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US House Passes $14B Auto Industry Restructuring Package

The US House of Representatives yesterday passed HR 7321, the Auto Industry Financing and Restructuring Act, by a vote of 237 to 170 (largely along party lines). The legislation, worked out with the White House, provides up to $14 billion in short-term bridge loans for the auto industry, laced with a number of restrictions and controls.

The legislation now goes to the Senate for consideration, where it faces considerable Republican opposition. The White House is urging passage.

If enacted, the bill calls for the President to designate a “car czar(s)”—one or more individuals—to carry out the requirements of the Act and hold the car companies accountable for implementing their long-term restructuring plans. The designee has veto power over industry expenditures in excess of $100 million, and allocates the funds on a priority basis to protect the economy.

The $14 billion is to be taken from the Section 136 funds already approved for retooling to produce fuel efficient autos. (The act reserves $500 million in credit subsidy for Section 136 loans, and authorizes additional appropriations to replenish Section 136 funds.)

No new funds will be available for bridge financing after the President’s Designee approves the automaker’s restructuring plan. The President’s Designee must establish by not later than 1 January appropriate measures to assess the progress of each automaker in developing a restructuring plan, and must evaluate the progress of each automaker against those measures in 45 days.

Automakers must submit by 31 March 2009 a restructuring plan to achieve long-term viability, international competitiveness and energy efficiency, including repayment of government financing, compliance with applicable fuel efficiency and emissions requirements, achievement of positive net present value, rationalization of costs and capacity, and proposals for restructuring existing debt. The designee may provide financial assistance to an automaker to implement an approved restructuring plan.

If the President’s Designee (PD) determines that adequate progress is not being made to reach agreement on a restructuring plan, the President’s Designee will submit to Congress his own plan to achieve long-term viability for the automaker.

The restructuring plan will not be approved unless the PD determines that the plan will result in the ability of the automaker to comply with applicable fuel efficiency and emissions requirements. In addition, the PD may accelerate repayment of a loan or cancel other financial assistance if the automaker fails to comply with applicable fuel efficiency and emissions requirements after 31 March 2009.

The bill outlines a number of “taxpayer protections” including:

  • Warrants. The PD may not provide any loan to an Automobile Manufacturer unless he or she receives from the automakers warrants for non-voting common stock or preferred stock equal to 20% of the loan amount. In Chrysler’s case, the government will receive warrants or the economic equivalent of warrants in Chrysler’s holding company or in Cerberus, the company that controls a majority stake in Chrysler.

  • Executive Compensation. All executive compensation restrictions of TARP apply to automakers receiving financial assistance for the duration of that assistance, plus: (1) no bonuses or incentives to 25 most highly paid employees; (2) stringent prohibition on golden parachutes; and (3) no compensation plan that could encourage manipulation of reported earnings to enhance compensation.

  • Dividends. Automakers receiving financial assistance (including any holding company in case of Chrysler) generally may not pay dividends, distributions, or their economic equivalent for duration of the assistance.

  • Super Seniority. All other obligations of any automaker receiving loans (or in the case of Chrysler, Chrysler’s holding company or Cerberus) will be subordinate to those loans to the extent permitted by the terms of such obligations in effect as of 2 December 2008. The automaker will pledge all available security and collateral against the loans.

  • Discharge. In the event of a subsequent bankruptcy of an automaker, the debts to the government from the financial assistance will not be dischargeable.

  • Aircraft. An automaker must divest and may not own or lease any private passenger aircraft while financial assistance is outstanding.

If an automaker fails to submit a restructuring plan that can be approved by the PD within the time provided by the Act, the loan will be called in 30 days, unless a restructuring plan is approved within that period.

In terms of oversight, the Act stipulates provisions similar to GAO and Special IG oversight provisions of TARP apply, plus the explicit grant to GAO of access to automakers’ records (including records of any subsidiary, affiliate, or majority stakeholder in case of Chrysler/Cerberus). There are extensive reporting requirements from GAO, Special IG, and the PD to Congress.

