How Unions Stop The Cars

Big Labor is a big problem for automakers' survival.

With the late-night demise of legislation containing $14 billion in emergency loans to Detroit's automakers, pressure is once again mounting on President Bush to step in. And he is reportedly thinking of doing just that. But the very thing that doomed this legislation will also doom any effort to rescue the industry: union intransigence. If Bush cares more about taxpayers than kudos, he should decline.

The legislation, backed by Sen. Bob Corker, a Tennessee Republican whose state itself is home to GM facilities, was the industry's best hope to return to health. It stripped some of the green baggage of the House bill that would have consigned Detroit to producing not cars that sell but what eco-warriors want. Nor would the legislation have handed quite as expansive powers of micromanagement to a car czar, forcing companies to obtain approval for basic product and capacity decisions.

Instead, it offered the automakers a way to restructure their massive obligations to labor and debtors, much like a bankruptcy court would do but without the stigma. Bondholders would have been required to accept a 70% loss--the remainder paid in stock, not cash. And Big Labor's main concession (besides accepting some stock instead of cash for its health care trust fund) was that it set a definite date for a pay cut next year.

At that time, its wages and benefits would fall in line with those that Nissan (nasdaq: NSANY - news - people ), Toyota (nyse: TM - news - people ) and other automakers pay their U.S. workers.

But the United Auto Workers reacted as if it had been asked to work in a Third World sweat shop and walked away. Sen. Debbie Stabenow, D-Mich., decried efforts to "sock it" to American workers. Never mind that labor costs make every car rolling out of Detroit $1,500 more expensive to produce than foreign cars made elsewhere in the U.S. Indeed, last year, GM and Toyota sold the same number of cars worldwide, but Toyota turned a healthy profit--while GM posted a $40 billion loss.

But the fact of the matter is that the wage cuts are a necessary condition to give Detroit a fighting chance for survival, but they're not sufficient. Indeed, that would require far more from unions.

Car sales next year are expected to drop 40%. This means that if auto companies are going to use any bailout money to restore viability, they will have to be able to shed some of its quarter-million-strong workforce.

However, if the UAW was unwilling to accept a pay cut, there is no reason to believe that it would compliantly accept such massive layoffs. More likely, it will use taxpayer money to keep every job alive as long as possible--and then return for more a few months later.

Beyond job cuts, the UAW will also have to agree to eliminate a whole host of exceedingly rigid work rules for its remaining constituents. Such rules, for instance, had historically made it difficult to train auto workers for multiple jobs to fulfill multiple needs. No less than labor's extravagant wage demands, these rules have crimped Detroit's adaptability.

Ford recently built a facility in Brazil where it can produce five different vehicle platforms at the same time, on the same line. What's more, many of its suppliers are housed in the facility as well, something that allows them to move parts to the assembly line at a moment's notice. Not only has this lowered Ford's production costs and boosted productivity, it has also given it flexibility to adjust its product mix to shifting market conditions. This is important at any time but is especially crucial now, when volatile oil prices are likely to produce abrupt shifts in consumer demand.

But union rules, with their featherbedding requirements and crabbed job descriptions, make it much harder for such a factory-of-the-future to operate in the U.S.

The irony is that foreign car makers are profitable in America--and the Detroit Three are profitable in every country but America. Only Big Labor can position Detroit carmakers for success in their own country. Bush shouldn't ask already-strapped taxpayers to make sacrifices to pull Detroit back from the precipice when its own key stakeholder won't.

Shikha Dalmia is a senior analyst at the Los Angeles-based Reason Foundation. She can be reached at shikha.dalmia@reason.org.

Illustration by Peter Arkle

A few years ago, if someone asked what sort of cell phone you had, your response would probably be to name a network, like Sprint (S) or Cingular (T). Wireless carriers so completely controlled the business, especially in the U.S., that many manufacturers weren't even allowed to put their brand names on handsets. Now this relationship is changing in ways that will reduce the power of carriers and, with luck, increase consumers' choices.

