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US auto execs plead for bailout

  US auto executives warned Congress on Tuesday that their industry was teetering on the brink of disaster as they pleaded for a $25 billion aid package despite political opposition to another multibillion-dollar government bailout.


The hearings come as government and business officials around the globe decide if, and how, they should commit billions of taxpayer dollars to bolster struggling automakers.

Rick Wagoner, the head of General Motors Corp, bluntly told the Senate Banking Committee why the executives were there. “This is about much more than just Detroit,” Wagoner said in his testimony. “It’s about saving the US economy from a catastrophic collapse.”

The hearings came a day after Senate Democrats proposed to bail out the ailing industry with $25 billion in loans. The weakened economy and global credit crisis pushed the US government into bailing out companies including insurer American International Group Inc; investment bank Bear Stearns; and mortgage companies Fannie Mae and Freddie Mac.

Wagoner; Robert Nardelli, head of Chrysler LLC; Alan Mulally, CEO of Ford Motor Co; Ron Gettelfinger, head of the United Auto Workers union; Michigan Sen. Debbie Stabenow and economist Peter Morici all testified on Tuesday. For the first time, the CEOs confirmed how much they are asking from the government.

General Motors is seeking between $10 and $12 billion, Ford is seeking roughly $8 billion and Chrysler would get $7 billion. “While the domestic auto industry has made mistakes in the past, the current problems have been exacerbated by one of the worst economies in nearly three decades,” Mulally said. “We are hopeful that we have enough liquidity based on current economic planning assumptions and planned cash improvement actions, but we know that we live in tumultuous economic times.”

The reception from legislators was somewhat less cordial than the well-paid executives are used to. Sen. Richard Shelby, an Alabama Republican and a member of the committee, has called the automakers “failed models” and said they should file for bankruptcy. Criticizing the bailout, Kentucky Republican Sen. Jim Bunning said the proposal “is not a serious one.”

“Detroit’s basic problem is that they created a business model that doesn’t have a snowball’s chance in hell of surviving in a global economy,” said Sen. Lindsey Graham, another Republican from South Carolina. Committee chairman Christopher Dodd, a Democrat, said a “majority” of Senate members favored some kind of help for automakers. “I would like to say in the next couple of days this is going to happen. I don’t think it is,” he said.


Both GM and Ford shares fell again on Tuesday. In the past 12 months, GM shares have lost more than 90% of their value and Ford is down more than 80%. The auto industry in Europe is also under pressure. The EU is studying support for its carmakers, and industry Commissioner Guenter Verheugen signaled support for a German offer to help the Opel unit of GM.

But others insisted there could be no special treatment for the industry, and the future of Opel is unclear. “You cannot compare the car sector with the financial sector,” Competition Commissioner Neelie Kroes said, referring to the mass bailouts by EU governments last month of key banks because of the financial crisis.


While joining the chorus in support of a car industry bailout, Bank of America Corp’s top official said that not all of Detroit’s Big Three should survive. “The first thing would be that (the US automakers) acknowledge that there is one too many auto companies and that consolidation needs to take place,” CEO Kenneth Lewis said at a Detroit Economic Club event.

The most likely victim could be Chrysler, owned by private equity firm Cerberus LLC. “We are willing to provide full financial transparency, and welcome the government as a stakeholder -- including as an equity holder,” Robert Nardelli, the head of Chrysler, told lawmakers. He said that without immediate financial help, the company may lack sufficient capital to continue operating and that Chrysler looked at a prepackaged bankruptcy and other alternatives before deciding to apply for the federal funds. “We are in a very fragile situation,” he said.


Legislation under consideration by US lawmakers would provide funding on top of $25 billion of loans approved earlier this year for the companies to improve their technologies and create a line of more fuel-efficient vehicles. The part of the plan that seems to have gained the least traction is the idea of using a portion of the $700 billion Troubled Asset Relief Program (TARP) for the automakers.

Treasury Secretary Henry Paulson said during a House Financial Services Committee hearing that while it would not be a good thing to let an automaker fail, the $700 billion fund should not be used to prevent such a failure. A major question of the bailout is how the companies will deal with its union workforce.

Gettelfinger said at the hearing the situation facing GM, Ford and Chrysler is dire. “If the government does not act to provide immediate assistance, GM, Ford and Chrysler could be forced to liquidate,” the union head said. “If one of these companies was to go into bankruptcy, I would almost bet it would take (down) two of them or possibly all three,” Gettelfinger added.

The Senate bill would impose conditions on the industry, but it is unclear whether those conditions would be enough to satisfy critics. “The Detroit Three are rapidly running out of cash and face filing for Chapter 11 reorganization,” Peter Morici, economist at the University of Maryland, testified. “It would be better to let them go through that process and re-emerge with new labor agreements, reduced debt and strengthened management.” Morici added that, “I would suggest if you give them $25 billion this month, they will be back,”

The government would take warrants for shares in exchange for aid, which would come with limits on executive compensation and a prohibition on the payment of dividends. (Reuters)