The Good, the Bad and the Ugly: Auto Bailout Alternatives

Dec. 12, 2008— -- What does the future hold for the American auto industry now that Congress failed to pass a bailout package?

Will the White House be forced to reverse course and dip into the emergency TARP funds set aside for the banking and mortgage industry and divert some of it to the automakers?

The White House signaled that door may be reopened when it released a statement Thursday night after the Senate had killed the congressional aid package.

"We will evaluate our options in light of the breakdown in Congress," the statement said.

The White House released another statement this morning, this time specifically citing the use of TARP funds as a possible way "to prevent a collapse of troubled automakers."

Even if TARP funds are made available to the Big Three, would that save the automakers from bankruptcy, or just delay it?

Ford, General Motors and Chrysler have all predicted that without emergency loans or "bridge financing," dire consequences would ensue for both the auto industry and the U.S. economy. Ford has not requested emergency loans but supports the extension of such help to its rivals.

GM issued a statement Thursday night expressing disappointment that the Senate was unable to pass a rescue package. "We will assess all of our options to continue our restructuring and to obtain the means to weather the current economic crisis."

Chrysler also released a statement saying it would "continue to pursue a workable solution to help ensure the future viability of the company."

Industry analysts and scholars, meanwhile, have differing opinions on what awaits the industry should bailout legislation fail. The industry, they say, could follow several different paths.

Even without congressional approval, the White House has "full authority" to grant emergency loans to the automakers through the government's $700 billion financial rescue plan known as the Troubled Asset Relief Program or TARP, House Speaker Nancy Pelosi, D-Calif., insists.

It's a move that the Bush administration and Treasury rejected earlier but in a statement released this morning, the White House signalled that it was now open to the idea.

"Under normal economic conditions we would prefer that markets determine the ultimate fate of private firms," the administration said. "However, given the current weakened state of the U.S. economy, we will consider other options if necessary – including use of the TARP program -- to prevent a collapse of troubled automakers.

If the Bush administration does not make use of TARP, it's uncertain whether the succeeding Obama administration would react differently.

The president-elect expressed support Thursday for an emergency loan package from Congress, but whether he would support using TARP money for an auto bailout remains unclear.

Without immediate aid, the automakers may not survive long enough to benefit from an Obama decision. General Motors has said that it could go bankrupt before the end of the year, weeks before Obama takes office. The same could be true for Chrysler, experts say. Ford is widely regarded to be in better financial health than its crosstown rivals.

"If you take at face value what Chrysler and GM have said, I don't know how they avoid a near-term bankruptcy," said Craig Fitzgerald, an auto analyst at Plante & Moran PLLC in Southfield, Mich. "They've said they're running out of money and can't access external capital markets. … I don't see any alternative if the bridge loan does not come through and the situation is as dire as GM and Chrysler have said."

Not everyone is certain that bankruptcies by the two automakers will take place before Bush leaves office.

"It seems like we went from a mid-2009 estimated running-out-of-money to the end of December in a heartbeat," said Edward Altman, a finance professor at New York University's Stern School of Business.