The relationship started to shift when people began using phones for more than voice calls and text messages. As browsers and e-mail systems became important, it mattered more whether you had a Palm (PALM) Treo or a BlackBerry (RIMM) than whether your phone ran on the Verizon Wireless or AT&T (T) network. Then along came Apple's (AAPL) iPhone to rewrite the rules completely.

The conventional wisdom holds that AT&T scored a coup when it signed on as the exclusive U.S. iPhone carrier, and on one level this is true. The company reported that it activated 2.4 million of the new 3G iPhones in the third quarter, that 40% of those customers came to AT&T from rival operators, and that their average monthly bill was 1.6 times that of other subscribers. But the impact on AT&T's bottom line is another story. Mostly because of the fat subsidy it pays Apple for each iPhone, AT&T's third-quarter earnings of $3.2 billion were $900 million less than they would otherwise have been.

AT&T should eventually recoup the subsidy from monthly fees, especially if subscribers don't come in for a new subsidized phone the minute their two-year contract is up. But what the carrier has probably lost forever is ownership of the customer, a process economists call "disintermediation."

Before the iPhone, relatively few owners of any phones—smart or dumb—downloaded applications. The carriers had a nice business selling ringtones and the odd game. But with iTunes and the App Store, Apple became the exclusive supplier of applications as well as music and videos. The content suppliers got about two-thirds of the revenue, Apple kept about a third, and the carriers were frozen out.

"It's remarkable the impact [Apple] has had," says Jim Balsillie, co-CEO of BlackBerry maker Research In Motion (RIMM). "They exposed a lot of disintermediation risk in the industry." Balsillie says when RIM proposed application stores a couple of years ago, the carriers were hostile. But Apple's success is forcing the carriers to play. "Now everyone wants [an app store]," Balsillie says, and RIM will oblige next year, offering terms that will give carriers some of the action. Google (GOOG) has the Android Market, and Microsoft (MSFT) is considering an app store for Windows Mobile.

A key test of the new relationship between handset makers and smartphone software publishers, carriers, and customers will arrive when turn-by-turn driving instructions come to the iPhone. Apple seems to have created the phone with navigation in mind, yet the App Store prohibits programs that offer real-time driving instructions. Such services are available for other smartphones, typically for $10 a month, with revenues split between the carrier and a service provider such as TeleNav or Networks in Motion. Apple is mum about its intentions, but rumors are flying that it plans a navigation offering that leaves carriers in the cold.

I wish Apple were less controlling and less opaque about what may be sold at the App Store, but on the whole, I think the development of a robust market for third-party smartphone applications is a great thing for consumers. It's a huge improvement from the days when stodgy, innovation-averse carriers ran the show.

This shift in power is a bad thing for wireless carriers, whose nightmares of being turned into commodity sellers of bandwidth are coming true. But it's a win for everyone else.

Honda Motor Co. said Thursday it will further cut vehicle production in North America as it adjusts to plunging automobile demand.

Tokyo-based Honda is reducing production by another 119,000 vehicles for its fiscal year ending March 31, bringing expected production for the fiscal year to 1.3 million units.

Honda spokesman Ed Miller said the cuts will take place at five of Honda's seven plants in the U.S. and Canada. Employees at the plants will be given other tasks or can take paid or unpaid vacation time, he said. No layoffs will result from the cuts, he said.

Another Honda spokesman, Ron Lietzke, said production will be scaled back at the company's engine plant in Anna, Ohio, and its transmission plant in Russells Point, Ohio.

Honda, the second-largest Japanese automaker, has been hurt by the global auto industry downturn, a product of slowing economic growth and tight credit markets around the world. Earlier this month, the automaker said its U.S. sales fell 32 percent in November and 5 percent for the first 11 months of the year.

