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Ailing automakers plead for $25b in loans

Grilled in Senate on many fronts

By Michael Kranish
Globe Staff / November 19, 2008
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WASHINGTON - Warning of a doomsday economic scenario, the top executives of the Big Three US automakers made a historic appeal yesterday for $25 billion in loans, telling Congress the money is desperately needed to stave off the collapse of the companies and the direct and indirect loss of millions of jobs.

"It's about saving the US economy from a catastrophic collapse," GM chairman Rick Wagoner told the Senate Banking Committee.

The chief executives of Chrysler and Ford also pleaded for the loans, which would come on top of a $25 billion package approved in September to help the automakers shift production to hybrid and other fuel-efficient vehicles. Since the passage of that measure, the credit markets have frozen, further cutting auto sales.

But the executives faced a barrage of criticism and questions from senators - both from those who said taxpayers should not help companies whose plight is the product of their own mismanagement, and also from those who support the bailout.

In a stern opening lecture, Senate Banking chairman Chris Dodd, Democrat of Connecticut, criticized the industry for producing "inefficient gas-powered vehicles," for dismissing hybrid electric-gas cars as making "no economic sense," and for refusing to acknowledge that their products contribute to global warming.

Nonetheless, Dodd said it was essential to provide the loans to stave off further economic calamity. "No one can say they didn't see this coming," he said.

Other committee members bluntly expressed their distrust of the industry to fix its problems, expressing concern that automakers were so outmoded that they would come back for more money to survive.

"Is $25 billion enough? Is this the end, or just the beginning?" asked Senator Richard Shelby, an Alabama Republican.

A Senate vote could be held as soon as today, but prospects for passage were unclear. The Bush administration has opposed using some of the $700 billion financial bailout package for automakers; Treasury Secretary Henry Paulson warned against the idea again in congressional testimony yesterday.

That means the lame-duck Congress would have to approve new legislation to provide the loans, but some lawmakers said yesterday that they doubted the loans would win approval during this week's session, suggesting that the automakers should make their plea again once the new Congress and the new administration take office in January. President-elect Barack Obama said on Sunday that he supports more aid to the auto industry because its collapse would be "a disaster," but also said it should not get a "blank check."

Yet the automakers said they can't wait that long.

Wagoner said the loans were essential to provide a bridge that can get the automakers safely across "the financial chasm before us," and promised "we will repay the taxpayers' faith many times over."

Senator Chuck Schumer, a New York Democrat, was among several panel members who sought assurances that the industry would be transformed as a result of the loans. "A business model based on the gas- guzzling past is unacceptable," Schumer said, adding that the companies needed to focus on products such as plug-in electric hybrid vehicles, a technological step beyond available hybrid cars.

Wagoner rejected criticism that the industry has failed to produce fuel-efficient cars sought by consumers, saying the industry was on its way to restructuring when it was hit by the global financial crisis.

Senator Elizabeth Dole, a North Carolina Republican, expressed skepticism that the loans would work, but said that they should be coupled with an agreement by automakers and their unions to provide fewer benefits to workers. The lone witness to testify yesterday against the bailout, University of Maryland professor Peter Morici, also said that the domestic automakers are not competitive in their labor costs with foreign automakers that have plants in the United States.

But Ron Gettelfinger, president of the United Auto Workers, told the committee that the perception that union contracts are too generous was false. He provided a long list of what he called painful concessions that he said have dramatically cut costs.

The union and the automakers also sought to address suggestions by some economists that it would be better in the long term to allow a failing company to go into bankruptcy and restructure debts and labor contracts. The auto executives said that bankruptcy was not a viable option, citing their vast financial obligations as well as their concern that many consumers would refuse to purchase a vehicle from a bankrupt company.

"If one of these companies was to go into bankruptcy, I would almost bet it would take two of them, or possibly all three of them" because the base of suppliers is interconnected, Gettelfinger said.

The three automakers presented a united front. Without the bailout, "liquidity could fall below the level necessary to sustain operations," said Robert Nardelli, CEO of Chrysler, which was bailed out by the government in 1979 with loan guarantees.

Ford CEO Alan Mulally, while saying the bailout was essential, presented a somewhat brighter picture, saying his firm was well along in restructuring and had posted a first-quarter profit.

Wagoner repeatedly stressed that GM had gone through restructuring and a revision of labor contracts that resulted in the company's stock price climbing to around $43 last year. It closed yesterday at $3.09.

Earlier in the hearing, Senator Debbie Stabenow, a Michigan Democrat, delivered an emotional appeal on behalf of the automakers, all of which are headquartered in her state. She even suggested that national security was at stake, saying the companies provide essential equipment to the Pentagon, although analysts have said the contributions of the companies to the country's defense are modest.

"We need this industry as the basic part of the fabric of our economy," Stabenow said. "Somebody needs to make something in America," she said, contrasting the work of automakers with financial industry executives who traded "pieces of papers" and have received billions of dollars in aid from Congress.

The hearing evoked memories of one of the most famous statements ever made before Congress, when then-GM president Charles Erwin Wilson was questioned during his 1953 confirmation hearing to be secretary of defense. Asked whether he could make a decision in the Pentagon that might hurt GM, Wilson dismissed the possibility by saying that he always believed that "what was good for the country was good for General Motors and vice versa."

In effect, the verity and relevance of that statement was once again the centerpiece of yesterday's hearing. The standing of GM, as well as Ford and Chrysler, has diminished because of a combination of factors, including competition from foreign automakers that move more quickly to producing fuel-efficient cars and, most recently, hybrids.

But those supporting the loans talked of the auto industry's role in America's manufacturing base.

"The surest way to turn today's recession into a depression would be to let this industry founder," said Senator Sherrod Brown, an Ohio Democrat.

Michael Kranish can be reached at kranish@globe.com.

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