Congress to Detroit: What's Your Plan?

If the Big Three automakers can't come up with a radical plan that will satisfy Congress, they can kiss the $25 billion bailout goodbye

The Ford Flex rolls off the assembly line at an assembly facility in Oakville, Canada. Simon Hayter/Getty Images

By David Welch

After going to Capitol Hill and begging for a $25 billion bailout, the three chief executives of General Motors (GM), Ford (F), and Chrysler have been sent away with a request for a "plan" by members of Congress. And if they want to get the taxpayers' money they so desperately need, they had better come up with something good.

The problem is, there's not a lot they can say that Congress, specifically Senate Republicans, wants to hear.

Many people, inside and outside the industry, believe the Big Three need to make wrenching cultural and strategic changes if they are to survive. One is former Treasury Secretary Paul H. O'Neill, who sat on the GM board from 1993 to 1995. "This is not going to work," O'Neill says, "unless there is 100% change [in Detroit]."

Which brings us to the question: How can government give Detroit a bridge loan while ensuring that the companies do more to be competitive? While the automakers offered nothing new in Washington, GM sources say President and Chief Operating Officer Frederick A. "Fritz" Henderson has talked almost daily with United Auto Workers President Ron Gettelfinger, discussing different things the two sides can do to cut costs. For its part, Ford says it can last into later next year, and Chrysler has been seeking a buyer.

UAW Calls for Concessions

In the meantime, government, labor, and the automakers need to come up with a plan that Congress will buy. Otherwise, bankruptcy is a possibility. If that happens, buyers would be turned away and revenue would plummet, Henderson said in an interview on Nov. 18.

But here's the tricky part. According to one Big Three lobbyist, Democratic congressional leaders don't want a plan that slashes jobs and cuts union benefits. Republicans think that's a great idea. With no clear direction from Washington yet, here's what a smart bailout package might look like. Let's start with the union. There's no question the UAW has made huge concessions over the past three years. The union cut more than 100,000 jobs and agreed to a new $14-an-hour wage for new workers (half the rate of veteran employees), as well as a health-care deal that will make GM much more competitive with Toyota (TM). Detroit will reap that savings mostly in 2010.

But there's a big problem. None of the companies can hire new workers because they have to retire the veterans first. Plus, sales are too low to justify new hiring so none of them have been able to realize the savings, says Henderson. For GM, he says the company can find its breakeven point even at sales rates as low as 11 million or 12 million vehicles a year, but it will take time and any new action must be negotiated.

To see these companies through to 2010—and send the message to Congress that management and the union are serious about helping to build the bridge—the UAW could agree to cut to Toyota-level pay and lower benefits at least until the loans are repaid. The good news is that UAW chief Gettelfinger indicated at a news conference on Nov. 20 that he'd be willing to do something. "The UAW is at the table," he said. "We welcome all stakeholders to make concessions."

White-Collar Perks Under Scrutiny

So the union is prepared to make cuts if Congress demands it. UAW workers in domestic plants make $29 an hour while Toyota workers make at most $25.

Top Republican senators said Sunday they will oppose a Democratic plan to bail out Detroit automakers, calling the U.S. industry a "dinosaur" whose "day of reckoning" is coming. Their opposition serious raises doubts about whether the plan will pass in this week's postelection session.

Democratic leaders want to use $25 billion of the $700 billion financial industry bailout to help General Motors Corp., Ford Motor Co. and Chrysler LLC.

Sens. Richard Shelby of Alabama and Jon Kyl of Arizona said it would be a mistake to use any of the Wall Street rescue money to prop up the automakers. They said an auto bailout would only postpone the industry's demise.

"Companies fail every day and others take their place. I think this is a road we should not go down," said Shelby, the senior Republican on the Senate Banking, Housing and Urban Affairs Committee.

"They're not building the right products," he said. "They've got good workers but I don't believe they've got good management. They don't innovate. They're a dinosaur in a sense."

Added Kyl, the Senate's second-ranking Republican: "Just giving them $25 billion doesn't change anything. It just puts off for six months or so the day of reckoning."

House Speaker Nancy Pelosi, D-Calif., said over the weekend that the House would provide aid to the ailing industry, though she did not put a price on her plan.

