Effects of the 2008-2009 automotive industry crisis on the United States
Encyclopedia
Beginning in the latter half of 2008, a global-scale recession
adversely affected the economy of the United States
. A combination of several years of declining automobile sales and scarce availability of credit led to a more widespread crisis
in the United States auto industry in 2008 and 2009.
Following dramatic drops in automobile sales throughout 2008, each of the "Big Three" U.S. automakers: General Motors
(GM), Ford Motor Company
, and Chrysler
, requested emergency loans in order to address impending cash shortages. By April 2009, the situation had worsened such that both GM and Chrysler were faced with imminent bankruptcy and liquidation. With the intent to prevent massive job losses and destabilizing damage to the entire manufacturing sector, the U.S. and Canadian
governments provided unprecedented financial bailout support to allow the companies to restructure and jettison legacy debt via Chapter 11 bankruptcy. Both companies separately filed for this protection by June 1
.
General Motors emerged from bankruptcy as a new company majority owned by the United States Treasury, and Chrysler emerged owned primarily by the United Auto Workers
union and by Italian
automaker Fiat S.p.A.. Both companies terminated agreements with hundreds of their dealerships and GM discontinued several of its brand
s as part of bankruptcy proceedings. Ford Motor Company was able to survive without entering bankruptcy partly due to a large line of credit which it obtained in 2007.
The U.S. automakers were more heavily affected by the crisis than their foreign counterparts, such as Toyota. Following the 2000s energy crisis, the U.S. automakers failed to produce more fuel-efficient vehicles as opposed to the high-profit sport utility vehicles that were popular in the late 1990s and early 2000s which led to excess inventory and undesirable product. Since the automotive crisis abated, all three American automakers have increased sales of vehicles and have posted a profit.
The US Big Three were first weakened by the substantially more expensive automobile fuels linked to the 2003-2008 oil crisis which, in particular, caused customers to turn away from large sport utility vehicles (SUVs) and pickup truck
s, the main market of the American "Big Three" (General Motors
, Ford, and Chrysler
). The US automakers also suffered from considerably higher labor costs than their non-unionized counterparts, including salaries, benefits, healthcare, and pensions. In return for labor peace, management granted concessions to its unions that resulted in uncompetitive cost structures and significant legacy costs. Further, the volume of cars sold in the U.S. was significantly tied to home equity lines of credit, with 24% of sales financed this way in 2006. When the availability of these loans suddenly dried up in 2008 due to the subprime mortgage crisis
, vehicle sales declined dramatically, from 17 million in 2006 to 10.6 million in 2009.
In 2006, Consumer Reports
reported that all 10 of the cars that it considered to be the 10 best were built by Japanese companies. While Michigan lost 83,000 Big Three auto manufacturing jobs between 1993 and 2008, more than 91,000 new auto manufacturing jobs were created in Alabama, Mississippi, Tennessee, Kentucky, Georgia, North Carolina, South Carolina, Virginia and Texas during that same time period.
The support given to General Motors
and Chrysler
by the Obama Administration was widely unpopular, with an April Washington Post poll finding that 41% of Americans approved of the actions. A June Wall Street Journal/NBC News
survey found 39% approval.
of the Brookings Institution
argued that hourly wages were similar between the Big Three and the transplants. "The basic hourly wage received by a UAW
worker in a Big Three plant is close to that received by a Toyota or Honda worker in a U.S. plant. The UAW-negotiated wage was roughly $28 an hour in 2007. For new workers, the hourly wage was lower at $14 an hour; senior workers made more money. The major cost difference between UAW members and employees in foreign-nameplate factories in the U.S. comes in fringe benefits. The UAW has been one of the more successful American unions in fighting for generous pensions and health benefits for its members."
Dan Ikenson of the Cato Institute
argued that "total compensation is the cost of labor to the companies, and for GM it is about $73 per hour and for Toyota about $48. The average cost differential between the Big Three and all the foreign nameplate companies is about $30 per hour. That's huge." His computation includes all labor-related costs (e.g.., wages, healthcare, and pension—for both current workers and retirees.)
Andrew Sorkin of the New York Times indicated that GM and Chrysler pay $10–20 more per hour than transplants; this was vigorously disputed by David Cole of the Center for Automotive Research.
Average annual wages for production workers at the Big Three were $67,480 in 2007, and $81,940 for skilled workers. In Canada, GM’s 2008 average labor costs (including both wages and benefits) were $69 per hour, and Toyota's at $48 per hour, with similar productivity.
According to the Heritage Foundation
, the ratio of retirees to workers varies across the Big Three. For each active worker at GM, there were 3.8 retirees or dependents in 2006. At Chrysler, there were 2.0 and at Ford there were 1.6. This means the legacy labor cost burden for GM is significantly greater than its competitors.
Peter Morici
, a professor at the University of Maryland, College Park
’s school of business, testified that the extremely high labor and product development costs will keep the Big Three from developing the high quality vehicles needed to become profitable and surviving.
The Asian-owned companies' U.S. employees are mainly non-unionized; the Big Three are bound by contracts with the UAW.
According to the UAW, labor cost represented 8.4% of the total cost of manufacturing and selling an automobile in 2006. "The vast majority of the costs of producing a vehicle and transporting it to a dealership and preparing it for sale – including design, engineering, marketing, raw materials, executive compensation and other costs – are not related to direct or indirect manufacturing labor."
Jared Bernstein
, the chief economist of Vice President Joe Biden
, noted in an April 7, 2009 interview that most of the concessions that the UAW made in the 2007 contract applied only to new hires. Older workers "still benefit from contracts that were signed a long time ago."
As a result of the Jobs Banks, the US automakers are contractually obligated to pay 85-95 percent of union wages and benefits to members of the United Auto Workers union who aren’t working – even if their plants have been closed. In the agreement, GM would to allocate $2.1 billion in Jobs Bank payments over four years, Chrysler $451 million for its program along with another $50 million for salaried union employees, and Ford agreed to set aside $944 million. Peter Morici, a professor at the University of Maryland, College Park
’s school of business, testified that the Jobs Bank was one of the biggest problems that the Big Three face, saying “Right now if a plant closes in St. Louis and a new one opens in Kansas City, the workers don’t have to move from St. Louis to Kansas City; they can opt to get a $105,000 payout or go on Jobs Bank where they can collect 95 percent of pay for the rest of their lives.”
However, reducing the number of brands required closing or consolidation of dealerships, which due to state franchise laws is very expensive. For example, GM's retirement of the Oldsmobile
brand cost nearly $2 billion.
(equity) which pays no interest, GM's debt and interest burden would be substantially reduced.
However, bondholders of both Chrysler and GM rejected the debt swap offers, complaining of unequal treatment compared to the UAW, citing that their outstanding debt was more than double that of the UAW's health care trust. The UAW had been offered 50% and 40% stakes in the new Chrysler and GM, respectively, while the bondholders would have received 33 cents on the US dollar for Chrysler and 10% of the new GM (an analyst stated that the GM offer would be projected to recover 24 cents on the dollar). With the approval of the Treasury, the offer for bondholders was later amended to include warrants for a further 15% stake.
Bondholders complained of US government interference that bypassed the higher precedence of debtholder claims to favour the UAW, due to the UAW's political contributions to President Barack Obama
. One lawyer for the Chrysler bondholders stated that auto task force head Steve Rattner had ignored negotiation requests from the bondholders committee, while Rattner also threatened to destroy one of the bondholder's reputation for holding out. One GM bondholder described this as the socialist state intervention typical of Hugo Chavez
's Venezuela
, saying "This is the kind of stuff you'd expect from a banana republic. Not from the United States."
Obama publicly accused Chrysler bondholders of being speculators, after they rejected the last offer which caused Chrysler to file for bankruptcy, with some of them receiving death threats after a bankruptcy judge refused to protect their anonymity. The hedge funds stated that their clients included pension funds and university endowments. Around $7 billion USD of GM bonds are held by "Mom and Pop-type investors", with one lawyer describing it as autoworker retirees versus retirees.
Not surprisingly, any recapitalization (typically through bankruptcy) would all but wipe out the value of existing common stock shares, which had already declined significantly.
Estimates were that a Big Three shutdown would cause a decline in personal income of $151 billion the first year, and $398 billion over three years. The federal, state and local governments would lose tax revenue, and instead spend on welfare programs a total of $156 billion over three years.
Economist David Wyss
of S&P has posited that if GM and Chrysler disappear, there could be an increase of about 1 million imported cars every year, which would remove about $25 billion from the U.S. economy. That would reduce GDP by 0.2 percentage points annually—excluding the impact of lost jobs (higher unemployment) and wages.
article, Jordan Kimmel, a fund manager at Magnet Investing in Randolph, New Jersey
, said that if the Big Three automakers were liquidated or completely shut down, foreign companies such as Honda and Toyota would open up new manufacturing plants in the U.S., and there would be no long term loss in employment or damage to the economy.
Michael Schuman of Time Magazine stated that although a giant corporation failing would be ugly, it is better than artificially keeping it alive without a prospect of improvement. He compared the possible collapse of the US domestic automakers to the 1999 dismantling of the Daewoo Group
in South Korea
. Daewoo's proportionate economic impact on Korea was larger than that of the Big Three to the United States. The persistence of the belief that Daewoo and other Korean conglomerates were too big to fail led many bankers and investors to continually waste money on bailouts, despite their poor business plans and unprofitable projects, as Daewoo was unable to repay these loans. Once the too-big-to-fail perception was dispelled, with large conglomerates no longer considered the safest investments, bankers and investors began financing new opportunities in areas which had been starved of capital (small firms, entrepreneurs and consumers), while Korea's GDP actually rose after Daewoo's unwinding. Schuman also noted a similar analogy with Japan during its Lost Decade of the 1990s
, where banks kept injecting new funds into unprofitable "zombie firms" to keep them afloat, arguing that they were too big to fail. However, most of these companies were too debt-ridden to do much more than survive on further bailouts, which led to an economist describing Japan as a "loser's paradise." Schuman states that Japan's economy did not begin to recover until this practice had ended.
, Blythe McGarvie
said that bankruptcy would allow the automobile industry to become more competitive and sustainable, and cited the airline industry bankruptcy as an example.
Wharton finance professor Jeremy Siegel
, author of the book "The Future for Investors," asserted that Chapter 11 bankruptcy would allow Detroit to reorganize but not cause the massive job losses feared by some. "Any bailout of the auto industry is really a bailout for the health benefits of the UAW. That's all it is."
Opponents of a bailout believe that the automakers' problems could be more efficiently resolved by a bankruptcy court with legal power to dissolve existing contracts, shedding costs, and debts that it can no longer afford. They suggested that a government "car czar" would be ineffective since their actions could be swayed by Washington politics.
