The U.S. government, which is getting comfortable playing Santa Claus, plans to stuff the stockings of beleaguered American automakers with $25 billions worth of loans.
Beset by unwise business decisions and troubles getting loans on their own during the credit crunch, the three major American carmakers have been asking for emergency loans from the government to get through the year.
They might get their wish (even if they have been naughty, not nice). Both the U.S. Senate and House of Representatives proposed legislation Monday to provide the loans that lawmakers say are necessary to save jobs and prop up the ailing auto industry.
While the Senate and House proposed different versions of the bailout plan, they both would divert $25 billion from the $700 billion package that Congress passed in a hurry in October to rescue the faltering financial market (see Lawmakers Approve Energy Tax Credits, Bailout).
If lawmakers work out their differences to pass a bailout plan, then it will be the second time in recent months that lawmakers have attempted to help the ailing auto industry.
In September, Congress approved a $25 billion loan guarantee program to help carmakers retool their plants to make more energy-efficient cars. Tesla Motors, a startup electric carmaker with its own fund-raising troubles, plans to apply for the loan (see Tesla CEO Denies Bankruptcy Rumors, Seek $25M and Cash-Strapped Tesla Raises $40M, Loses Lawsuit).
The Big Three have since argued that the $25 billion approved in September wouldn't come soon enough to keep them from crashing and burning. The loan guarantee program is to start in January and be administered by the U.S. Department of Energy, which typically carries out a lengthy process for approving loan guarantees.
Less than two weeks ago, GM reported a third-quarter operating loss of $4.2 billion and a monthly cash burn rate of $2.3 billion. The company has been discussing a possible merger with Chrysler, which also has its own ambitious plans for building electric cars (see Chrysler Eyes 2010 for Launch of One of Three Electric Cars).
Despite the desperation, however, the cash-poor GM has insisted that it still will launch the Chevy Volt, a plug-in hybrid, in November 2010. GM has drummed up lots of publicity for the Volt, touting it as a shiny example of its engineering prowess and ability to compete with a slew of European and Asian carmakers in the emerging electric car market.
Passing a new $25 billion bailout plan will be tough. The White House and many Republicans already oppose the idea, saying the government has done its share of using taxpayers' money to help out the automakers. Besides, the $700 billion package is meant to help banks and mortgage lenders, not automakers.
President Bush favors amending the $25 billion loan guarantee program passed in September to make the money available sooner, but only to companies that "make the difficult choices and do the restructuring necessary to become viable without additional taxpayer subsidies," said White House spokeswoman Dana Perino said in a statement.
The Senate and the House introduced separate $25 billion plans on Monday. Senate Majority Leader Harry Reid, D-Nev., introduced the proposal to offer money through low-cost loans. The proposal is attached to two bills, an economic stimulus package and another measure to extend unemployment benefits.
House Financial Services Committee Chairman Barney Frank, D-Mass., followed suit hours later to introduce a similar bill. Although the Senate and House bills are alike, the House version makes more demands on carmakers to show they can turn their operations around and to allow government more oversight of their businesses.
Here are the highlights of Frank's bill:
- The Treasury would make the loans no earlier than Dec. 1 and require car companies applying for loans to submit a short-term plan on how to spend the money. The plan also must contain steps for developing a long-term restructuring plan that includes repaying the loan with interest.
- The long-term restructuring plan, due March 31, 2009, must include measures to improve car fuel efficiency and to get out of debt. If the plan is deemed unacceptable, then the Treasury can ask for getting its money back sooner.
- Car companies cannot award bonuses to employees making more than $200,000 per year while the companies hold the loans. Also, no golden parachutes will be allowed.
- The Treasury must get warrants worth at least 20 percent of the loan's value from each loan recipient.
- Loan recipients cannot pay dividends while their loans are outstanding.
- Companies must alert the government of any asset sale, investment, contract or other agreement that exceeds $25 million. The government can stop any of these deals from taking place if they affect the loan recipients' ability to pay back the money.
- The loans would last seven years and come with an interest rate of 5 percent for the first five years and 9 percent after that.