Questions Surround Auto Industry Aid

Analysts, politicians are unsure which programs will help GM, Chrysler.

October 28, 2008, 8:04 PM

Oct. 29, 2008&#151; -- It's official: Automakers and the government are talking about measures to aid the ailing U.S. auto industry -- but exactly what shape that aid will take seems to be anyone's guess.

"It's right now in such a state of flux, it's going to depend now what the automakers can convince the government to do," said Aaron Bragman, a research analyst for the economic analysis firm Global Insight in Detroit. "It really is at a turning point, I think, in the American auto industry."

Slumping auto sales and the tight credit market have led many to question whether the country's top automakers -- General Motors, Ford and Chrysler -- are headed toward bankruptcy. Financial pressures have reportedly prompted GM, which analysts say is burning through $1 billion a month to survive, to seek to acquire or merge with Chrysler.

At a press conference Tuesday, White House spokeswoman Dana Perino confirmed that General Motors and Chrysler "have been in contact with the administration on various levels," but she would not say whether the two companies were in merger talks.

GM and Cerberus Capital Management, which owns a majority stake in Chrysler, declined to comment.

Politicians and analysts have been buzzing about at least three possible measures to help domestic automakers:

Government backing for a GM-Chrysler deal: GM is seeking $10 billion in government funding to support a purchase of Chrysler, Reuters has reported. In return, the government would get some preferred stock in the newly-combined automaker, the report said, citing unnamed sources.

While the possible combination of GM and Chrysler has been derided by some analysts, others have said that GM could benefit from Chrysler's sizeable cash reserves and market share.

"I think one of the intents here is to help the consolidation for the industry with Chrysler becoming part of GM," said David E. Cole, chairman of the Center for Automotive Research. "How this is likely to play out and the timing of this is unclear, but I think the bottom line is the industry is going through a dramatic restructuring."

Same loans, new use: Analysts say that the easing of restrictions on the $25 billion government loan guarantee program approved for the auto industry earlier this month could help automakers stay afloat. The package was initially aimed at helping automakers upgrade their plants and build more fuel-efficient cars.

"If the automakers can use that money for much more flexible ways, it'll go a long way toward helping them out," Bragman said.

But it's unclear whether the program's restrictions will actually be relaxed and how long it will take for the loans to go out. Department of Energy Press Secretary Healy E. Baumgardner said the government was still writing the rules for the loan program and has yet to receive any applications from the automakers.

"It is premature to estimate a timetable for when the loans will be available or to discuss any monetary amounts at this point," Baumgardner said in an e-mail statement to ABC News.

Troubled asset relief: Perino said that the U.S. Treasury Department would determine whether U.S. automakers and their finance arms are eligible for the Troubled Asset Relief Program, a government program to buy up troubled loans from financial institutions. The program, commonly known as TARP, was approved earlier this month as part of the government's $700 billion financial rescue package.

A spokeswoman for GMAC, the financing company jointly owned by GM and Chrysler, confirmed that the company is in talks with government officials "to understand the implementation process of the TARP and other programs to determine any potential participation by GMAC."

Speculation about the various measures comes days after Michigan's congressional delegation sent an open letter to Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, calling on them "to take the necessary steps to promote liquidity in the U.S. auto industry."

But Michigan elected officials aren't saying exactly what those steps should be.

Staffers for two of the letter's signatories -- Michigan Reps. John Dingell, a Democrat, and Joe Knollenberg, a Republican -- each said the congressmen would support solutions favored by the automakers.

"The congressman believes all options should be on the table," said Michael Robbins, Dingell's chief of staff . "It's really up to the companies to decide what is best for them."

Knollenberg spokesman Nate Bailey said that while Knollenberg had worked on both the $25 billion loan program and TARP, "beyond that, Congressman Knollenberg is open to discussing with them whatever they view as necessary to protect their jobs and to keep the companies afloat."

Some critics have railed against any government intervention in the auto industry, arguing that the automakers' troubles were of their own making. Auto industry supporters, meanwhile, claim that the automakers aren't entirely to blame, saying everything from health care costs to trade agreements have left U.S. automakers less competitive than their foreign rivals.

Meanwhile, attitudes of lawmakers once resistant to government auto industry intervention are changing, said John Casesa, a longtime auto analyst and a managing partner of Casesa Shapiro Group LLC.

"Whereas three months ago, they would have said, 'You made your bed, now sleep in it,' they are willing to look past that and say, 'Can we do this for the good of the country?'" Casesa said.

Cole said that, at this point, the government can't afford not to step in. If a major U.S. automaker fails, he said, job losses at auto assembly plants, parts manufacturing plants and other businesses could total as many as 2 million.

"It has the potential of escalating to being a very serious problem," Cole said. "It's kind of like the old saying: 'An ounce of prevention equals a pound of cure.'"

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