GM argued that a bankruptcy would threaten jobs and the solvency of the U.S. federal government's Pension Benefit Guaranty Corporation
(PBGC). PBGC Director has said: "GM has not been able to give us a straight answer about the funded status of their pension plan. We can't successfully monitor the situation if they are not responsive."
GM's pension fund had enough money for current obligations, but a report issued by the a Deutsche Bank estimates that the pension may be $18 billion under-funded by the end of 2008.
advocated a government-facilitated solution in which Big Three assets are transferred or sold to other firms better able to deploy the plant and employee resources. "[The] most constructive role the government can play at this point is to provide a short-term infusion of capital with strict repayment rules that will essentially require the auto makers to sell off their assets to other, successful companies." The authors argued that the Big Three make automobiles that not enough Americans want to buy, which cannot be solved by a bankruptcy restructuring focused initially on cost-side considerations like wages and benefits.
has advocated a government and private industry partnership to transform the automotive industry, creating a "high mileage vehicle economy" based on hybrid and fuel cell cars. Loans would be provided immediately, with conditions. He advocates a U.S. strategy of automotive technological leadership, which would "dramatically improve energy and national security, climate security, and U.S. global competitiveness."
(R-TX) wrote, "In bailing out failing companies, they are confiscating money from productive members of the economy and giving it to failing ones. By sustaining companies with obsolete or unsustainable business models, the government prevents their resources from being liquidated and made available to other companies that can put them to better, more productive use. An essential element of a healthy free market, is that both success and failure must be permitted to happen when they are earned. But instead with a bailout, the rewards are reversed – the proceeds from successful entities are given to failing ones. How this is supposed to be good for our economy is beyond me.... It won’t work. It can’t work... It is obvious to most Americans that we need to reject corporate cronyism, and allow the natural regulations and incentives of the free market to pick the winners and losers in our economy, not the whims of bureaucrats and politicians."
In a December 17, 2008 opinion column, economist Thomas Sowell
said that there was no bailout for the horse and buggy
industry 100 years ago when it was replaced by the automobile, and that the overall standard of living is higher when winners and losers are determined by customers instead of by politicians. He also blamed the decline of the Big Three on the economic policies of the "rust belt
" states, and said that Japanese car companies preferred to build factories in other U.S. states that were not so hostile to businesses.
In a June 16, 2009 report Ernst & Young
stated: "Policies that protect firms or industries can result in reduced incentives for entrepreneurs to invest in innovative ideas and for large firms to invest in R&D because they no longer face the competitive pressure to constantly improve their product in order to improve (or maintain) their market share."
.
hearing on the automotive crisis in the presence of the heads of Chrysler
, Ford
and General Motors
. The auto manufacturers explained that they would need financial aid of $25 billion if they were to avoid bankruptcy. The Senate was divided on the issue. The Republican senators were unwilling to provide aid, some even suggesting that bankruptcy might be the best option as it would free manufacturers from the employment deals agreed with the unions. The Democrats, however, continued to insist that action needed to be taken quickly, in line with President Elect Obama
's stance on the matter. Rick Wagoner
, head of General Motors, estimated that there could be a loss of 3 million jobs within the first year if the auto industry failed. "This is all about a lot more than just Detroit. It's about saving the U.S. economy from a catastrophic collapse," he said.
At the November 19, 2008 hearing, Gary Ackerman
(D-NY) said, "Maybe you can tell us what you're actually going to do to sell cars people want," and Michael Capuano (D-Mass) said, "My fear is you're going to take this money and continue the same stupid decisions you've made for 25 years."
On November 20, General Motors shares fell to the lowest price since the Great Depression
as the chances of a bail-out diminished. Ford shares also fell drastically. The shares later recovered as there were rumors of bipartisan progress on some kind of a bailout.
A November 20, 2008 Detroit Free Press
article said that the UAW was considering ending its jobs bank program as a condition for a federal bailout.
Democratic Congressional party leaders Nancy Pelosi
and Harry Reid
sent a letter to the CEO's of the Big Three automakers calling on these leaders to present by December 2 of 2008 a "credible restructuring plan" involving "significant sacrifices and major changes to [the] way of doing business," to qualify for further government assistance. The letter included a variety of principles and requirements, including a situation assessment, forecasts under various assumptions, taxpayer protection, transparent reporting to an oversight body, dividend and executive pay restrictions, and approach to covering healthcare and pension obligations.
On December 2, 2008, the Big Three submitted revised plans to Congress which apparently included more drastic measures such as the lowering of executive pay, reducing the number of brands and refinancing company debt. It emerged that the total amount of the bailout requested had now risen to $34 billion. Painting an even more dramatic picture of what would happen if Congress did not respond quickly, Chrysler said it would need $7 billion by the end of the month just to keep running while GM asked for $4 billion immediately.
In an interview that was broadcast on NBC's Meet The Press
on Sunday, December 7, 2008, President-elect Barack Obama
said, "The last thing I want to see happen is for the auto industry to disappear, but I'm also concerned that we don't put $10 billion or $20 billion or $30 billion or whatever billion dollars into an industry, and then, six months to a year later, they come back hat in hand and say, `Give me more.'"
On December 10, 2008, the House Financial Services Committee released a copy of the proposed financial bailout package for GM, Ford, and Chrysler. The bill proposed the appointment of a 'car czar' to oversee automakers' restructuring efforts, and restrictions on executive bonuses, golden parachute
packages and required automakers to sell or divest themselves of any privately owned or leased aircraft
.
announced that he had approved the bailout plan, which would give loans of $17.4 billion to U.S. automakers GM and Chrysler, stating that under present economic conditions, "allowing the U.S. auto industry to collapse is not a responsible course of action." Bush provided $13.4 billion now, with another $4 billion available in February 2009. Funds would be made available from the Emergency Economic Stabilization Act of 2008
. General Motors would get $9.4 billion, and Chrysler $4 billion.
However, it had been argued that the Treasury lacked the statutory authority to direct TARP funds to the automakers, since TARP is limited to “financial institutions" under Section 102 of the TARP. It was also argued that providing TARP funds to automaker's financing operations, such as GMAC, runs counter to the intent of Congress for limiting TARP funds to true "financial institutions". On December 19, 2008, President Bush used his executive authority to declare that TARP funds may be spent on any program he personally deems necessary to avert the financial crisis, and declared Section 102 to be nonbinding.
The federal loan would prevent General Motors from going into immediate bankruptcy. The bailout required both companies to dramatically restructure their operations to demonstrate long-term viability. In February 2009, the Obama administration would determine the automakers' progress in meeting the conditions of the loans, and then decide whether to supply more government aid or to force automakers to repay the loans and face bankruptcy. The loans would carry an interest rate of 5 percent but may rise to 10 percent if the auto manufacturers default on them.
/Timothy Geithner oversight of a possible second round of lending to the auto companies. In mid-Feb., the auto companies GM and Chrysler in fact did apply for additional funds.
The Task Force was formed in February 2009 instead, and began meetings at that time.
. GM made no mention of plans for its German subsidiary, Opel
, or its British subsidiary, Vauxhall
.
On the 1st June 2009, General Motors filed for Chapter 11 bankruptcy after failing to successfully negotiate deals with bond holders. On the day the application was made, General Motors was largely a nationalized institution (the US government owning 60% and the Canadian 12.5%), the remaining private stakes mainly being owned by employees. The application to a court in New York
marked the largest failure of an industrial company in US history. The restructuring would drastically change General Motors, with at least 20,000 US employees likely to lose their jobs. General Motors had previously announced that another nine plants will be closed while three more will be idled. GM's chief executive Fritz Henderson appealed to customers to give the company another chance, claiming "the GM that let too many of you down is now history".
A May 18, 2009 article in The Washington Post said that seven weeks after the Obama administration fired GM CEO G. Richard Wagoner Jr., Wagoner had still not received the $20 million severance package that the company had contractually promised him.
During a June 9, 2009 interview, Edward E. Whitacre Jr., the new chairman of GM, said, "I don’t know anything about cars [...] A business is a business, and I think I can learn about cars. I’m not that old, and I think the business principles are the same.” "
As of early June 2009, the Bush and Obama administrations had invested $80.3 billion.
On May 24, 2011, Chrysler repaid the last of the money to the US and Canadian treasuries, several years ahead of schedule.
of the companies involved in this crisis also played key parts during the process.
and other media outlets, the Big Three CEOs (Rick Wagoner
of GM, Alan Mulally
of Ford and Robert Nardelli
of Chrysler) who attended the November 19, 2008, meeting in Washington D.C. to request a bailout traveled to the meeting in private luxury jet aircraft. A November 19 CNN article noted that "Gary Ackerman
, D-NY... and several other representatives suggested that it was difficult to give money to the automakers when the CEOs had all flown to Washington on corporate jets. 'Those types of symbolic things matter and set a tone,' said Peter Roskam
, R-Ill." House Speaker Nancy Pelosi
summed up the Congressional response to their requests with the statement "Until they show us the plan, we cannot show them the money," and demanded that the automakers return to submit convincing turnaround plans by Dec. 2.
A November 19, 2008, CNN
article quoted Thomas Schatz, president of Citizens Against Government Waste
, as saying, "They're coming to Washington to beg the taxpayers to help them. It's unseemly to be running around on a $20,000 flight versus a $500 round trip." The article noted that although it was not known how much the private flights cost, analyst Richard Aboulafia of the Teal Group said that $20,000 was a reasonable estimation.
On December 2, 2008, it was reported that General Motors and Ford were planning to sell their fleets of corporate luxury jets.
s after the above-noted criticism for arriving to Washington for the November hearing in private jets. Wagoner rode in a Chevrolet Malibu
hybrid accompanied by Beth Lowery, the company's top environmental and safety official. Mulally travelled in a Ford Escape Hybrid. Nardelli arrived in a Chrysler Aspen
Hybrid.
point of view the Big Three have a negative image. There are ecology-minded sections of the American public that view with little sympathy the big automakers background of maximizing profits by deliberately destroying mass-transport systems and privately-owned railways between the 1920s and 60s.
Some have alleged that The Big Three contributed to the development of suburbs, seen as fuel-inefficient in that it requires commuters to drive to cities from increasingly more distant suburbs. Facing a saturated car market in the US in the early 1920s GM engaged in a controversial policy along with road-builders that triggered the massive shift from the mass transportation of the previous century to the 'one-person-one-car' trip of today.
downgraded the Issuer Default Rating of General Motors and Chrysler to "C," indicating "default is imminent."
A December 22, 2008, article from Bloomberg reported that General Motors and Ford "had their debt cut further below investment status by Standard & Poor’s and Moody’s Investors Service. GM’s unsecured debt was trimmed one level to C, or 11 grades below investment quality, by S&P. Moody’s lowered its rating on $26 billion in Ford debt by two grades to Caa3, or nine below investment quality."