The PD is to prioritize allocation of financial assistance to automakers:

  • For bridge loans, based in order on (1) necessity of the financial assistance, (2) potential impact of failure of the Auto Manufacturer on the US economy, and (3) ability to utilize the financial assistance optimally.

  • For any long-term financial assistance, based in order on (1) ability to utilize the financial assistance optimally, (2) potential impact of failure of the Auto Manufacturer on the US economy, and (3) necessity of the financial assistance.

The loans have a 7-year term (or longer as may be determined by the PD). The interest rate is 5% for the first 5 years and 9% thereafter. There is no prepayment penalty. For the duration of the loan, the PD may review and prohibit any asset sale, investment, contract, or commitment proposed to be entered into by the automaker valued in excess of $100 million if inconsistent with or detrimental to long-term viability.

The PD may accelerate repayment of a loan or cancel other financial assistance of an automaker if (1) the PD determines that the automaker has failed to make adequate progress towards developing a restructuring plan, (2) the automaker fails to submit an acceptable restructuring plan or fails comply with any other applicable condition or requirement of the loan program, or (3) the automaker fails to make adequate progress in the implementation of an approved restructuring plan.

Each automaker is also to analyze the potential use of excess production capacity to manufacture vehicles (including buses and rail cars) for sale to public transit agencies. The Act also includes provisions to guarantee leases of qualified public transit agencies.




They forgot a provision requiring GM’s and Crysler’s creditors to guarantee the government loans to the degree that they are spend to redeem the creditors. The super seniority provision is good but not good enough because it is not certain that the bankruptcy estate is worth enough even to cover the most senior loans. Of cause with such an additional provision GM’s and Crysler’s creditors may file for bankruptcy despite of government loans and all by themselves if they believe the rescue attempt is fruitless anyway because they would end up paying for the rescue attempt if it fails. Another problem with the super seniority provision is that if I understand it correctly the government debt is only superior to new debt raised after December 2, 2008 which means it is effectively subordinate to all debt in GM and Chrysler since they have been unable to raise new debt since that date. If it passes in its current form I am afraid the government is very likely never to see a penny of their money again.


All they need to do outfit all of their operations with CANDU reactors and ZEBRA batteries. CANDU reactors and ZEBRA batteries would revolutionize the auto industry. The Japanese have just begun research into a space elevator, so CANDU reactor waste can be carried into space - and from there, sent directly to the sun for final disposal. ...ejj...

Mark A

I disapprove of this package. I dont think it does enough. But there isnt enough time to work out all the details in the time allowed.

I think they should not be bailed out, and if they fail, they fail. Afterwards, what GM needs to do is split off its divisions, and streamline. Sell Buick to some Chinese companies, or Kia, needing a established dealer network. Kill off GMC, as they are duplicates of Chevrolet, or sell them to someone like Caterpiller or John Deere. Merge Pontiac with Holden, out of Australia. Sell Hummer to someone like Caterpiller or John Deere. Keep Chevrolet complete, with basic offerings like the Volt. Keep Cadillac, but move it upscale and make it like a modern day Duesenburg, but with a more hi-tech approach to inovative drivetrains, to compete with BMW, Mercedes, Bugatti, Ferrari, Porsche, etc.

Chrysler should either become only a Dodge division, and compete with Chevrolet's/Toyota's offerings, or merge/ be bought out by Nissan. Then Nissan/Dodge would have a truck (Dodge Ram) to compete with Ford and Chevy in the super duty market, and Nissan cars have a bigger Dodge dealer network. Sell off Jeep to someone like Kia.

Ford is in the best position financially, but should still either eliminate its Mercury division, or sell it off to someone like Jaguar. Then Ford competes head to head with big hitters Chevy, Toyota, Nissan/Dodge. Move Lincoln upscale, to compete with Cadillac, Mercedes, Bentley, Jaguar, Aston Martin, etc.

This is a defining moment in automotive history. Lets hope the cards get played out correctly before they ruin us all.