The company's latest production cuts come on top of previous reductions of 56,000 vehicles for North America announced earlier in the fiscal year. Last month, Honda said it was cutting production in Japan and Europe by 61,000 vehicles.

Miller said production will be cut by 18,000 vehicles at Honda's plant in Lincoln, Ala.; by 58,000 vehicles at its plants in Marysville and East Liberty, Ohio; by 37,000 vehicles at its operations in Alliston, Canada; and by 6,000 vehicles at its recently opened plant in Greensburg, Ind.

Lietzke said the cuts at the Ohio auto plants would be completed by March.

U.S.-traded shares of Honda fell $1.68, or 7.3 percent, to $21.32 in morning trading amid uncertainty over the fate of a federal rescue of the U.S. auto industry. The Senate failed to pass a proposed bailout package Thursday.

BCE Inc. said Friday that it plans to buy back up to 5 percent of its common shares and resume paying dividends following the collapse of the deal to take Canada's largest telecom company private in what would have been the biggest leveraged buyout in history.

The parent company of Bell Canada said it will repurchase up to 40 million outstanding common shares and will reinstate its quarterly dividend at 36.5 Canadian cents per share.

"A share buyback is the most efficient method of distributing capital to our shareholders, particularly given the current valuation metrics of the company," said chief financial officer Siim Vanaselja.

The buyback would cost BCE about 840.8 million Canadian dollars ($677 million) at its price at midday Friday.

BCE said earlier this week that it would restore the dividend and buy back stock following the collapse of the proposed $35 billion buyout by an investor group led by the Ontario Teachers' Pension Plan and several U.S. partners. The investors group had expected to complete its deal for BCE on Dec. 11.

But the deal fell through after a review by accounting firm KPMG found it would have left the company in violation of solvency tests of the privatization agreement, partly due to the amount of debt involved in the transaction and current market conditions.

There were also arguments over a breakup fee. The buyers group had said that no breakup fee will be paid, but BCE said in a separate statement it will demand payment of 1.2 billion Canadian dollars ($970 million).

Bell Canada issued a statement Friday saying that it will continue to move forward as a re-energized company and is supportive of BCE's buyback plans.

"Given this steadily improving business trajectory, we view the dividend and share buyback initiatives announced by BCE today as very attractive to our shareholders now and going forward," said George Cope, president and CEO of Bell and BCE.

BCE said the first new dividend payment will be made Jan. 15 to shareholders of record on Dec. 23. BCE also scheduled its annual meeting of shareholders on Feb. 17 in Montreal.

The dividend yields 6.95 percent at Friday morning's share price of 21.02 Canadian dollars, down CA$1.01 in trading in Toronto.

That share price is down from CA$38.35 just before it became apparent on Nov. 26 that Teachers' cash bid of CA$42.75 a share would not proceed.

The Toronto-based Ontario Teachers' Pension Plan -- with assets of CA$108 billion ($87 billion) in 2007 -- invests and administers the retirement funds for Ontario's 353,000 active, inactive, and retired teachers. U.S.-based Providence Equity Partners and Madison Dearborn Partners LLC are also involved in the proposed buyout.

BCE, which has more than 54,000 employees, had annual revenue of CA$17.8 billion ($14.4 billion) in 2007. It had 5.8 million wireless subscribers, 8.64 million phone lines, 1.94 million Internet subscribers and 1.82 million satellite television subscribers in 2006. It is Canada's largest communications company.

Oregon's largest dairy will test a new generation of technology that captures methane from cow manure -- tapping an underused energy source and lowering greenhouse gas emissions.

NW Natural and Bonneville Environmental Foundation are building the $1 million methane digester at Threemile Canyon Farms in Boardman.

Methane digesters are not new, but Bill Eddie of the foundation said the model developed by J-U-B Engineers of Boise, Idaho, costs much less and can be used on small farms as well as big ones.

