U.S. Motor Vehicle Industry: Federal Financial Assistance and Restructuring

Congressional research reportMay 29, 2009

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U.S. Motor Vehicle Industry: Federal Financial

Assistance and Restructuring

Bill Canis, Coordinator

Specialist in Industrial Organization and Business

James M. Bickley

Specialist in Public Finance

Hinda Chaikind

Specialist in Health Care Financing

Carol A. Pettit

Legislative Attorney

Patrick Purcell

Specialist in Income Security

Carol Rapaport

Analyst in Health Care Financing

Gary Shorter

Specialist in Financial Economics

May 29, 2009

Congressional Research Service

7-5700

www.crs.gov

R40003

CRS Report for Congress

Prepared for Members and Committees of Congress

U.S. Motor Vehicle Industry: Federal Financial Assistance and Restructuring

Summary

In the past year, the U.S. auto industry has been severely buffeted by three adverse factors:

soaring gasoline prices caused motorists to focus more on fuel efficiency; economic recession and

growing unemployment reduced demand for new autos; and the near collapse of the commercial

credit markets made auto purchases more difficult. These economic currents led Chrysler to file

for bankruptcy at the end of April and prompted General Motors to suggest that it may follow suit

on June 1, 2009.

General Motors, Chrysler, and Ford—the Detroit 3—have seen an historic decline in sales; most

foreign manufacturers have seen a steady erosion as well. During the first four months of 2009,

year over year sales of North American-produced (i.e., domestic) vehicles by Chrysler, GM, and

Ford declined by 61%, 49%, and 35%, respectively, while Nissan, Toyota, and Honda sales of

domestic vehicles fell by 32%, 28%, and 26%, respectively. Toyota posted its first annual net loss

since 1950.

GM and Chrysler had the weakest financial base as the recession and credit crisis deepened,

leading them to seek federal assistance for restructuring plans. (Ford raised cash in the capital

markets in 2007 before the banks curbed lending and has had the wherewithal to finance its own

operations.) The Bush and Obama administrations, with support from Congress, have supported

GM and Chrysler with a range of financial assistance including direct loans, working capital,

financial aid for suppliers, and warranty support. The Obama administration’s Auto Task Force,

chaired by the Secretary of the Treasury, has worked closely during spring 2009 with GM and

Chrysler to develop restructuring plans and loan commitments in an attempt to avoid bankruptcy.

Over $56 billion in assistance had been provided to the two companies as of May 28, 2009. After

rejecting auto maker viability plans that it deemed insufficient, President Obama gave Chrysler

until April 30 and General Motors until June 1, 2009, to shape new cost-cutting plans.

Although most Chrysler stakeholders—U.S. and Canadian governments; labor unions; current

owners Cerberus Capital Management and Daimler and future partner, Fiat—agreed to terms for

a new, smaller Chrysler, a small group of bondholders withheld their support, resulting in

Chrysler filing for bankruptcy on April 30. In Federal bankruptcy court, Judge Arthur Gonzalez

approved a number of requests that indicate the company may emerge speedily by the end of June

with its most valuable assets comprising the new Chrysler-Fiat alliance. The less valuable

assets—such as closed plants—would remain with a court-administered “old” Chrysler and

would not encumber the new company, which will initially be owned by the UAW’s retirement

fund (68%), Fiat (20%) and the U.S. and Canadian governments (12% combined).

GM is seeking to avoid bankruptcy, but needs the support of its stakeholders to avoid that course.

As part of its streamlining, it has negotiated a new contract with the UAW and announced in midMay that it would eliminate 1,100 dealers by 2010. GM’s bondholders are a larger, more diverse

group than Chrysler’s and, to avoid bankruptcy court, 90% of them would have had to approve

the refinancing of $24 billion in GM debt. GM has been unable to reach that level of agreement

with the bondholders and it will most likely proceed to bankruptcy court to finalize its

restructuring plan.

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U.S. Motor Vehicle Industry: Federal Financial Assistance and Restructuring

Contents

Introduction ................................................................................................................................1

The Detroit 3 in Crisis...........................................................................................................1

Organization of This Report ..................................................................................................3

Auto Industry Loan Developments: Late 2008-Early 2009 ..........................................................4

Auto Industry Restructuring Plans in December 2008............................................................4

Congressional Action in December 2008 ...............................................................................8

Federal Action to Aid the Auto Industry ................................................................................9

Impact on the National Economy .............................................................................................. 31

National Impact of Detroit 3 Failure.................................................................................... 31

Impact Focused on “Auto Alley”......................................................................................... 33

The Domestic Motor Vehicle Market......................................................................................... 34

Loss of Detroit 3 Market Share............................................................................................ 34

Falling Demand Affects All Automakers in the United States and Abroad............................ 36

Labor Negotiations in 2007 to Address Competitive Issues.................................................. 40

The Energy Independence and Security Act of 2007 (EISA) ................................................ 41

Legislative Efforts to Assist Automakers in November 2008................................................ 42

Assistance to Auto Industry in the 2009 Stimulus Package................................................... 43

Employment in the Automotive Sector ................................................................................ 44

Financial Issues in the Auto Industry ......................................................................................... 46

Credit Conditions ................................................................................................................ 46

Bush Administration’s Financial Plan to Assist Automakers................................................. 49

Financial Solutions: Bridge Loans and Restructuring................................................................. 52

Federal Bridge Loans .......................................................................................................... 53

Bankruptcy Procedures in Case Restructuring Fails ............................................................. 56

Pension and Health Care Issues ................................................................................................. 61

Pensions and Pension Insurance .......................................................................................... 61

Health Care Issues .............................................................................................................. 65

Stipulations and Conditions on TARP Loans to the Auto Industry.............................................. 67

Executive Privileges and Compensation .............................................................................. 68

Other Restructuring Plan Conditions ................................................................................... 75

Key CRS Policy Staff and Areas of Expertise ...................................................................... 79

Figures

Figure 1. U.S. Motor Vehicle Sales............................................................................................ 34

Tables

Table 1. Summary of Direct Federal Assistance For General Motors and Chrysler ..................... 20

Table 2. Reorganization of “New” Chrysler ............................................................................... 27

Table 3. Market Shares of U.S. Car and Truck Sales .................................................................. 37

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U.S. Motor Vehicle Industry: Federal Financial Assistance and Restructuring

Table 4. U.S. Automotive Employment ..................................................................................... 45

Table 5. Funded Status of General Motors and Ford Pension Plans for U.S. Employees,

Year-end 2007........................................................................................................................ 62

Table 6.Contact Information for Key CRS Policy Staff .............................................................. 79

Contacts

Author Contact Information ...................................................................................................... 78

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U.S. Motor Vehicle Industry: Federal Financial Assistance and Restructuring

Introduction1

On April 30, 2009, Chrysler LLC, unable to gather the support of a group of investment

companies who held about $1 billion in secured debt, filed for Chapter 11 reorganization in New

York. By May 9, 2009, those creditors had ended their opposition to the sale of some Chrysler

assets to Italian automaker Fiat (initially 20%), the United Auto Workers union (a 55% stake), and

the U.S. government (a 35% stake). With support from the Obama Administration, the Canadian

government, a large majority of creditors, and autoworkers’ unions in the United States and

Canada, bankruptcy reorganization could be completed within 60 days after its April 30 filing.

During this reorganization, Chrysler plants have been closed and auto suppliers and auto dealers

have felt significant economic effects.

General Motors, which has been working on a restructuring deal that might allow it to avoid a

Chapter 11 filing on June 1, also faces opposition from secured debt holders, but has reached

agreement with most of the other stakeholders. As of May 28, it appears that GM may not be able

to obtain support from all stakeholders and will also file for bankruptcy as a means to

successfully reorganize. It is likely to emerge from a restructuring as a much smaller company

that may be able to stabilize its market position and sales. 2

In the unfavorable economic circumstances of late 2008 and early 2009, the entire U.S. motor

vehicle sector (passenger cars and light trucks, and both domestic and foreign-owned companies)

faces difficult times. Almost every manufacturer reported declines in 2008 and early 2009.3

Moreover, the conditions in the industry worsened as Chrysler’s and GM’s initial restructuring

plans were deemed insufficient. The Obama Administration, in particular, is playing a large role

in the automakers’ rescue.

The Detroit 3 in Crisis 4

A decline of sales in motor vehicles, which had been evident since 2004, accelerated sharply in

late 2008 and during the first four months of 2009, despite falling gasoline prices though the end

of 2008.5 Overall auto sales fell to a 26-year low, despite the automakers’ aggressive sales

incentives. Rapidly declining gas prices failed to boost automotive sales, but, together with

incentives, may have caused the slight shift in consumer demand from cars back to light trucks

starting in December 2008.6 Sales in 2008 ran about 30-40% lower than in the same month in

This section was written by Bill Canis, Specialist in Industrial Organization and Business.

See The New York Times, Automotive News, and the Detroit Free Press for continuing coverage of the Chrysler and

GM restructuring processes.

Subaru (owned by Fuji Heavy Industries of Japan) was the only brand to gain sales in the U.S. market in 2008, about

500 vehicles (+0.3%) ahead of the previous year.

The “Detroit Three” comprise General Motors (GM), Ford Motor Company, and Chrysler LLC.

Gasoline prices, which averaged $1.95/gal. in February 2005, hit a peak of $4.11/gal. in July 2008. From July 2008,

gasoline prices fell from $4.11/gal. to $1.74/gal. in December 2008, a 58% decline in six months. Through the first four

months of 2009, gasoline prices rose to an average of $2.10/gal. Department of Energy (DOE), Energy Information

Administration (EIA), “U.S. All Grades All Formulations Retail Gasoline Prices (Cents per Gallon),” Petroleum

Navigator, http://tonto.eia.doe.gov/dnav/pet/hist/mg_tt_usM.htm.

Detroit News, “Auto Sales Plummet to 26-Year Low” (December 3, 2008); Financial Times, “Incentives Rise as

Carmakers Fight To Get Buyers Behind the Wheel,” January 7, 2009.

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U.S. Motor Vehicle Industry: Federal Financial Assistance and Restructuring

2007. Although year-over-year sales were 13.2 million units in 2008, forecasts for 2009 project

sales of only 9.5 million units.7

For 2008, sales were down to 13.2 million units, a decline of 18%, compared to more than 16

million units sold in 2007 (see section on domestic auto market later in this report for details).

That decline continued into 2009: during the first four months of 2009, year over year sales of

North American-produced (i.e., domestic) vehicles by Chrysler, GM, and Ford declined by 61%,

49%, and 35%, respectively, while Nissan, Toyota, and Honda sales of domestic vehicles fell by

32%, 28%, and 26%, respectively. Only Hyundai-Kia experienced a year-over-year sales increase

of domestically produced vehicles (6%). 8 According to the Bureau of Economic Analysis, motor

vehicle output reduced GDP by a seasonally adjusted annual rate of -2.01% in the fourth quarter

of 2008 and by -1.36% during the first quarter of 2009.9

Many argue that the current situation of the U.S. domestically owned auto industry primarily

reflects a structural shift in the Detroit 3’s competitive position, which has declined at an

accelerating rate during this decade.10 That decline has been compounded by the worst U.S.

economic conditions in several decades. The credit crunch that has dampened general consumer

demand for new vehicles has also reduced the ability of the Detroit 3’s “captive” credit

companies to make loans to many consumers and to dealers for their inventories, an issue that the

Treasury Department and the Federal Reserve Board have become actively engaged in. The

Detroit 3 have much higher pension and retiree health care costs (frequently called “legacy

costs”) than foreign automakers. The Detroit 3 may also be more adversely affected by stricter

federal corporate average fuel economy (CAFE) standards than foreign-owned producers,

because of the Detroit companies’ history of sales of less fuel-efficient product fleets.11

The cyclical decline in the market has also combined with a rapid shift in early 2008 by

consumers from trucks and SUVs back to cars, declining overall sales, and accelerating losses of

market shares for the “Detroit Three.”12 The combined shocks of these adverse factors have

placed the Detroit 3 business model, which includes a collective bargaining relationship between

management and labor, at risk. Congress is facing the possibility that one or more of the

unionized, domestically owned motor vehicle companies could go out of business if its

restructuring plans do not prove successful.

IHS Global Insight, U.S. Forecast and Analysis, April 23, 2009.

Automotive News. “U.S. Car Sales, April & YTD,” May 4, 2009.

U.S. Department of Commerce. Bureau of Economic Analysis (BEA), National Income and Product Account Table

1.2.2. Contributions to Percent Change in Real Gross Domestic Product by Major Type of Product (seasonally adjusted

at annual rates). http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=16&ViewSeries=NO&Java=no&

Request3Place=N&3Place=N&FromView=YES&Freq=Qtr&FirstYear=2008&LastYear=2009&3Place=N&Update=

Update&JavaBox=no#Mid

This is especially the theme of a critical book written about the U.S. auto industry by Micheline Maynard: The End of

Detroit: How the Big Three Lost Their Grip on the American Car Market, New York: Doubleday, 2003. The issue has

been examined by in its historical context in CRS Report RL32883, U.S. Automotive Industry: Recent History and

Issues, by Stephen Cooney and Brent D. Yacobucci.

On this point, see also CRS Report RL34743, Federal Loans to the Auto Industry Under the Energy Independence

and Security Act, by Bill Canis and Brent D. Yacobucci.

Although cars may have outsold trucks over the course of 2008, it is not yet clear whether the decline in fuel prices at

the end of the year will cause a longer term swing of consumer sentiment back from cars to SUVs and other truck-type

vehicles; Business Week, “The SUV Is Rising from the Dead,” December 8, 2008, p. 63.

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U.S. Motor Vehicle Industry: Federal Financial Assistance and Restructuring

Legislation was introduced in the 110th Congress to implement a federal loan program to prevent

one or more of the Detroit 3 from falling into bankruptcy, but no bills were approved. Congress in

December 2008 left the decision whether and how to assist the Detroit 3 companies to the Bush

Administration. On December 19, 2008, President George W. Bush announced a plan to loan

$17.4 billion from the Troubled Assets Relief Program (TARP)13 to GM and Chrysler LLC to

prevent any near-term bankruptcy and to help them to restructure as more viable and competitive

companies over the longer term.

After accepting loans under the terms of these agreements, GM and Chrysler presented forwardlooking business plans, as required in the agreements, on February 17, 2009. The plans indicated

how they could become financially viable and pay back federal loans. Both companies indicated

that they would require additional federal financial support to achieve long-term viability.

The possibility that one or more of the Detroit automakers might fail increased when Chrysler

filed for Chapter 11 bankruptcy reorganization on April 30, 2009, turning its fate over to the

bankruptcy court. Chrysler and the Obama administration had obtained the approval for a

restructuring plan by nearly all stakeholders during April, including the UAW, the Canadian Auto

Workers (CAW) union, dealers, its current owner, Cerberus Capital Management L.P., its former

owner, Daimler and its potential merger partner, Fiat Automobiles SpA. In addition, the U.S. and

Canadian governments had agreed to new capital investments in the company. The largest

bondholders agreed as well, but some hedge funds and investment firms objected to the terms.

Their inability to reach agreement, combined with the deadline of April 30 set earlier by President

Obama, made it impossible to finalize an out-of-court restructuring agreement. Chrysler chose the

only alternative and filed for bankruptcy reorganization on April 30, 2009. Although executives

and administration officials forecast that the bankruptcy proceeding would take 30-60 days,

others questioned this fast pace and the ultimate success of the Chrysler-Fiat alliance that would

emerge at the end of the bankruptcy proceedings. 14

Organization of This Report

This report focuses on the current situation faced by the Detroit 3, key aspects of their current

crisis, including possible consequences of a failure of one or more companies, and some aspects

of legislative actions that have been considered to bridge their financial conditions to a more

stable situation. The subjects covered are:

•

The impact of the automotive industry on the broader U.S. economy and of

potential failure of the Detroit 3 companies;

•

Financial issues, including the present conditions affecting credit for automotive

consumers, suppliers and dealers, and legal and financial aspects of governmentoffered loans to the industry;

•

The current situation in the U.S. automotive market, including efforts in 2007 and

subsequently by the Detroit 3 and the United Auto Workers union (UAW) to

address problems of long-term competitiveness;

The Troubled Asset Relief Program (TARP) was established by the Emergency Economic Stabilization Act (EESA),

(P.L. 110-343). The basics of this legislation are discussed in CRS Report RS22963, Financial Market Intervention, by

Edward V. Murphy and Baird Webel.

The Wall Street Journal, “A Chrysler Bankruptcy Won’t be Quick” (May 1, 2009).

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U.S. Motor Vehicle Industry: Federal Financial Assistance and Restructuring

•

Issues related to government assistance, and various forms of bankruptcy,

including Chrysler’s filing for bankruptcy on April 30;

•

Legacy issues, specifically pension and health care responsibilities of the

Detroit 3; and

•

Stipulations that have been imposed on auto manufacturers as conditions of

assisting in their restructuring.

Before reviewing these aspects of the situation and specific policy questions, the report will

summarize the developments since December 2008.