Could you take 10 000 000 ++ Hummers and other similar Big-3 dinosaurs on the same trip to the sun?

Wonder how much of the $14B will be used to build more efficient elctrified vehicles.

If none, it will be tax payers money down the drain.


Mark A, your suggestions are ridiculous. You assume that somebody wants to buy all these companies that are losing money. Kia doesn't want Buick or Jeep, John Deere doesn't want GMC. Jag, which is owned by Tata (sold by Ford to Tata rather recently) doesn't need or want Mercury. GM can't make money on Hummer because nobody wants a Hummer any more. What makes you think this will change if somebody else buys it? What makes you think somebody else would want to buy it? Remember Oldsmobile and Plymouth? They are gone. Gone, not sold to somebody else. US auto sales have dropped from 15M per year down to around 10M. There is not enough room for all these players, regardless of who owns them.


My guesses? A bailout will not pass, or will soon be abandoned after making matters worse. GM and Chrysler file. Ford makes it, barely.

Peter is right; some parts of GM, Ford, and Chrysler have no sale value. Some are not really cars at all, a Mercury is a Ford. Oldsmobile and Plymouth were so like other products that there was no reason to continue them. Pontiac is redundant.

Part of the breakup may follow national lines. Volvo and Saab will revert to Swedish or EU companies. Buick apparently is well liked in China and could be sold. The domestic Buick might have to be shut. Overseas lines such as Holden will be sold off.

Overall I expect a domestic GM consisting of Chevrolet, Cadillac, and a truck division. Chevrolet would drop trucks. Saturn will become independent and possibly attract a foreign company seeking to acquire a US presence.

I think Chrysler is hopeless; moreso because they have no significant overseas assets. Ford will stop domestic car production including Lincoln and import the best of their overseas products. Ford trucks will continue.

Mark A

Peter Peter, dont take my suggestions literally. These are just ideas that I am suggesting. We are at a defining moment. Lets not bail these guys out just because we feel it is right. Lets work towards improvements and innovation.

Some of these upcoming Chinese automakers would love to buy into an existing dealer network, that is sold pennies on the dollar due to bankrupcy. John Deere or Caterpiller may not want to sell trucks or Hummers ever, but if they did, they could do it again for pennies on the dollar. There are many upcoming auto companies that would love to have the existing dealer network and automaking facilities that a Buick or a Jeep could provide. Dealers can either follow along or go to something else. Dont take things so literally.


Don't bail them out, but provide enough to buy time while a bankruptcy plan can be fashioned. The court system is too slow and expensive a process, but someone has to impose conditions on all parties, auto companies, labor, and lenders. Giving the auto companies numbers and telling them to negotiate is useless since there is no incentive for the other parties to give.


Which Big-3 can effectively compete world wide with existing gas guzzlers and/or with future PHEVs and BEVs?

(Certainly not all 3).

To survive, management vision and pay would have to change drastically and labor cost would have to be reduced by up to 50%.

Short of full bankruptcy, those two necessary measures will not materialize and the Big-3 will most likely sink deeper and deeper into oblivion. Bail outs are futile and will just delay the unavoidable.

If sold piece meal, some parts may survive when reorganized, divorced from current mamagers and workers and current gas guzzler mentality in favor of more efficient partly and fully electrified vehicles.

An automobile technical revolution has to take place. People and many car industry doctrines will fall to make room for new technologies. To resist would be futile and extremely costly.

Andrey Levin

There is only one person who can make this plan works. General Petraeus.


What is the use of producing more gas guzzlers (with government funds) if you can't sell them.

There are already many unsold thousands in the dealers parking lots. They will run out of space in the Big-3 keep producing.

We are definately NOT short of gas guzzlers. There are too many around.

Big-3 temporary closing (while retooling for HEVs, PHEVs and BEVs) would be a better idea.

Governments $$$ B could be used 50% for retooling and 50% to pay unemployment insurance for laid off workers at no more than 2x minimum wages for up to 12 months.

Bail outs $$$B should not be used for business as usual but to provoke a positive technology change in the car industries.

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