That means small farms wouldn't have the expense of trucking heavy manure to a central facility. Instead, they could have their own digesters and pipe excess gas to a collection spot.

Unlike older digesters that rely on concrete and steel to build the manure holding basin, the new design contours the earth and lines the basin with plastic. The covered basin is filled with old tires, which serve as a matrix for bacteria that break down the manure, allowing the methane to be drawn off for use as fuel.

The utility and the environmental group get half the capital costs back as state energy tax credits spread over five years. NW Natural can sell carbon offsets to its 6,300 Smart Energy customers, who make up about 1 percent of its customer base. The dairy can substitute the methane for propane to heat water that is used to clean milking parlors.

Agriculture accounts for about a third of the methane released into the atmosphere in the U.S. Other sources include landfills, coal mining, and oil and gas refineries. It is considered the No. 2 greenhouse gas contributing to global warming, after carbon dioxide.

Oregon is one of the seven western states and four Canadian provinces that have signed the Western Climate Initiative to cut greenhouse gas emissions in the region by 15 percent by 2020.

The Threemile Canyon equipment is scheduled to go on line in March.

"It's a risky project," said Eddie. "Every piece of the revenue stream is going to be important."

Farm manager Marty Myers said the digester fits the dairy's existing manure handling operation and easily be expanded if the test works out. The methane could ultimately power the refrigeration units that cool milk.

Threemile Canyon Farms employs 300 people full time and 400 seasonally. The farm milks 16,000 cows on a farm covering 93,000 acres. Until now, the manure has been held in a lagoon and sprayed on the farm's 37,000 acres of farmland growing feed for the cows.

The digester will handle the manure from 1,200 cows, each producing an estimated 120 pounds of manure a day -- for a total of about 144,000 pounds a day.

Once technology is ready to remove impurities, NW Natural expects to use digester methane in its pipelines, said spokesman Bill Edmonds. Methane is the main component of natural gas.

Stephanie Page, renewable energy specialist for the Oregon Department of Agriculture, said methane digesters are coming into increasing use in Oregon. Two are working on diary waste in Tillamook and Salem, and others are in municipal waste. A fruit processing company outside Corvallis is developing one.

The White House and Treasury Dept. said they are likely to help U.S. automakers avert bankruptcy after Republican senators defeated a bill late Thursday, Dec. 11, that would have provided $14 billion in taxpayer loans to the companies.

For weeks, Democratic senators have called on the White House to use some of the $700 billion Wall Street bailout fund to make loans to General Motors (GM) and Chrysler, and to provide a line of credit to Ford (F), which is not in as dire financial shape as its two rivals. But the White House told Congress the fund was not created for industries outside of banks and financial services companies.

After the auto-rescue bill died in the Senate following weeks of data indicating rising unemployment, however, the White House changed course. Another factor was the further decline in stock prices Friday morning, which analysts attributed to the likely bankruptcy of General Motors and Chrysler.

"Because Congress failed to act, we will stand ready to prevent an imminent failure until Congress reconvenes and acts to address the long-term viability of the industry," said Treasury spokeswoman Brookly McLaughlin.

A Breakdown over Wages?

Senate minority leader Mitch McConnell (R-Ky.) and Senator Bob Corker (R-Tenn.) said Thursday night on the Senate floor that negotiations broke down over the United Auto Workers' unwillingness to agree to a date for certain active workers' wages and benefits to be cut to match those of workers at non-union auto factories in the U.S., such as those of Toyota (TM) and Honda (HMC).

Senator Corker, who acted as a broker between the Republican caucus and the UAW and automakers, said Friday: "I feel a sense of surrealness today that we came so close to what would have been a landmark agreement."

Corker said he had asked the UAW to agree to language that would have made labor costs "competitive" with foreign-owned plants, and the definition would have been certified by the next Secretary of Labor. Democratic senators would not have supported the language unless the UAW agreed to it.