Auto Industry Loan Developments: Late 2008-Early

200915

Auto Industry Restructuring Plans in December 2008

Legislation to provide emergency “bridge loans” to the domestically owned Detroit 3 auto

manufacturers (“original equipment manufacturers,” OEMs) was introduced on November 17,

2008, by Senate Majority Leader Harry Reid (S. 3688). It would have provided loans to the

Detroit 3 by using funds available in the TARP. The industry’s need for these loans and their

current situation was discussed in a hearing before the Senate Banking Committee on November

18, 2008, with the chief executive officers of the Detroit 3 and UAW president Ronald W.

Gettelfinger. The next day, the same witnesses also appeared before the House Financial Services

Committee.

Use of TARP funds by the Detroit 3 was opposed by the Bush Administration, as well as by many

Members of Congress, including the Republican leadership. 16 The Administration suggested

instead using funds already appropriated for the auto industry under a direct loan program

operated by the Energy Department (DOE) under the Energy Independence and Security Act

(EISA, P.L. 110-140, funded under P.L. 110-329, §129, as discussed in a previous CRS report17).

A bipartisan group of senators, led by Senators George Voinovich of Ohio, Christopher Bond of

Missouri, and Carl Levin and Debbie Stabenow, both of Michigan, subsequently drafted a

compromise proposal, which would have permitted funding under EISA. But the House and

Senate leadership on November 21, 2008, demurred on this approach, and suggested that the auto

companies instead needed to provide more detailed plans, including how they would use bridge

loan funding from the federal government and how they would restructure themselves to insure

their long-term competitiveness and viability.

This section was written by Bill Canis, Specialist in Industrial Organization and Business.

Opposition was expressed on and off the floor of Congress by, among others, John Kyl (Senate Minority Whip),

Senate Banking Ranking Member Richard Shelby, Senator Lamar Alexander, House Majority Leader John Boehner,

House Financial Services Ranking Member Spencer Bachus, and Representative Jim Cooper; all quoted variously in

Detroit News, “Auto Aid Debate Heats Up,” and “Congress Starts Talks on Auto Loans,” November 17, 2008; “Blitz

Starts for Big 3 Aid as Reid Introduces Bill to Tap $700B Bailout;” and, “Political Titans Clash in Auto Loan War,”

November 18, 2008.

See CRS Report RL34743, Federal Loans to the Auto Industry Under the Energy Independence and Security Act, by

Bill Canis and Brent D. Yacobucci, for the analysis, history, and funding of this legislation.

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U.S. Motor Vehicle Industry: Federal Financial Assistance and Restructuring

The companies presented their plans to Congress on December 2, 2008. Although each of the

Detroit 3 faces serious economic difficulties, financial conditions among the three differ

markedly. The following sections review the plans, as summarized in company documents and

discussed in Senate Banking and House Financial Services Committee hearings that resumed on

December 4-5, 2008.

GM December 2008 Restructuring Plan

GM’s leadership took the position that the company was already on the right track to achieve

long-term competitiveness and viability. Its plan included “a major transformation of its business

model,” while “accelerating its plans to produce more fuel-efficient vehicles.” However, that

transformation consumed a substantial amount of resources and accounted for a major portion of

GM’s debt – a total of $62 billion, according to data in the plan. Nevertheless, GM claimed, “the

company would not require Government assistance were it not for the dramatic collapse of the

U.S. economy, which has devastated the company’s current revenues and liquidity.”18

In its December 2008 congressional testimony, GM stated that the company was so close to

running low on operating capital that the company had to escalate its request for emergency

“bridge loan” lending and credit. Its request included an immediate $4 billion loan from the

government to ensure that the company would remain solvent through the end of 2008. It would

need a further $6 billion for the same purpose for the first quarter in 2009. Furthermore, assuming

a relatively pessimistic scenario of a U.S. light motor vehicle sales market of 12 million units for

2009, the company requested a total loan facility of $12 billion, plus a backup $6 billion line of

government credit, in case things were worse than expected. The total government commitment

requested by GM, through the end of 2009, was $18 billion.19

GM’s December 2008 restructuring plan included a substantial future downsizing of the labor

force, even in view of large numbers of buyouts that have already occurred. According to GM it

had already reduced its total U.S. workforce from 191,000 in 2000 to 96,500 in 2008, a loss of

95,000 jobs. As part of its restructuring plans, it indicated a further elimination of 20,000 to

30,000 more positions by 2012, to include both hourly and salaried employees.20 A total of nine

plants would be closed, from 47 down to 38 U.S. powertrain, stamping, and assembly plants by

2012. Most of these closures had already been announced. 21 GM’s plans also included sale or

downsizing of four out of their eight current brands, with Hummer, Saab, Saturn, and Pontiac not

being considered as “core” future brands.22

General Motors Corporation. Restructuring Plan for Long-Term Viability, December 2, 2008, p. 2; debt level based

on Table 4.

GM Restructuring Plan (December 2008), p. 2.

In subsequent announcements in February and April 2009, General Motors increased the number of jobs that would

be eliminated and the number of plants that would be closed. According to the Detroit News, April 28, 2009, “GM

plans to eliminate more than 7,000 additional jobs over what it announced February 17 and 42 percent of its dealerships

nationwide while shuttering an additional factory. That means GM plans to shutter 16 of its 47 U.S. manufacturing

plants by 2012. Thirteen of those plants will close by the end of 2010, including six this year.”

These data are from the December 2008 GM Restructuring Plan, Table 6, labeled “Manufacturing Improvements” –

indicating that the proportional difference between number of plant closures versus personnel reductions is to be

accounted for through technology and efficiency improvements.

General Motors subsequently announced that it would terminate its relationship with these brands and end the

manufacture of Pontiac vehicles. Saturn, Hummer, and Saab brands are for sale.

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U.S. Motor Vehicle Industry: Federal Financial Assistance and Restructuring

Chrysler December 2008 Restructuring Plan

In its December 2008 restructuring plan, Chrysler requested that it receive $7 billion in a

“working capital bridge loan” by December 31, 2008. The Chrysler plan stated that its available

cash had shrunk from $9.4 billion after the first half of 2008 to an estimated year-end level of

$2.5 billion. The company would spend an estimated $11.6 billion in the first quarter of 2009,

principally because of $8.0 billion in payments to suppliers and $1.2 billion to “other vendors.”

Yet, “the first three months of the year are the months with the lowest sales volumes and, hence,

the lowest cash flows.”23 In testimony, CEO Robert Nardelli stated that Chrysler’s private-equity

majority holding company, Cerberus Capital Management LP, had contributed a fresh capital

injection of $2 billion in mid-2008, but that it had rejected further capital assistance later in the

year.24

Chrysler stressed that since acquisition of a majority share by Cerberus in mid-2007, it had taken

major steps to reduce costs, streamline operations, and reduce its reliance on truck-based vehicles

with low fuel economy ratings (Chrysler has been the most dependent of the Detroit 3 on light

truck sales – see Table 3 in a later section of this report). CEO Nardelli had been recruited from

outside the auto industry to inject a fresh approach into corporate management. “Four

unprofitable vehicle models were discontinued and over $1 billion in unprofitable assets were

identified for sale, with more than 70% of those assets disposed of ... [the company] eliminated

1.2 million units of capacity ... [and] separated over 32,000 employees ...”25 This, Chrysler said,

left the company with 55,000 employees worldwide in 2008, almost all in North America.

According to the company, virtually all of those jobs would be at risk if Chrysler were to go

bankrupt, and could not obtain “debtor-in-possession” financing, which the company did not

believe would be available.26

The Chrysler document and CEO Nardelli both insisted that Chrysler has a long-term plan for

viability as a stand-alone OEM. This included a proposal to introduce electric vehicles, supported

by an $8.5 billion request for loans from the DOE loan program established under EISA. It also

included some efforts to share manufacturing under joint ventures with such foreign-owned

companies as Volkswagen and Nissan-Renault.27 Many observers were skeptical of Chrysler’s

claim that it could continue to operate as an independent manufacturer, as exemplified by an

exchange between Senator Robert Corker and Nardelli at the Senate hearing on December 4,

2008.28 Subsequently, Chrysler and its parent, Cerberus Capital Management, signed a “nonbinding” agreement with Italian auto manufacturer Fiat to establish a “global strategic alliance.”

In exchange, Chrysler gave Fiat “an initial 35% equity interest in Chrysler.”29

Chrysler LLC. Chrysler’s Plan for Short-Term and Long-Term Viability, December 2, 2008, pp. 3-4.

U.S. Senate. Committee on Banking, Housing, and Urban Affairs. Hearing, December 4, 2008, The State of the

Domestic Automobile Industry: Part II. Testimony of Robert Nardelli. For press coverage, see Detroit Free Press,

“Help from Cerberus Unlikely,” December 6, 2008.

Chrysler’s Plan (December 2008), pp. 2-3.

Chrysler’s Plan (December 2008), pp. 11-12. On “debtor-in-possession” financing, see the section in this report that

explains bankruptcy rules.

Chrysler’s Plan (December 2008), pp. 6-7. A planned joint venture with China’s Chery auto manufacturing firm has

been cancelled, however.

Senate Banking Committee hearing, December 4, 2008.

Chrysler LLC, “Fiat Group, Chrysler LLC, and Cerberus Capital Management LP Announce Plans for a Global

Strategic Alliance,” news release, January 20, 2009. In Chrysler’s April 30, 2009 bankruptcy filing, Fiat will initially

(continued...)

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Ford’s Business Plan

Alone among the Detroit 3, Ford in late 2008 was not applying for immediate government

assistance. In part, this was because Ford had already raised $23.5 billion in equity from capital

markets in December 2006, through borrowing secured by virtually all of the company’s assets.

The company, as part of its restructuring and market-repositioning plan under new CEO and

former Boeing executive Alan Mulally, had also sold its Aston Martin, Jaguar, and Land Rover

brands and operations, all based in the United Kingdom. It had in late 2008 sold most of its

controlling interest in Mazda, an OEM based in Japan, and was considering the “strategic” future

of its Swedish subsidiary, Volvo. The focus of CEO Mulally’s strategy has been to integrate

disparate North American and overseas operations, enabling the company to more readily

manufacture for the U.S. market the types of higher fuel economy vehicles that it already designs,

produces, and sells overseas (called the “One Ford” strategy by the company).30 Ford also is

counting on $5 billion from the DOE loan program to support a $14 billion plan to reorient its

lineup toward more fuel-efficient vehicles. 31

Nevertheless, Ford was fully supportive of a program of federal assistance for the Detroit 3. Part

of the reason that Ford had gone to credit markets earlier was that, “at the time, Ford was viewed

as the Detroit automaker most likely to go under.”32 The company reports that it closed 17 plants

and “downsized by 12,000 salaried employees and 45,000 hourly employees in North America”

since 2005.33 Ford’s own plan stressed that its ability to survive a recession and return to

profitability were not only contingent on how well the total market performs, but also on the

short-term survival of its domestic competitors, because “Our industry is an interdependent one.

We have 80% overlap in supplier networks,” plus many dealers also have operations selling GM

or Chrysler products. Accordingly, Ford requested a “stand-by” line of credit of up to $9 billion as

“a back-stop to be used only if conditions worsen further and only to the extent needed.”34

On January 29, 2009, Ford announced its 2008 annual and fourth quarter financial results. The

company lost a total of $14.6 billion for the year. The net fourth quarter loss was $5.9 billion,

with a pre-tax operating loss of $3.6 billion. Although the company announced that it would draw

on an outstanding $10 billion line of credit to back up its cash holdings in the first quarter of

2009, Ford continued to state that, “it does not need a bridge loan from the U.S. government.” It

stated that it had achieved cost and inventory reduction targets, and had stopped the loss of

market shares in the United States and Europe. 35 In April, Ford’s confidence in the near-term

outlook increased when it announced its first quarter 2009 results, showing a loss of $1.4 billion,

which was smaller than expected. CEO Mulally said, “while the difficult market conditions had a

(...continued)

own a 20% share in the new Chrysler, with performance-related requirements that could increase its stake to 35%.

This approach is summarized in its Ford Motor Company Business Plan, December 2, 2008, pp. 7-8.

Ford Business Plan, p. 30.

Sholnn Freeman, “A Temporary Reprieve: Ford, Others Must Still Negotiate Rough Road,” Washington Post,

December 20, 2008, p. D3.

Ford Business Plan, p. 9.

Ford Business Plan, p. 2.

Ford Motor Co. News release, “Ford Reports 4th Quarter Net Loss of $5.9 Billion ... ,” January 29, 2009.

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significant impact on our first-quarter results, we made strong progress on our plan to transform

Ford.”36

Congressional Action in December 2008

Following the December appeals by the Detroit 3, Congress considered legislation to assist the

industry. Initially, such plans to assist the industry were reportedly blocked by differences

between the Bush Administration and many Members of Congress, including Speaker of the

House Nancy Pelosi, over whether funding for short-term loans to the Detroit 3 should come from

the TARP or from the EISA DOE loan program set up for production of advanced technology

vehicles. 37 But this gridlock was soon broken in view of the automakers’ urgent needs. The

Speaker and Senate Democratic leaders agreed effectively to reprogram the DOE loan money for

one or more short-term loans, with a plan to replenish the EISA loan funding after the 111th

Congress convened in January 2009. With the likelihood of default by the companies continuing

to rise, the amount of budget outlays for the EISA loans ($7.5 billion) was now estimated by the

Congressional Budget Office to support $15 billion in direct loans rather than the $25 billion

authorized under EISA. In any case, this was much less than the $34 billion requested in early

December by the Detroit 3 (including the $9 billion in standby credit requested by Ford). 38

Chairman Barney Frank of the House Financial Services Committee introduced a bill reflecting

this compromise on December 10, 2008 (H.R. 7321). The Bush Administration reportedly

supported the bill.39 The legislation passed the House 237-170 on the same day. It authorized a

total of $14 billion in direct loans, subject to a number of conditions, funded by $7 billion in

budgetary support from the EISA program. The measure also set up a presidential designee

(popularly known as a “car czar,” although the bill allowed for multiple designees) to oversee

compliance by borrowing companies with the terms of the program, including adequate

compliance with requirements for meeting commitments to achieve long-term viability and

competitiveness. The loans were limited to $14 billion, because $500 million of the original EISA

budgetary support was reserved for the original purpose of that program, support for advanced

vehicle technology production.

Despite the urging of the Bush Administration, H.R. 7321 faced opposition in the Senate.40 On

December 11, 2008, Minority Leader Mitch McConnell indicated to the Senate that the

Republican caucus had studied the House-passed bill, and that they were unable to support it.41

Efforts were made to craft a new compromise proposal, including conditions that would specify

concessions by unions on behalf of the hourly workforce and by bondholders, but they were

unsuccessful. Majority Leader Reid moved to close debate, for the purpose of achieving a final

The Detroit News, “Mulally: Ford’s Plan Working,” April 25, 2009.

Bloomberg.com, “Bush, Pelosi Deadlocked over Bailout for Automakers,” December 4, 2008.

Detroit Free Press, “Pelosi Drops Opposition to Tapping Plant Aid,” (December 6, 2008).

Detroit News, “Dems, White House Agree to $15B Auto Bailout, ” December 10, 2008.

See advocacy for the bill by Secretary of Commerce Carlos M. Gutierrez, “A Bridge Detroit Needs,” Washington

Post, December 11, 2008, p. A25; Republican opposition, particularly from Banking Committee Ranking Member

Richard Shelby is noted in the Washington Post of the same day, “Auto Bailout Clears House, but Faces Hurdles in

Senate,” p. A1.

Congressional Record (December 11, 2008), pp. S10895-96.

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vote on the House-passed bill. The vote in favor of cloture was 52-35, which was an insufficient

majority, and the Senate abandoned further action on the issue. 42

Federal Action to Aid the Auto Industry

Following the Senate cloture vote, the Bush Administration indicated that, after all, it would

consider making loans from the TARP in support of the auto industry. White House Press

Secretary Dana Perino stated:

Under normal economic conditions, we would prefer that markets determine the ultimate fate

of private firms. However, given the current weakened state of the U.S. economy, we will

consider other options if necessary, including use of the TARP program to prevent a collapse

of troubled automakers. A precipitous collapse of this industry would have a severe impact

on our economy, and it would be irresponsible to further weaken and destabilize our

economy at this time.43

Over the course of the following week, the Bush Administration determined how, and under what

conditions, it would provide industry assistance. On December 19, 2008, speaking from the

White House, President Bush announced his plan to assist the auto industry. He stated that, while

“government has a responsibility not to undermine the private enterprise system ... If we were to

allow the free market to take its course now, it would almost certainly lead to disorderly

bankruptcy and liquidation for the automakers.”44

The specific Bush Administration plan was contained in two “term sheets,” drawn up by the

Treasury Department for GM and Chrysler, the companies in need of immediate assistance. The

term sheets were identical, except for the appendices, which spelled out the specific loans

provided for each of the two companies.45 The automakers were provided with $13.4 billion in

loans in December 2008 and January 2009, divided as follows. GM and Chrysler received $4

billion each when the loans closed on December 29, 2008. On January 16, 2009, GM received an

additional $5.4 billion. These three loan installments used what remained of the $350 billion first

“tranche” of TARP under EESA. Beyond that, the Administration could make no more outlays

without seeking approval from Congress to open the second tranche of TARP funds. Thus, a third

projected loan of $4 billion to GM, planned by the Bush Administration for February 2009, was

made “contingent on Congressional action.”46 This contingency was met on January 15, 2009,

when the Senate voted 52-42 to release the second tranche without further conditions, and the

Floor action on the measure was summarized by the Majority Leader in Congressional Record, December 11, 2008,

pp. S10922-31. He credited Sens. Robert Corker and Christopher Dodd with leading the effort to produce a

compromise. The move to close debate was made on an unrelated legislative item, H.R. 7005. The Chairman and

Ranking Member of the Finance Committee, Sens. Max Baucus and Charles Grassley, respectively, announced their

joint opposition to H.R. 7321 because of inclusion of a provision unrelated to the auto industry, which would have

required the U.S. government to act as guarantor for “sale-in, lease-out” transactions engaged in by some public

transportation authorities; see ibid., pp. S10909-11.

