Put your hands up for Detroit

The US car industry finally has sight of a rescue plan but it must now persuade Congress it can deliver its side of the bargain. Stephen Foley reports

So, here we are, at a fork in the road. There's agreement about where we are headed: a sunny new land where a restructured US car industry has a viable future. It's just that different ideological GPS systems have mapped out quite different journeys.

Turn right for the direct route, ploughing through communities and leaving hundreds of thousands of workers as roadkill. Turn left for a scenic drive of undetermined duration, with a tank full of government money to burn.

Grimly nailbiting, isn't it? Will the beleaguered car manufacturers of Detroit, America's Motor City, get the government funds they need to stave off bankruptcy? Will a Congressional deal be blocked by filibustering free marketeers from the Republican party, making their last stand before the handover of power?

Even as the White House and Democratic leaders unveiled the outlines of a bailout agreement yesterday, we seemed little nearer the end of the wearying tussle on Capitol Hill. For General Motors and Chrysler, two of the big three, the needle is well into the red.

Both have said they could run out of money around the end of the year. Ford, which mortgaged everything up to and including its iconic blue logo before the credit markets shut down, says that the shockwaves from a bankruptcy by a rival might be enough to sink it too if its suppliers are put out of business.

The deal on the table yesterday is for $14bn of government loans to tide the companies over until 31 March, after which they must pass a "viability test". To get there, they must gather creditors, unions, dealers and suppliers to plan a voluntary restructuring. If they don't pass the test, they will be put into bankruptcy, where a court can mandate much tougher action, including breaking the companies apart and selling off whatever assets have value.

Congress has found it impossible to tie its bailout to specific restructuring plans, despite a month of trying, and a stop-gap measure that pushes the issue out into the new administration has seemed inevitable for some days. According to yesterday's compromise, the restructuring process will be put under the auspices of a "car czar", to be appointed by President George Bush, in consultation with his successor, Barack Obama.

"What we have seen in the last few weeks is how incredibly complex this issue is turning out to be," says Clint Currie, transportation analyst at Stanford Group in Washington. "That is why the car czar is a good idea, since you will need someone with financial expertise to see this through." The question of whether the Big Three really can pass a viability test – either alone or through a forced merger, say of GM (the biggest of the three) and Chrysler (the smallest) – depends heavily on the pressure for concessions that a car czar is able to exert on their stakeholders. Nancy Pelosi, Speaker of the House of Representatives, described it using a barber shop metaphor this week: everyone is getting a haircut.

Yesterday, Joel Kaplan, the White House's deputy chief of staff, suggested the czar would be doing something more robust than dressing hair. "This is someone who is going to bring them around the table, knock heads." Mr Currie said: "Viability will depend on the concessions that the different groups make. The biggest onus right now is on the labour groups, and it not just about hourly pay. The legacy benefits they are going to have to give. Next, going down the list, are the people who own the companies' debt, and it is hard to get them to accept 30 cents on the dollar unless there is some kind of threat. I think a deadline is a good bargaining tool."

The United Auto Workers union president, Ron Gettelfinger, said yesterday that he "strongly supports" the compromise deal. He has softened his stance that workers have already conceded enough in last year's talks with GM over a new labour contract, which goes into effect in 2010. That deal agreed a plan to transfer $51bn in healthcare benefits for current and retired employees into a trust administered by the UAW, freeing GM from liabilities it says have hurt its competitiveness. The union has already agreed this month to allow GM to defer payments into the trust.





Mr Gettelfinger appears willing to strike more bargains, as long as workers have some compensation if their concessions return GM to health. "If we're going to be asked to give up more, and it appears that we are, then we should have an equity stake in the company," he said.

Even with concessions from labour and creditors, most analysts believe additional government money will be needed as part of the restructuring plan, with longer-term loans appearing most likely – perhaps tied to commitments on the production of more environmentally friendly cars and acceptance of higher fuel-efficiency standards.

But even those who favour bankruptcy over bailout accept quietly that government money would have to be involved, at the very least through taking on pension liabilities under the federal Pension Benefit Guaranty Corporation and some big unemployment benefit bills, or with the government guaranteeing warranties so that buyers don't desert bankrupt companies. Straightforward loans might look a cost-effective way forward, come 31 March.

Inevitably, even if a viability test is passed in the spring, there are no guarantees. Car sales, which are running down by more than one-third in the US compared with last year, are not likely to snap back fast, and there are other issues, too. "As David Whiston, analyst at Morningstar, said: "All of the companies have to hope they can quickly reverse the perception of Detroit's quality gap. Too many Americans gave up on Detroit after bad experiences in the 1970s and 80s and are now firmly loyal to a foreign brand. Reversing this trend will likely take an entire generation."

