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Home » News » Business

Thursday, October 30, 2008

Fed tries to rescue automakers

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Extends short-term loans, cuts interest rates by half-point

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By Patrice Hill

The Federal Reserve on Wednesday agreed to extend short-term loans to the finance arms of Detroit's Big Three automakers while it slashed interest rates by another half percentage point to try to prop up the rapidly sinking economy.

The central bank acted as major bankruptcies among automakers and other businesses escalated threats to the economy. The Fed has made scant progress, meanwhile, at thawing frozen credit markets that are choking debt-dependent consumers and companies alike.

GMAC, the lending arm of General Motors Corp., and its counterparts at Ford and Chrysler have been largely shut out of credit markets since mid-September, making it difficult or impossible for them to offer loans to customers. Many auto dealerships have had to shut down because they could not obtain financing for their inventories.

The automakers' sales have plummeted to their lowest levels in decades, and GM has been fast running out of cash. Both GM and Chrysler - among the largest employers in the United States - are thought to be heading toward bankruptcy unless their access to credit is restored or they receive federal assistance.

While the auto companies are bankruptcy risks, they have unquestioned importance to the economy. By one estimate, one in 10 American jobs is tied directly or indirectly to auto manufacturing. The companies account for nearly half of U.S. retail sales and contribute powerfully to overall growth in the economy.

The Fed essentially has agreed to become a lender of last resort to the companies, despite their poor credit ratings and prospects. Using authorities not invoked since the Great Depression, the central bank has taken on the role of lender to top-rated corporations like General Electric Co. that issue commercial paper, as well as much of the financial system outside the Fed's traditional banking bailiwick, including Wall Street firms and insurance companies.

"The Federal Reserve and Treasury Department are in a kitchen sink mode," said Richard Yamarone, economist at Argus Research Corp. "Anything and everything is getting tossed at the crisis whether or not it makes economic sense."

John Silvia, an economist with Wachovia Securities, said the Fed is having to "make lemonade out of lemons" with its increasingly extreme efforts to aid the economy and pry open credit markets.

"There simply is no easy out for the financial markets, the economy or policymakers," he said. "The great American financial workout continues."

The prospect of federal financing did not give the auto companies a higher opinion from Standard & Poor's.

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