White House. Press Briefing, December 12, 2008, p. 1.

White House. Office of the Press Secretary. “President Bush Discusses Administration’s Plan to Assist Automakers,”

December 19, 2008.

The term sheets are available on Treasury’s website: http://www.treas.gov/press/releases/hp1333.htm. For a general

discussion of TARP rules under EESA, see CRS Report RL34730, Troubled Asset Relief Program: Legislation and

Treasury Implementation, by Baird Webel and Edward V. Murphy.

GM term sheet, Appendix A.

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GM loan went forward as planned. 47 The Chrysler term sheet further specified that Chrysler’s

parent holding company must guarantee the first $2 billion of the loan amount. The term sheets

for both companies also established a loan interest rate of 5%, with an additional 5% interest rate

penalty on any amount in default.48

The Treasury Department made the loans available to Chrysler and GM only under certain “terms

and conditions.” The overriding condition was that each firm must become “financially viable”;

that is, it must have a “positive net value, taking into account all current and future costs, and can

fully repay the government loan.” “Binding terms and conditions ... mirror those that were

supported by a majority of both Houses of Congress ...” They established oversight rules and

security to be obtained by the government in exchange for providing loans. “Additional targets ...

were the subject of Congressional negotiations,” but were never voted on. These included a

requirement that the companies reduce corporate debt by two-thirds; that they transfer to

corporate equity half of the cash contribution promised to an independent hourly employee retiree

health care fund; eliminate “jobs bank” rules; and that unions accept “competitive” wages and

work rules.49

With respect to Chrysler’s deal with Fiat, Chrysler CEO Robert Nardelli stated that, “The

potential ... alliance is consistent both with our strategic plan and with the long-term viability plan

required under the U.S. Treasury loan.” The agreement would be designed to gain for Chrysler

access to “all Fiat small-vehicle platforms,” as well as to Fiat’s international distribution network

(Chrysler at present has only limited sales outside of North America). Nardelli further stated that,

“It is important to note that no U.S. taxpayer funds would go to Fiat.” He also said that Chrysler

would continue to seek the remainder of the $7 billion in federal financial support that it had

requested.50

The companies were required to submit to a “President’s Designee” by March 31, 2009, a

detailed restructuring plan indicating the extent to which they have met both financial and

competitive labor restructuring targets. Subject to one 30-day extension allowed, the “Designee”51

was required to decide whether to certify that the plan met all standards set in the term sheet, and,

if not, could recall the outstanding loan balance. 52

These terms and conditions have been the focus of much discussion and debate since the

presidential announcement. Some argue that requirements, unilaterally set by the Bush

Administration, are actually weaker than the legislation proposed by it and the Democratic

majority, and approved in the House. Although H.R. 7321 did not mandate specific changes in

labor contracts, it did provide (Section 8) that if the parties did not reach agreement on a

restructuring plan by March 31, 2009, the presidential designee “shall call the loan ... within 30

Resolution of disapproval, S.J.Res. 5, introduced by Sen. David Vitter and nine cosponsors, defeated by 52-42

(January 15, 2009).

U.S. Department of the Treasury. Indicative Summary of Terms for Secured Term Loan Facility, December 19, 2008,

“Appendix A” in both GM and Chrysler term sheets.

White House. Office of the Press Secretary. Fact Sheet: Financing Assistance to Facilitate the Restructuring of Auto

Manufacturers to Attain Financial Viability, December 19, 2008. Emphases in original.

Letter of Chrysler CEO Robert Nardelli “to all Chrysler employees, dealers, suppliers, and other stakeholders,”

January 23, 2009.

The “President’s Designee” was later established by the Obama Administration as the Auto Task Force within the

U.S. Department of the Treasury.

Treasury, Summary of Terms, p. 7.

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days ...” In effect, unions, bondholders, and other interests had that window to negotiate a

restructuring plan, or, in effect, by statutory law the company would be forced into bankruptcy.

Since the Bush plan was established by executive order, it was subject to subsequent modification

by President Obama without further action by Congress.

The UAW believed that plan’s conditions for labor contract changes were too prescriptive. Union

president Ron Gettelfinger said that he was “pleased the Bush Administration acted to provide

urgently needed bridge loans” to the auto companies, and “to pursue a process for restructuring

outside of bankruptcy.” But he was “disappointed that [President Bush] has added unfair

conditions singling out workers ... We will work with the Obama Administration and the new

Congress to ensure these unfair conditions are removed,” he said.53 Senator Debbie Stabenow in a

press release said that

[T]he White House has been characterizing the bridge-loan package as simply having goals

for worker concessions ... [but] ... These provisions raise serious concerns regarding unfair,

punitive conditions being placed on the backs of workers.54

On January 21, 2009, the House addressed the auto loans specifically, in Title III of H.R. 384, a

bill to release the second tranche of TARP funds. This bill would have required that a

restructuring plan must be agreed by all stakeholders, without reference to specific targets and

requirements established in December 2008 term sheets for GM and Chrysler. The measure

passed 260-166. However, as the Senate had already defeated a resolution to withhold TARP

funds, the House action had no direct legal effect, without any further Senate action. 55

As GM and Chrysler rolled out their viability plans on February 17, 2009, and the Obama

Administration established a new interagency task force, negotiations continued under the same

essential framework established by the Bush Administration. However, according to a report in

the Detroit Free Press, the Obama Administration has “relaxed the rules” with respect to GM’s

turnaround plan, by not requiring deals with the UAW and bondholders to be finalized before

submission of the viability plan.56

GM and Chrysler Viability Plans of February 2009

GM’s Revised Restructuring Plan

On February 17, 2009, GM presented to the Treasury Department a revised restructuring plan.

The new plan revised estimates from the plan presented to Congress just two months earlier:

Forecasts of motor vehicle sales were revised downward, meaning that GM’s loan requirements

from Congress were revised upward.

International Union, United Automobile, Aerospace & Agricultural Implement Workers of America (UAW). Press

release, “UAW Applauds Auto Loans, But Says Workers Must Not Be Singled Out for Unfair Conditions,” December

19, 2008.

Office of Sen. Stabenow. Press release, “Stabenow Statement on Provisions in Auto Rescue Package,” Dec. 19,

2008.

See comments to the press by House Financial Services Committee Chairman Barney Frank, quoted in Washington

Post, “House Urges Tighter Rules for Bailout Beneficiaries,” January 22, 2009.

Detroit Free Press, “GM Allowed to Forgo Some Loan Terms Set by Bush Administration,” February 24, 2009.

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Furthermore, GM on February 26, 2009, reported that it lost $30.9 billion in 2008. This followed

an even higher reported loss for 2007, but that loss had been largely attributable to a one-time

write-down of future tax credits, a non-operating loss. While GM reported $3 billion in 2008

structural cost savings, revenue from worldwide automotive operations, responsible for almost all

the company’s total top-line revenue, fell by more than $30 billion, from $179 billion to $148

billion. At year-end 2008, GM cash and other liquid assets were reported as $14 billion, but this

included $9.4 billion in loans already received from the TARP. With a weak auto market in the

United States and worldwide, and given a further federal loan of $4 billion in February 2009, GM

may have had no operating cash balance in the first quarter net of federal transfers, and

continuing expenses would use up all the federal loans disbursed under the Bush Administration

loan agreement. 57

In filing its formal statement (10-K) on its annual results to the Securities and Exchange

Commission, GM and its auditors agreed “there is substantial doubt about GM’s ability to

continue as a going concern.”58 Commenting on the February 2009 viability plan, the company

stated that, “GM requires [federal] funding in 2009 to continue operations until global automotive

sales recover and its restructuring operations generate results.... ”59

The revised GM plan of February 2009 was a detailed and thorough examination of the

company’s prospects, including a range of contingencies, depending on overall auto market and

general economic developments:

•

The December report projected a “baseline” scenario of 12 million total U.S.

motor vehicle sales (cars and light trucks) in 2009, with a “downside” of 10.5

million units. By February, the old downside had become the new baseline, with

a new downside of only 9.5 million. The company’s forecast of U.S. 2009 gross

domestic product (GDP) performance worsened from an annual 1.0% fall to a

2.0% decline. 60

•

With this decline of GDP and motor vehicle sales prospects, GM raised its

estimates of required federal financial support from $18 billion in its December

report to at least $22.5 billion. This could rise, the company said, to as much as

$30 billion through 2011, if market trends followed the downside scenario.61

•

The February 2009 plan added information on foreign government assistance that

was not disclosed in the December plan. GM stated that it had requested up to $6

billion in loans from Canada, Britain, Germany, Sweden, and Thailand, plus

The calculation is as follows. GM reported a $14 billion cash balance as of December 31, 2008, presumably

including $9.4 billion in low-interest loans from the TARP. That left $4.6 billion in GM’s own internally generated

cash reserves. A further TARP loan of $4.0 billion was disbursed on February 17,2009, but the Center for Automotive

Research, an industry research group, estimated that GM’s “cash burn” for the first quarter of 2009 would be $3 billion

per month; see American Metal Market, “GM Struggling to Avoid Bankruptcy, $30.9B in Red” (February 27, 2009).

Reported in Detroit News, “GM’s Auditors Raise Doubts on Automaker’s Viability; Detroit Free Press, “GM

Auditors Raise the Specter of Chapter 11” (both March 5, 2009).

GM, “GM Reports Preliminary Fourth Quarter and Calendar Year 2008 Financial Results,” news release (February

26, 2009).

General Motors Corporation. 2009-2014 Restructuring Plan (February 17, 2009), Chart 2 on p. 8 and Table 1, p. 11.

GM 2009-14 Restructuring Plan (February 2009), p. 10.

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additional support to cover “legacy costs.” GM projected that its global operating

cash flow will stay negative through 2011.62

•

GM provided further details and confirmation on its plans to reduce brands and

models. As stated in its December plan, GM stated that it would reduce its U.S.

vehicle offerings to four “core” nameplates: Chevrolet, Cadillac, Buick and GMC

trucks. Pontiac was to be downsized to a “niche” product and sold through a

Buick-Pontiac-GMC dealer channel. 63 GM also stated that it would sell or

otherwise dispose of the Saturn, Saab, and Hummer brands. Whereas the

December plan called for reducing 48 current model “nameplates” to 40 by 2012,

with 12 new product “launches” in that year, the February 2009 viability plan

called for a reduction to 36 nameplates with five 2012 launches.64

•

In part as a consequence of this reduction in brands and nameplates, the GM

restructuring plan anticipates a continued decline in domestic market share. From

23.8% of the North American motor vehicle market in 2006, GM estimates that

its 2008 share fell to 21.5%, and will decline further to 19.1% by 2014. However,

its baseline market scenario is for a recovery in total vehicle sales to increase

from 13.5 million units in the United States (16.6 million in North America) to

about three million units more by 2014.65

•

With a smaller market share in markets that will only recover to the levels of the

early 2000s, GM will need fewer plants. From 47 U.S. manufacturing and

assembly plants operating in 2008, GM planned in December 2008 to cut back to

38 plants in 2012, but already reduced that projection to 33 plants in the February

2009 plan. Its U.S. assembly plant production capacity, which in December it had

planned to reduce from 2.8 million to 2.3 million units, would now be reduced to

2.0 million units in the United States. If the North American market reaches the

GM baseline number of 18.9 million units in 2012, and GM’s projected market

share is just under 20%, this means only slightly more than half of the vehicles

that it sells in North America will be assembled in the United States.66

•

GM projects in its restructuring plan a worldwide reduction of 47,000 employees

through the end of 2009, with the majority of those job cuts – 26,000 – taking

place outside the United States.67 The reduction in U.S. salaried employees will

be from 30,000 in 2008 to 26,000, and in hourly production employees from

62,000 to 46,000. After 2009, GM projects that its U.S. salaried and hourly

employment will roughly hold steady, or even increase slightly.68

•

GM continues to project a significant decline in numbers of U.S. dealers.

Already, between 2004 and 2008, GM reduced its total by more than 1,000

dealers, leaving 6,246 still operating in the United States. It projects a further

GM 2009-14 Restructuring Plan (February 2009), pp. 10, 28 and Table 11. See also the summary reported in Detroit

Free Press, “GM Survival Plan Seeks Up to $6 Billion from Other Governments” (February 20, 2009).

At a later date, GM announced that it would end manufacture of the Pontiac brand.

GM 2009-14 Restructuring Plan (February 2009), pp. 15-16

GM 2009-14 Restructuring Plan (February 2009), Table 9.

These projections are from GM 2009-14 Restructuring Plan (February 2009), Table 9 and Appendix H.

GM 2009-14 Restructuring Plan (February 2009), pp. 13-14.

GM 2009-14 Restructuring Plan (February 2009), Appendix H.

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25% reduction, to about 4,700 dealers, by 2012, and a continued decline to 4,100

by 2014. Dealer totals in metropolitan market areas will be pruned even more

severely, by almost half, while GM plans to reduce its number of rural market

outlets by about 25% through 2014.69

•

Under the GM viability plan, the possibilities for paying back its loans from

TARP vary widely depending on projected market scenarios. GM’s baseline

scenario for 2014 is 16.8 million units sold. If GM sees only a slight decline in

market share, as projected, it anticipates that it would reduce its outstanding

TARP loan balance to about $14 billion by that date. With an upside scenario of

18 million units, the TARP loans could be paid off by then. With a downside

scenario of 15.3 million units sold, the balance owed by 2014 would be higher

than in 2011, or close to $30 billion.70

•

GM was required under the term sheet drawn up by the Bush Administration to

project how the enterprise will achieve a positive net present value (NPV). An

independent analysis of GM’s prospects was drawn up for this restructuring plan

by Evercore LLC, an investment banking firm that specializes in providing

advisory services to multinational corporations. Evercore’s analysis indicated that

GM could achieve a positive NPV of $5 billion-$14 billion by 2014, if the

baseline scenario of a U.S. market of 16.8 million unit sales obtains. However,

the NPV would be negative if the U.S. motor vehicle market only achieves the

downside scenario of 15.3 million units. The analysis excludes estimated

payments required by GM to the VEBA71 established to take over retiree health

care expenses and a significant pension-funding shortfall in 2008.72

In its February 2009 viability plan, GM disclosed that its pension funds, which had been

“consistently overfunded” in 2005-2007, recorded a substantial decline in the latter half of 2008.

In its annual results, GM reported a pension fund deficit of $12.4 billion, or an underfunding of

about 13%. In its viability plan, GM notes that it could be required to make additional

contributions to the plan in 2013-2014.73 Pension, VEBA, and labor concession issues are

discussed later in this report. Also to be discussed later in the report is GM’s assessment of the

cost of an alternative approach to continued federal assistance, reorganization under the

protection of Chapter 11 of the federal bankruptcy code.

In calculating its future cash flow, GM also assumed a significant benefit in terms of low-interest

loans from the DOE direct loan program from advanced technology vehicle manufacturing,

described earlier. In 2008 it submitted two applications for a total of $8.4 billion from the

program, and also anticipates a third request in 2009. GM’s advanced technology vehicle

GM 2009-14 Restructuring Plan (February 2009), pp. 16-17 and Table 3. In mid-May 2009, Chrysler and GM

announced dealer reducations, with Chrysler cancelling 789 dealerships by June 6, 2009, and GM planning to cancel

1,100 by October 2010.

GM 2009-14 Restructuring Plan (February 2009), pp. 26, 32 and Table 14.

A VEBA is a Voluntary Employees’ Benefit Association which manages the portfolio assets of an hourly-employee

retirement program.

GM 2009-14 Restructuring Plan (February 2009), pp. 28-29 and Appendix J.

GM 2009-14 Restructuring Plan (February 2009), p. 31 and Table 13; see also GM CY2008 news release.