(D-Michigan) received $438,304 over 30 years, or $14,610 a year. House member John Dingell
(D-Michigan) received nearly $1 million over his 54 years in Congress, or $18,518 a year. House member Joe Knollenberg
(R-Michigan) received $879,327 over only 16 years in office, or $54,957 a year. Dingell's wife Debbie used to work as a lobbyist for General Motors, and after she married Dingell, she became a senior GM executive at an undisclosed salary. As of May 2008, Dingell owned GM stock worth up to $350,000, GM stock options worth up to $1 million more, and a GM pension fund. In 2000, the Dingells owned GM stock options worth up to $5 million. In 1998, Dingell sold GM stock options worth up to $1 million. The value of that stock, options and pension has been lost in the bankruptcy restructuring that Congress approved for GM.
GM sent letters to tens of thousands of their dealers, supplier executives, employees and union members, asking recipients to call and write Congress with several "talking points" about the potential effects of a GM bankruptcy.
Detroit's "Big Three" automakers went to Washington, D.C., on December 2 (arriving in Washington in hybrids after being criticized for traveling to the earlier November Senate hearing in private jets) to present their long-term viability plans to the United States Congress
, and those plans included significant commitments to fuel-saving
and electric vehicle
technologies.
Ford Motor Company
unveiled an aggressive plan to electrify its fleet of vehicles, including plans to offer an all-electric van-type vehicle in 2010 for use in commercial fleets, complemented by a battery-powered sedan in 2011. By 2012, the company will bring a family of regular hybrids, plug-in hybrids, and battery electric vehicle
s to market. Ford intends to invest about $14 billion on fuel-efficient technologies over the next seven years and aims to achieve a 36% improvement in fuel economy for its entire fleet by the 2015 model year. The company has applied to DOE's Advanced Technology Vehicles Manufacturing Loan Program
for $5 billion to support these efforts, but the company also sought up to $9 billion in bridge loans. However, Ford expected to remain viable through 2009 and hopes to avoid drawing on the loan.
GM
unveiled the production version of the Chevy Volt in September. The vehicle will be able to travel up to 40 miles in all-electric mode. General Motors Corporation (GM) is involved in a well-publicized effort to launch its plug-in hybrid model, the Chevy Volt, in 2010, and the company also intends to employ the Volt drivetrain in other vehicles. GM plans to launch predominately fuel-efficient cars and crossovers over the next four years, investing $2.9 billion in fuel-efficient technologies and alternative fuels during that time period. By 2012, GM will offer 15 hybrid models, and more than half of its fleet will be flex-fuel vehicles, able to run on either gasoline or ethanol-rich E85. GM is seeking $12 billion in bridge loans through 2009 and is also asking for revolving credit of $6 billion that it could draw on if its sales forecast falls short. The company ended the third quarter of the year with cash reserves of $16 billion, but it estimates that it should have at least $11 billion on hand to maintain its operations. Without a federal loan, GM expects its cash reserves to fall to $10.1 billion by year's end and to fall to $3.6 billion by February.
Chrysler LLC predicted that for the 2009 model year, 73% of its vehicles will be more fuel efficient than their 2008 models, and the company planned to launch more small, fuel-efficient vehicles in the future. The company's plan also called for the introduction of a Dodge Ram
hybrid in 2010, along with the company's first electric-drive vehicle. Chrysler also planned to offer three additional electric-drive vehicles by 2013. And like GM, Chrysler planned to make half of its fleet flex-fuel capable by 2012. The company sought a bridge loan of $7 billion. Chrysler ended the first half of the year with $9.4 billion in cash, but expected to end the year with only $2.5 billion in cash, and was concerned that it might not make it through the first quarter of 2009 without the loan.
Automakers have already submitted applications for more than $20 billion in retooling loans to pay for fuel efficient vehicle projects.
, and that this money is part of the bailout that it received from the U.S. government.
, Chevrolet
, Buick
and GMC brands, whilst phasing out, or possibly selling their Pontiac
, Hummer
and Saturn brands.
On June 2, GM Motors announced the sale of the Hummer
brand of off-road vehicles to Sichuan Tengzhong Heavy Industrial Machinery Company Ltd., a machinery company in western China, in which the transaction is expected to close in the third quarter of 2009.
(R-Tennessee) introduced a bill, (S. 1198) "Auto Stock for Every Taxpayer Act". The bill would require the government to distribute stock in General Motors and Chrysler to each individual taxpayer. " The bill has since died in committee.
Late 2000s recession
The late-2000s recession, sometimes referred to as the Great Recession or Lesser Depression or Long Recession, is a severe ongoing global economic problem that began in December 2007 and took a particularly sharp downward turn in September 2008. The Great Recession has affected the entire world...
adversely affected the economy of the United States
Economy of the United States
The economy of the United States is the world's largest national economy. Its nominal GDP was estimated to be nearly $14.5 trillion in 2010, approximately a quarter of nominal global GDP. The European Union has a larger collective economy, but is not a single nation...
. A combination of several years of declining automobile sales and scarce availability of credit led to a more widespread crisis
Automotive industry crisis of 2008–2009
The automotive industry crisis of 2008–2010 was a part of a global financial downturn. The crisis affected European and Asian automobile manufacturers, but it was primarily felt in the American automobile manufacturing industry...
in the United States auto industry in 2008 and 2009.
Following dramatic drops in automobile sales throughout 2008, each of the "Big Three" U.S. automakers: General Motors
General Motors
General Motors Company , commonly known as GM, formerly incorporated as General Motors Corporation, is an American multinational automotive corporation headquartered in Detroit, Michigan and the world's second-largest automaker in 2010...
(GM), Ford Motor Company
Ford Motor Company
Ford Motor Company is an American multinational automaker based in Dearborn, Michigan, a suburb of Detroit. The automaker was founded by Henry Ford and incorporated on June 16, 1903. In addition to the Ford and Lincoln brands, Ford also owns a small stake in Mazda in Japan and Aston Martin in the UK...
, and Chrysler
Chrysler
Chrysler Group LLC is a multinational automaker headquartered in Auburn Hills, Michigan, USA. Chrysler was first organized as the Chrysler Corporation in 1925....
, requested emergency loans in order to address impending cash shortages. By April 2009, the situation had worsened such that both GM and Chrysler were faced with imminent bankruptcy and liquidation. With the intent to prevent massive job losses and destabilizing damage to the entire manufacturing sector, the U.S. and Canadian
Government of Canada
The Government of Canada, formally Her Majesty's Government, is the system whereby the federation of Canada is administered by a common authority; in Canadian English, the term can mean either the collective set of institutions or specifically the Queen-in-Council...
governments provided unprecedented financial bailout support to allow the companies to restructure and jettison legacy debt via Chapter 11 bankruptcy. Both companies separately filed for this protection by June 1
June 2009
June 2009 was the sixth month of that year. It began on a Monday and ended after 30 days on a Tuesday.- Portal:Current events :This is an archived version of Wikipedia's Current events Portal from June 2009....
.
General Motors emerged from bankruptcy as a new company majority owned by the United States Treasury, and Chrysler emerged owned primarily by the United Auto Workers
United Auto Workers
The International Union, United Automobile, Aerospace and Agricultural Implement Workers of America, better known as the United Auto Workers , is a labor union which represents workers in the United States and Puerto Rico, and formerly in Canada. Founded as part of the Congress of Industrial...
union and by Italian
Italy
Italy , officially the Italian Republic languages]] under the European Charter for Regional or Minority Languages. In each of these, Italy's official name is as follows:;;;;;;;;), is a unitary parliamentary republic in South-Central Europe. To the north it borders France, Switzerland, Austria and...
automaker Fiat S.p.A.. Both companies terminated agreements with hundreds of their dealerships and GM discontinued several of its brand
Brand
The American Marketing Association defines a brand as a "Name, term, design, symbol, or any other feature that identifies one seller's good or service as distinct from those of other sellers."...
s as part of bankruptcy proceedings. Ford Motor Company was able to survive without entering bankruptcy partly due to a large line of credit which it obtained in 2007.
The U.S. automakers were more heavily affected by the crisis than their foreign counterparts, such as Toyota. Following the 2000s energy crisis, the U.S. automakers failed to produce more fuel-efficient vehicles as opposed to the high-profit sport utility vehicles that were popular in the late 1990s and early 2000s which led to excess inventory and undesirable product. Since the automotive crisis abated, all three American automakers have increased sales of vehicles and have posted a profit.
Background
Many note that the crisis occurred mainly as a result of bad business practices of the Big Three U.S. automakers. Analysts point out that Asian companies that manufacture automobiles in the U.S. were not experiencing similar problems. A December 22, 2008 New York Times article stated, "For the most part, the so-called auto transplants — foreign-owned car companies with major operations in the United States — have deep pockets and ample credit, and they are not facing potential bankruptcy like General Motors and Chrysler." Much of the criticism centered on structural differences between the Big Three and the "transplants" (foreign companies manufacturing in U.S.) that result in major cost differentials.The US Big Three were first weakened by the substantially more expensive automobile fuels linked to the 2003-2008 oil crisis which, in particular, caused customers to turn away from large sport utility vehicles (SUVs) and pickup truck
Pickup truck
A pickup truck is a light motor vehicle with an open-top rear cargo area .-Definition:...
s, the main market of the American "Big Three" (General Motors
General Motors
General Motors Company , commonly known as GM, formerly incorporated as General Motors Corporation, is an American multinational automotive corporation headquartered in Detroit, Michigan and the world's second-largest automaker in 2010...
, Ford, and Chrysler
Chrysler
Chrysler Group LLC is a multinational automaker headquartered in Auburn Hills, Michigan, USA. Chrysler was first organized as the Chrysler Corporation in 1925....
). The US automakers also suffered from considerably higher labor costs than their non-unionized counterparts, including salaries, benefits, healthcare, and pensions. In return for labor peace, management granted concessions to its unions that resulted in uncompetitive cost structures and significant legacy costs. Further, the volume of cars sold in the U.S. was significantly tied to home equity lines of credit, with 24% of sales financed this way in 2006. When the availability of these loans suddenly dried up in 2008 due to the subprime mortgage crisis
Subprime mortgage crisis
The U.S. subprime mortgage crisis was one of the first indicators of the late-2000s financial crisis, characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages....
, vehicle sales declined dramatically, from 17 million in 2006 to 10.6 million in 2009.
