Tuesday, October 21, 2008

Automakers Rev Up for a Bailout, Too

Automakers Rev Up for a Bailout, Too

The U.S. is spending massive sums to save the banking sector. And guess what? Detroit wants a bailout, too. Rarely a day goes by without lobbyists working for General Motors (GM), Ford (F), Chrysler, and the unions pestering the Obama and McCain campaigns for a major rescue package. What has been unthinkable for eight years—Detroit could barely get President Bush to take a lunch date—is now decidedly thinkable. Barack Obama, who for months has called for the feds to double $25 billion in government loans to help the Big Three build green vehicles, is taking the appeals seriously. (McCain supports the original loan amount.)

Of course, Detroit is playing politics. Its hired guns point out that many auto plants are in battleground states—Ohio, Pennsylvania, Indiana, and Missouri. The lobbyists also are making the case that political peril will loom even after a new Administration takes office in January. If a domestic carmaker fails as the recession tightens its grip, they warn, sitting congressmen will pay in the 2010 midterm elections. Here's how one Detroit lobbyist puts it: "You don't want your guys in 2010 to own what could happen in 2009."

Let's set aside naked political opportunism. The lobbyists have a point. The Detroit Three may be too weak to survive what looks to be a deep and protracted downturn—even if GM and Chrysler merge, another once-unthinkable prospect that the two companies are seriously considering.


The collapse of one, two, or all three automakers would cut a swath through the already struggling Midwest economy. According to the Center for Automotive Research, the domestic car companies and their suppliers employ some 600,000 line workers. Add in companies that indirectly rely on the industry for jobs, estimates the research center, and 3.6 million people potentially are at risk.

There's more. If an automaker declared Chapter 11, taxpayers would be on the hook for billions in retiree benefits from that company. The trade deficit would balloon as foreign companies grabbed the domestics' customers. Sure, Toyota Motor (TM) and others would build more plants in the U.S., but much of the manufacturing and R&D would happen overseas. Finally, consider the reputational hit to a superpower that can't sustain a domestic auto industry.

Given the stakes, it's not hard to see why momentum for a bailout is building. Besides doubling the original $25 billion loan, Democrats seem willing to allow the Big Three to spend the money not just on developing fuel-efficient models but also on paying the bills while they fix their problems. The hope is that this will get the Big Three through 2009. By then, auto sales may have picked up and a new health-care pact with the United Auto Workers should help Detroit slash billions of dollars in costs. Assuming the companies are sufficiently healthy, they can then repay the loans with interest.

And if things get worse than expected? Industry insiders say the feds might need to take direct stakes in the automakers—as they're now doing with the banks. In exchange, Detroit could give the government stock warrants as Chrysler did when it got loan guarantees from Uncle Sam in 1979. No one wants to go there. But stranger things have already happened.

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