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planning, a major component of its strategic corporate plans, as well as its global cash flow

analysis, assumes a net benefit through 2014 of $7.7 billion from the DOE program.74

The responses from other national governments to GM’s requests for financial aid in early 2009

were mixed or indeterminate. This response may be critical, because 64% of GM’s worldwide

sales in 2008 were outside of the United States, up from 59% in just one year. GM’s 2008 global

sales were down 11%, compared to an overall global market drop of 5%.75 In its viability plan,

GM calls for holding its global market share roughly constant, at around 12.5% over six years,

even while it accepts a possible loss of market share in the U.S. domestic market. And it is

counting on a strong overall global market recovery in the out years, to reach 82.5 million units

by 2014, from estimated sales of 67 million units in 2008, and not higher than 70 million annually

through 2011.76

The Swedish government refused to bail out GM’s wholly owned subsidiary, Saab, forcing that

company into bankruptcy reorganization, liquidation, or sale to a third party.77 In Germany, GM’s

subsidiary Opel has requested $4.2 billion to stay out of bankruptcy, but local labor leaders are

calling for the company to be spun off from the U.S. parent. Senior GM officials have said that if

GM, which directly employs 56,000 people in Germany and elsewhere in Europe, were to fail, it

would put as many as 300,000 persons out of work. The German government is reportedly

seeking talks with the U.S. Treasury, before making any financial commitments.78 In early May,

Fiat announced that it was in talks to purchase the Opel unit.79 GM and Chrysler together

requested initially $3.2 billion (C$4 billion), from Canada.80 The Canadian government

subsequently agreed to $2.4 billion in assistance for Chrysler in late April.81 Also, in a loan

request not reported by GM, its Korean affiliate, Daewoo, has reportedly requested about $700

million in assistance from a Korean state-owned bank, which is also a large minority shareholder

in the company.82

GM 2009-14 Restructuring Plan (February 2009), pp. 20-22, 30 and Table 12

Data from GM CY2008 news release.

GM 2009-14 Restructuring Plan (February 2009), Table 11.

Associated Press, “Saab Files for Bankruptcy Protection,” reported in Detroit News (February 20, 2009);

Bloomberg.com, “Saab Seeks Protection from Creditors as GM Pulls Out” (February 20, 2009); Washington Post, M’s

Saab Seeks Protection from Creditors in Sweden” (February 21, 2009).

Deutsche Welle (German overseas broadcasting service), “German Unions Push to Split Opel from General Motors”

(February 16, 2009); Detroit News, “”U.S.-German Working Group to Seek Help for GM’s Opel” (February 22, 2009);

Financial Times, “Opel’s Dreams of GM Split May prove Elusive” (March 1, 2009); Detroit Free Press, “Germany:

Opel Aid Request Will Take Time” (March 2, 2009). Estimates on employment impact of an Opel failure are in Detroit

Free Press, “GM Appeals to Europe for Government Aid,” and Bloomberg.com, “GM Says Opel Running Out of Cash

...” (both March 3, 2009).

Detroit News, “Fiat Seeks GM Europe Deal” (May 4, 2009).

Detroit News, “Canada Will Get 2 Firms’ Plans” (February 20, 2009). GM and its Canadian hourly workforce,

organized in the Canadian Auto Workers Union, in March 2009 announced a tentative agreement on changes to their

labor contract, including a pay freeze and acceptance of a worker co-payment on health care expenses; Washington

Post, “GM Reaches Tentative Deal with Canadian Auto Union;” Detroit Free Press, “GM and CAW Strike a Deal on

Concessions” (both March 9, 2009).

Detroit News, “Plan Includes Another $10.5 Billion Loan to Chrysler” (April 30, 2009).

Detroit News, “GM’s South Korean Arm Holds talks with State-Run Bank” (February 19, 2009).

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Chrysler’s Revised Restructuring Plan

Chrysler introduced itself in its February 2009 viability plan as the “quintessential American auto

company”—complete with a cover statement noting that (unlike GM) the vast majority of its

sales (73%), production (61%), employees (74%), as well as dealers and suppliers, are in the

United States. The cover also featured the stars and stripes, soldiers driving a Jeep down

Pennsylvania Avenue, the company’s pentastar symbol, and photos of U.S. auto pioneers Walter

P. Chrysler and the Dodge brothers.83

More substantively, the company reported for the first time that it lost $8 billion in 2008, and that

at year-end, it had a cash balance of $2.5 billion. As with GM, the company’s report appears to

confirm that it has a positive cash balance thanks only to federal loans already received. 84

Chrysler crystallized its situation by analyzing viability under three scenarios:

•

“Stand Alone.” With specified concessions, Chrysler stated that it could survive

on this basis, with $5 billion in short-term government assistance, beyond what it

has already received, plus $6 billion as applied for under the DOE advanced

vehicle technology loan program. This scenario assumed a minimum U.S. motor

vehicle market of 10.1 million units in 2009, failing which the company would

require additional assistance and concessions.

•

Strategic Partnership/Consolidation. “In all industry scenarios ... Chrysler will be

more viable, both operationally and financially, with a strategic partner.” The

plan noted the non-binding agreement signed with Fiat, which would enable

Chrysler to produce more fuel-efficient vehicles in a broader range of markets.

But it also noted that the Fiat deal was contingent on Chrysler receiving

requested federal assistance. Nor would Chrysler be viable, even with the Fiat

alliance, should U.S. sales fall as much as one million below the ten-million-unit

level in 2009, unless Chrysler received additional government support.

•

Orderly Wind Down. “If Chrysler is not able to restructure its balance sheet ... ,

negotiate targeted concessions from constituents, [and] receive an additional $5

billion capital infusion from the U.S. Government ... ,” then the company’s only

option would be to file a Chapter 11 bankruptcy petition. This would be “a first

step to achieving an orderly wind down.”85

The balance of this subsection will consider Chrysler’s description of its financing requirements

and conditions under the first two alternatives. Its presentation of the bankruptcy option will be

summarized, along with that of GM, in the subsequent section on reorganization and bankruptcy.

Later in this section, Chrysler’s decision to file for federal bankruptcy protection on April 30,

2009, will be discussed.

It should be noted that Chrysler based its long-term viability on a market outlook that is much

more conservative than the one presented by GM. Its December 2008 viability plan forecast an

Chrysler Restructuring Plan for Long-Term Viability (February 17, 2009).

Chrysler Viability Plan (February 2009), pp U49-U51.

These three alternatives are summarized in Chrysler Viability Plan (February 2009), p. U11. Chrysler emphasized

“Credit availability for customers/dealers is a prerequisite for [any] viability plan.”

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11.1 million U.S. light motor vehicle sales market in 2009, rising to 13.7 million by the 20122014 out years. The February 2009 plan reduced forecast 2009 sales to 10.1 million (with a

downside risk of 9.1 million), rising to 11.6 million in 2012, and 12.6 million in 2014 – about

four million fewer than GM’s baseline scenario, which GM says may be needed for it to reach a

positive NPV.

In its current debt structure, Chrysler listed a total of $23.8 billion in outstanding indebtedness.

Secured indebtedness to outside lenders stood at $6.9 billion. To that Chrysler added a total of $2

billion in secured debt received in 2008 from its parent, Cerberus, and its former owner and

minority partner, Daimler AG. It evaluated its government loan of December 2008 as $4.3 billion

on its books. The remainder, almost half the total at $10.6 billion, is unsecured indebtedness owed

to the UAW for retiree health care, including the VEBA scheduled to start in 2010.

Under the stand-alone plan, Chrysler stated that it has an agreement with the UAW to cut its

VEBA indebtedness in half, contingent on a satisfactory overall debt restructuring. Cerberus and

Daimler “expressed willingness” to relinquish existing equity in the company and to convert their

$2 billion in secondary indebtedness into equity. However, Chrysler will need an additional $5

billion from the U.S. Treasury’s TARP, plus it is counting on a $6 billion loan from the DOE loan

program. This would leave Chrysler, by its calculations, with $22.8 billion in indebtedness under

the stand-alone model, of which $15.6 billion would be owed to the U.S. government.86

The Chrysler plan identified significant advantages from the strategic partnership or consolidation

model, as against a “stand-alone” future. However, the proposed deal with Fiat brought no cash

into the equation, and the cash benefits were back-loaded into the out years, from 2012 to 2016.

Fiat has achieved a remarkable turnaround under Sergio Marchionne, its CEO since 2002, and has

re-emerged as a profitable, though relatively small, major player in the global auto business (2.5

million annual sales versus about 2.0 million for Chrysler 87). The advantages of such a deal,

according to the Chrysler plan, were:

•

“Among the top 10 selling brands in Europe, Fiat brand has the lowest level of

CO2 emissions,” and also is the most fuel-efficient European OEM across the full

range of its vehicles; 60% of its sales are “mini, small, and compact cars.” By

contrast “Chrysler’s portfolio is dominated by minivans, mid and large sport

utility vehicles, and trucks which represent over 50% of its sales.” While new

alliance platform and powertrain development costs would lead to a small net

drain on Chrysler finances in 2009-11, the total benefit of development synergies

would be $6.9 billion through 2016, with a potential positive bottom-line impact

calculated at $7.4 billion.

•

The Fiat alliance would benefit both companies’ geographical presence. Chrysler

sells more than 90% of its vehicles in North America, whereas Fiat sales are 65%

in Europe and 33% in South America. Together, the plan states, the two

companies would form the world’s sixth-largest motor vehicle producer, and also

establish a base to penetrate Asian markets, where their presence is currently

negligible (Chrysler has discontinued plans for a joint venture with the Chinese

auto OEM Chery).

Chrysler Viability Plan (February 2009), p.p. U15-U17.

See chart in Chrysler Viability Plan (February 2009), p. U93.

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U.S. Motor Vehicle Industry: Federal Financial Assistance and Restructuring

•

No federal loan money would be used to pay for the deal. Fiat would receive a

35% equity position in Chrysler in return for the alliance. Fiat would have the

option to acquire an additional 20% of Chrysler’s equity, “based on achieving

performance metrics.”88

Despite its emphasis on the benefits of the Fiat alliance, it was not Chrysler’s first choice. Since

2007, it also explored partnerships with GM and Nissan-Renault. Chrysler management and an

independent analysis by the Center for Automotive Research found that a deal with GM was the

“best option for U.S. Auto Industry from financial and operational perspective but they [GM]

‘took it off the table.’”89

Cerberus Capital Management, Chrysler’s majority owner, and the New York Times engaged in a

spirited debate over whether more federal funds should be committed to Chrysler, without any

new cash infusion from Cerberus. In an editorial, the Times noted that, “Our argument for bailing

out Detroit has been based on the notion that the collapse of the American carmakers would

devastate an economy already reeling from huge job losses.” But, “The case for saving Chrysler

is certainly the weakest.” The newspaper stated that Chrysler’s viability plan offered little or no

additional capacity reductions “leaving it with capacity to make almost one million more vehicles

than it will sell this year.” So, the Times asked, “If Chrysler is really on track for a turnaround ...

why doesn’t Cerberus ... put up the money itself? Why should taxpayers have to take the risk?”90

Cerberus Chief Operating Officer and General Counsel Mark Neporent answered the editorial. He

stated that:

Cerberus’ investors are pension and retirement plans, charitable and educational endowments

and individual family savings. Our investment guidelines limit the amount of capital

committed to any single investment.

Noting the Times’ past criticism of “excessive risk-taking by money managers,” he questioned

why they should criticize the prudence of Cerberus and urge that it should be “‘more pliant’ and

break rules intended specifically to control risk.” He then defended the steps taken by Cerberus to

turn Chrysler around, and emphasized other financial measures the company was willing to take,

including subordination of $2 billion in “other interests” to government financing. He closed by

adding that Cerberus remained committed “to help create a sustainable future for Chrysler.”91

Presidential Task Force on the Auto Industry

The Bush Administration left office having devised a package of loans actually disbursed or to be

disbursed to two of the Detroit 3, GM and Chrysler. Supervision of the companies’ compliance

with the terms of the loans and plans to achieve future viability was left to an undefined

“President’s designee” in the loan term sheets. In the presidential transition period and the initial

The details and benefits of the Fiat alliance are presented in Chrysler Viability Plan (February 2009), pp. U81-U97.

Chrysler Viability Plan (February 2009), p. U13. See also pp. U157-U159 for information on synergistic gains from

a GM-Chrysler tie-up, as was considered.

New York Times, “Why Can’t Cerberus Foot the Bill?” (February 23, 2009). Support for the position that Chrysler’s

February 2009 plan adds little to previously announced company plans is reported in Detroit News, “Chrysler Cuts

Called Modest” (March 5, 2009).

Mark A. Neporent, “Cerberus’ Commitment to the Future of Chrysler,” letter to New York Times (March 2, 2009).

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weeks of the Obama Administration, there was speculation as to who might fill a role, popularly

known as the “car czar,” in managing the oversight of the loan program and the two companies’

fulfillment of the terms of the loan agreements. On February 20, 2009, the White House

announced that this role would not be filled by an individual but by a Presidential Task Force.

The Task Force has been led by the Secretary of the Treasury Timothy Geithner and the Director

of the National Economic Council in the Office of the President, Larry Summers. Other ex officio

designees named to the Task Force were the

•

Secretary of Transportation,

•

Secretary of Commerce,

•

Secretary of Labor,

•

Secretary of Energy,

•

Chair of the President’s Council of Economic Advisers,

•

Director of the Office of the Management and Budget,

•

Environmental Protection Agency Administrator,

•

Director of the White House Office of Energy and Climate Change.

In addition to these ex officio appointments, the White House statement named specific

individuals in current government positions who were designated as members of the Task Force:

•

Diana Farrell, Deputy Director, National Economic Council,

•

Gene Sperling, Counselor to the Secretary of the Treasury,

•

Jared Bernstein, Chief Economist to Vice President Biden,

•

Edward Montgomery, Senior Advisor, Department of Labor,92

•

Lisa Heinzerling, Senior Climate Counsel to the EPA Administrator,

•

Austan Goolsbee, Staff Director and Chief Economist of the Economic Recovery

Advisory Board,

•

Dan Utech, Senior Advisor to the Secretary of Energy,

•

Heather Zichal, Deputy Director, White House Office of Energy and Climate

Change,

•

Joan DeBoer, Chief of Staff, Department of Transportation,

•

Rick Wade, Senior Advisor, Department of Commerce.93

Mr. Montgomery heads “a new initiative to support and help revitalize American auto communities.” As a former

Deputy Secretary of Labor and a dean at the University of Maryland, Mr. Montgomery he would be the Director of

Recovery for Auto Communities and Workers, according to the President. His job within the Task Force is to help

coordinate federal, state, local, and private sector activities to assist communities impacted by industry downsizing,

including provision of assistance through the Trade Adjustment Assistance program, and other federal measures.

This list was taken from White House. Office of the Press Secretary, “Geithner, Summers Convene Official

Designees to Presidential Task Force on the Auto Industry” (February 20, 2009).

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In addition, the White House announcement also included, as a member of the Task Force, Ron

Bloom, formerly an investment banker and adviser to the head of the United Steelworkers union,

who was newly appointed as Senior Advisor on the Auto Industry at the Department of the

Treasury. On February 23, 2009, it was also announced that Steven Rattner, co-founder of the

private equity firm, Quadrangle Group, would also join the Treasury as Counselor to the

Secretary and would have a role as a leader of the Auto Industry Task Force.94 A third person

recruited from the private sector to assist the Task Force is Professor Alan B. Krueger, an

economist from Princeton University.

After its initial formation, the Task Force spent late February and early March intensively

interviewing auto industry leaders, including GM CEO Richard Wagoner, Chrysler CEO Robert

Nardelli, and their senior executives. Interviewees also included top executives from Ford, Fiat,

the UAW, bondholders, representatives of the supplier industry, and Governor Jennifer Granholm

of Michigan. The Task Force has been engaged in shaping the restructuring plans for both

automakers and in dealing with related issues concerning auto suppliers, dealers and automobile

warranties.95 Table 1 provides an overview of federal assistance made available since December

2008 to GM and Chrysler by the Task Force and the Bush Administration.

Table 1. Summary of Direct Federal Assistance For General Motors and Chrysler

(through May 28, 2009)

Type of Financial Support

Recipient and Amount

Subsidized loans under TARP

GM: $19.4 billion

Chrysler: $4 billion

Working capital (DIP financing)

Chrysler: $3.3 billion

Loan to new Chrysler after bankruptcy

$4.7 billion

Loans to auto financing companies

GMAC: $13.5 billion

Chrysler Financial: $1.5 billion

Auto supplier support program

GM: $3.5 billion

Chrysler: $1.5 billion

Auto warranty guarantee program

Up to $1.25 billion authorized

Total

$52.65 billion

Source: CRS

Wall St. Journal, “Rattner to Join Treasury as Auto-Industry Adviser”; Detroit News, “Treasury’s Auto Efforts To Be

Led by Private Equity Investor” (both February 23, 2009).

For two different perspectives on the steps taken by the Auto Task Force, see Christian Science Monitor,

“Government’s Role in the Economy Getting Too Big?” (May 3, 2009) and Detroit Free Press, “Obama’s Auto Team

Makes the Right Moves (May 4, 2009).