In 2006, Consumer Reports
Consumer Reports
Consumer Reports is an American magazine published monthly by Consumers Union since 1936. It publishes reviews and comparisons of consumer products and services based on reporting and results from its in-house testing laboratory. It also publishes cleaning and general buying guides...
reported that all 10 of the cars that it considered to be the 10 best were built by Japanese companies. While Michigan lost 83,000 Big Three auto manufacturing jobs between 1993 and 2008, more than 91,000 new auto manufacturing jobs were created in Alabama, Mississippi, Tennessee, Kentucky, Georgia, North Carolina, South Carolina, Virginia and Texas during that same time period.
The support given to General Motors
General Motors
General Motors Company , commonly known as GM, formerly incorporated as General Motors Corporation, is an American multinational automotive corporation headquartered in Detroit, Michigan and the world's second-largest automaker in 2010...
and Chrysler
Chrysler
Chrysler Group LLC is a multinational automaker headquartered in Auburn Hills, Michigan, USA. Chrysler was first organized as the Chrysler Corporation in 1925....
by the Obama Administration was widely unpopular, with an April Washington Post poll finding that 41% of Americans approved of the actions. A June Wall Street Journal/NBC News
NBC News
NBC News is the news division of American television network NBC. It first started broadcasting in February 21, 1940. NBC Nightly News has aired from Studio 3B, located on floors 3 of the NBC Studios is the headquarters of the GE Building forms the centerpiece of 30th Rockefeller Center it is...
survey found 39% approval.
Industry and Labor statistics
At the time, the Big Three employees, parts-supplier employees and car-dealer employees totaled approximately 1.6 million. All auto-related industries and after-market service businesses employed approximately 3.1 million people in the United States. The U.S. Bureau of Labor Statistics breaks down the workers into the following segments, as of September 2008: Parts manufacturing-504,000; Repair operations-864,000; Wholesale operations-340,000; Dealer operations-1.2 million; and Manufacturing-114,000. GM directly employs 123,000 in all of North America. An estimated two million people relied on the industry for health care and 775,000 retirees collect auto-industry pensions.Hourly wages and benefits
Gary BurtlessGary Burtless
Gary Burtless is an American economist. He received his A.B. from Yale University in 1972 and his Ph.D. from the Massachusetts Institute of Technology in 1977. He worked as an economists from the U.S. Department of Health, Education, and Welfare from 1977 to 1979 and the U.S...
of the Brookings Institution
Brookings Institution
The Brookings Institution is a nonprofit public policy organization based in Washington, D.C., in the United States. One of Washington's oldest think tanks, Brookings conducts research and education in the social sciences, primarily in economics, metropolitan policy, governance, foreign policy, and...
argued that hourly wages were similar between the Big Three and the transplants. "The basic hourly wage received by a UAW
United Auto Workers
The International Union, United Automobile, Aerospace and Agricultural Implement Workers of America, better known as the United Auto Workers , is a labor union which represents workers in the United States and Puerto Rico, and formerly in Canada. Founded as part of the Congress of Industrial...
worker in a Big Three plant is close to that received by a Toyota or Honda worker in a U.S. plant. The UAW-negotiated wage was roughly $28 an hour in 2007. For new workers, the hourly wage was lower at $14 an hour; senior workers made more money. The major cost difference between UAW members and employees in foreign-nameplate factories in the U.S. comes in fringe benefits. The UAW has been one of the more successful American unions in fighting for generous pensions and health benefits for its members."
Dan Ikenson of the Cato Institute
Cato Institute
The Cato Institute is a libertarian think tank headquartered in Washington, D.C. It was founded in 1977 by Edward H. Crane, who remains president and CEO, and Charles Koch, chairman of the board and chief executive officer of the conglomerate Koch Industries, Inc., the largest privately held...
argued that "total compensation is the cost of labor to the companies, and for GM it is about $73 per hour and for Toyota about $48. The average cost differential between the Big Three and all the foreign nameplate companies is about $30 per hour. That's huge." His computation includes all labor-related costs (e.g.., wages, healthcare, and pension—for both current workers and retirees.)
Andrew Sorkin of the New York Times indicated that GM and Chrysler pay $10–20 more per hour than transplants; this was vigorously disputed by David Cole of the Center for Automotive Research.
Average annual wages for production workers at the Big Three were $67,480 in 2007, and $81,940 for skilled workers. In Canada, GM’s 2008 average labor costs (including both wages and benefits) were $69 per hour, and Toyota's at $48 per hour, with similar productivity.
According to the Heritage Foundation
Heritage Foundation
The Heritage Foundation is a conservative American think tank based in Washington, D.C. Heritage's stated mission is to "formulate and promote conservative public policies based on the principles of free enterprise, limited government, individual freedom, traditional American values, and a strong...
, the ratio of retirees to workers varies across the Big Three. For each active worker at GM, there were 3.8 retirees or dependents in 2006. At Chrysler, there were 2.0 and at Ford there were 1.6. This means the legacy labor cost burden for GM is significantly greater than its competitors.
Peter Morici
Peter Morici
Peter Morici is an American macroeconomist and Professor of International Business at the R.H. Smith School of Business at the University of Maryland, College Park. He is a graduate of SUNY Albany in New York State where he received his Ph.D in Economics in 1974.- Career :From 1974 to 1976, Morici...
, a professor at the University of Maryland, College Park
University of Maryland, College Park
The University of Maryland, College Park is a top-ranked public research university located in the city of College Park in Prince George's County, Maryland, just outside Washington, D.C...
’s school of business, testified that the extremely high labor and product development costs will keep the Big Three from developing the high quality vehicles needed to become profitable and surviving.
The Asian-owned companies' U.S. employees are mainly non-unionized; the Big Three are bound by contracts with the UAW.
According to the UAW, labor cost represented 8.4% of the total cost of manufacturing and selling an automobile in 2006. "The vast majority of the costs of producing a vehicle and transporting it to a dealership and preparing it for sale – including design, engineering, marketing, raw materials, executive compensation and other costs – are not related to direct or indirect manufacturing labor."
Jared Bernstein
Jared Bernstein
Jared Bernstein is an American economist who previously served as Chief Economist and Economic Policy Adviser to Vice President Joseph Biden in the Obama Administration. In early 2009 Bernstein was named Executive Director of the newly formed White House Middle Class Working Families Task Force. He...
, the chief economist of Vice President Joe Biden
Joe Biden
Joseph Robinette "Joe" Biden, Jr. is the 47th and current Vice President of the United States, serving under President Barack Obama...
, noted in an April 7, 2009 interview that most of the concessions that the UAW made in the 2007 contract applied only to new hires. Older workers "still benefit from contracts that were signed a long time ago."
Jobs Bank costs
The Detroit News published a story in 2005 on how the Big Three U.S. automakers paid more than 12,000 idled employees their full salary and benefits in "jobs bank" programs. The program was established in the 1984 UAW labor contracts with the Big Three to protect workers' salaries and discourage layoffs, as part of the automakers' contracts with the UAW. The union's intent was to protect jobs via a plan to guarantee pay and benefits for union members whose jobs were extinguished by technological progress or plant restructurings. In most cases, workers are paid via the jobs bank only after exhausting government and company unemployment benefits. Some of those workers were placed in retraining.As a result of the Jobs Banks, the US automakers are contractually obligated to pay 85-95 percent of union wages and benefits to members of the United Auto Workers union who aren’t working – even if their plants have been closed. In the agreement, GM would to allocate $2.1 billion in Jobs Bank payments over four years, Chrysler $451 million for its program along with another $50 million for salaried union employees, and Ford agreed to set aside $944 million. Peter Morici, a professor at the University of Maryland, College Park
University of Maryland, College Park
The University of Maryland, College Park is a top-ranked public research university located in the city of College Park in Prince George's County, Maryland, just outside Washington, D.C...
’s school of business, testified that the Jobs Bank was one of the biggest problems that the Big Three face, saying “Right now if a plant closes in St. Louis and a new one opens in Kansas City, the workers don’t have to move from St. Louis to Kansas City; they can opt to get a $105,000 payout or go on Jobs Bank where they can collect 95 percent of pay for the rest of their lives.”
Number of brands
GM had eight brands sold in the us (not including it's overseas brands Vauxhaul, Opel, Holden and at the time GM Daewoo which is now called GM Korea) until it sold three and liquidated one of those brands during bankruptcy, leaving four (Chevrolet, Cadillac, GMC and Buick), while Toyota has only three. More brands require additional marketing and product development expenditures, which drives incremental costs relative to the competition. One analyst estimated that reducing GM brands from 8 to 3 would save $5 billion annually.However, reducing the number of brands required closing or consolidation of dealerships, which due to state franchise laws is very expensive. For example, GM's retirement of the Oldsmobile
Oldsmobile
Oldsmobile was a brand of American automobile produced for most of its existence by General Motors. It was founded by Ransom E. Olds in 1897. In its 107-year history, it produced 35.2 million cars, including at least 14 million built at its Lansing, Michigan factory...
brand cost nearly $2 billion.
Number and control of dealerships
GM and Chrysler have nearly 10,000 dealerships between them, employing an estimated 500,000 people. GM has many more, smaller dealerships spread across its eight brands than Toyota. Dealerships are protected by state laws that make them difficult to close without paying large fees. This makes dealership reform challenging without bankruptcy protection.Bondholders
GM was carrying a $43 billion debt burden, with nearly $3 billion per year in interest costs. If bondholders swapped stakes for common stockCommon stock
Common stock is a form of corporate equity ownership, a type of security. It is called "common" to distinguish it from preferred stock. In the event of bankruptcy, common stock investors receive their funds after preferred stock holders, bondholders, creditors, etc...
(equity) which pays no interest, GM's debt and interest burden would be substantially reduced.
However, bondholders of both Chrysler and GM rejected the debt swap offers, complaining of unequal treatment compared to the UAW, citing that their outstanding debt was more than double that of the UAW's health care trust. The UAW had been offered 50% and 40% stakes in the new Chrysler and GM, respectively, while the bondholders would have received 33 cents on the US dollar for Chrysler and 10% of the new GM (an analyst stated that the GM offer would be projected to recover 24 cents on the dollar). With the approval of the Treasury, the offer for bondholders was later amended to include warrants for a further 15% stake.
Bondholders complained of US government interference that bypassed the higher precedence of debtholder claims to favour the UAW, due to the UAW's political contributions to President Barack Obama
Barack Obama
Barack Hussein Obama II is the 44th and current President of the United States. He is the first African American to hold the office. Obama previously served as a United States Senator from Illinois, from January 2005 until he resigned following his victory in the 2008 presidential election.Born in...
. One lawyer for the Chrysler bondholders stated that auto task force head Steve Rattner had ignored negotiation requests from the bondholders committee, while Rattner also threatened to destroy one of the bondholder's reputation for holding out. One GM bondholder described this as the socialist state intervention typical of Hugo Chavez
Hugo Chávez
Hugo Rafael Chávez Frías is the 56th and current President of Venezuela, having held that position since 1999. He was formerly the leader of the Fifth Republic Movement political party from its foundation in 1997 until 2007, when he became the leader of the United Socialist Party of Venezuela...