The road ahead: Details of the deal

The Democrats and the White House have hashed out a compromise plan to bail out the car makers, but Republicans in the Senate are threatening to block it. The outlines of the deal are as follows:

* $14bn in bridge loans or lines of credit, using funds previously appropriated for creating fuel-efficiency technologies. Loans to have a term of seven years, at an interest rate of 5 per cent for the first five, rising to 9 per cent.

* In return for loans, warrants for rights to receive non-voting common stock or preferred stock, equal to 20 per cent of the loan amount, would be granted to the government.

* Government will be the most senior creditor, and its loans cannot be discharged even in a bankruptcy filing.

* A "car czar" or panel of presidentially appointed officers to have power to require immediate repayment of loans if car maker fails to make adequate progress by 15 February.

* Final restructuring plans must be presented by 31 March, 2009.

* A car maker's restructuring plan must comply with applicable fuel efficiency and emissions requirements.

* Restrictions on executive compensation.

* No dividends for shareholders.

Start your day with The Independent, sign up for daily news emails
News
ebookA unique anthology of reporting and analysis of a crucial period of history
News
peopleMathematician John Nash inspired the film Beautiful Mind
News
Richard Blair is concerned the trenches are falling into disrepair
newsGeorge Orwell's son wants to save war site that inspired book
Life and Style
Audrey Hepburn with Hubert De Givenchy, whose well-cut black tuxedo is a 'timeless look'
fashionIt may be a paradox, but the industry loves it
Arts and Entertainment
The pair in their heyday in 1967
music
Life and Style
fashionFrom bathing dresses in the twenties to modern bikinis
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Guru Careers: Software Developer / C# Developer

£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

Neil Pavier: Management Accountant

£45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...

Sheridan Maine: Commercial Accountant

£45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...

Laura Norton: Project Accountant

£50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...

Day In a Page

Abuse - and the hell that came afterwards

Abuse - and the hell that follows

James Rhodes on the extraordinary legal battle to publish his memoir
Why we need a 'tranquility map' of England, according to campaigners

It's oh so quiet!

The case for a 'tranquility map' of England
'Timeless fashion': It may be a paradox, but the industry loves it

'Timeless fashion'

It may be a paradox, but the industry loves it
If the West needs a bridge to the 'moderates' inside Isis, maybe we could have done with Osama bin Laden staying alive after all

Could have done with Osama bin Laden staying alive?

Robert Fisk on the Fountainheads of World Evil in 2011 - and 2015
New exhibition celebrates the evolution of swimwear

Evolution of swimwear

From bathing dresses in the twenties to modern bikinis
Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

Sun, sex and an anthropological study

One academic’s summer of hell in Magaluf
From Shakespeare to Rising Damp... to Vicious

Frances de la Tour's 50-year triumph

'Rising Damp' brought De la Tour such recognition that she could be forgiven if she'd never been able to move on. But at 70, she continues to flourish - and to beguile
'That Whitsun, I was late getting away...'

Ian McMillan on the Whitsun Weddings

This weekend is Whitsun, and while the festival may no longer resonate, Larkin's best-loved poem, lives on - along with the train journey at the heart of it
Kathryn Williams explores the works and influences of Sylvia Plath in a new light

Songs from the bell jar

Kathryn Williams explores the works and influences of Sylvia Plath
How one man's day in high heels showed him that Cannes must change its 'no flats' policy

One man's day in high heels

...showed him that Cannes must change its 'flats' policy
Is a quiet crusade to reform executive pay bearing fruit?

Is a quiet crusade to reform executive pay bearing fruit?

Dominic Rossi of Fidelity says his pressure on business to control rewards is working. But why aren’t other fund managers helping?
The King David Hotel gives precious work to Palestinians - unless peace talks are on

King David Hotel: Palestinians not included

The King David is special to Jerusalem. Nick Kochan checked in and discovered it has some special arrangements, too
More people moving from Australia to New Zealand than in the other direction for first time in 24 years

End of the Aussie brain drain

More people moving from Australia to New Zealand than in the other direction for first time in 24 years
Meditation is touted as a cure for mental instability but can it actually be bad for you?

Can meditation be bad for you?

Researching a mass murder, Dr Miguel Farias discovered that, far from bringing inner peace, meditation can leave devotees in pieces
Eurovision 2015: Australians will be cheering on their first-ever entrant this Saturday

Australia's first-ever Eurovision entrant

Australia, a nation of kitsch-worshippers, has always loved the Eurovision Song Contest. Maggie Alderson says it'll fit in fine