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U.S. Motor Vehicle Industry: Federal Financial Assistance and Restructuring

Aid to Auto Industry Suppliers

In their viability plans, both GM and Chrysler highlighted the financial problems confronting

their supplier base. OEM production cuts, uncertainty of payments of supplier receivables should

an OEM enter bankruptcy, and the general freezing up of the credit system were all financially

imperiling the Detroit 3 supplier base (and, by implication, the supplier base of other auto OEMs

in the U.S. market, as well). GM listed the “supply chain” as the first “key risk” in its February

2009 viability plan. GM also noted its special commitment to Delphi, the successor to its former

parts-making division, which has been in bankruptcy since October, 2005. Cash-strapped as it is,

GM agreed in March 2009 to purchase Delphi’s steering business to protect its continued access

to parts, after Delphi’s plan to sell the unit fell through. 96 In its plan, Chrysler indicated that 22%

of its supply base, by value, is “financially troubled,” compared to just 10% in August 2008.97

The Motor & Equipment Manufacturers Association (MEMA), which represents suppliers to both

the OEMs and the “aftermarket,” proposed to the Treasury Department and to Congress a threepart program, which would use the TARP to backstop the auto supplier industry. The total

estimated cost of this program would be as much as $25.5 billion, distributed as follows:

•

Government guarantee of supplier receivables. A guarantee of receivables

payable to suppliers (to a value of 80%) from each of the Detroit 3 would enable

suppliers to borrow against receivables in capital markets. Maximum cost to the

Treasury, based on Detroit 3 production levels, would be about $10.5 billion.

•

“Quick pay” receivables program. This would provide additional liquidity to

suppliers to TARP-supported OEMs by reducing the typical 45-55 day payback

period for their suppliers to 10 days. Estimated cost of the program would be $7

billion, as a revolving credit fund would be set up to be used by GM and

Chrysler.

•

Government loan guarantees for suppliers. This would encourage commercial

banks to increase lending to suppliers by guaranteeing commercial loans or lines

of credit. The estimated guarantee level would be up to $8 billion.98

Both GM and Chrysler, in their viability plans, expressed support for federal support to suppliers.

GM, however, called for a more limited program of credit insurance to be established

immediately, which would guarantee receivables of selected suppliers at a cost of about $4.5

billion. GM emphasized that such a program would be needed as GM seeks to reduce costs by

establishing a more financially robust and smaller supplier base, within a more consolidated

supplier industry.99 Chrysler supported both the guarantee of accounts payable by the federal

government and the “quick pay” proposal. It also called for direct loans to suppliers from the

GM 2009-14 Restructuring Plan (February 2009), pp. 32-33; Bloomberg.com, “GM To Speed Payments to Delphi,

Buy Parts Factory” (March 3, 2009); Detroit News, “GM Buys Back Delphi Steering” (March 4, 2009).

Chrysler Viability Plan (February 2009), p. U153.

Letter from Robert McKenna, president and CEO of MEMA to Secretary of the Treasury Timothy F. Geithner

(February 13, 2009), including attached document Motor Vehicle Supplier Sector Emergency Financial Assistance

Request. See especially pp. 5-10 of the attached document.

GM 2009-14 Restructuring Plan (February 2009), pp. 32-33 and Appendix U.

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U.S. Motor Vehicle Industry: Federal Financial Assistance and Restructuring

government “to relieve Chrysler from the cash burden of funding [debtor-in-possession] loans for

numerous suppliers.”100

In its first decision, the Presidential Task Force announced on March 19, 2009, a limited auto

supplier support program, with $5 billion of TARP funds. This program is similar to the model

requested by GM. It is limited to suppliers of domestic OEMs and “will be run through American

auto companies that agree to participate in the program:”

The program will provide suppliers [for a small fee] with access to government-backed

protection that money owed to them for the products that they ship will be paid no matter

what happens to the recipient car company. Participating suppliers will also be able to sell

their receivables into the program at a modest discount.101

Although the program was more modest than MEMA had requested, it supported the program as

an important step in stabilizing the supplier base.102 According to the Washington Post, support

would be limited to those suppliers designated by the OEMs receiving TARP funds, and

“suppliers ... besieged automakers with questions about who would receive support and who

wouldn’t.”103 The article also quoted a Chrysler letter to suppliers saying that the “government

loan associated with this program is not large enough to permit all of Chrysler’s U.S.-based

suppliers to participate.” Ford declined to participate, saying, “We remain viable and expect no

issue with continued payments to our suppliers.”104 At General Motors, its roughly 1,500 Tier 1

direct suppliers to its U.S. plants are eligible for the assistance. Its approximately 16,000 indirect

North American suppliers – who sell to the Tier 1105 manufacturers or provide GM with nonmanufacturing services, such as healthcare and information technology – are generally not

eligible. The GM supplier financing program is administered by Citibank.

The Treasury’s supplier assistance program protects only GM and Chrysler receivables106 but

MEMA believes that it will prove to be too limited a cushion considering the severity of the

decline in U.S. auto sales and the plans of Chrysler and General Motors to idle their plants for

most of the summer. According to the Original Equipment Suppliers Association (OESA),

suppliers who have been running at a low 52% of capacity in March face a potential drop below

40% in July, placing considerable strain on the financial outlook for many suppliers.

100

Chrysler Viability Plan (February 2009), p. U154.

U.S. Department of the Treasury. “Treasury Announces Auto Supplier Support Program,” press release, and fact

sheet, “Auto Supplier Support Program: Stabilizing the Auto Industry at a Time of Crisis” (March 19, 2009).

102

Motor & Equipment Manufacturers Association. “Parts Suppliers Praise Administration for Acting to Assist

Industry,” press release (March 19, 2009).

103

Washington Post, “Auto Parts Makers Get $5 Billion Lifeline” (March 20, 2009), p. D1.

104

Ibid.

101

105

Tier 1 suppliers are direct suppliers to the auto manufacturers; Tier 2 and 3 suppliers generally supply the Tier 1

companies.

106

Parts suppliers are also buffeted by the recession. On May 28, 2009, Visteon, a former Ford auto parts unit, filed for

Chapter 11 bankruptcy, saying that Ford has committed to ensure long-term continuity of supply and to support debtorin-possession (DIP) financing for the restructuring efforts. Reuters, “Visteon Files for Bankruptcy to Protect U.S.

Operations” (May 28, 2009)

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U.S. Motor Vehicle Industry: Federal Financial Assistance and Restructuring

Aid to Chrysler and General Motors Auto Dealers

Faced with reduced production and product offerings, GM and Chrysler announced in early May

that they would reduce their dealer networks by 25% as part of their restructuring plans.

Chrysler’s dealer reduction would take place almost immediately, a step it can take since it is in

bankruptcy. GM’s reduction would be of a longer duration, since its dealer contracts do not expire

until October 2010.

These reductions and a severely diminished pool of lending capital for new vehicles have caused

concern among GM and Chrysler dealers. They have expressed concern about the ability of some

dealers to survive this transition period and question the need for reducing the GM and Chrysler

dealer networks, arguing that more dealers translates into more sales for the automakers. In the

case of Chrysler, terminated dealers have asked for a longer transition period than the three weeks

offered.

Regarding the lack of financing for new autos, several steps have been taken to supply dealers

with a more adequate financing:

107

•

As discussed in more detail under a later section, Financial Issues in the Auto Industry,

the Bush Administration provided the two financing arms – GMAC and Chrysler

Financial—with TARP loans of $6 billion and $1.5 billion, respectively. These loans were

made to provide more liquidity so that dealers could continue to purchase inventory from

the manufacturers and assist consumers with financing. An additional $7.5 billion is

expected to be loaned to GMAC in May 2009 to jumpstart auto lending, according to

Treasury Secretary Geithner.107 (Chrysler Financial’s assets are being transferred to

GMAC under the terms of the restructuring.)

•

In December, the Federal Reserve announced that auto dealers could participate in a new

$200 billion “term asset-backed securities loan facility” (TALF) to finance inventory

purchases.

•

The Obama Administration announced a new “warrantee commitment program,”

to assure potential vehicle purchasers that new car warranties would be backed

by the federal government during the period in which the two companies were

being restructured. Whatever the status of the companies, even if it included a

period in bankruptcy, any vehicle warranty offered by the companies would be

“back-stopped” with federal support.108

•

The Small Business Administration’s 7(a) loan program has been expanded,

enabling dealers and other small businesses to get access to working capital.

According to the National Automobile Dealers Association, this change will

“encourage lenders to assist thousands of additional dealers with the liquidity

they need to keep their doors open, make payroll and prevent further

layoffs…”109

Automotive News, “GMAC Could Get $7.5 billion More from U.S., Report Says” (May 11, 2009).

108

The program is described in Department of the Treasury. “Obama Administration’s New Warrantee Commitment

Program” (March 30, 2009).

109

National Automobile Dealers Association press release, “NADA Praises SBA Action to Expand Loan Eligibility”

(May 1, 2009).

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•

President Obama has expressed support for a new federal program to remove older cars

from the road, as a means to spur automobile sales. This technique has been successful in

other countries – notably in Germany,110 where auto sales increased by 21% in February

and by a smaller amount in March – and in a number of states, such as Texas and

California. Several bills have been introduced that would authorize such scrappage

programs, including H.R. 520/S. 247, the Accelerated Retirement of Inefficient Vehicles

Act, introduced respectively by Representative Israel and Senator Feinstein; H.R. 1550,

the Consumer Assistance to Recycle and Save Act (CARS), introduce by Representative

Sutton; and H.R. 1606, the New Automobile Voucher Act, introduced by Representative

Manzullo.

Presidential Decision on Loan Requests – New Conditions for Support

On March 30, 2009, President Obama announced that the Auto Task Force had completed its

evaluation of the GM and Chrysler viability plans in light of their requests for additional federal

assistance. In the case of GM, he stated, “the plan they put forward is ... not strong enough.” With

respect to Chrysler, “with deep reluctance” the Administration concluded that it could not survive

on a stand-alone basis and “needs a partner to remain viable.”111 The Administration therefore

accorded the two companies a short period of time to revise their plans and undertake additional

actions, before making a final decision on the amount and framework of longer-term support.

In a “key finding” on auto industry restructuring, the Administration emphasized that, while GM

and Chrysler present different issues and problems, in both cases, “their best chance of success

may well require utilizing the bankruptcy code in a quick and surgical way.” This would not be a

liquidation or a “traditional,” long, drawn-out bankruptcy in the Administration’s vision, but a

“structured” bankruptcy as a tool to “make it easier for General Motors and Chrysler to clear

away old liabilities.... ”112

Administration Calls for “More Aggressive” GM Viability Plan

For GM, the Administration offered “adequate working capital over the next 60 days,” while the

company revised its viability plan. As an “initial step,” the resignation of CEO Wagoner was

requested and accepted, because, in the President’s words, of a recognition of a need for “new

vision and new direction to create the GM of the future.”113

In its analysis, the Task Force found that not only had GM failed to complete the steps necessary

to achieve agreement between the company, the bondholders, and the UAW on necessary

concessions to succeed as a viable enterprise, but the plan itself was seriously flawed. GM’s plan

did not adequately deal with the issues of too many brands and dealers, nor did it significantly

shift its product strategy away from a reliance for profits on high-margin trucks and SUVs. The

Task Force concluded it did not explain how GM was going to come close to maintaining its

110

For a longer discussion of how some foreign governments are prompting sales of older cars through voucher

programs (or “cash for clunkers”), see later in this report, “Falling Demand Affects All Automakers in the United

States and Abroad.”

111

White House. Briefing Room, “GM & Chrysler” (March 30, 2009).

112

Treasury, “Obama Administration New Path.”

113

White House, “GM & Chrysler.”

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market share going forward while shedding half of its current product brands, and the plan

assumed “improvement in net price realization despite a seriously distressed market, lingering

consumer quality perceptions, and an increase in smaller vehicles (where the Company has

previously struggled to maintain pricing power).”

In addition, the Task Force found that the plug-in hybrid Chevrolet Volt, currently in

development, held “promise ... [but] will likely be too expensive to be commercially successful in

the short term.” It found that cash needs associated with legacy liabilities would continue to grow

through 2013-2014, reaching a level of $6 billion per year. The Task Force analysis did conclude,

however, that, given “improvements that have been made to date, ... there could be a viable

business within GM if the Company and its stakeholders engage in a substantially more

aggressive restructuring plan.”114

In support of this conclusion, the Administration announced that it would insure that GM had

“working capital” for 60 more days “to develop a more aggressive restructuring plan and a

credible strategy to implement such a plan.”115 Leadership of the company as CEO during this

period devolved to the president and chief operating officer under Wagoner, Frederick Henderson.

Administration: Chrysler Needs Deal with Fiat

By contrast, the Task Force did not believe that Chrysler could continue as a stand-alone

company. The company was considered to lack the scale necessary to transform its product

mix toward smaller-size vehicles. It was not geographically diversified, with its sales

concentration too heavily focused on North America. And, unlike GM, Chrysler had failed in

recent years to make significant gains in quality improvements when measured against

competitors. As a result, the [Task Force] found that Chrysler’s plan is not viable as

currently structured. However, a partnership with another company, such as Fiat or another

prospective partner ... could lead to a path for viability for Chrysler.116

Following up on this conclusion (and the Task Force had reportedly met with Fiat CEO Sergio

Marchionne), the Obama Administration offered Chrysler support for 30 more days while it

sought to reach a definitive partnership agreement with Fiat. If such a deal could be reached, the

Administration would consider lending up to $6 billion more to the partnership, providing some

additional conditions were met. These included “extinguishing the vast majority of Chrysler’s

secured debt.” There would also have to be a labor agreement with the UAW “that entails greater

concessions than those outlined in the existing loan agreements.” The new restructuring plan

would have to assume no more than $6 billion in ongoing U.S. government support, provide for a

positive company cash flow, and an “adequately capitalized mechanism” for financing vehicle

purchases by both customers and dealers.117

114

This analysis and criticisms are detailed in Department of the Treasury. GM February 17 Plan: Viability

Detrmination (March 30, 2009).

115

Department of the Treasury. “Obama Administration New Path to Viability for GM & Chrysler” (March 30, 2009).

116

Details and conclusion in Department of the Treasury. Chrysler February 17 Plan: Viability Determination (March

30, 2009).

117

Treasury, “Obama Administration New Path.”

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Chrysler Files For Bankruptcy

At the end of March, the administration gave Chrysler 30 days to obtain support for its

restructuring plan from all the stakeholders, including unions, bondholders, potential partner Fiat,

previous partner Daimler (which still owned 19.9%), and its current owner, Cerberus Capital

Management.

Chrysler and the Auto Task Force used the month of April to assemble support from each of these

constituencies so that the company could avoid bankruptcy court and, instead, emerge as a leaner

company in partnership with Fiat. One by one, most of the stakeholders agreed to the terms of an

out-of-court settlement. 118 Among the investors holding $6.9 billion in Chrysler debt, a group

representing 30% of the company’s debt did not reach agreement with the U.S. Treasury and

Chrysler by the April 30th deadline. Lacking out-of-court agreement with these investment firms

and hedge funds, Chrysler filed for federal bankruptcy protection as a mechanism to reach a final

restructuring agreement.

Terms of the Chrysler-Fiat Alliance Agreement

President Obama announced the terms of the incomplete Chrysler-Fiat Alliance on April 30. It is

expected to create the sixth-largest global auto manufacturer and produce a range of new, fuelefficient automobiles. Fiat chairman Sergio Marchionne has indicated he’d be interested in

running the new company as chief executive officer. 119 This alliance, which includes a new ninemember board of directors, has a new set of owners as shown in Table 2, as well as new

corporate leadership,120 and the following components:121

•

Cerberus Capital Management will waive its share of Chrysler’s $2 billion second lien

debt and forfeit its entire equity stake. It agreed to transfer its ownership of Chrysler

headquarters to the new alliance.

•

Daimler, Chrysler’s former owner and a current minority shareholder, has waived its

share of Chrysler’s $2 billion of second lien debt and gave up its 19% equity stake. It

agreed to pay $600 million to Chrysler’s pension funds.

•

Fiat agreed to contribute a free license to use all of its intellectual property on automobile

technology in exchange for 20% of the new company’s equity. Fiat will select three

Chrysler directors once the company is reorganized and its equity stake could grow from

20% to 35% and then to 51% if it meets performance benchmarks. These requirements

for a larger equity holding will require Fiat to introduce a vehicle built in a U.S. plant that

achieves 40 mpg; provide Chrysler with a new overseas distribution network and make

new, cleaner engines at a U.S. Chrysler facility.

118

The Detroit News, “Daimler Gives Up Stake in Chrysler” (April 28, 2009).

Bloomberg.com, “Obama Pushes Chrysler-Fiat Deal at Bankruptcy Looms” (April 30, 2009).

120

CEO Robert Nardelli will leave Chrysler and take a position at Cerberus; Vice Chairman and President Tom

LaSorda has retired. C. Robert Kidder, former chairman of Borden Chemical and Duracell International, will become

Chrysler chairman when the new company emerges from bankruptcy.

121

Cited from U.S. Department of the Treasury press release, “Obama Administration Auto Restructuring Initiative and

Chrysler-Fiat Alliance” (April 30, 2009).

