MarketWatch: Auto industry presents big test

Washington has reached a tentative agreement over the terms of an emergency loan for the near-bust American car industry that could result in General Motors and Chrysler receiving federal aid by next Monday.

Politicians on both sides of the political divide on Capitol Hill have reached broad agreement on the $15 billion (£10.1 billion) bailout loan and it was hoped that a draft Bill would reach the floor of the House of Representatives by last night.

Assuming a successful vote in the House, the Bill would then have to be voted on in the Senate and finally signed off by President Bush in what would be one of the last legislative measures of his office.

The Bill will effectively provide legislation allowing the carmakers to tap a federal loan that was originally set up to pay for basic operating costs involved in green modifications for new vehicles.

In the event that the Bill is passed this week, it will have taken a month for the distressed carmakers to get their money.

In November, the heads of General Motors, Ford and Chrysler travelled to Washington to tell Congress that the American car market was in such a dire situation that two of the three might run out of cash by the end of the year.

Nancy Pelosi, the Speaker of the House and keeper of Washington's purse-strings, refused to force through an emergency loan Bill until the car executives had returned with business plans detailing how they proposed to pay the money back.

Capitol Hill is loath to use American taxpayers' money to prop up effectively bust businesses and lawmakers from both the House Financial Services Committee and the Senate Banking Committee have questioned the executives of the big three carmakers to find out whether the auto groups are sufficiently robust to survive the worst recession since the 1980s.

Since then, politicians from the Republican and Democrat parties have been bickering over the terms of the loan.

It is understood that $15 billion will be offered under the same terms as the Troubled Asset Relief Programme designed to bail out the banks. The loan would cover a seven-year period, payable at 5 per cent interest for five years, and 9 per cent for the final two.

A number of onerous conditions would be attached: Washington would have to be notified if either Chrysler or General Motors sought to buy another group worth more than $25 million and no director would be able to hold the role of joint chairman and chief executive.

Under other terms, the two companies would be in default on the loans if they failed to submit comprehensive restructuring plans by March 31 next year, and they would be banned from paying dividends to shareholders.

Under the terms of the emergency loan, the US Government would take a significant stake in both General Motors and Chrysler that would equal about 20 per cent of any money loaned to the manufacturers.

This week, negotiations were stymied over two sticking points, both of which appear to have been resolved. Politicians appear to have reached agreement over the appointment of a so-called car “tsar”, who would oversee the promised reform of the car companies, and also the handling of existing lawsuits brought by the manufacturers.

Ford reiterated this week that it did not need to draw down any state loan at the moment and had sufficient capital to last throughout 2009, as long as market conditions did not deteriorate significantly. But Ford has made clear that it would need a federal loan in the event that one of the other carmakers went bust.

Gearing up

$34bn The aid package initially requested by the carmakers

$15bn The size of the aid package that they are likely to receive

3m Number of American jobs directly threatened

7 The number of years over which the government lending package will run

25 Number of top executives of Chrysler and GM who are ineligible for bonuses during the loan period

0 Number of dividends payable for the duration of the loans

Source: Times research

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