's Venezuela
Venezuela
Venezuela , officially called the Bolivarian Republic of Venezuela , is a tropical country on the northern coast of South America. It borders Colombia to the west, Guyana to the east, and Brazil to the south...
, saying "This is the kind of stuff you'd expect from a banana republic. Not from the United States."
Obama publicly accused Chrysler bondholders of being speculators, after they rejected the last offer which caused Chrysler to file for bankruptcy, with some of them receiving death threats after a bankruptcy judge refused to protect their anonymity. The hedge funds stated that their clients included pension funds and university endowments. Around $7 billion USD of GM bonds are held by "Mom and Pop-type investors", with one lawyer describing it as autoworker retirees versus retirees.
Not surprisingly, any recapitalization (typically through bankruptcy) would all but wipe out the value of existing common stock shares, which had already declined significantly.
Claims that failure would be harmful to economy
The auto industry is a key component of the U.S. economy. Economists used 2007-2008 data to build estimates of what a shutdown would cost in summer 2008, in order to set benchmarks to help policy makers understand the impact of bankruptcies. Such estimates were widely discussed among policy makers in late 2008. Closing the Big Three would mean loss of 240,000 very highly-paid jobs at the Big Three, a loss of 980,000 highly-paid jobs at the suppliers and local dealers, plus the loss of 1.7 million additional jobs throughout the economy—a total loss of 3 million jobs.Estimates were that a Big Three shutdown would cause a decline in personal income of $151 billion the first year, and $398 billion over three years. The federal, state and local governments would lose tax revenue, and instead spend on welfare programs a total of $156 billion over three years.
Economist David Wyss
David Wyss
David Wyss is an American economist. As New York-based Standard & Poor's chief economist, Wyss was responsible for S & P's economic forecasts and publications. He also coauthored the monthly Equity Insight and the weekly Financial Notes...
of S&P has posited that if GM and Chrysler disappear, there could be an increase of about 1 million imported cars every year, which would remove about $25 billion from the U.S. economy. That would reduce GDP by 0.2 percentage points annually—excluding the impact of lost jobs (higher unemployment) and wages.
Claims that failure would not be harmful to economy
In a November 19, 2008 CNBCCNBC
CNBC is a satellite and cable television business news channel in the U.S., owned and operated by NBCUniversal. The network and its international spinoffs cover business headlines and provide live coverage of financial markets. The combined reach of CNBC and its siblings is 390 million viewers...
article, Jordan Kimmel, a fund manager at Magnet Investing in Randolph, New Jersey
Randolph, New Jersey
-Demographics:As of the census of 2000, there were 24,847 people, 8,679 households, and 6,804 families residing in the township. The population density was 1,185.2 people per square mile . There were 8,903 housing units at an average density of 424.7 per square mile...
, said that if the Big Three automakers were liquidated or completely shut down, foreign companies such as Honda and Toyota would open up new manufacturing plants in the U.S., and there would be no long term loss in employment or damage to the economy.
Michael Schuman of Time Magazine stated that although a giant corporation failing would be ugly, it is better than artificially keeping it alive without a prospect of improvement. He compared the possible collapse of the US domestic automakers to the 1999 dismantling of the Daewoo Group
Daewoo
Daewoo or the Daewoo Group was a major South Korean chaebol . It was founded on 22 March 1967 as Daewoo Industrial and was dismantled by the Korean government in 1999...
in South Korea
South Korea
The Republic of Korea , , is a sovereign state in East Asia, located on the southern portion of the Korean Peninsula. It is neighbored by the People's Republic of China to the west, Japan to the east, North Korea to the north, and the East China Sea and Republic of China to the south...
. Daewoo's proportionate economic impact on Korea was larger than that of the Big Three to the United States. The persistence of the belief that Daewoo and other Korean conglomerates were too big to fail led many bankers and investors to continually waste money on bailouts, despite their poor business plans and unprofitable projects, as Daewoo was unable to repay these loans. Once the too-big-to-fail perception was dispelled, with large conglomerates no longer considered the safest investments, bankers and investors began financing new opportunities in areas which had been starved of capital (small firms, entrepreneurs and consumers), while Korea's GDP actually rose after Daewoo's unwinding. Schuman also noted a similar analogy with Japan during its Lost Decade of the 1990s
Lost Decade (Japan)
The is the time after the Japanese asset price bubble's collapse within the Japanese economy, which occurred gradually rather than catastrophically...
, where banks kept injecting new funds into unprofitable "zombie firms" to keep them afloat, arguing that they were too big to fail. However, most of these companies were too debt-ridden to do much more than survive on further bailouts, which led to an economist describing Japan as a "loser's paradise." Schuman states that Japan's economy did not begin to recover until this practice had ended.
Restructuring process alternatives
Industry experts, academics, and media outlets made a variety of recommendations regarding reforming or restructuring the Big Three. Many of these include bankruptcy, a court-supervised method of reorganizing or shutting-down a company.Bankruptcy in the Auto Industry and Alternatives
Bankruptcy discussions centered around the prospect of Chapter 11 bankruptcy, commonly called restructuring, commonly used to provide a window of opportunity for a corporation to renegotiate contracts, sell assets or component businesses for cash, obtain debt forgiveness, or otherwise reform itself as a viable business enterprise. The alternative, Chapter 7 bankruptcy, is used to shut down and liquidate an enterprise and sell off the pieces, with the proceeds going to the debt holders. Under both types of bankruptcy, the shareholders typically lose their investment and debt holders obtain control of the corporation. During November 2008, the debate involved whether a Chapter 11 filing would be beneficial or feasible.Arguments in favor of Chapter 11 bankruptcy
In a November 19, 2008, editorial in ForbesForbes
Forbes is an American publishing and media company. Its flagship publication, the Forbes magazine, is published biweekly. Its primary competitors in the national business magazine category are Fortune, which is also published biweekly, and Business Week...
, Blythe McGarvie
Blythe McGarvie
Blythe J. McGarvie has been President of Leadership for International Finance, LLC, a firm focusing on improving clients' financial positions and providing leadership seminars for corporate and academic groups, since January 2003, according to her Forbes profile. Her firm specializes in providing...
said that bankruptcy would allow the automobile industry to become more competitive and sustainable, and cited the airline industry bankruptcy as an example.
Wharton finance professor Jeremy Siegel
Jeremy Siegel
Jeremy James Siegel is the Russell E. Palmer Professor of Finance at the Wharton School of the University of Pennsylvania in Philadelphia, Pennsylvania...
, author of the book "The Future for Investors," asserted that Chapter 11 bankruptcy would allow Detroit to reorganize but not cause the massive job losses feared by some. "Any bailout of the auto industry is really a bailout for the health benefits of the UAW. That's all it is."
Opponents of a bailout believe that the automakers' problems could be more efficiently resolved by a bankruptcy court with legal power to dissolve existing contracts, shedding costs, and debts that it can no longer afford. They suggested that a government "car czar" would be ineffective since their actions could be swayed by Washington politics.
Arguments against Chapter 11 bankruptcy
Critics of Chapter 11 Bankruptcy as a restructuring process argued that consumers would be unwilling to purchase a car from a bankrupt automaker, as the ability of the automaker to support the warranty is key to the purchase decision. Advocates have argued that the government or private lenders could establish a fund to enable warranty coverage.GM argued that a bankruptcy would threaten jobs and the solvency of the U.S. federal government's Pension Benefit Guaranty Corporation
Pension Benefit Guaranty Corporation
The Pension Benefit Guaranty Corporation is an independent agency of the United States government that was created by the Employee Retirement Income Security Act of 1974 to encourage the continuation and maintenance of voluntary private defined benefit pension plans, provide timely and...
(PBGC). PBGC Director has said: "GM has not been able to give us a straight answer about the funded status of their pension plan. We can't successfully monitor the situation if they are not responsive."
GM's pension fund had enough money for current obligations, but a report issued by the a Deutsche Bank estimates that the pension may be $18 billion under-funded by the end of 2008.
Feasibility of a prepackaged Chapter 11 bankruptcy
A "prepackaged" Chapter 11 bankruptcy means that the key stakeholders have agreed in advance what will happen during the bankruptcy proceedings, which enables greater certainty regarding the outcome and less time spent in bankruptcy protection. Advocates have indicated this would be preferable, while critics argued it was unlikely that all of the stakeholders could agree on terms while outside of bankruptcy.Government facilitated sale of assets
The Brookings InstitutionBrookings Institution
The Brookings Institution is a nonprofit public policy organization based in Washington, D.C., in the United States. One of Washington's oldest think tanks, Brookings conducts research and education in the social sciences, primarily in economics, metropolitan policy, governance, foreign policy, and...
advocated a government-facilitated solution in which Big Three assets are transferred or sold to other firms better able to deploy the plant and employee resources. "[The] most constructive role the government can play at this point is to provide a short-term infusion of capital with strict repayment rules that will essentially require the auto makers to sell off their assets to other, successful companies." The authors argued that the Big Three make automobiles that not enough Americans want to buy, which cannot be solved by a bankruptcy restructuring focused initially on cost-side considerations like wages and benefits.
Government facilitated restructuring
Economist and author Jeffrey SachsJeffrey Sachs
Jeffrey David Sachs is an American economist and Director of The Earth Institute at Columbia University. One of the youngest economics professors in the history of Harvard University, Sachs became known for his role as an adviser to Eastern European and developing country governments in the...
has advocated a government and private industry partnership to transform the automotive industry, creating a "high mileage vehicle economy" based on hybrid and fuel cell cars. Loans would be provided immediately, with conditions. He advocates a U.S. strategy of automotive technological leadership, which would "dramatically improve energy and national security, climate security, and U.S. global competitiveness."
Arguments against government intervention
On November 24, 2008, Congressman Ron PaulRon Paul
Ronald Ernest "Ron" Paul is an American physician, author and United States Congressman who is seeking to be the Republican Party candidate in the 2012 presidential election. Paul represents Texas's 14th congressional district, which covers an area south and southwest of Houston that includes...
(R-TX) wrote, "In bailing out failing companies, they are confiscating money from productive members of the economy and giving it to failing ones. By sustaining companies with obsolete or unsustainable business models, the government prevents their resources from being liquidated and made available to other companies that can put them to better, more productive use. An essential element of a healthy free market, is that both success and failure must be permitted to happen when they are earned. But instead with a bailout, the rewards are reversed – the proceeds from successful entities are given to failing ones. How this is supposed to be good for our economy is beyond me.... It won’t work. It can’t work... It is obvious to most Americans that we need to reject corporate cronyism, and allow the natural regulations and incentives of the free market to pick the winners and losers in our economy, not the whims of bureaucrats and politicians."