119

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•

The United Auto Workers (and its counterpart in Canada, the Canadian Auto Workers)

agreed by unanimous vote122 to significant concessions on wages, benefits, and retiree

health, including agreements on overtime, holiday and cost of living pay, hiring of parttime employees and entry level workers and suspension of major portions of its Job

Security Program.

•

The new Chrysler will establish a Voluntary Employee Beneficiary Association (VEBA)

that will, after 2010, provide health care benefits to Chrysler retirees. The VEBA will

own 67.69% of Chrysler initially and select one independent director, but otherwise have

no governance rights. In the Shareholder Plan filed with the bankruptcy court, the VEBA

director agrees to “vote its membership interests in accordance with the recommendations

of the independent directors of the company in proportion to such recommendations.”123

•

The U.S. Treasury will receive an initial 9.85% equity stake, with the right to appoint

four directors, but otherwise will not play a role in the new Chrysler’s governance.

•

The governments of Canada and Ontario will together receive 2.46% of the new equity,

based on their financial contribution to restructure Chrysler and they will have the right to

appoint one independent director.

•

Chrysler will enter into an agreement with GMAC that will provide dealer and customer

financing after bankruptcy, in lieu of Chrysler Financial, which agreed to cooperate in the

transition of its current dealer agreements to GMAC.

•

Chrysler will continue to honor warranties, backed by the U.S. Treasury’s Warranty

Support Program.

•

The dealer network will be reduced by 25%; existing dealers will reduce their dealer and

service contact margins and suppliers have agreed to price reductions on the inputs they

supply the company.

Table 2. Reorganization of “New” Chrysler

Percentage Ownership of Stakeholders

Owner

Initial Interest

Interest After Fiat

Meets First Terms

Interest After Federal

Loan is Terminated

Fiat

20.00

35.0

51.00

U.S. Department of the Treasury

9.85

8.0

6.03

UAW Retiree Medical Benefits Trust

67.69

55.0

41.46

Canadian Government

2.46

2.0

1.51

100.00

100.0

100.00

Total

Source: Form of Amended and Restated Limited Liability Company Operating Agreement for New Chrysler, filed

with U.S. Bankruptcy Court, see page 84.

122

The Detroit News, “Daimler Gives Up Stake in Chrysler” (April 28, 2009).

Shareholder Agreement filed by Chrysler with U.S. Bankruptcy Court, May 2009, Sec. 2.4, “VEBA Voting

Restriction.”

123

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U.S. Motor Vehicle Industry: Federal Financial Assistance and Restructuring

The only constituency that did not reach agreement on the restructuring plan before April 30 was

the bondholder group which holds $6.9 billion in debt. Within this investor group, the largest

banks – J.P. Morgan, Citibank, Morgan Stanley and Goldman Sachs – agreed to accept $2

billion124 in cash for this debt, but a group of investment firms and hedge funds balked. They

argued that, as senior creditors, U.S. law required that they be considered first and before junior

creditors. They said that the UAW and Fiat were granted seats on the board, but that bondholders

were offered no representation. Oppenheimer Funds, one of the firms that did not agree to terms,

said in a statement:

Our holdings in secured Chrysler debt are entitled to priority in long-established U.S.

bankruptcy law, and we are obligated to our fund shareholders to support agreements that

respect these laws.125

According to news reports,

Many dissidents paid from 50 cents to 70 cents on the dollar for their Chrysler loans, so

they’re sitting on losses, according to people familiar with the matter. Ronald E. Kolka,

Chrysler’s chief financial officer, said in a court filing that the first-lien debt is trading at

about 15 cents on the dollar in the secondary market.126

After a week in bankruptcy court, the dissident bondholders group was dissolved when several of

the investment firms withdrew, removing significant obstacles to a quick bankruptcy proceeding.

The administration and many in Congress were deeply concerned about the delays caused by the

investors group. They viewed them as unnecessarily hamstringing an important agreement that

had national economic significance. In announcing the alliance agreement on April 30, 2009,

President Obama singled out the dissident investors, referring to them as “a small group of

speculators” who “decided to hold out for the prospect of an unjustified taxpayer-funded bailout.”

Representative John Dingell said of them:

The rogue hedge funds that refused to agree to a fair offer to exchange debt for cash from the

U.S. Treasury – firms I label as the ‘vultures’ – will now be dealt with accordingly in

court.127

Bankruptcy Court Issues for Chrysler

In light of the impasse over repaying the investors, Chrysler filed for bankruptcy in the New York

Bankruptcy Court on April 30, 2009. To finance the bankruptcy, the U.S. Treasury gave Chrysler

$500 million in working capital and arranged $4.5 billion in debtor-in-possession, or DIP,

124

The U.S. Treasury raised its offer to $2.25 billion but withdrew it after some investors rejected it, according to a

May 1, 2009 article in the Detroit News, “Obama Confident Bankruptcy Will Save Chrysler.”

125

Bloomberg.com, “Chrysler Lenders Tested Obama, Lost Game of Chicken” (May 1, 2009).

126

Ibid.

127

Ibid.

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U.S. Motor Vehicle Industry: Federal Financial Assistance and Restructuring

financing. 128 It promised up to $6 billion in senior secured financing to support the new company

after the sale to Fiat.129

A Treasury filing made to the bankruptcy court lays out the choice for the court:

Irrespective of how Chrysler came to this point, it, along with its employees, vendors,

dealers, customers and the communities built around Chrysler’s operations, now face two

sharply divergent possibilities: Chrysler can liquidate, wind down its operations and end its

long history of building American cars; or Chrysler can consummate a sale within the next

60 days to an appropriate industry partner. Hard choices and painful consequences may well

result even from the sale of Chrysler to an appropriate partner within the next 60 days.

However, the alternative is far worse.130

Federal judge Arthur Gonzalez was assigned to the case; he has previously managed other major

U.S. bankruptcies, including Enron and WorldCom. 131 In his first rulings on the case, Judge

Gonzalez approved a Chrysler request to keep the company open during bankruptcy, so it can pay

such costs as lawyers and the electric bill at Chrysler headquarters (Chrysler’s plants will be shut

until the conclusion of the bankruptcy proceeding). Chrysler’s attorneys will seek to convince the

judge that “sales of Chrysler assets to a new Chrysler-Fiat partnership is the only way to avoid a

collapse of the entire company.”132

A recent analysis of the pending bankruptcy proceeding in Automotive News is instructive:

The fastest way out of Chapter 11 is through a prepackaged bankruptcy filing, in which all

creditors agree to a reorganization plan before the filing. In that case, it is possible for the

troubled company to present the plan to the bankruptcy judge, get it approved, and be out of

bankruptcy—sometimes within days.

But the odds of a giant automaker, with assets around the globe, getting all of its thousands

of creditors to agree in advance to a reorganization plan are slim to none, bankruptcy experts

say. That increases the value of Section 363 sales as a way to speed the process. Section 363

could come into play as Fiat picks and chooses from Chrysler’s assets to form an alliance,

discarding the parts it doesn't want.133

In a 363 sale, Chrysler’s most attractive assets, such as the plants it wants to operate in the future,

would be spun off into a new Chrysler, under the Fiat alliance. The rest of the assets, such as

closed plants, would remain with the old Chrysler and be sold off. Chrysler has filed a motion for

the judge to approve a Section 363 sale. It must adhere to a strict U.S. Treasury timetable or face

default on U.S. government loans.

128

See a further discussion of DIP loans in this report under the section “Financial Solutions: Bridge Loans and

Restructuring.”

129

Detroit Free Press, “Chrysler to Shed 8 Plants in Case” (April 30, 2009).

130

U.S. Treasury filing in U.S. Bankruptcy Court in New York (April 30, 2009).

131

The Wall Street Journal, “The Chrysler Bankruptcy Plan: Chrysler Bankruptcy Judge Handled Enron, WorldCom”

(May 1, 2009).

132

Detroit Free Press, “Trying to Keep the Doors Open” (May 1, 2009).

133

Automotive News, “Section 363 Sales Could Speed Chrysler’s Exit from Chapter 11” (April 30, 2009).

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U.S. Motor Vehicle Industry: Federal Financial Assistance and Restructuring

General Motors Faces New Challenges

With continuing tight credit, the U.S. economy mired in recession, and unemployment rising, 134

General Motors has found an out-of-court turnaround more and more difficult to put together. It is

facing a June 1 deadline to develop a restructuring plan that its stakeholders, including the U.S.

government, must accept if bankruptcy reorganization is to be avoided. 135

Economic factors are potentially more serious for GM than Chrysler because of the possibility

that many consumers could stay away from GM showrooms over bankruptcy concern, thus

worsening GM’s financial position. GM built only 1.33 million vehicles globally in the first

quarter 2009. That is 903,000 fewer than in the same period a year ago and was reflected in the

$5.9 billion GM loss in the first quarter. Revenue dropped by 47% compared with the same

period a year ago. GM has announced that it will end its Pontiac division and is planning

extended shutdowns this summer at all of its North American plants.136 Ray Young, GM’s chief

financial officer said,

Once you start losing revenues, you get yourself into a vicious cycle from which you cannot

recover. We prefer to restructure outside of bankruptcy, but if we have to go in, we need to

go in and out quickly.137

General Motors, working with the Obama administration’s auto task force, is attempting to meet

the government’s requirements for future assistance. Along these lines, it renegotiated its

agreement with the United Auto Workers about pay, work rules, and the funding of its retiree

health care obligations. It offered 10% equity to individual bondholders who hold $27 billion in

debt. GM said that it needs to cut the debt by at least $24 billion, so it would need the approval of

90% of its bondholders.138 On May 27, GM announced that it did not see the possibility of

reaching an agreement with the bondholder group.139

Unlike Chrysler, GM is not seeking a partner, but it is in discussion with a number of foreign

automakers and domestic investors who have expressed an interest in parts of GM’s operations.

The most publicized of these discussions are with Fiat and Magna which are both interested in

purchasing GM’s European operations, especially its Opel unit. In addition, Fiat has an interest in

GM’s profitable Latin American operations. GM is also selling Saturn, Saab, and Hummer and

various entities have expressed interest in each of them.

Recent reports indicate that the Auto Task Force is pressing GM to make plans for bankruptcy.140

Under this scenario, GM would be split into a “new General Motors,” along with its strongest

assets, and an “old GM” comprised of operations it did not want to operate in the future. This is

similar to the approach Chrysler is taking. This approach is intended to allow GM to emerge from

bankruptcy as a leaner and more competitive organization.

134

The U.S. April unemployment rate hit 8.9%, up from 8.5% in March.

Automotive News, “GM to notify dealers of cuts this week; bankruptcy ‘more probable’” (May 11, 2009).

136

The Detroit Free Press, “GM Details Its Summer Shutdowns” (April 24, 2009).

137

The New York Times, “GM, Leaking Cash, Faces Bigger Chance of Bankruptcy” (May 8, 2009).

138

Ibid.

139

The Washington Post, “Rescue Plan Would Give U.S. Most of GM’s Stock” (May 27, 2009).

140

The Washington Post, “GM Posts Loss of $6 Billion” (May 8, 2009).

135

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U.S. Motor Vehicle Industry: Federal Financial Assistance and Restructuring

Impact on the National Economy141

The question of rescuing one or more of the Detroit 3 automakers comes up at a time of

considerable weakness in the overall economy. In the fourth quarter of 2008, real gross domestic

product (GDP) fell by 6.3% (well beyond the Commerce Department advance estimate that it

would decline by 3.8%)142 and by 6.1% in the first quarter 2009. Most economists are not very

sanguine about short run prospects either. The International Monetary Fund forecasts that the

world economy will shrink this year for the first time in decades and the U.S. economy will

contract by 2.8%, the largest decline since 1946.143 U.S. unemployment is projected to peak at

about 10%.144 Many believe that the consequences of a Detroit 3 company’s failure for the

national economy would add to the adverse economic climate.

National Impact of Detroit 3 Failure

The White House Fact Sheet on the loan program for GM and Chrysler estimated that “the direct

costs of American automakers failing and laying off their workers in the near term would result in

a more than 1% reduction in real GDP growth and about 1.1 million workers losing their jobs,

including workers for auto suppliers and dealers.” Economists generally assess that economic

growth of at least 2% is required to accommodate a growing labor force and keep the rate of

unemployment from rising.

In the third and fourth quarters of 2008 and the first quarter 2009, the annual-rate value of motor

vehicle output was $333.5 billion, $257.2 billion, and $211.3 billion, respectively, out of a total

annual-rate gross domestic product (GDP) of $14.4 trillion, $14.2 trillion, and $14.1 trillion for

the same time periods.145 Motor vehicle production thus represented 2.3% of total output during

the third quarter of 2008, but only 1.8% and 1.5%, respectively, of total output during the fourth

quarter 2008 and first quarter 2009. The total number of workers employed in the manufacture of

U.S. autos in 2007, measured on an annual basis, was 859,000. Of those, 186,000 worked in light

vehicle assembly, and 673,000 were employed in the manufacture of parts.146

Estimates vary of job loss resulting from a failure of one or more Detroit 3 companies and their

production. The estimates depend on different models and assumptions. But in every case, the

impact on employment is serious.

•

141

The Inforum model at the University of Maryland produced estimates of “peak

year” (2011) job loss ranging from 826,000 jobs in event of “retirement” of 20%

of Detroit 3 production (a shutdown of Chrysler, for example) to more than 2.2

This section was written by Bill Canis, Specialist in Industrial Organization and Business.

142

U.S. Department of Commerce. Bureau of Economic Analysis. News release on “Gross Domestic product,” January

30, 2009

143

Congress Daily, April 22, 2009

144

IHS Global Insight, U.S. Economy Forecast Flash, April 2, 2009

145

Department of Commerce, Bureau of Economic Analysis. National Income and Product Accounts Table 1.2.5.

Gross Domestic Product by Major Type of Product, in billions of dollars, seasonally adjusted at annual rates.

http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=19&Freq=Qtr&FirstYear=2007&LastYear=2009

146

Thomas H. Klier and James M. Rubenstein, “Who Really Made Your Car?,” Chicago Fed Letter, Federal Reserve

Bank of Chicago, October 2008. See also Table 4 in this report.

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U.S. Motor Vehicle Industry: Federal Financial Assistance and Restructuring

million peak-year job losses in the event of a 60% Detroit 3 shutdown. However,

the study also notes that the higher shutdown level is unlikely over the long term

and that the practical worst-case scenario would be a restructuring and

downsizing, with a 40% production loss. This would be estimated to result in 1.5

million jobs lost in the peak year, and a net average loss of just under one million

jobs per year through 2014, against what employment would otherwise be.147

•

Anderson Economic Group/BBK, an international business advisory firm with

customers in the automotive industry, produced a separate set of estimates with a

different methodology. AEG/BBK’s worst-case scenario was bankruptcy and

eventual liquidation of two of the Detroit 3. In this case, they estimated that more

than 1.2 million jobs would be lost in the first year, and nearly 600,000 in the

second year. Netting out a small number of persons gaining alternative

employment, the AEG/BBK estimate was 1.8 million jobs lost over two years

among the OEMs, their suppliers and dealers, and others “indirectly” linked to

the industry.148

•

The Center for Automotive Research (CAR), a research organization with some

support from industry, did an economic simulation of a failure of domestic

automakers based on two separate sets of assumptions.149 In the first case it was

assumed that the problems of the Detroit 3 automakers led to a permanent 100%

decline in the production of domestic automakers in the first year (2009). It was

also assumed that the effect of that shock would result in such a large drop in the

demand for parts that suppliers would be forced to either liquidate or restructure.

It was assumed that the disruption to the parts suppliers would cause domestic

production of foreign-owned auto manufacturers to also drop to zero in the first

year. In this scenario, the total number of jobs lost in the United States in the first

year was estimated to be 2.95 million.150 That figure includes jobs lost at auto

manufacturers and parts suppliers, as well as in the rest of the economy, because

of the drop in consumer spending resulting from the direct job losses. In the

second year (2010), production at the foreign-owned firms would begin to pick

up and employment would recover somewhat with the number of jobs lost falling

to 2.46 million.

•

The second CAR scenario assumes that although in the first year (2009) domestic

production of the Detroit 3 automakers drops to zero, auto production recovers to

50% of its former output in the second year and continues at that level. In this

147

University of Maryland. Inforum Economic Summary, Potential Job Losses from Restructuring the U.S. Auto

Industry, December 16, 2008.

148

Anderson Economic Group/BBK. Automaker Bankruptcy Would Cost Taxpayers Four Times More Than Amount of

Federal Bridge Loans, December 8, 2008.

149

David Cole, et al., CAR Research Memorandum: The Impact on the U.S. Economy of a Major Contraction of the

Detroit Three Automakers, Center for Automotive Research, November 4, 2008.

150

Jeffrey Werling in the Maryland Inforum study (p. 3) stated, regarding the CAR top number, “It seems implausible

that 100% of U.S. auto production would be idled. Yet the most widely cited total job loss figure, ‘up to 3 million,’ is

based on such an unrealistic assumption.” Toyota and Honda, for example, are already reportedly planning

modifications to their “just-in-time” supply chain models in order to ameliorate the effects of supplier bankruptcies;

see, Detroit News, “Toyota May Modify Supply Chain,” December 30, 2008. The figure of 3 million could be taken,

however, as an estimate of the total number of jobs that could be at risk.

