After a gruelling several weeks, the U.S. government announced Friday it will extend short-term funding to General Motors and Chrysler, allotting $13.4 billion in immediate funding to the two automakers and an additional $4.0 billion contingent on the delivery of the second tranche of the TARP.
"For years, the U.S. automakers have faced serious challenges," U.S. President George W. Bush said. "In recent months the global financial crisis made these challenges even more severe... The only way they can buy time to restructure is with help from the federal government."
In the minutes that followed, U.S. Treasury Secretary Henry Paulson announced that with the auto bailout, the Treasury Department has exhausted the first $350 billion tranche of the TARP, and urged congress to deploy the second $350 billion of the program.
He also said that restructuring was necessary for the long term viability of the auto industry.
The announcement ends an epic battle in Washington which resulted in the rejection of a bailout legislation in the Senate which would have used capital allocated for greener automobile innovations at the Department of Energy. However, disagreement over the regulations forcing the ailing firms to restructure caused the bill to fail by a wide margin.
Consequently, the Treasury Department assumed the task of crafting a plan to save the industry.
Under the terms, loans are contingent on the firms proving their viability by March 31, 2009 or else repay all loans extended. The terms also include limits on executive compensation and for the firms to provide warrants for non-voting stock.
The U.S. government loans will also take precedence over all other debt held by the firms, and requires the automakers to reduce debt by two-thirds in an equity swap.
Furthermore, the firms cannot issue new dividends until the government loans are repaid.
In a memo, Chrysler CEO Bob Nardelli said he will inject $4.0 billion in initial funding to the firm, and that he plans to become accountable for the loan and the requirements set by the government. The concession will happen quickly, he added.
Nardelli also added that Cerberus Capital, Chrysler's owner, has already agreed to forgo any profit from the government loan.
In an e-mailed statement, General Motors said that the action will save many jobs in the United States and that it plans on working quickly to restructure the firm to viability.
In another statement, Ford CEO Alan Mulally said the firm already has a viability plan, but continues to seek $9 billion in government funding. He added that the firm does not need a short-term loan from government since it does not face a near-term liquidity issue.
In the minutes following the open, GM shares rallied 15.3% while Ford shares soared 8.1%.
By Erik Kevin Franco and edited by Nancy Girgis
©CEP News Ltd. 2008