In a December 17, 2008 opinion column, economist Thomas Sowell
Thomas Sowell
Thomas Sowell is an American economist, social theorist, political philosopher, and author. A National Humanities Medal winner, he advocates laissez-faire economics and writes from a libertarian perspective...
said that there was no bailout for the horse and buggy
Horse and buggy
A horse and buggy or horse and carriage refers to a light, simple, two-person carriage of the late 18th, 19th and early 20th centuries, drawn usually by one or sometimes by two horses...
industry 100 years ago when it was replaced by the automobile, and that the overall standard of living is higher when winners and losers are determined by customers instead of by politicians. He also blamed the decline of the Big Three on the economic policies of the "rust belt
Rust Belt
The Rust Belt is a term that gained currency in the 1980s as the informal description of an area straddling the Midwestern and Northeastern United States, in which local economies traditionally garnered an increased manufacturing sector to add jobs and corporate profits...
" states, and said that Japanese car companies preferred to build factories in other U.S. states that were not so hostile to businesses.
In a June 16, 2009 report Ernst & Young
Ernst & Young
Ernst & Young is one of the largest professional services networks in the world and one of the "Big Four" accountancy firms, along with Deloitte, KPMG and PricewaterhouseCoopers ....
stated: "Policies that protect firms or industries can result in reduced incentives for entrepreneurs to invest in innovative ideas and for large firms to invest in R&D because they no longer face the competitive pressure to constantly improve their product in order to improve (or maintain) their market share."
Changes to management and board
Critics argued for the removal of General Motors' senior management. Such removal is typical in a bailout.Mergers
If one or more of the Big Three could have merged, enabling cost savings and focusing on the most profitable brands. However, the UAW and CAW opposed this move, as it would certainly involve layoffs. GM and Chrysler held talks which ultimately went to nothing, with Chrysler, as of June 10, 2009, a fully owned subsidiary of Italian automaker FiatFiat
FIAT, an acronym for Fabbrica Italiana Automobili Torino , is an Italian automobile manufacturer, engine manufacturer, financial, and industrial group based in Turin in the Italian region of Piedmont. Fiat was founded in 1899 by a group of investors including Giovanni Agnelli...
.
Comparison with British Leyland
The comparison was made with the situation of British Leyland (itself an amalgamation of many car makers similar to General Motors) in the 1970s, which at the time had a 36% market share in the UK. During this period the UK government nationalised and invested several billion pounds into the ailing business which faced with competition from Mainland Europe and questionable build quality the business struggled to compete. While the business slimmed its product line, concentrated mainly on the profitable Austin and Rover brands and by the 1980s had some successful models such as the Austin Metro, the brand ended up being broken up and is now owned by Nanjing Automobile and has largely been dismantled.Federal Government bailout process and timeline
On November 19, 2008, there was a United States SenateUnited States Senate
The United States Senate is the upper house of the bicameral legislature of the United States, and together with the United States House of Representatives comprises the United States Congress. The composition and powers of the Senate are established in Article One of the U.S. Constitution. Each...
hearing on the automotive crisis in the presence of the heads of Chrysler
Chrysler
Chrysler Group LLC is a multinational automaker headquartered in Auburn Hills, Michigan, USA. Chrysler was first organized as the Chrysler Corporation in 1925....
, Ford
Ford Motor Company
Ford Motor Company is an American multinational automaker based in Dearborn, Michigan, a suburb of Detroit. The automaker was founded by Henry Ford and incorporated on June 16, 1903. In addition to the Ford and Lincoln brands, Ford also owns a small stake in Mazda in Japan and Aston Martin in the UK...
and General Motors
General Motors
General Motors Company , commonly known as GM, formerly incorporated as General Motors Corporation, is an American multinational automotive corporation headquartered in Detroit, Michigan and the world's second-largest automaker in 2010...
. The auto manufacturers explained that they would need financial aid of $25 billion if they were to avoid bankruptcy. The Senate was divided on the issue. The Republican senators were unwilling to provide aid, some even suggesting that bankruptcy might be the best option as it would free manufacturers from the employment deals agreed with the unions. The Democrats, however, continued to insist that action needed to be taken quickly, in line with President Elect Obama
Barack Obama
Barack Hussein Obama II is the 44th and current President of the United States. He is the first African American to hold the office. Obama previously served as a United States Senator from Illinois, from January 2005 until he resigned following his victory in the 2008 presidential election.Born in...
's stance on the matter. Rick Wagoner
Rick Wagoner
George Richard "Rick" Wagoner, Jr. is an American businessman and former Chairman and Chief Executive Officer of General Motors. Wagoner resigned as Chairman and CEO at General Motors on March 29, 2009, at the request of the White House...
, head of General Motors, estimated that there could be a loss of 3 million jobs within the first year if the auto industry failed. "This is all about a lot more than just Detroit. It's about saving the U.S. economy from a catastrophic collapse," he said.
At the November 19, 2008 hearing, Gary Ackerman
Gary Ackerman
Gary Leonard Ackerman is the U.S. Representative for , serving since a special election in 1983. He is a member of the Democratic Party...
(D-NY) said, "Maybe you can tell us what you're actually going to do to sell cars people want," and Michael Capuano (D-Mass) said, "My fear is you're going to take this money and continue the same stupid decisions you've made for 25 years."
On November 20, General Motors shares fell to the lowest price since the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
as the chances of a bail-out diminished. Ford shares also fell drastically. The shares later recovered as there were rumors of bipartisan progress on some kind of a bailout.
A November 20, 2008 Detroit Free Press
Detroit Free Press
The Detroit Free Press is the largest daily newspaper in Detroit, Michigan, USA. The Sunday edition is entitled the Sunday Free Press. It is sometimes informally referred to as the "Freep"...
article said that the UAW was considering ending its jobs bank program as a condition for a federal bailout.
Democratic Congressional party leaders Nancy Pelosi
Nancy Pelosi
Nancy Patricia D'Alesandro Pelosi is the Minority Leader of the United States House of Representatives and served as the 60th Speaker of the United States House of Representatives from 2007 to 2011...
and Harry Reid
Harry Reid
Harry Mason Reid is the senior United States Senator from Nevada, serving since 1987. A member of the Democratic Party, he has been the Senate Majority Leader since January 2007, having previously served as Minority Leader and Minority and Majority Whip.Previously, Reid was a member of the U.S...
sent a letter to the CEO's of the Big Three automakers calling on these leaders to present by December 2 of 2008 a "credible restructuring plan" involving "significant sacrifices and major changes to [the] way of doing business," to qualify for further government assistance. The letter included a variety of principles and requirements, including a situation assessment, forecasts under various assumptions, taxpayer protection, transparent reporting to an oversight body, dividend and executive pay restrictions, and approach to covering healthcare and pension obligations.
On December 2, 2008, the Big Three submitted revised plans to Congress which apparently included more drastic measures such as the lowering of executive pay, reducing the number of brands and refinancing company debt. It emerged that the total amount of the bailout requested had now risen to $34 billion. Painting an even more dramatic picture of what would happen if Congress did not respond quickly, Chrysler said it would need $7 billion by the end of the month just to keep running while GM asked for $4 billion immediately.
In an interview that was broadcast on NBC's Meet The Press
Meet the Press
Meet the Press is a weekly American television news/interview program produced by NBC. It is the longest-running television series in American broadcasting history, despite bearing little resemblance to the original format of the program seen in its television debut on November 6, 1947. It has been...
on Sunday, December 7, 2008, President-elect Barack Obama
Barack Obama
Barack Hussein Obama II is the 44th and current President of the United States. He is the first African American to hold the office. Obama previously served as a United States Senator from Illinois, from January 2005 until he resigned following his victory in the 2008 presidential election.Born in...
said, "The last thing I want to see happen is for the auto industry to disappear, but I'm also concerned that we don't put $10 billion or $20 billion or $30 billion or whatever billion dollars into an industry, and then, six months to a year later, they come back hat in hand and say, `Give me more.'"
Congressional bailout bill
On December 9, 2008, negotiators revealed the terms of an emerging deal between the White House and Congress under which a short-term $15 billion bailout for the Big Three would be overseen by a federal "car czar" or trustee.On December 10, 2008, the House Financial Services Committee released a copy of the proposed financial bailout package for GM, Ford, and Chrysler. The bill proposed the appointment of a 'car czar' to oversee automakers' restructuring efforts, and restrictions on executive bonuses, golden parachute
Golden parachute
A golden parachute is an agreement between a company and an employee specifying that the employee will receive certain significant benefits if employment is terminated. Sometimes, certain conditions, typically a change in company ownership, must be met, but often the cause of termination is...
packages and required automakers to sell or divest themselves of any privately owned or leased aircraft
Aircraft
An aircraft is a vehicle that is able to fly by gaining support from the air, or, in general, the atmosphere of a planet. An aircraft counters the force of gravity by using either static lift or by using the dynamic lift of an airfoil, or in a few cases the downward thrust from jet engines.Although...
.
Senate rejects bailout
On December 11, the bill failed to pass, losing 52-35 on a Senate procedural vote. A statement from GM expressed its deep disappointment with the failure and said, "We will assess all of our options to continue our restructuring and to obtain the means to weather the current economic crisis." Chrysler said that it "is obviously disappointed in what transpired in the Senate and will continue to pursue a workable solution to help ensure the future viability of the company."Bush approves bailout
On December 19, George W. BushGeorge W. Bush
George Walker Bush is an American politician who served as the 43rd President of the United States, from 2001 to 2009. Before that, he was the 46th Governor of Texas, having served from 1995 to 2000....
announced that he had approved the bailout plan, which would give loans of $17.4 billion to U.S. automakers GM and Chrysler, stating that under present economic conditions, "allowing the U.S. auto industry to collapse is not a responsible course of action." Bush provided $13.4 billion now, with another $4 billion available in February 2009. Funds would be made available from the Emergency Economic Stabilization Act of 2008
Emergency Economic Stabilization Act of 2008
The Emergency Economic Stabilization Act of 2008 The Emergency Economic Stabilization Act of 2008 The Emergency Economic Stabilization Act of 2008 (Division A of , commonly referred to as a bailout of the U.S. financial system, is a law enacted in response to the subprime mortgage crisis...
. General Motors would get $9.4 billion, and Chrysler $4 billion.
However, it had been argued that the Treasury lacked the statutory authority to direct TARP funds to the automakers, since TARP is limited to “financial institutions" under Section 102 of the TARP. It was also argued that providing TARP funds to automaker's financing operations, such as GMAC, runs counter to the intent of Congress for limiting TARP funds to true "financial institutions". On December 19, 2008, President Bush used his executive authority to declare that TARP funds may be spent on any program he personally deems necessary to avert the financial crisis, and declared Section 102 to be nonbinding.