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U.S. Motor Vehicle Industry: Federal Financial Assistance and Restructuring

scenario, the estimated U.S. job loss in the first year would be 2.46 million,

falling to 1.50 million in the second year.

Impact Focused on “Auto Alley”

Any loss of output due to the difficulties with U.S. automakers will likely be felt nationwide, but

because of the geographic concentration of those firms it will be much greater in some regions

than in others. According to Klier and Rubenstein, Michigan accounts for the manufacture of onequarter of all auto parts.151 They also point out that there is a corridor between the Great Lakes

and the Gulf of Mexico that has become known as “auto alley.” In 2008, 43 of 50 auto assembly

plants were located in auto alley. Those geographic areas where automakers are concentrated

would experience the greatest economic difficulties resulting from any loss of U.S. auto output.

Klier and Rubenstein also estimate that three-quarters of all auto parts suppliers are located within

one day’s drive (truck delivery) of Detroit, including those located within the Canadian province

of Ontario.152

Howard Wial of the Brookings Institution, a Washington, DC-based think tank, has done an

analysis of how different U.S. metropolitan areas would be affected if the Detroit 3 companies

were to go out of business.153 Wial’s analysis suggests that 50 metropolitan areas rely heavily on

Detroit 3-related jobs, measured as the OEMs and suppliers accounting for 1% or more of the

area workforce. Though this may seem a small share of total employment, he cites studies to

claim that up to twice as many jobs in metro areas are supported by jobs directly in the auto and

auto parts industry. These metro areas are almost all clustered in the “auto alley” region noted

above, stretching as far south as Tuscaloosa, Alabama, and as far to the northeast as western New

York. The only affected metro area west of St. Louis is Ogden, Utah, and no cities are included on

either coast, or in the South, beyond Kentucky, Tennessee, and Alabama. Among the metro areas

with the most Detroit 3-related jobs, only the Detroit area itself has more than 100,000 jobs in

total that meet this description. The Chicago area is next with about 20,000 jobs. Some smaller

cities figure among the top 20 metro areas in Detroit 3-related employment, such as Kokomo,

Indiana, where 22% of all jobs are in autos and auto parts. But, Wial says,

There are also many auto and auto parts jobs in Los Angeles, Dallas, and Cincinnati, large

metropolitan areas where these industries account for a smaller share of employment.

Closures of Detroit 3-related plants in those areas would harm the workers who were laid off

but would have less effect on metropolitan area economies.154

Conversely, he found that, “In addition, there are 21 metropolitan areas, mainly in the South

where at least 1% of total employment is in autos and/or auto parts, but where little or none of

that employment is attributable to the Detroit 3 or their suppliers.” These metro areas are almost

all in the southern states north of Florida and east of the Mississippi River. However, Wial

151

Klier and Rubenstein, “Who Really Made Your Car?,” (October 2008 article). Also discussed more fully in their

book, Who Really Made Your Car? Restructuring and Geographic Change in the Auto Industry (Kalamazoo, MI:

Upjohn Institute, 2008).

152

Klier and Rubenstein, Who Really Made Your Car?, chapters 5-6. For a state-by-state analysis of automotive

manufacturing jobs, see CRS Report RL34297, Motor Vehicle Manufacturing Employment: National and State Trends

and Issues, by Michaela D. Platzer, especially Figure 5 and Table 1.

153

Howard Wial, “How a Metro Nation Would Feel the Loss of the Detroit Three Automakers,” Metropolitan Policy

Program at Brookings, December 12, 2008.

154

Wial, “Loss of Detroit Three,” p. 3.

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U.S. Motor Vehicle Industry: Federal Financial Assistance and Restructuring

concludes, “If the Detroit 3 disappear then some of [these] metropolitan areas may gain jobs, but

they will not gain all of the jobs lost by the Detroit 3.”155

The Domestic Motor Vehicle Market156

Loss of Detroit 3 Market Share

Foreign brands, both imported and produced at U.S. plants, have been gaining market share for

decades. 157 As illustrated in Figure 1, the Detroit 3’s decline relative to the total U.S. market has

continued since 2000. From two-thirds of the total U.S. market for passenger cars and light trucks

in 2000, the Detroit 3 share declined gradually to 58.2% in 2005. Some of this decline

represented aggressive U.S. manufacturing and expansion plans by foreign-owned companies:

Toyota, Honda, Nissan, and Hyundai have all opened new assembly plants in the United States

since 2000, and more are on the way.

Figure 1. U.S. Motor Vehicle Sales

Passenger Cars and Light Trucks

Millions of Units

2000

2001

2002

2003

2004

U.S. Total

2005

2006

2007

2008

2009*

Detroit 3

Source: Automotive News Market Data Center (2008-09 data); Ward’s Automotive Yearbook (2001-2008).

Notes: 2009 is based on sales in the first four months of the year and IHS Global Insight forecasts of sales of 9.5

million units for the full year.

155

Wial, “Loss of Detroit Three,” p. 4.

This section was written by Bill Canis, Specialist in Industrial Organization and Business.

157

CRS Report RL32883, U.S. Automotive Industry: Recent History and Issues, by Stephen Cooney and Brent D.

Yacobucci, esp. Figure 9 and Table 3.

156

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U.S. Motor Vehicle Industry: Federal Financial Assistance and Restructuring

Although, as noted below in this report, some planned foreign-owned plants may be delayed,

Toyota is still planning to open a new plant in Mississippi, Kia is building its first plant in

Georgia, and Volkswagen, which had closed a U.S. plant in the 1980s, has said that it will

continue to build an announced plant in Tennessee. Additionally, a number of the foreign-owned

plants have significantly expanded existing facilities.158

However, after losing eight points of market share in 2000-2005, the Detroit 3 saw their losses

accelerate by an additional 10 points between then and 2008, dropping to a 47.5% market share.

This loss of market share occurred at the same time as the total market was in decline. Although

the U.S. automotive market is cyclical, the decline in sales starting in mid-2008 has been

especially abrupt because of the crisis in global credit markets. Figure 1 indicates that the total

domestic light motor vehicle market stabilized at around 17 million sales per year through 2005

(passenger cars and light trucks, which include sport utility vehicles, minivans, and pickup

trucks). It dropped about a half-million units in 2006 to 16.5 million, another half-million to 16.2

million in 2007, then plunged to just 13.2 million in 2008.159 As mentioned previously in this

report, U.S. sales in 2009 are projected to be about 9.5 million units, according to IHS Global

Insight.160 Car and light truck unit sales by the Detroit 3 fell to just 6.2 million, compared to 11.5

million in 2000, and almost 10 million as late as 2005. More detailed data show that each of the

Detroit 3 saw sales decline by nearly one million vehicles or more just since 2005, and each

suffered significant market share losses. Automotive data is usually figured in “units,” which

means, for example, that an expensive Cadillac Escalade counts the same as an inexpensive Kia

Rio. But for the entire industry, average new vehicle transaction prices, after rising from 2004

through 2007, fell steadily in 2008, meaning less “top line” revenue per unit sold.161 Moreover,

Table 3 illustrates that part of the Detroit 3’s problems relate to the continued reliance on truck

sales, when light trucks are declining as an overall share of the market. Having become more

specialized in larger vehicles, the Detroit 3 have been especially adversely affected by the sharper

decline in the sales of such vehicles.

In 2001, “light truck” sales, which include smaller SUVs known as “crossover” utility vehicles

(CUVs), were higher than U.S. passenger car sales for the first time. Trucks’ lead over cars

continued to expand through 2005 – 9.3 million units to 7.7 million units in that year, for a net

margin of 1.6 million. But 2004-2005 saw Hurricanes Ivan, Katrina, and Rita, which temporarily

disrupted oil and gas production in the Gulf of Mexico and exacerbated a period of rising fuel

prices and volatility that continued through 2008.162 In 2008 U.S. car and truck sales both fell: car

sales by 843,000 versus a two million unit decline in light truck sales. Truck sales were also more

than three million units less than the all-time 2005 annual peak. While most foreign-owned

manufacturers had also expanded their truck offerings (including SUVs and minivans) in the U.S.

market, they have not been as reliant as the Detroit 3 on truck products. By 2008, each of the

Detroit 3 still counted on light trucks for a majority of sales (55% for GM, higher levels for Ford

and Chrysler), while no foreign-owned competitor did so. Only about a third of foreign-brand

companies’ sales overall were classified as light trucks.

158

Automotive News, “Transplant Expansions: Onward Ho!” December 1, 2008, p. 3.

159

For the third quarter, the annual rate of sales was even lower, and, owing to lower-than-average income and credit

ratings among their customers, Detroit 3 companies only commanded 42% of the domestic retail market; Detroit Free

Press, “Credit Crunch Hits Buyers of Detroit 3” (October 26, 2008).

160

IHS Global Insight, North American Light-Vehicle Industry Forecast Report, April 2009, pp. 12-13.

161

Detroit Free Press, “Vehicle Transaction Prices Continue Falling” (October 28, 2008).

162

On recent trends, see CRS Report RL34625, Gasoline and Oil Prices, by Robert Pirog.

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U.S. Motor Vehicle Industry: Federal Financial Assistance and Restructuring

During the present decade, both market forces and federal regulation have begun to push fuel

economy levels upward, leading to a move away from larger, less fuel-efficient vehicles, a market

that the Detroit 3 have generally dominated. While the CAFE standard set by the Department of

Transportation’s National Highway Transportation Safety Administration (NHTSA) for cars has

held steady at 27.5 mpg throughout the decade, the actual average of model-year vehicles sold, as

measured on a different basis by the Environmental Protection Agency (EPA), has increased from

22.9 mpg to 24.1 mpg, with most of the gain coming in model year (MY) 2007-2008.163 While

the light truck standard held steady at 20.7 mpg through 2004, actual average truck mpg, as

measured by EPA, remained less than 17.0 mpg. Both the federal standard and the actual average

declined in 2005 for light trucks. The actual average mpg was 18.1 by MY2008.164

Falling Demand Affects All Automakers in the United States and

Abroad

While the first half of 2008 was characterized by a market shift to more fuel-efficient vehicles in

the U.S. market under the influence of high fuel prices, the latter half of the year saw almost all

OEMs suffer from declining sales, in the United States and globally. IHS Global Insight estimated

that global vehicle production fell by 16% in the fourth quarter of 2008. CSM, an automotive

consulting group, estimated that there is now enough worldwide capacity to build 90 million cars

a year, but only 66 million will be produced in 2009.165

163

EPA’s numbers, which are used on the window stickers of new cars and trucks, are downgraded from the CAFE test

to better reflect in-use fuel economy. For example, the CAFE test is limited to 55 miles per hour, and does not include

the use of air conditioning or other accessories.

164

For more details, see CRS Report RL34743, Federal Loans to the Auto Industry Under the Energy Independence

and Security Act, by Bill Canis and Brent D. Yacobucci.

165

Sources quoted in New York Times, “Car Slump Jolts Toyota, Halting 70 Years of Gain,” December 23, 2008, p. 1.

Congressional Research Service

U.S. Motor Vehicle Industry: Federal Financial Assistance and Restructuring

Table 3. Market Shares of U.S. Car and Truck Sales

2001

2005

Sales (millions of units)

2008

Sales (millions of units)

Manufacturers

Cars

Light

Trucks

Total

Market

Share (%)

Cars

Light

Trucks

Total

Market

Share (%)

Cars

Light

Trucks

Total

Market

Share (%)

2.3

2.6

4.9

28.3

1.8

2.7

4.5

26.3

1.3

1.6

2.9

22.0

Ford

1.5

2.4

3.9

22.9

1.0

2.1

3.1

18.3

0.7

1.3

2.0

15.2

Chrysler

0.6

1.7

2.3

13.3

0.5

1.8

2.3

13.6

0.5

1.0

1.5

11.4

Detroit 3

(total)

4.4

6.7

11.0

64.5

3.3

6.6

9. 9

58.2

2.5

3.8

6.3

47.7

Asian Brands

3.3

1.9

5.2

30.4

3.6

2.6

6.2

36.6

3.8

2.2

6.0

45.5

German

Brands

0.8

0.1

0.9

5.0

0.7

0.1

0.8

5.0

0.7

0.2

0.9

6.8

Total U.S.

Salesa

8.4

8.7

17.1

100.0

7.7

9.3

16.9

100.0

7.0

6.2

13.2

100.0

Source: Automotive News Market Data Center (2008 data); Ward’s Automotive Yearbook (2001-2008).

CRS-37

U.S. total includes other specialty manufacturers.

U.S. Motor Vehicle Industry: Federal Financial Assistance and Restructuring

Not just the Detroit 3 are affected by this slump. Toyota announced its first net operating loss

since 1950 and said that it lost $7.7 billion in the first quarter 2009, even more than the $5.9

billion that General Motors lost in the same period.166 Like other automakers, Toyota has seen an

erosion of its market. On March 3, 2009, the Associated Press reported that Toyota’s financial

subsidiary, Toyota Financial Services, had requested a $2 billion loan from the Japan Bank for

International Cooperation, a government-backed bank. 167 Nissan CEO Carlos Ghosn in February

2009 revised earlier predictions of an annual profit to a projected $2.9 billion loss. He announced

plans to reduce production by 20% and to eliminate 20,000 jobs.168

Honda similarly projected negative results for the second half of its fiscal year (ending March

31st). Both Honda and Toyota cited strengthening of the yen against the U.S. dollar to the highest

level in 13 years as a major factor in their worsening results. According to the Financial Times,

“I would like the government and the Bank of Japan to move a bit more swiftly in ensuring

the stability of the exchange rate,” [said Honda CEO Takeo Fukui,] code for intervening in

the market to weaken the currency.169

Reaction among Japanese companies in the U.S. has included temporary production cutbacks at

their U.S. plants, and Toyota’s announced delay in completing its new plant in Mississippi, where

it will build the Prius hybrid model. Toyota also consolidated production of its full-size Tundra

pickup at the San Antonio plant, and temporarily closed one line there. Production cutback and

temporary production shutdown announcements were widespread among Asian OEMs in the

United States.170 Nissan has converted its truck and SUV line in Mississippi to produce a

commercial type of vehicle.171 Among German-owned manufacturers, Mercedes Benz has offered

buyouts to all 4,000 of its production workers in Alabama.172

Assistance to the auto industry by encouraging owners to trade in older, more polluting, vehicles

in favor of new or late-models is one option that has gained favor in Europe. Part of the German

government’s recently enacted $106 billion stimulus package is an allocation of about $2 billion

to subsidize those who scrap vehicles at least nine years old by giving them up to $4,000 to

purchase a new car that meets the newest and strictest European emission standard. Volkswagen,

Opel, and Fiat have seen significant sales increases in Germany since the measure was

introduced. With a budget to cover about 600,000 car purchases, official sources say they are

receiving 6,000 subsidy applications per day. 173 A similar program in France provides more than

166

The New York Times, “Toyota Posts Annual Loss and Warns of Another” (May 8, 2009).

Reported by Detroit News, “Toyota Talking on Japan Government Loan” (March 3, 2009).

168

Automotive News, “Nissan Expects $2.9 Billion Loss; Will Cut Jobs, Output” (February 16, 2009).

169

Quoted by Jonathan Soble, “Honda Cuts Expenses Amid Further Downturn,” Financial Times, December 18, 2008;

see also Wall St. Journal, “Corporate News: Honda Slashes Outlook for Full-Year Sales, Profit,” December 18, 2008,

p. B3; While Japanese domestic auto sales fell to the lowest levels in 20 years in 2007-08, a cheap yen level of about

120 to the dollar and strong exports allowed Japanese production to reach an all-time high in early 2008. But the

dollar’s fall to less then 90 yen and a global growth slowdown has led to falling auto company profits, production and

exports; Business Week, “How the Strong Yen Has Weakened Japan,” January 19, 2009, pp. 50-51.

170

Automotive News, “Honda, Toyota, Others Whack N.A. Output,” December 15, 2008, p. 8.

171

Automotive News, “Nissan to Sell Small Commercial Vehicles in U.S.,” December 15, 2008, p. 24.

172

Tuscaloosa News, “Mercedes Offers Buyouts to Vance Plant Employees,” October 31, 2008.

167

173

The best English-language description of the program is in Canadian Press, “Germany Pays Consumers to Junk Old

Cars” (February 5, 2009); also, Deutsche Welle, “Berlin Rejects Expansion of Car Subsidy Scheme” (February 12,

2009); Financial Times, “Scrapping Old Cars Boosts German Sales” (March 3, 2009).

