Auto giants up against bailout fatigue

For many lawmakers of both parties, it may be one costly bailout too many.

SOURCES: Center for Automotive Research, Ward's Automotive, Yahoo! Finance/© 2008 MCT

Financial support for the beleaguered US auto industry? In today's Washington, that may represent a bailout too far.

Democratic leaders in Congress insist that they'll push hard for aid to automakers in this fall's lame-duck legislative session. They want to tap the Treasury's $700 billion financial rescue package for emergency loans to Detroit.

But the legislative rank and file may be experiencing bailout fatigue following weeks of shoveling billions at reeling Wall Street firms. And the Bush administration remains opposed to what it calls handouts for failing – and highly unionized – auto manufacturing firms.

The situation could change the minute a new Obama administration takes office. But for now, control of the US government remains divided between the parties, and the Big Three appear to be the place where the GOP is drawing its line.

"Some Republicans may see this as an opportunity to get back to their tried-and-true free-market principles," says Alan Abramowitz, a political scientist at Emory University in Atlanta who studies the makeup of political parties.

At a packed Senate Banking Committee hearing on the auto industry's future Nov. 18, most senators seemed to agree that the companies had brought many of their problems on themselves.

The need for Detroit to produce more fuel-efficient vehicles, and to streamline their business operations, has long been evident, said panel chairman Sen. Christopher Dodd (D) of Connecticut.

"No one can say they didn't see this coming," said Senator Dodd.

Auto-industry leaders laid blame on the worldwide economic downturn, however, pointing out that per-capita sales have plunged to their lowest point since World War II. They pleaded for a financial bridge to carry them over the chasm of the current recession.

Contrary to popular opinion, Detroit has kept up with the times, according to auto executives.

"We've moved aggressively in recent years to position GM for long-term success," said General Motors CEO Rick Wagoner in his prepared testimony. "And we were well on the road to turning our North American business around."

Meanwhile, Treasury Secretary Henry Paulson on Nov. 18 told a separate congressional hearing that the administration remains firmly opposed to using cash from the $700 billion Troubled Asset Relief Program (TARP) to help GM, Ford, or Chrysler.

"There are other ways" to help the troubled firms, Secretary Paulson told the House Financial Services Committee.

An auto bankruptcy would not be a good thing, particularly given the weakness of the overall economy, said Paulson.

But solving their financial problems should be done in a manner which "leads to long-term sustainable viability," said the Treasury chief.

Senate majority leader Harry Reid (D) of Nevada says he will hold a vote during this week's postelection session that would make the automakers eligible for some of the $700 billion TARP money.

Bush officials, for their part, have said that any immediate auto aid should come from $25 billion already approved by Congress for use in making more fuel-efficient vehicles.

But the regulations governing possible use of that $25 billion call for loan recipients to meet stringent cash-flow standards, among other things. Officials from the Department of Energy, which controls the money, have said they don't want to be in the position of giving loans to firms that then go belly-up.

Overall, the Bush administration has spoken carefully about the situation, but in a manner which appears to reflect the fact that GM may soon topple over the cliff into bankruptcy.

"We're surprised that Senate Democrats would propose a bailout that fails to require auto makers to make the hard decisions needed to restructure and become viable," said White House press secretary Dana Perino in a statement.

So why are Republicans apparently OK with the fact that some of the biggest manufacturing firms in America may be forced into bankruptcy reorganization? Isn't the GOP the party of big business, after all?

That may be true, but certain circumstances have combined to put the Big Three currently in a difficult political situation, note some analysts.

To begin with, there is the United Auto Workers union. One of the nation's few remaining strong industrial unions, it is an important player in the auto industry – and a natural Democratic constituency.

Bankruptcy on the part of an auto firm would inevitably lead to changes in current union contracts, perhaps lessening the UAW's sway in the industry.

In recent years the industry has also trimmed plants in the South and other generally GOP areas, leading to the perhaps unintended effect that its manufacturing is now reconcentrated in its industrial Midwestern base.

Michigan, after all, is heavily Democratic. Even Indiana went for Barack Obama this time around.

Meanwhile, free-marketeers see the auto firm business models as tangled and archaic. Besides the heavy legacy costs of union contracts, the Big Three are saddled with too many dealers, in part because of state franchising laws that make it prohibitively expensive to shut dealerships down.

In turn, this has led to the continued existence of brands that may no longer be successful in the marketplace.

In that context, some see bankruptcy as a necessary, cleansing tonic.

"The Big Three are weighed down by excessive labor costs, nameplate proliferation, and inefficient dealer networks. Only in reorganization could an automaker address these problems directly," writes Heritage Foundation legal expert Andrew Grossman in an analysis of the Big Three's financial situations.

Of course, the distribution of power in Washington will change radically next January. At that point, Republicans will be reduced to a congressional minority, and the attitude of the Obama administration will mean everything to the automakers, as far as a bailout is concerned.

At that point everything done so far will be on the table, points out Andrew Samwick, a professor of economics at Dartmouth College in Hanover, N.H.

"It will be interesting to see how a new president, who doesn't have any investment in existing policy, will evaluate past commitments," says Professor Samwick. "Will he even back the TARP program?"

President-elect Obama has said he believes aid for US automakers is necessary, but he hasn't said where the money should come from, or how much is needed. He has said the money should come as part of a long-term plan for the industry.

For Detroit, the question may be how much of the industry is left, in its current form, when he takes office.

• Material from the Associated Press was used in this report.

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