The federal loan would prevent General Motors from going into immediate bankruptcy. The bailout required both companies to dramatically restructure their operations to demonstrate long-term viability. In February 2009, the Obama administration would determine the automakers' progress in meeting the conditions of the loans, and then decide whether to supply more government aid or to force automakers to repay the loans and face bankruptcy. The loans would carry an interest rate of 5 percent but may rise to 10 percent if the auto manufacturers default on them.
Obama Presidential Task Force on the Auto Industry
Under the Obama Administration, the idea of a car czar was considered and ultimately abandoned in favor of joint Lawrence SummersLawrence Summers
Lawrence Henry Summers is an American economist. He served as the 71st United States Secretary of the Treasury from 1999 to 2001 under President Bill Clinton. He was Director of the White House United States National Economic Council for President Barack Obama until November 2010.Summers is the...
/Timothy Geithner oversight of a possible second round of lending to the auto companies. In mid-Feb., the auto companies GM and Chrysler in fact did apply for additional funds.
The Task Force was formed in February 2009 instead, and began meetings at that time.
Second bailout
On 18 February 2009, General Motors and Chrysler again approached the US government, in regard to obtaining a second bridging loan of $21.6 billion (£15.2 billion). $16.6 billion of this would go to General Motors, while Chrysler would take $5 billion. General Motors agreed to shed 47,000 jobs, close five plants, and axe 12 car models. Chrysler agreed to cut 3,000 jobs, cut one shift from production, and axe three car models. General Motors was also looking to sell its Swedish subsidiary, SaabSaab
Saab AB is a Swedish aerospace and defence company, founded in 1937. From 1947 to 1990 it was the parent company of automobile manufacturer Saab Automobile, and between 1968 and 1995 the company was in a merger with commercial vehicle manufacturer Scania, known as Saab-Scania.-History:"Svenska...
. GM made no mention of plans for its German subsidiary, Opel
Opel
Adam Opel AG, generally shortened to Opel, is a German automobile company founded by Adam Opel in 1862. Opel has been building automobiles since 1899, and became an Aktiengesellschaft in 1929...
, or its British subsidiary, Vauxhall
Vauxhall Motors
Vauxhall Motors is a British automotive company owned by General Motors and headquartered in Luton. It was founded in 1857 as a pump and marine engine manufacturer, began manufacturing cars in 1903 and was acquired by GM in 1925. It has been the second-largest selling car brand in the UK for...
.
Obama Address to Joint Session of Congress
In his joint address to Congress in 2009, Obama stated that"We will invest fifteen billion dollars in technologies like...more efficient cars and trucks built right here in America. As for auto industry, everyone recognizes that years of bad decision-making and global recession have pushed our automakers to the brink. We should not, and will not, protect them from their own bad practices. But we are committed to the goal of a re-tooled, re-imagined auto industry that can compete and win. Millions of jobs depend on it. Scores of communities depend on it. And I believe the nation that invented the automobile cannot walk from it"
Chrysler bankruptcy
On 30 April 2009, Chrysler filed for Chapter 11 bankruptcy after talks with lenders broke down. On the 14th May 2009 Chrysler announced it was to close 25% of its US dealerships as part of its restructuring process.Bankruptcy of General Motors
Only days after approaching the US Government to seek further funding, General Motors published its losses for the final quarter of 2008 to be at $9.6 billion (£6.7 billion). This brought its overall 2008 losses to $30.9 billion. In 2007, General Motors made a loss of $38.7 billion. In the light of the published losses GM has conceded that it expected auditors to question its future viability when it releases its annual report in March.On the 1st June 2009, General Motors filed for Chapter 11 bankruptcy after failing to successfully negotiate deals with bond holders. On the day the application was made, General Motors was largely a nationalized institution (the US government owning 60% and the Canadian 12.5%), the remaining private stakes mainly being owned by employees. The application to a court in New York
New York
New York is a state in the Northeastern region of the United States. It is the nation's third most populous state. New York is bordered by New Jersey and Pennsylvania to the south, and by Connecticut, Massachusetts and Vermont to the east...
marked the largest failure of an industrial company in US history. The restructuring would drastically change General Motors, with at least 20,000 US employees likely to lose their jobs. General Motors had previously announced that another nine plants will be closed while three more will be idled. GM's chief executive Fritz Henderson appealed to customers to give the company another chance, claiming "the GM that let too many of you down is now history".
A May 18, 2009 article in The Washington Post said that seven weeks after the Obama administration fired GM CEO G. Richard Wagoner Jr., Wagoner had still not received the $20 million severance package that the company had contractually promised him.
During a June 9, 2009 interview, Edward E. Whitacre Jr., the new chairman of GM, said, "I don’t know anything about cars [...] A business is a business, and I think I can learn about cars. I’m not that old, and I think the business principles are the same.” "
Amount of investment
A February 18, 2009 CNN article said the bailout could cost U.S. taxpayers $130 billion.As of early June 2009, the Bush and Obama administrations had invested $80.3 billion.
On May 24, 2011, Chrysler repaid the last of the money to the US and Canadian treasuries, several years ahead of schedule.
Image issues
Issues involving the public imagePublic relations
Public relations is the actions of a corporation, store, government, individual, etc., in promoting goodwill between itself and the public, the community, employees, customers, etc....
of the companies involved in this crisis also played key parts during the process.
GM ad an apology and a recommitment
On December 8, 2008, General Motors unveiled a new advertisement where the company apologized for disappointing and violating the trust of American consumers. They pledged to make a commitment to regain focus on core brands and away from pickups and SUVs, declaring they needed to make such an unfiltered statement "since quite a bit of media commentary has not kept pace with our actual progress to transform the company."November 19 Congressional hearing
According to ABC NewsABC News
ABC News is the news gathering and broadcasting division of American broadcast television network ABC, a subsidiary of The Walt Disney Company...
and other media outlets, the Big Three CEOs (Rick Wagoner
Rick Wagoner
George Richard "Rick" Wagoner, Jr. is an American businessman and former Chairman and Chief Executive Officer of General Motors. Wagoner resigned as Chairman and CEO at General Motors on March 29, 2009, at the request of the White House...
of GM, Alan Mulally
Alan Mulally
Alan Roger Mulally is an American engineer and business executive who is currently the President and Chief Executive Officer of the Ford Motor Company...
of Ford and Robert Nardelli
Robert Nardelli
Robert Louis "Bob" Nardelli was the chairman and chief executive officer of Chrysler. He had earlier served in a similar capacity at The Home Depot from December 2000 to January 2007. Prior to that, Nardelli had risen to become one of the top four executives at General Electric...
of Chrysler) who attended the November 19, 2008, meeting in Washington D.C. to request a bailout traveled to the meeting in private luxury jet aircraft. A November 19 CNN article noted that "Gary Ackerman
Gary Ackerman
Gary Leonard Ackerman is the U.S. Representative for , serving since a special election in 1983. He is a member of the Democratic Party...
, D-NY... and several other representatives suggested that it was difficult to give money to the automakers when the CEOs had all flown to Washington on corporate jets. 'Those types of symbolic things matter and set a tone,' said Peter Roskam
Peter Roskam
Peter James Roskam is the U.S. Representative for , serving since 2007. He is a member of the Republican Party and Chief Deputy Whip in the 112th Congress, ranking fourth among house Republican leaders; also served in the Illinois Senate and the Illinois House of Representatives.-Early life,...
, R-Ill." House Speaker Nancy Pelosi
Nancy Pelosi
Nancy Patricia D'Alesandro Pelosi is the Minority Leader of the United States House of Representatives and served as the 60th Speaker of the United States House of Representatives from 2007 to 2011...
summed up the Congressional response to their requests with the statement "Until they show us the plan, we cannot show them the money," and demanded that the automakers return to submit convincing turnaround plans by Dec. 2.
A November 19, 2008, CNN
CNN
Cable News Network is a U.S. cable news channel founded in 1980 by Ted Turner. Upon its launch, CNN was the first channel to provide 24-hour television news coverage, and the first all-news television channel in the United States...
article quoted Thomas Schatz, president of Citizens Against Government Waste
Citizens Against Government Waste
Citizens Against Government Waste is a 501 non-profit organization in the United States. It functions as a think-tank, 'government watchdog', and advocacy group for fiscally conservative causes...
, as saying, "They're coming to Washington to beg the taxpayers to help them. It's unseemly to be running around on a $20,000 flight versus a $500 round trip." The article noted that although it was not known how much the private flights cost, analyst Richard Aboulafia of the Teal Group said that $20,000 was a reasonable estimation.
On December 2, 2008, it was reported that General Motors and Ford were planning to sell their fleets of corporate luxury jets.
Hybrid electric vehicle usage
Wagoner, Mulally and Nardelli each drove separately to Washington for a December 2 Congressional hearing in hybrid electric vehicleHybrid electric vehicle
A hybrid electric vehicle is a type of hybrid vehicle and electric vehicle which combines a conventional internal combustion engine propulsion system with an electric propulsion system. The presence of the electric powertrain is intended to achieve either better fuel economy than a conventional...
s after the above-noted criticism for arriving to Washington for the November hearing in private jets. Wagoner rode in a Chevrolet Malibu
Chevrolet Malibu
Malibus and all other Chevelles were completely restyled for 1968 with semi-fastback rooflines on two-door hardtops and wheelbases split to on two-door models and 118 for four-door sedans and station wagons. Engine offerings included a new V8 rated at that replaced the V8 that had served as the...
hybrid accompanied by Beth Lowery, the company's top environmental and safety official. Mulally travelled in a Ford Escape Hybrid. Nardelli arrived in a Chrysler Aspen
Chrysler Aspen
The Chrysler Aspen is a full-size sport utility vehicle from Chrysler. Launched for the 2007 model year, the Aspen is essentially a rebranded Dodge Durango SUV...
Hybrid.
Non-ecological past practices
From the energy-conservationEcology
Ecology is the scientific study of the relations that living organisms have with respect to each other and their natural environment. Variables of interest to ecologists include the composition, distribution, amount , number, and changing states of organisms within and among ecosystems...
point of view the Big Three have a negative image. There are ecology-minded sections of the American public that view with little sympathy the big automakers background of maximizing profits by deliberately destroying mass-transport systems and privately-owned railways between the 1920s and 60s.
Some have alleged that The Big Three contributed to the development of suburbs, seen as fuel-inefficient in that it requires commuters to drive to cities from increasingly more distant suburbs. Facing a saturated car market in the US in the early 1920s GM engaged in a controversial policy along with road-builders that triggered the massive shift from the mass transportation of the previous century to the 'one-person-one-car' trip of today.
