GM, Chrysler Receive $13.4 Billion in Immediate Federal Loans
December 19, 2008

By Michelle Krebs

The Bush administration announced Friday morning that it will provide $13.4 billion in short-term loans to General Motors and Chrysler; the automakers will receive another $4 billion in February.

President George Bush admitted reluctance about providing government loans to the Detroit automakers but noted the beleagured U.S. economy would suffer a harsh blow if one or more of Detroit's automakers collapsed into a "disorderly bankruptcy" at this time.

"These are not ordinary circumstances," Bush 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." 

The money will come from the $700 billion Troubled Asset Relief Program (TARP). Automakers will get $13.4 billion immediately and another $4 billion from the fund in February to keep them operating through March.

The much discussed strings attached to the loans require:

- pay back of loans to the government ahead of all other debt payments; 

- demonstration of progress toward financial viability and restructuring by March 31 or the loans will be called back and the automakers would be forced into bankruptcy;  

- reduction of debt by two-thirds by, in part, making half of the payments to the union retirement fund in equity;

- concessions by unions to make pay and work rules competitive with foreign automakers doing business in the U.S. by year-end 2009. The concessions include elimination of paying workers when they aren't working;

- concessions from management, debtholders, suppliers and dealers;

- issuance of warrants for non-voting stock to the government;

- limits on executive pay and perks, including travel by corporate jets;

- the government authority to block transactions larger than $100 million;

- government access to financial records;

- no payment of dividends until debt is repaid.

Obama Gives Plan His Blessing

President-elect Barack Obama, who will inherit the automakers' calamity and could make changes in the game plan, endorsed the loans Friday, calling them a "necessary step" to avoid a major blow to the economy. 

"The auto companies must not squander this chance to reform bad management practices and begin the long-term restructuring that is absolutely required to save this critical industry," Obama said in a statement.

GM, Chrysler -- and Ford -- Respond Quickly

GM and Chrysler -- as well as Ford, which is not part of the loan package -- responded quickly. GM management will hold a press conference at 11 a.m. Friday to discuss the loan package.

In the meantime, GM said the government's financial bridge was much appreciated "at this most critical time for the U.S. auto industry and our nation's economy." The automaker, in its statement said, the government's action will help preserve jobs and support the continued operation of GM and the many suppliers, dealers and small businesses across the country that depend on GM.

"This will allow us to accelerate the completion of our aggressive restructuring plan for long-term, sustainable success. It will lead to a leaner, stronger General Motors," the automaker said.

Chrysler Chairman and CEO Bob Nardelli thanked the administration and U.S. Treasury "on behalf of the men and women of Chrysler and its extended enterprise...for for their confidence" in Chrysler.

Ford is not part of the loan package but instead has asked the federal government for access to a $9 billion line of credit if the economy worsens. Still, Ford, in expressing its appreciation for the GM and Chrysler loans, noted again the interdependency between auto companies and their suppliers and dealers.

Posted by Michelle Krebs at 5:18 AM under Chrysler , Featured , GM , News | Comments (2) | digg this | Seed Newsvine

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