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$15B for Auto Makers

POSTED: December 09, 2008, 12:00 am

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Just one week after being tarred and feathered on Capitol Hill, the CEO’s of the nation’s three large automobile manufacturers appear to have convinced Congressional leaders of their need for federal aid to stay afloat. Yesterday, all indications were that a proposal to provide $15 billion in aid to keep General Motors and Chrysler running until March 31. The Ford Motor Company is in better condition than its Detroit counterparts and has indicated it does not need assistance at this time. Ford, though, has made it clear that it has a vested interest in the survival of its competitors since they share many of the same suppliers and dealers. While less than the $34 billion initially sought, the aid comes at a time when the nation is shedding jobs by the hundreds of thousands, and entire industries are now looking to the federal government for assistance. House Speaker Nancy Pelosi and the White House have reached agreement that the aid the industry is seeking should come from an existing pool of $25 billion fund to modernize the industry.

“With the economy teetering on outright collapse, the nation could not have absorbed the blow of millions of workers displaced.”

Playing out in the background of the unfolding drama over the aid package was demands that General Motors CEO Rick Waggoner step down. The CEO’s of the “Big Three” auto makers took heat two weeks ago on Capitol Hill when they arrived in the nation’s capital in their corporate jets for meetings with Members of Congress. The strong reaction and bad publicity around the use of symbols of corporate excess, at a time when the country is in a deep recession, provoked the companies to sell their private aircraft and have their executives return to the capital in hybrid vehicles. General Motors, long the face of the American automobile industry, was an easy target for lawmakers and Waggoner the “poster boy” for a company whose fortunes had soured. Chrysler, for its part, appears to be on a death watch as it is considered a likely takeover target by one of its U.S. competitors or a foreign auto manufacturer.

The United Auto Workers (UAW), the union that represents the rank and file workers in the industry, has indicated it is willing to make concessions in its collective bargaining agreements so long as workers are not bearing the brunt of the burden. For the UAW to even suggest it is willing to surrender some benefits is an indication of the degree to which the entire industry is vulnerable to collapse. It is an unprecedented, but necessary, move by labor if the nation’s automobile industry is to have any chance of survival.

The proposed aid package comes with strings attached. For one, the White House is calling for the creation of a “car czar” who would oversee the industry and negotiate with auto executives and labor leadership about the turnaround plans of the companies. In addition, Congressional leaders want to create a financial oversight board that would generally serve the same purpose as the czar that the Bush White House favors. Demands are also expected to be placed on the automakers to retool their factories to produce energy efficient vehicles and likely targets will be established for that transition along with production goals. It remains to be seen whether pressure will be applied to GM to fire Waggoner. Already the vice chairman of General Motor’s board has expressed support for the embattled CEO and suggested he is being used as a scapegoat for a problem that far exceeds his direct control.

It is clear that the sudden change of attitude by Congressional leaders was last Friday’s jobless report and the fear that the failure of the auto industry would set off a chain reaction of job losses. With the economy teetering on outright collapse, the nation could not have absorbed the blow of millions of workers displaced. It is a move that comes with risks. Even with the aid there is no guarantee that General Motors and Chrysler can survive. In fact, Chrysler’s eulogy may have already been written. Even if they are still standing on March 31, the state of the American economy is such that consumers will have little appetite for major purchases and if credit is still unavailable, the companies will be back at square one. The likely scenario is that Chrysler will be absorbed and General Motors may also seek a suitor. Already the companies will be forced to shed unpopular lines causing many workers to be laid off.

For Washington, and the incoming Obama administration, the aid package further confirms that the federal government is now the financier of resort for the private sector. The challenge is that every company or industry can make a claim for aid but at some point Congress and the White House is going to have to turn the spigot off or risk the outright takeover of the private economy. Between providing direct aid to private industry and President-elect Obama’s call for a large public works program, the meter is running and before it is turned off the tab for this recovery is likely to run in the trillions of dollars.

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