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$1,000 for those who trade in older vehicles for newer models, though the emission requirements

are not as strict as in Germany. 174 Canada also has a national Vehicle Scrappage Program, but

instead of directly encouraging new car purchases, it offers incentives to use other forms of

transportation or $300 in cash.175

Similar to these efforts abroad, several bills have been introduced in Congress. Senator Dianne

Feinstein and Representative Steve Israel introduced similar bills, S. 247/H.R. 520, which would

pay up to $4,500 to those in the United States who trade in an older, less fuel-efficient model for a

new, high fuel economy vehicle. Representative Betty Sutton introduced H.R. 1550, which would

provide a voucher program to replace older vehicles with newer models, mainly those

automobiles manufactured in the United States, or in some cases, North America. Representative

Don Manzullo introduced H.R. 1606, which would establish a voucher program for the purchase

of new vehicles with no requirement for a trade-in. The House Energy and Commerce Committee

reported H.R. 2454 (American Clean Energy and Security Act) on May 21, 2009, which includes

a voucher system that

Provides vouchers if a consumer’s old vehicle gets less than 18 miles per gallon (mpg) and

the new car achieves at least 22 mpg. If the new vehicle mileage per gallon is at least 4 mpg

higher than the old vehicle, the voucher would be $3,500; if the new vehicle mileage is at

least 10 mpg higher than the old vehicle, the voucher would be $4,500. The legislation has

similar provisions for light duty and certain other trucks.176

More direct subsidies are also being considered by other governments. A French government plan

to loan about $7.6 billion to Renault and Peugeot ran into opposition from the European

Commission and other European Union member states, because it apparently would have

required these OEMs not to close any plants in France and to source from French-based suppliers.

After discussions with the European Commission, French authorities agreed “not to implement

measures that would breach the principles of the single market.”177 The European Union, through

the European Investment Bank (EIB), has also indicated that it would assist the industry, although

one commentator has said, “The European Union has talked about making a huge wedge of

money available for the industry – up to ... $50 billion – but this has remained hot air so far.”178

The British government has announced an Automotive Assistance Program, which will offer loan

and loan guarantees up to a total of ₤1.3 billion. Following a collapse in new vehicle sales there,

the Bank of England has also indicated that it would assist OEMs and dealers in consumer

lending. 179

174

Government of France. Decree no. 2009-66 (January 19, 2009). See comments also by Neil Winton in Detroit News,

“Survival of the Fittest Trumps Everything at Geneva This Year” (February 27, 2009).

175

CBC News, “Clunker Removal Program Bound to Fail, Says Analyst” (February 2, 2009).

176

U.S. House of Representatives, Committee on Energy and Commerce, “Energy and Commerce Committee Passes

Comprehensive Clean Energy Legislation, May 21, 2009.

177

Financial Times, “Brussels and France Resolve Auto Dispute” (March 2, 2009).

178

Winton, “Survival of the Fittest.” The EIB has limited the total loan amounts available to the European auto industry

to €7 billion (less than $10 billion), “with most of the funds to develop clean cars.” See Financial Times, “Carmakers

Warned Nearing Loan Limits” (March 9, 2009), and “EU Lender’s Rebuff on Auto Loans Likely to Inflame Ailing

Carmakers” (March 10, 2009).

179

Detroit Free Press, “British Bank Nears Aid for Carmakers’ Finance Units” (February 25, 2009); Detroit News,

“General Motors Yet To Approach UK for Aid” (March 5, 2009).

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Labor Negotiations in 2007 to Address Competitive Issues

Many analysts have commented that, in competing with foreign-owned auto manufacturers, the

Detroit 3 are hampered by outdated labor contracts, negotiated with the UAW through decades of

collective bargaining.180 In 2007, each of the Detroit 3 negotiated new collective bargaining

agreements with their principal union, the UAW. 181 These agreements provided for transfer of

retiree health care in 2010 from the companies to a separate trust, with some board members

appointed by the UAW. The trusts will be established with financial support initially from each of

the Detroit 3. The agreements also provided the companies with other flexibility in managing and

reducing labor costs, so that they could compete on a footing perceived to be more equal to

foreign-owned companies, which are generally non-union in the United States. This included

union acceptance of a second, and lower, tier of wages and benefits for new hires by the Detroit 3,

under specified circumstances. 182

But with the auto market declining, there has been little new hiring at the lower wage rate.183

Even so, wage rate gaps between the Detroit 3 and the international companies may be

exaggerated. CAR data quoted in a Wall Street Journal article compare standard UAW hourly

assembly line worker pay of $26 per hour with $26 per hour at Toyota, $24 at Honda, and $21 at

Hyundai. Honda and Kia are starting production line workers at their new plants in Indiana and

Georgia, respectively, at a wage of just less than $15 per hour, but this compares with a similar

starting “Tier 2” wage for new UAW hires at Ford and GM.184

The principal gap remains in the legacy cost burden that the 2007 Detroit 3 contract agreements

with the UAW attempted to address. CAR is quoted as calculating that Toyota’s hourly total labor

cost, including all benefits, is $44 per hour versus $73 at GM.185 In its December 2008

restructuring plan presented to Congress, Ford attached a table showing that wages and wagerelated costs in 2008 were $43 per hour, versus an average of $35 per hour at foreign-owned U.S.

auto manufacturers. But Ford’s total hourly labor cost was $71, against $49 for the foreign-owned

companies. The principal difference was a “legacy cost” – principally projected health care costs

for retirees – of $16 per hour, versus comparable foreign companies’ costs of $3 per hour. The

new UAW contract, by transferring this cost off Ford’s books to the VEBA in 2010, would bring

the hourly cost burden down to $58 per hour. And, if Ford could replace 20% of its projected

workforce with new, entry-level employees, as allowed by contract, Ford asserts it would bring

the hourly cost level down to $53.186

180

This issue was reviewed in CRS Report RL32883, U.S. Automotive Industry: Recent History and Issues, by Stephen

Cooney and Brent D. Yacobucci, and CRS Report RL33169, Comparing Automotive and Steel Industry Legacy Cost

Issues, by Stephen Cooney.

181

This included Chrysler, which had become newly independent from German parent Daimler after Cerberus, a hedge

fund, bought an 80% share of the company.

182

These agreements are described in CRS Report RL34297, Motor Vehicle Manufacturing Employment: National and

State Trends and Issues, by Michaela D. Platzer.

183

Washington Post, “Bankruptcy Could Offer GM More Flexibility” (November 29, 2008), p. D1.

184

Wall St. Journal, “America’s Other Auto Industry,” December 1, 2008, p. A22; Automotive News, “Transplant

Wages Are a Moving Target,” December 15, 2008, p. 3.

185

Wall St. Journal, “America’s Other Auto Industry.”

186

Ford Business Plan, Appendix 2.

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Another issue addressed in the 2007 contracts and in congressional hearings was pay for laid-off

autoworkers and the “jobs bank.” Laid-off Detroit 3 production workers receive unemployment

compensation from state governments, plus supplementary compensation from company funds

that brings their pay close to the base level for one year.187 After that, if they are still unemployed,

they may be eligible to enter the jobs bank, where they may continue to receive almost their full

base salary, even if no jobs are available. The terms are now more restrictive under the new

contract, and two years is the maximum stay. The jobs bank was declared suspended by the UAW

as of December 2008, in an effort to assist the Detroit 3. Elimination of the jobs bank was made

an explicit target of the federal loans term sheets signed by GM and Chrysler in December 2008.

In January 2009, on the occasion of announcing its annual 2008 financial results, with a large

corporate loss, Ford indicated that it and the UAW had agreed to end the jobs bank program at

Ford.188

The Energy Independence and Security Act of 2007 (EISA)

The new collective bargaining agreements were negotiated and ratified by the time Congress

approved, and President Bush signed, a substantial increase in mandated fuel economy in EISA

(P.L. 110-140) in December 2007. Although the Detroit 3 were losing money, the new labor

agreements, combined with an EISA direct loan program for manufacturing advanced technology

vehicles and components, appeared to provide new resources for a transition that would aid the

Detroit 3 in achieving improved fuel economy. 189

Representatives of the Detroit 3 reportedly attempted to increase the scale of loans available

during legislative consideration of appropriations to fund the EISA direct loan program, as well as

to reduce restriction of the EISA loans to production of advanced technology vehicles. But these

efforts were unavailing, as Congress maintained the same program rules, when it approved the

appropriations in September 2008.190

By the time Congress considered funding this program in September 2008, the economic climate

for the auto sector as a whole, and for the Detroit 3 in particular, had worsened markedly. The

downturn in the broader domestic economy reduced sales for virtually all manufacturers in the

middle of the year, as consumer confidence declined and credit became harder to obtain. While

neither Ford nor GM has been profitable since 2006, the operating losses turned much worse in

2008. GM lost a larger-than-expected $30.29 billion in 2008191 and $5.9 billion in the first quarter

of 2009 (compared with $3.3 billion in the year-ago same quarter).192 Ford reported a $14.6

billion loss for all of 2008, the worst annual result in the company’s 105-year history. 193 It had a

narrower-than-expected loss of $1.4 billion for the first quarter 2009, compared with a slight

profit in the same year-ago quarter.194 “Cash burn” (net operating cash loss) for GM was less than

187

Communication to CRS from UAW, December 17, 2008.

Ford Motor Co. news release, January 29, 2009.

189

Details of the direct loan program are discussed in CRS Report RL34743, Federal Loans to the Auto Industry Under

the Energy Independence and Security Act, by Bill Canis and Brent D. Yacobucci.

190

See CRS Report RL34743, Federal Loans to the Auto Industry Under the Energy Independence and Security Act, by

Bill Canis and Brent D. Yacobucci.

191

Detroit Free Press, “As GM Losses Deepen, Bankruptcy Fears Grow” (February 27, 2009).

192

Bloomberg.com, “GM Loss Widens to $5.98 Billion as Bankruptcy Looms” (May 7, 2009).

193

New York Times, Business Section, “Ford Reports a Record $14.6 Billion Loss for 2008” (January 9, 2009).

194

CNN Money, “Ford loses $1.4 billion” (April 24, 2009).

188

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expected in the first quarter 2009, at $10.2 billion; Ford’s was $3.7 billion. Both companies see

the rate diminishing during the year.195 According to court filings, Chrysler lost $16.8 billion in

2008 and its monthly cash burn rate is $1.7 billion.196

Legislative Efforts to Assist Automakers in November 2008

Following the November 2008 elections, the Bush Administration was asked to consider making

funds available to the auto industry from the $700 billion appropriated for relief of the financial

sector in the Emergency Economic Stabilization Act (EESA, P.L. 110-343).197 Secretary of the

Treasury Henry Paulson and Senate Minority Leader Mitch McConnell instead urged Congress to

assist the automakers by diverting funds from the EISA loan program. 198

On November 17, 2008, Senate Majority Leader Harry Reid introduced S. 3688, which, in Title

II, included a provision allowing $25 billion from the EESA funding to be used as loans to

automakers in the United States under certain conditions. On November 18-19, hearings were

held before the Senate Banking Committee and the House Financial Services Committee, in

which the chief executive officers of the Detroit 3, as well as UAW President Gettelfinger, made

the case for immediate assistance to the industry. They were supported by some Members of

Congress. Critics of such assistance were also heard.

The industry CEOs stated that they were asking for “bridge loans” to tide them over during a

market decline of unanticipated severity, which had affected all automakers, and an equally

unanticipated unavailability of credit from financial markets. The bridge loans would provide

time for cost-saving measures, including the transfer of retiree health care responsibilities, to

work. That, plus a hoped-for recovery of the domestic auto market by 2010, could allow the

Detroit 3 to return to financial stability. As GM’s then-CEO G. Richard Wagoner testified:

[We, in cooperation with the UAW] have taken actions designed to improve GM’s liquidity

by $20 billion by the end of 2009, and they obviously affect every employee, retiree, dealer,

supplier, and investor involved in our company ... I do not agree with those who say we are

not doing enough to position GM for success. What exposes us to failure now is not our

product lineup, is not our business plan, is not our employees and their willingness to work

hard, it is not our long-term strategy. What exposes us to failure now is the global financial

crisis, which has severely restricted credit availability and reduced industry sales to the

lowest per capita level since World War II.

Our industry, which represents America’s real economy, Main Street, needs a bridge to span

the financial chasm that has opened before us. We’ll use this bridge and we’ll use it

effectively to pay for essential operations, new vehicles and power trains, parts from our

195

Reuters, “Ford CFO says sees lower cash burn through year”, (April 24, 2009); Bloomberg.com, “Young Says GM

Cash Burn in 2009 to Be Slower Than 2008”, (February 26, 2009).

196

Bloomberg.com, “Chrysler Secured Lenders Will File Secrecy Request, Lawyer Says” (May 5, 2009).

197

Speaker of the House Nancy Pelosi and Senate Majority Leader Harry Reid, Letter to Secretary of the Treasury

Henry M. Paulson (November 8, 2008).

198

Financial Times (FT.com), “Paulson Rejects TARP Aid for US Carmakers” (November 12, 2008); Bloomberg.com,

“Paulson Urges Congress to Approve Automaker Funding” (November 13, 2008); and “Democrats, Bush Deadlocked

over Expanding Aid to U.S. Carmakers” (November 19, 2008).

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U.S. Motor Vehicle Industry: Federal Financial Assistance and Restructuring

suppliers, wages and benefits for our workers and suppliers, and taxes for state and local

governments that help deliver essential services to millions of Americans.199

In the hearings, the CEOs revealed how the $25 billion in loans would be divided among their

three companies. CEO Wagoner of GM stated that his company would need $10-12 billion to

bridge the present period of financial insecurity, while Robert Nardelli of Chrysler said that his

company would require $7 billion. Alan Mulally of Ford stated that Ford currently did not have

an operating capital shortfall, but would request that $7 billion to $8 billion be reserved in case of

eventual cash needs.200

Congressional critics of the industry’s requests included Senator Richard Shelby, Ranking

Member of the Banking Committee, and Representative Spencer Bachus, Ranking Member of the

House Financial Services Committee. They argued that to a large extent, the problems of the

Detroit 3 were due to the long-term consequences of poor management and labor decisions,

which would not be fixed with short-term financial assistance, and that the industry would soon

be requesting additional federal support. Moreover, assistance to the auto industry, it was stated,

would encourage other industries to also importune the federal government for aid during the

present economic downturn.201

No action was taken in the Senate on S. 3688 in November 2008. Further developments were

deferred until December 2008, after full reports had been presented by the Detroit 3 on their

financial condition and restructuring plans.

Assistance to Auto Industry in the 2009 Stimulus Package

After the Bush Administration provided loans to the auto industry in December 2008, Congress

also considered assistance as part of the 2009 stimulus package approved as H.R. 1 (ARRA, the

American Recovery and Reinvestment Act, P.L. 111-5, signed into law by President Obama on

February 17, 2009). Senator Barbara Mikulski had introduced a bill, S. 333, which would have

allowed purchasers of light motor vehicles to deduct interest payments and state and local excise

taxes on their 2009 federal income tax return. The measure was subject to a cap on the amount

paid for the vehicle, and the benefit was reduced for higher income earners. A companion bill,

H.R. 159, was introduced in the House by Representative William Pascrell. The chief provisions

of S. 333 were included as §§1008-1009 in the version of H.R. 1 approved on a 61-37 vote by the

Senate on February 10, 2009.

In the conference committee, the deduction for interest charges was deleted. Thus, §1008 in the

law as finally approved and signed, the deduction for motor vehicle purchases in the balance of

2009 is restricted to state and local sales or excise taxes on the vehicle. The same income and

sales price limitations are in effect, but the provision is expanded to include motorcycles and

motor homes.

199

U.S. Senate. Committee on Banking, Housing, and Urban Affairs. Hearing. Examining the State of the Domestic

Auto Industry (November 18, 2008), Testimony of G. Richard Wagoner.

200

Senate Banking Committee hearing, November 18. The total level of requests was raised to $34 billion in

subsequent business plans formally submitted by the three companies to Congress on December 2, 2008 (as

summarized in Washington Post, “Auto Giants Ratchet Up Pleas for Aid” (December 3, 2008), p. A1.

201

See their respective statements in the Senate Banking Committee hearing (December 4, 2008) and the House

Financial Services Committee hearing (December 5, 2008), on the domestic auto industry.

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Analysts generally agreed that the final measure would have a relatively minimal effect in

increasing auto sales. An analyst for the automotive data firm R.L. Polk & Co. estimated that the

average value to consumers would be $330 per vehicle. The impact on sales was estimated at less

than 100,000 vehicles, whereas, if the interest deduction had been maintained, the impact could

have been as high as 350,000 vehicle sales. In addition to this direct assistance to individual

private consumers, the legislation also contained a number of aid provisions for development of

advanced vehicle technologies, and to finance the purchase of such vehicles for the federal

vehicle fleet. 202

Employment in the Automotive Sector

Employment in the automotive sector of the U.S. economy includes both manufacturing and

services activities, but the latter actually employ more than in manufacturing. As seen in Table 4,

at the end of 2008 the Current Employment Survey of the Department of Labor’s Bureau of

Labor Statistics estimated that there were about 790,000 persons employed altogether in motor

vehicle manufacturing (including heavy trucks, trailers and other vehicles), compared to more

than 3.5 million in various (automotive-related) service activities.

Since the era of Henry Ford, automotive employment has been a mainstay of U.S. manufacturing

employment. But its relative significance has decli

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