"The House is ready to do it," said Democratic Rep. Barney Frank of Massachusetts, chairman of the House Financial Services Committee. "There's no downside to trying."

But Democrats have only a narrow majority in the Senate and President George W. Bush opposes the idea. That raises the possibility that any help for automakers will have to wait until 2009, when Barack Obama takes office and the Democrats increase their majority in the Senate.

At least two Republican senators support an automaker bailout -- George Voinovich of Ohio and Kit Bond of Missouri. But if the Republicans are seen as neglecting an industry that inevitably collapses, they risk lasting political problems in Midwestern industrial states that can swing for either political party.

Obama won most of the manufacturing states in the presidential race, including Ohio, a perennial battleground, and Indiana, which had not voted for a Democrat for president since 1964. Obama easily won Michigan after Republican John McCain publicly pulled out weeks before Election Day.

Sen. Carl Levin, D-Mich., said automakers are working to adapt to a changing consumer market, but they need immediate help to survive the nation's current economic crisis.

"This is not a Big Three problem alone," Levin said. "This current crisis is a crisis in the economy where there is no credit available to purchase, and where people are not buying cars because they are afraid."

The companies are lobbying lawmakers furiously for an emergency infusion of cash. GM has warned it might not survive through year's end without a government lifeline.

"It's not the General Motors we grew up with. It's a General Motors that is headed down this road to oblivion," said Shelby. "Should we intervene to slow it down, knowing it's going to happen? I say no, not for the American taxpayer."

Obama said he believes that aid is needed but that it should be provided as part of a long-term plan for a "sustainable U.S. auto industry" -- not simply as a blank check.

"For the auto industry to completely collapse would be a disaster in this kind of environment," Obama said in an interview on CBS's "60 Minutes" that was set to air Sunday night. "So my hope is that over the course of the next week, between the White House and Congress, the discussions are shaped around providing assistance but making sure that that assistance is conditioned on labor, management, suppliers, lenders, all of the stakeholders coming together with a plan -- what does a sustainable U.S. auto industry look like?"

Automakers say bankruptcy protection is not an option because people would be reluctant to make long-term car and truck purchases from companies that might not last the life of their vehicles. But lawmakers opposed to the bailout say Chapter 11 might be a better option than government loans and they cite the experience of airlines that have gone through the process of reorganization.

Shelby and Levin were interviewed on NBC's "Meet the Press" and Shelby also appeared with Frank on CBS' "Face the Nation." Kyl spoke on "Fox News Sunday."

At least 110 banks have requested more than $170 billion from the Treasury Department's rescue fund, and many more are expected to have submitted applications before Friday's deadline.

The requests would come from the $250 billion the Treasury set aside from the $700 billion fund to purchase stock in banks.

Analysts at Keefe, Bruyette & Woods estimated that 62 banks have received full or preliminary approval from the Treasury for $173 billion from the Troubled Asset Relief Program. The government said Monday that American International Group Inc. also would receive $40 billion from the program.

That $40 billion, however, won't come from the $250 billion set aside for the banks.

Another 48 banks have applied for about $6.5 billion, according to the Keefe, Bruyette & Woods report. Several banks that have filed applications said they haven't yet decided whether to accept any funds.

The tally doesn't include requests from four life insurance companies that are seeking regulatory approval to purchase savings and loans in order to become eligible for government funds.

One of those companies, Hartford Financial Services Group Inc., said it would be eligible to receive between $1.1 billion and $3.4 billion if its purchase of Federal Trust Bank is approved. Generally, only banks and savings and loans are eligible for direct investment from the TARP. AIG is the only nonbank company to receive such funds so far.

The total also doesn't include American Express Co., which said Monday it has restructured as a bank holding company, reportedly to seek up to $3.4 billion in funding.

Publicly-held banks were required to file their applications by Friday. Private banks have been given an extended, though unspecified, deadline.

Industry sources expect a flurry of last-minute applications will be filed Friday. Treasury spokeswomen on Friday wouldn't disclose how many applications have been filed or how much has been requested.

Nine large banks, including Bank of America Corp., Wells Fargo & Co., Citigroup Inc. and JPMorgan Chase & Co., received $125 billion last month.

