(By Mayur Pahilajani - iStockAnalyst Writer)
Washington, D.C. - Detroit’s Big Three auto companies are still not sure about their fate as the Bush Administration and Democrats are slugging it out over a potential bailout plan that could prevent the auto industry from collapsing.
The lawmakers are still debating whether the auto industry deserves to be saved with the help of tax payers' money. Some experts believe that the auto companies could file Chapter 11 bankruptcy to restructure their business and take other drastic steps, under court supervision.
However, it is not easy to give up on the sector. Together General Motors Corp. (NYSE: GM), Ford Motor Co. (NYSE: F), and Chrysler LLC employ around 250,000 workers in the United States; and filing bankruptcy would create a ripple effect, forcing millions of people to lose jobs and slamming already slowing down economy with another failed industry. Additionally, one in every ten people in the U.S. workers is employed in the auto sector.
"Recognizing the severe challenges facing the domestic automobile industry, whose failure could jeopardize millions of jobs here at home and have a devastating impact on our economy," House Speaker Nancy Pelosi said in a statement on November 16. The troubled industry reported that the October sales of cars and trucks have tumbled by as much as 32 percent, which is the lowest level since 1991, led by GM's sales drop of 45 percent in the month.
She added, "The House Democratic bill will provide immediate, targeted assistance to allow the carmakers, together with affected unions, time to develop a plan to assure the long-term viability of the industry." Dearborn, Michigan-based Ford reported $3 billion loss in the third quarter, and GM posted a net loss of $2.5 billion or $4.45 per share for the third quarter. GM has also posted around $80 billion in losses since 2005, including $20 billion so far this year.
Senate Majority Leader Harry Reid Monday recently introduced legislation asking $25 billion in federal loans, which is in addition to $25 billion approved by the U.S. House of Representatives in September, out of the $700 billion financial-rescue package under the Troubled Assets Relief Program (TARP) recently authorized by Congress. But Republicans immediately refused to approve the bill.
In addition, Treasury Secretary Henry M. Paulson, Jr. on Tuesday has made clear in his testimony before the House Committee on Financial Services that the financial rescue legislation was to stabilize our financial system and to strengthen it; and it is not a "panacea" for all the economic difficulties.
He said, "The rescue package was not intended to be an economic stimulus or an economic recovery package; it was intended to shore up the foundation of our economy by stabilizing the financial system, and it is unrealistic to expect it to reverse the damage that had already been inflicted by the severity of the crisis."
The initial $25 billion funds approved by the Bush administration are aimed to ease financial distress and help the firms meet new federal fuel-efficiency standards. The loan will be provided to the industry over the period of three years, supporting the sector during the on-going financial crisis. But the auto makers were not pleased with the rescue package as it may not help them shore up their financial statements and to pay suppliers.
Some Republican policymakers such as Alabama Senator Richard Shelby have said to an extent that after the collapse of the auto industry in the US, the sales gap could be filled with foreign-based auto companies.
Some market analysts on Wall Street believe that the funds program provided by the government is likely to have a few strings attached to it.
"Any effort to divert funds from the advanced technology initiative contained in section 136 of last year's energy bill is a step backward in assuring the viability and competitiveness of the U.S. auto industry," Speaker Pelosi said. "A restructured, competitive American automobile industry will continue to play a crucial role in our national economy and in the global marketplace."
Meanwhile, the three companies are still hopeful that they will reach a deal with the U.S. government soon. The head of three companies including Ford's Chief Executive Officer Alan Mulally, GM's Richard Wagoner and Chrysler's Robert Nardelli are scheduled to testify on Tuesday at a Senate Banking Committee hearing to justify the loan they have been seeking to avert bankruptcy.
