General Motors Corp. and Chrysler LLC, seeking to stay afloat with taxpayer money, asked for up to $22 billion more in federal aid Tuesday and offered to restructure themselves to justify the $17.4 billion in Treasury loans they already have received.
GM said it may need another $16.6 billion in loans on top of the $13.4 billion it received to weather the nearly 40 percent drop in auto sales in the past year. It announced it is closing five additional plants and nearly a quarter of its 6,200 dealerships, and will cut three of its brands - Saab, Hummer and Saturn - if it is not able to sell them. Chrysler also outlined a substantial downsizing and requested $5 billion more in loans.
The automakers made their latest request for taxpayer subsidies against a backdrop of deepening economic stress prompted by the worsening plight not only of the auto industry but also of the rest of the global economy. The Dow Jones Industrial Average sank more than 297 points to 7,552.60 - only a whisker above its November low of 7,552.29 - while other major stock indexes lost more than 4 percent.
Adding to the souring economic news was a report that the 20 largest banks that received assistance under the Treasury’s bank bailout program actually decreased lending in the latest quarter.
To bolster their case for more federal aid, GM and Chrysler provided backup plans for filing for bankruptcy in response to requests from the Treasury. Auto executives said the plans demonstrated that bankruptcy would be far more costly for taxpayers than trying to reorganize the companies using piecemeal government loans.
“The auto industry plays a vital role in the United States,” said GM Chief Executive Officer Rick Wagoner, who once again ruled out bankruptcy as an option, contending that the company is simply too big to fail. “Supporting GM we believe is a sound investment for U.S. taxpayers.”
Mr. Wagoner made it clear that GM, the nation’s largest automaker, intends to depend on government support to stay in business over the next several years. He said he also has requested funding from governments in Germany, Canada and Sweden. He outlined various scenarios under which GM would seek further loans from the U.S. Treasury that could add up to $30 billion over the next five years, including potential assistance making pension payments.
He said auto suppliers also will need the Treasury’s help to stay afloat, and that might come in the form of credit insurance that ensures they get paid.
“We know that Washington is very skeptical” and expects the car companies to keep coming back for more money, Mr. Wagoner said, insisting that the company will return to profitability within two years, assuming auto sales recover from their 40-year lows.
“We’ve got a proven track record of being able to cut costs,” he said. “This report lays out a good way to restructure part of the balance sheet.” But he conceded that the company’s biggest financial burden - $27.5 billion in debt to finance retiree health care benefits - has not been resolved in negotiations with bondholders.
White House press secretary Robert Gibbs said “more will be required” of the auto companies if they expect more loans. He said the administration can´t rule out a restructuring through bankruptcy for struggling automakers, although it views the industry as “tremendously important” to the economy.
“I wouldn´t preclude policy choices,” he told reporters traveling with the president to Colorado. The auto companies “represent a huge part of our manufacturing base, and to have a strong and viable auto industry is tremendously important for the future.”
Chrysler said it planned an additional 3,000 layoffs and that it would need an additional $5 billion to get the company through the worst auto sales market in 40 years. Chrysler is eliminating another three models in an effort to achieve financial viability: the Dodge Aspen, Durango and Chrysler PT Cruiser.
Both companies said they did not want to resort to bankruptcy, largely because of the high price tag for taxpayers. GM estimated that it would need up to $100 billion in government loans to reorganize under Chapter 11 bankruptcy, while Chrysler said it would need up to $25 billion, partly because the loans would be needed immediately to fill in for private lenders who previously supplied credit to their dealers and suppliers.
“The fundamental issue here is who’s going to come up with $20 billion to $25 billion” to support a bankruptcy filing, said Chrysler CEO Bob Nardelli, disputing analysts who say consumers would refuse to buy cars from bankrupt automakers.
“It’s not whether you buy the car or don’t buy the car,” he said, but rather whether bankruptcy would put “unbearable stress” on the whole chain of auto manufacturing and auto dealers that rely on the car companies. “It would have a cataclysmic effect on the auto industry.”
Mr. Nardelli described the additional loan he is requesting from the Treasury, which he would like to receive upon approval of his restructuring plan on March 31, as “bridge financing to get us through this economic trough.”
Chrysler is predicting that U.S. auto sales will fall to a 40-year low of 10.1 million this year before picking up again in 2010 and 2011. It hopes to pay off its Treasury loans by 2012. GM presented a significantly brighter outlook, saying it expects sales to pick up to 11.5 million to 12 million in the next year, which would enable it to return to profitability within two years.
Despite weeks of negotiations with the United Auto Workers and bondholders, the companies said they were not able to obtain concessions in key areas targeted by the Treasury when it provided loans in January: reducing GM’s $27.5 billion in public debt by two-thirds and securing agreement from the union to accept stock instead of cash contributions to their retiree health care funds.
Just before announcing the plans, however, the companies said they obtained concessions from the unions on some work rules as well as abandoning the job bank program, which provides supplemental unemployment benefits for laid-off workers.
By Andrew P. Napolitano
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