies must bring all their stakeholders together ¬– including labor, dealers, creditors, and suppliers – to make the hard choices necessary to achieve long-term viability.”

Associated Press material was used in this report.

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