Neel Kashkari, interim director of the bailout at Treasury, told lawmakers Friday that about 20 more banks would receive funds that day.

The Treasury has "approved dozens of applications from banks across the country," he said.

Several banks announced Friday that they have received funds under the plan, including Huntington Bancshares Inc., Comerica Inc. and KeyCorp.

American International Group Inc. late Sunday was reportedly near a deal for a revised bailout package from the U.S. government that would make borrowing terms easier for the troubled insurer.

A proposed $123 billion bailout package would be replaced with a new $150 billion package, according to the Wall Street Journal.

Details of the arrangement could be announced as early as Monday, when AIG is scheduled to report its third-quarter results, the Journal said. The plan reportedly would replace an $85 billion two-year loan with a $60 billion five-year loan at a lower interest rate.

The government also reportedly would inject $40 billion into AIG in exchange for preferred stock.

AIG representatives were not immediately available for comment.

The government had earmarked $85 billion in September for AIG's rescue. Another $37.8 billion was made available in October.

Detroit's
$25 Billion
Fast-Track
Bailout

Automakers' desperate plight is speeding along a rescue from Washington, with for now
no plans for hearings

• Plus: GM's Crippling Burn Rate

NEW YORK (CNNMoney.com) -- A majority of Americans aren't happy with the way Treasury Secretary Henry Paulson is handling his job or with the financial rescue package he and Congress created, according to a poll released Wednesday.

Of 1,058 people surveyed in a CNN/Opinion Research Corp. poll, 64% said they disapproved of Paulson's performance and 28% said they approved. The poll was conducted on Oct. 17-19 and the margin of error was plus or minus 3 percentage points.

The Treasury secretary, however, fared better than the president has recently. In an earlier poll, 72% of Americans said they disapproved of the way President Bush is handling his job.

A majority in the latest poll - 56% - said they also oppose the financial rescue package passed by Congress earlier this month. That package allows Treasury to buy troubled assets to stabilize the financial system.

In particular, 53% of Americans polled said they thought a major action taken as a result of that package - Uncle Sam providing capital to banks and other financial institutions in exchange for an equity stake in those companies - is a bad idea.

Fifty-eight percent also think the idea of the government providing financial assistance to keep a big company in business in exchange for a stake in that company is also a bad idea.

The Treasury has stepped in to help giant insurer American International Group (AIG, Fortune 500), which has received more than $100 billion in government loans. It has also taken over and agreed to provide funding for mortgage finance companies Fannie Mae and Freddie Mac.

There is one financial rescue strategy that won support in the poll: 58% of those polled said they favored government assistance to homeowners who can't pay their mortgages.

The financial rescue package requires the government to encourage lenders to modify mortgages in cases where the government holds at least a partial stake in a mortgage-backed security. And in cases where the government buys loans directly, it may modify the loans on its own.

On Oct. 1, the Federal Housing Administration launched a program to encourage lenders to write down loans to below a home's appraised value in exchange for refinancing a troubled borrower into an FHA-backed loan.

Early reports on that program, however, suggest that any positive effect on foreclosures may take time.

Meanwhile, FDIC Chairwoman Sheila Bair, who was instrumental in working on the financial rescue package provisions, has said publicly she thinks the government now needs to do more to help struggling homeowners. 

U.S. regulators are preparing to expand their response to the financial crisis beyond the $700 billion bailout package that was approved by Congress and signed into law earlier this month, sources familiar with the matter said today.

An additional plan is set to be announced soon, most likely tomorrow morning, the sources said on the condition of anonymity.

Some of the sources said they expect the plan would go beyond the bailout by taking steps to shore up interbank lending, bank health as well as possibly expand deposit insurance beyond the current $250,000.

Treasury Secretary Henry M. Paulson Jr. and Federal Reserve Chairman Ben S. Bernanke will hold a conference call with the chief executives of the nation's largest banks at 3 p.m. today to brief them on the plan.

Treasury declined to be specific, but in a statement the department said, "Treasury and the Fed are meeting today with leading financial market participants to finalize details on a financial market stabilization initiative."

Three agencies that are involved in the crafting of the plan include the Fed, Treasury and Federal Deposit Insurance Corp.