Bond ratings downgraded
On December 19, 2008, Fitch RatingsFitch Ratings
The Fitch Group is a majority-owned subsidiary of FIMALAC, headquartered in Paris. Fitch Ratings, Fitch Solutions and Algorithmics, are part of the Fitch Group....
downgraded the Issuer Default Rating of General Motors and Chrysler to "C," indicating "default is imminent."
A December 22, 2008, article from Bloomberg reported that General Motors and Ford "had their debt cut further below investment status by Standard & Poor’s and Moody’s Investors Service. GM’s unsecured debt was trimmed one level to C, or 11 grades below investment quality, by S&P. Moody’s lowered its rating on $26 billion in Ford debt by two grades to Caa3, or nine below investment quality."
Lobbying and other financial ties between Big Three and Congress
The Big Three spent almost $50 million to lobby Congress during the first nine months of 2008. Senator Carl LevinCarl Levin
Carl Milton Levin is a Jewish-American United States Senator from Michigan, serving since 1979. He is the Chairman of the Senate Committee on Armed Services. He is a member of the Democratic Party....
(D-Michigan) received $438,304 over 30 years, or $14,610 a year. House member John Dingell
John Dingell
John David Dingell, Jr. is the U.S. Representative for , serving since 1955 . He is a member of the Democratic Party...
(D-Michigan) received nearly $1 million over his 54 years in Congress, or $18,518 a year. House member Joe Knollenberg
Joe Knollenberg
Joseph "Joe" Knollenberg is a politician from the U.S. state of Michigan. From 1993 to 2009, he was a Republican member of the U.S. House of Representatives, representing ....
(R-Michigan) received $879,327 over only 16 years in office, or $54,957 a year. Dingell's wife Debbie used to work as a lobbyist for General Motors, and after she married Dingell, she became a senior GM executive at an undisclosed salary. As of May 2008, Dingell owned GM stock worth up to $350,000, GM stock options worth up to $1 million more, and a GM pension fund. In 2000, the Dingells owned GM stock options worth up to $5 million. In 1998, Dingell sold GM stock options worth up to $1 million. The value of that stock, options and pension has been lost in the bankruptcy restructuring that Congress approved for GM.
GM sent letters to tens of thousands of their dealers, supplier executives, employees and union members, asking recipients to call and write Congress with several "talking points" about the potential effects of a GM bankruptcy.
Products: electric and hybrid vehicles
United States Congress
The United States Congress is the bicameral legislature of the federal government of the United States, consisting of the Senate and the House of Representatives. The Congress meets in the United States Capitol in Washington, D.C....
, and those plans included significant commitments to fuel-saving
Fuel efficiency
Fuel efficiency is a form of thermal efficiency, meaning the efficiency of a process that converts chemical potential energy contained in a carrier fuel into kinetic energy or work. Overall fuel efficiency may vary per device, which in turn may vary per application, and this spectrum of variance is...
and electric vehicle
Electric vehicle
An electric vehicle , also referred to as an electric drive vehicle, uses one or more electric motors or traction motors for propulsion...
technologies.
Ford Motor Company
Ford Motor Company
Ford Motor Company is an American multinational automaker based in Dearborn, Michigan, a suburb of Detroit. The automaker was founded by Henry Ford and incorporated on June 16, 1903. In addition to the Ford and Lincoln brands, Ford also owns a small stake in Mazda in Japan and Aston Martin in the UK...
unveiled an aggressive plan to electrify its fleet of vehicles, including plans to offer an all-electric van-type vehicle in 2010 for use in commercial fleets, complemented by a battery-powered sedan in 2011. By 2012, the company will bring a family of regular hybrids, plug-in hybrids, and battery electric vehicle
Battery electric vehicle
A battery electric vehicle, or BEV, is a type of electric vehicle that uses chemical energy stored in rechargeable battery packs. BEVs use electric motors and motor controllers instead of, or in addition to, internal combustion engines for propulsion.A battery-only electric vehicle or...
s to market. Ford intends to invest about $14 billion on fuel-efficient technologies over the next seven years and aims to achieve a 36% improvement in fuel economy for its entire fleet by the 2015 model year. The company has applied to DOE's Advanced Technology Vehicles Manufacturing Loan Program
Advanced Technology Vehicles Manufacturing Loan Program
Advanced Technology Vehicles Manufacturing Loan Program is a $25 billion direct loan program funded by Congress in fall 2008 to provide debt capital to the U.S. automotive industry for the purpose of funding projects that help vehicles manufactured in the U.S. meet higher mileage requirements and...
for $5 billion to support these efforts, but the company also sought up to $9 billion in bridge loans. However, Ford expected to remain viable through 2009 and hopes to avoid drawing on the loan.
GM
General Motors
General Motors Company , commonly known as GM, formerly incorporated as General Motors Corporation, is an American multinational automotive corporation headquartered in Detroit, Michigan and the world's second-largest automaker in 2010...
unveiled the production version of the Chevy Volt in September. The vehicle will be able to travel up to 40 miles in all-electric mode. General Motors Corporation (GM) is involved in a well-publicized effort to launch its plug-in hybrid model, the Chevy Volt, in 2010, and the company also intends to employ the Volt drivetrain in other vehicles. GM plans to launch predominately fuel-efficient cars and crossovers over the next four years, investing $2.9 billion in fuel-efficient technologies and alternative fuels during that time period. By 2012, GM will offer 15 hybrid models, and more than half of its fleet will be flex-fuel vehicles, able to run on either gasoline or ethanol-rich E85. GM is seeking $12 billion in bridge loans through 2009 and is also asking for revolving credit of $6 billion that it could draw on if its sales forecast falls short. The company ended the third quarter of the year with cash reserves of $16 billion, but it estimates that it should have at least $11 billion on hand to maintain its operations. Without a federal loan, GM expects its cash reserves to fall to $10.1 billion by year's end and to fall to $3.6 billion by February.
Chrysler LLC predicted that for the 2009 model year, 73% of its vehicles will be more fuel efficient than their 2008 models, and the company planned to launch more small, fuel-efficient vehicles in the future. The company's plan also called for the introduction of a Dodge Ram
Dodge Ram
The Dodge Ram is a full-size pickup truck manufactured by the Chrysler Group LLC. As of late 2010, it has been sold under the Ram Trucks brand. Previously, Ram was part of the Dodge lineup of light trucks...
hybrid in 2010, along with the company's first electric-drive vehicle. Chrysler also planned to offer three additional electric-drive vehicles by 2013. And like GM, Chrysler planned to make half of its fleet flex-fuel capable by 2012. The company sought a bridge loan of $7 billion. Chrysler ended the first half of the year with $9.4 billion in cash, but expected to end the year with only $2.5 billion in cash, and was concerned that it might not make it through the first quarter of 2009 without the loan.
Automakers have already submitted applications for more than $20 billion in retooling loans to pay for fuel efficient vehicle projects.
Production capacity: factory closings
On December 12, 2008, General Motors announced that it was temporarily closing 20 factories in North America. On December 17, Chrysler announced it would idle all 30 of its plants for at least one month.GM will invest $1 billion of bailout money in Brazil
A February 2, 2009 article in the Latin American Herald Tribune said that General Motors would invest $1 billion in BrazilBrazil
Brazil , officially the Federative Republic of Brazil , is the largest country in South America. It is the world's fifth largest country, both by geographical area and by population with over 192 million people...
, and that this money is part of the bailout that it received from the U.S. government.
Brand Consolidation
General Motors' plan to consolidate their portfolio of US brands, concentrating on the CadillacCadillac
Cadillac is an American luxury vehicle marque owned by General Motors . Cadillac vehicles are sold in over 50 countries and territories, but mostly in North America. Cadillac is currently the second oldest American automobile manufacturer behind fellow GM marque Buick and is among the oldest...
, Chevrolet
Chevrolet
Chevrolet , also known as Chevy , is a brand of vehicle produced by General Motors Company . Founded by Louis Chevrolet and ousted GM founder William C. Durant on November 3, 1911, General Motors acquired Chevrolet in 1918...
, Buick
Buick
Buick is a premium brand of General Motors . Buick models are sold in the United States, Canada, Mexico, China, Taiwan, and Israel, with China being its largest market. Buick holds the distinction as the oldest active American make...
and GMC brands, whilst phasing out, or possibly selling their Pontiac
Pontiac
Pontiac was an automobile brand that was established in 1926 as a companion make for General Motors' Oakland. Quickly overtaking its parent in popularity, it supplanted the Oakland brand entirely by 1933 and, for most of its life, became a companion make for Chevrolet. Pontiac was sold in the...
, Hummer
Hummer
Hummer was a brand of trucks and SUVs, first marketed in 1992 when AM General began selling a civilian version of the M998 Humvee. In 1998, General Motors purchased the brand name and marketed three vehicles: the original Hummer H1, based on the Humvee; and the H2 and H3 models that were...
and Saturn brands.
On June 2, GM Motors announced the sale of the Hummer
Hummer
Hummer was a brand of trucks and SUVs, first marketed in 1992 when AM General began selling a civilian version of the M998 Humvee. In 1998, General Motors purchased the brand name and marketed three vehicles: the original Hummer H1, based on the Humvee; and the H2 and H3 models that were...
brand of off-road vehicles to Sichuan Tengzhong Heavy Industrial Machinery Company Ltd., a machinery company in western China, in which the transaction is expected to close in the third quarter of 2009.
Auto Stock for Every Taxpayer Act
On June 8, 2009 Senator Lamar AlexanderLamar Alexander
Andrew Lamar Alexander is the senior United States Senator from Tennessee and Conference Chair of the Republican Party. He was previously the 45th Governor of Tennessee from 1979 to 1987, United States Secretary of Education from 1991 to 1993 under President George H. W...
(R-Tennessee) introduced a bill, (S. 1198) "Auto Stock for Every Taxpayer Act". The bill would require the government to distribute stock in General Motors and Chrysler to each individual taxpayer. " The bill has since died in committee.
See also
- Automotive industry crisis of 2008–2010
- Chrysler bankruptcy
- Effects of the 2008-2010 automotive industry crisis on CanadaEffects of the 2008-2010 automotive industry crisis on CanadaThe Canadian auto industry is closely linked to the U.S., due to the Automotive Products Trade Agreement and later the North American Free Trade Agreement , and is in similar trouble...
- General Motors bankruptcy
- Presidential Task Force on the Auto IndustryPresidential Task Force on the Auto IndustryThe Presidential Task Force on the Auto Industry is an ad hoc group of United States cabinet-level and other officials that was formed to deal with the financial bail out of automakers Chrysler Corporation and General Motors....