UAW President Ron Gettelfinger on Friday took issue with the characterization that the talks broke down because of wages. "The wages discussions were about politics in the Republican caucus," said the union leader. Gettelfinger said he didn't want to get pinned down to specific language in the bill over "parity" or "competiveness" because comparisons between Detroit and foreign automakers are complicated by the benefits held by the vast pool of union retirees.

Negotiation Successes

The union, in negotiations with Corker on Thursday, agreed to take half of $21 billion of future health-care and benefit payments owed to it by the automakers in stock rather than cash. And they agreed to negotiate wage "competitiveness" over the next three months. Big investors and banks that hold automakers' bonds also agreed to accept a 70% writedown on the face value of their investments, and to take half of the rest in stock.

The bill language gave authority to a government-appointed "car czar," who would have had to certify the financial "viabaility" of the automakers by Mar. 31, including wage competitiveness. But Republican senators wanted specific language in the bill to address labor. Gettelfinger said that tactic was designed to "pierce the heart of organized labor."

Corker, despite his freshman status in the Senate, emerged as a major player in negotiations during the past three weeks as he came to favor a government-facilitated restructuring of the automakers instead of a having them reorganize under Chapter 11 bankruptcy.

Corker encouraged Treasury Secretary Henry Paulson to adopt as much of the framework of the Senate bill as possible in granting the automakers some of the Wall Street bailout funds. "What we put forth in the bill, and nearly got a deal on, were loan covenants that the Treasury Secretary could adopt by fiat," said the senator.

Details of how Treasury may help the automakers are expected to emerge over the next few days.

Pfizer Inc. said Friday it will cut 700 jobs in France out of its total French workforce of 3,000 as part of the U.S. drugmaker's global reorganization.

New York-headquartered Pfizer, the world's largest pharmaceutical firm, said the cuts would be made on a voluntary basis and would concern both its sales force and headquarters staff.

The pharmaceutical industry has been slashing its workforce due to growing generic competition, few new blockbusters, drug safety concerns and pressure from insurers and government health programs to discount prices.

Other drug companies are also announcing cuts. Last month, GlaxoSmithKline said it was cutting its U.S. sales force by 1,000. Novartis announced a cut of 550 sales jobs in October. Earlier this year, Merck eliminated about 1,200 sales positions. Bristol-Myers Squibb Co., Wyeth and Pfizer Inc. also have cut sales forces this year, and many drug companies made major cuts in 2007, too.

(This version CORRECTS Corrects Pfizer headquarters to New York, graf 2)

The war between the intangible and tangible sectors of the U.S. economy is over—and intangibles have won. Since the economy went into recession a year ago, the industries producing or distributing physical or tangible goods—including construction, manufacturing, retail trade, and transportation—have lost an astounding 1.8 million jobs. That includes a decline of 260,000 jobs in the much-beleaguered auto industry and its dealer network, and a drop of 300,000 in residential construction employment.

Meanwhile, the intangible sector, which includes such industries as education and health care, has received far less attention than autos and housing. But since the recession start date of December 2007, the intangible-producing industries have gained about 500,000 jobs.

In fact, today's troubles in autos and housing are indications of a long-term shift: The U.S. economy, in part because of globalization but also because of the nature of knowledge-based growth, has been moving toward producing outputs that have long-lasting effects but don't have a solid and visible forms. One such intangible produced by the education system is human capital, which is another phrase for the long-term value of education. Another important intangible is intellectual capital, which is the accumulation of scientific knowledge, business and financial knowhow, and artistic accomplishments. Finally, the U.S. is spending heavily on building up health capital. That's the dollar value of a person's lifetime health, according to David Cutler, a Harvard University economist and a key adviser to President-elect Barack Obama.

