White House says it won't allow Big Three to fail

US could tap $700 billion financial-rescue fund to keep automakers afloat temporarily.

By , Staff writer of The Christian Science Monitor

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    At his press conference Friday, UAW head Ron Gettelfinger reacted with relief on news that the Treasury Department was prepared to keep US automakers from going bankrupt in the short term.
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The White House appears to have decided that US automakers are too big to fail – or, more specifically, too big to fail given the current state of the economy.

Hours after a Senate effort to pass an auto bailout bill collapsed, administration officials Friday morning said they were willing to reverse their previous position and consider using their existing $700 billion financial-rescue fund to prevent the collapse of any of Detroit's Big Three.

For the US auto industry, it's a lifeline, but a slender one. US officials indicated that their help might be limited to helping GM, Chrysler, and Ford survive until Congress can reconvene and readdress the issue.

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"The current weakened state of the economy is such that it could not withstand a body blow like a disorderly bankruptcy in the auto industry," said White House press secretary Dana Perino.

The White House move was perhaps the last remaining way GM and Chrysler could avoid bankruptcy by the year end. On Thursday evening, the Senate narrowly rejected a proposed $14 billion rescue plan.

The plan failed after the United Auto Workers refused to give in to the demand of some Republicans that the union accept immediate wage cuts.

In Detroit, UAW President Ron Gettelfinger welcomed the Bush administration's move with relief.

"I think it's great news – the response that we've been getting out of both the White House and the Treasury," said Mr. Gettelfinger.

Many Republican lawmakers, and some economists, believe it would be better for the most troubled automakers to immediately proceed to a managed bankruptcy. They could quickly restructure and emerge leaner and more efficient, as airlines have in recent years.

The automakers themselves, and many Democrats, say that the outcome of such a step is uncertain. Consumers could refuse to buy cars from a firm that has gone bankrupt, for instance. The collapse of a chain of auto-parts suppliers could cause overall US auto production to grind to a halt.

Under normal circumstances, the free-market inclinations of a GOP White House might have led it to embrace the "quick bankruptcy" position. But these are not normal times.

The economy is already losing jobs at an unprecedented rate, and the failure of GM and Chrysler could pitch the nation into even worse economic times.

In the worst-case scenario, in which all of the Big Three go under, up to 2.6 million jobs could be lost, according to an estimate from Moody's Economy.com chief economist Mark Zandi. That represents 1.9 percent of the total American workforce.

"A precipitous collapse of this industry would have a severe impact on our economy, and it would be irresponsible to further weaken and destabilize our economy at this time," said the administration's Ms. Perino on Friday.

The Treasury Department has about $15 billion left from the first half of the $700 billion financial rescue fund. The rest of the money has been committed to banks and insurance companies.

The second half of the $700 billion would be a lot of money, of course – another $350 billion. But its use is subject to further congressional review, meaning that the Senate could vote to block it.

Some critics of the White House move to aid Detroit argue that the Treasury's financial-rescue package can only be used for financial firms under the terms of its establishing legislation.

Furthermore, by opening the door to the auto companies, who potentially need hundreds of billions to survive, the administration is jeopardizing "George Bush's legacy as a friend of the taxpayer," says Heritage Foundation legal policy analyst Andrew Grossman.

"Such action would be wrong legally, wrong economically, and counterproductive to turning around these troubled businesses," he says.

Material from the Associated Press was used in this report.

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