These intangibles—critical for today's knowledge-based economy—are not well measured by the gross domestic product figures produced by the Bureau of Economic Analysis. However, intangibles do produce jobs. Consider the last business cycle, which ran from March 2001 to December 2007. Over that stretch, health and education alone added 3.5 million jobs, roughly 63% of all the net jobs produced by the economy. Altogether, the intangible sector accounted for about 75% of job growth. By comparison, the tangible sector, led by manufacturing, lost some 1.8 million jobs over the same period.

A Fine Line?

Of course, this division between the tangible and intangible sectors is a bit messy in practice. Some manufacturing companies, such as Intel (INTC) and IBM (IBM), are big producers of intangibles in the form of research and technological knowledge. Oil companies, which are dedicated to the tangible act of drilling for crude, also invest heavily in the intangible knowledge of where to find the oil. At the same time, the intangible sector is not immune to the downturn. Publishing is losing jobs, as newspapers, magazines, and book companies wrestle with the shift to digital formats. And finance is experiencing big job losses, which will only accelerate in the coming months. Education and health-care spending, meanwhile, is tied to state and local budgets, which are likely to crater without help from the federal government.

But at least so far, the intangible sector, notably health care, has remained remarkably buoyant. In September 2006, I predicted that 30% to 40% of all new jobs created over the next quarter-century would be in health care. That long-term forecast turned out to be an understatement in the short run. Since that story was published, health care has added roughly 800,000 jobs, while employment has declined sharply in the rest of the economy.

For Obama and his incoming Administration, the question is whether the shift to intangible production is a sustainable economic strategy over the long run. Better education, improved health, and more research are clearly necessary to be globally competitive. But it's not clear yet whether a country such as the U.S. can afford to let all its tangible industries shift abroad. That's why Washington is grappling with the knotty problem of spending billions to save the domestic automakers. But Americans who want jobs have no such dilemma. For them, intangible is the way to go.

For years there were whispers on Wall Street about Bernard Madoff’s hedge fund. The cynics said the returns were too good, too steady and Madoff’s operation always looked too slim for the tens of billions of dollars it was managing. But given Madoff’s more than four-decades of experience as trader and past service as chairman of the Nasdaq Stock Market the wealthy kept giving him their money.

Well, it looks like those concerns were right all along now that federal prosecutors have charged the 70-year-old Madoff with securities fraud, in what could amount to one of the biggest Wall Street scams ever. Securities regulators, in a civil complaint, say Madoff’s scheme may have cost investors up to $50 billion—although that figure appears to be based on Madoff’s own bravado. At a minimum, it appears the $17 billion Madoff was managing earlier this year may be gone.

The allegations against Madoff describe a classic Ponzi scheme, in which money is taken in from new investors to pay out money to earlier investors. Madoff, authorities allege, even told his sons earlier this week that the hedge fund was nothing more than “a giant Ponzi scheme.’’

It didn’t take long for investors in Madoff’s fund to begin crying foul. Hours after the news of Madoff’s arrest broke, investors were contacting lawyers to determine how they can get their money back—assuming there is any money left over. The Securities and Exchange Commission is moving to appoint a receiver to take control of the Madoff fund to protect whatever assets remain. Scott Berman, a lawyer who represents a number of Madoff investors, says the fear in a case like this is that the investors will be left “fighting over the crumbs.”

It’s way to soon to know how long the alleged scheme had been going on, although authorities allege it began years ago, after Madoff tried to cover up for past losses. But it appears Madoff ultimately was unmasked by the worst financial crisis since the Great Depression. Just like many hedge fund operators, Madoff received a wave of redemption notices in recent months, from investors looking to preserve cash. Authorities say investors sought to pull-out some $7 billion from the fund—money Madoff apparently did not have.

In the end, most Ponzi schemes collapse when too many investors seek to pull their money out at the same time, and the operator doesn’t have the cash on hand. Many a scheme has failed when the markets turn south. One potential red flag that investors failed to notice along the way is that the hedge fund was being audited by a small outfit in Rockland County, NY—not one of the large accounting firms.

But the financial crisis appears to be hastening the unwinding process of potential scams, as it has dried-up all sources of liquidity. Banks are unwilling to lend and investors are fleeing hedge funds, stocks, bonds, commodities and other asset classes for the safety of cash.

In September, another alleged Ponzi scheme collapsed, when federal prosecutors arrested Minnesota businessman Tom Petters. Federal prosecutors allege that much of Petters’ empire, which consisted of buying up distressed businesses, was based on a series of lies. He’s been charged with bilking some six-dozen hedge funds out of $3 billion. Petters’ alleged scheme came undone when some of the hedge funds that lent him money had gotten redemption requests from their investors and began asking Petters to pay-off his debt. Just like Madoff, Petters apparently couldn’t come up with the cash. Several of the hedge funds that lent money to Petters are in tatters, and some are shutting down.

A lack of liquidity may have been behind the bizarre scheme involving New York attorney Marc Dreier. Earlier this week, federal prosecutors charged the high-profile attorney with allegedly scamming several hedge funds into giving him up to $100 million by selling shares in what appears to be a fraudulent real estate venture. It appears Dreier’s 250-lawyer firm was running low on cash and had failed to make payments on a bank loan.

As the financial crisis deepens, don’t be surprised if other scams get flushed out in the coming weeks and months.

Last-ditch efforts to forge an agreement to rescue the U.S. automakers fell apart late Thursday, Dec. 11, when union officials refused fast and deep cuts in worker pay. The collapse created the real possibility that General Motors (GM) and Chrysler will face bankruptcy in a matter of weeks, unless the Treasury Dept. acts to prevent it.

Senate Minority Leader Mitch McConnell (R-Ky.) said on the Senate floor Thursday night that a refusal of the United Auto Workers, headed by Ron Gettelfinger, to agree to lower wages and benefits at parity with workers at Toyota (TM) and Honda (HMC) in the U.S. by a date certain in 2009 was the last sticking point preventing Republicans from supporting the bill.

"We were three words away from a deal," said Senator Bob Corker (R-Tenn.), who spent all day trying to broker an agreement between Republicans, the union, and the auto companies. Tennessee is home to a GM and Nissan (NSANY) plant, as well as a future Volkswagen (VOWG.DE) plant and several supplier facilities.

Officials from the UAW did not return phone calls at press time.

"It's disappointing that Congress failed to act tonight," the White House said in a prepared statement. "We think the legislation we negotiated provided an opportunity to use funds already appropriated for automakers and presented the best chance to avoid a disorderly bankruptcy while ensuring taxpayer funds only go to firms whose stakeholders were prepared to make difficult decisions to become viable."

"A Loss for the Country"

The Senate rejected the bailout 52-35 on a procedural vote after the talks collapsed.

Senate Majority Leader Harry Reid (D-Nev.) called the bill's collapse "a loss for the country," adding: "I dread looking at Wall Street tomorrow. It's not going to be a pleasant sight."

The bill called for $14 billion to be divided between GM and Chrysler, both of which are at the financial breaking point as the recession and consumer credit crunch have crippled their finances. The companies, anticipating failure in the Senate, have hired bankruptcy law firms. Ford (F) has said it doesn't need federal assistance now but has asked for a $9 billion line of credit in case sales deteriorate below the current level.

According to Corker, bond holders that conferred with lawmakers Thursday agreed to take a 70% writedown on debt they hold from the automakers, and to take half of the remainder in stock. GM has $42 billion in debt, not counting payments the company must make to the union's health-care trust in 2010. As part of the deal, the UAW also agreed to take half of its future $21 billion in payments to its health-care fund in stock. "The companies would have been stronger than they have been in 40 years, or headed for Chapter 11," said Corker.

Senator Debbie Stabenow (D-Mich.) took a harsh and emotional tone with Republicans who voted against the bill. "Evidently the only thing that matters to those on the other side of the aisle is that workers make too much money," she said.