Washington Prepares to Take Stake in BIG 3 for Bailout


via WSJ

WASHINGTON — Congress and the White House inched toward agreement on legislation that would throw a financial lifeline to the Big Three auto makers, giving the government a substantial ownership stake in the industry and a central role in its restructuring.

Under the terms of the draft legislation, which continued to evolve Monday evening, the government would receive warrants for stock equivalent to at least 20% of the loans any company receives. The company also would have to agree to limits on executive compensation and dividend payments, much like those contained in the government’s $700 billion rescue of the financial industry.

Assuming congressional Democrats and the White House come to agreement on the plan, the car industry would be the latest to submit to strict government scrutiny in return for a bailout, joining most prominently the banking sector.

The auto industry would undergo a restructuring process akin to bankruptcy reorganization, only with fewer rigors and with the government, not a judge, in control, and with many associated political complications.

The program would be overseen by an official, tapped by President George W. Bush, whom congressional aides and lawmakers describe as an “auto czar.” This person would act as a kind of trustee with authority to bring together labor, management, creditors and parts suppliers to negotiate a restructuring plan. He or she also would be able to review any transaction or contract valued at more than $25 million.

“We call this the barbershop,” said House Speaker Nancy Pelosi, a California Democrat. “Everybody’s getting a haircut here, in terms of the conditions of the bill,” she said, noting the likely impact on labor, bondholders, shareholders, car dealers, suppliers and executives. “The management itself has to take a big haircut on all of this.”

Senior congressional Democrats and top Bush aides wrestled late Monday with final details of the package, which the White House would prefer were even tougher on the car makers. General Motors Corp., Ford Motor Co. and Chrysler LLC have asked for a total of $34 billion to weather the downturn in the economy and steep slump in vehicle sales. GM and Chrysler say they need a cash infusion before the end of December to avoid shutting down.

The White House has been pressing for a compromise package but gave a chilly reception to the latest overture by Democrats. White House officials suggested the package isn’t rigorous enough, people familiar with the matter said, and would open the door for companies that aren’t financially viable to receive long-term financing.

[U.S. Could Take Stakes in Big 3]

“We’ll continue to work with members on both sides of the aisle to achieve legislation that protects the good-faith investment by taxpayers,” said White House spokeswoman Dana Perino.

The latest version of the bill would extend to the companies billions of dollars in short-term financing. These bridge loans are expected to total about $15 billion, enough to carry the auto makers through next March.

Any deal would have to be ratified by Congress. Support there remains tepid and opposition remains high, especially among Republicans in the Senate, who can block the bill through a filibuster.

A handful of Republican senators have said they are willing to help the industry, but it isn’t clear how many will swing behind legislation this week. Senate Minority Leader Mitch McConnell (R., Ky.) said the rescue must be financed out of existing funds and include strong taxpayer protections. Mr. McConnell stopped short of endorsing the bill Monday, but did note the auto industry is “an important source of jobs throughout America, including my own state of Kentucky.”

Democratic leaders have hopes of pushing a bill through Congress this week, with the Senate likely moving first. “Congress is trying to save Detroit,” said Senate Majority Leader Harry Reid (D., Nev.). “If senators are willing to work together…we can pass legislation.”

In a statement, GM noted the “extraordinary action” that both the auto makers and Congress will be taking. “As part of our plan, we will abide by the conditions proposed in the bill and will continue our restructuring with great urgency,” the company said, urging passage of the bill.

Chrysler said it looks “forward to working with Congress and this administration, and the next administration, and to completing our restructuring in an orderly fashion.”

The congressional plan appears to be aiming for many of the benefits of restructuring in bankruptcy court, without an actual bankruptcy filing. But the financing offered the companies is only enough for a few months. In bankruptcy, companies typically line up so-called debtor-in-possession financing that is enough to last them most or all the way through the process.

“I think Congress is trying to go halfway,” said Evan Flaschen, bankruptcy attorney with the Connecticut firm Bracewell & Giuliani LLP. “Now you wonder if there will be a second half to this with more money.”

As in bankruptcy court, the legislation tries to establish a process under which the auto makers would negotiate with creditors. The companies would be expected to modify contracts with bondholders and unions. The threat looming under the proposed program would be an actual bankruptcy filing — which the trustee could prompt by withdrawing the loans — something auto makers have argued could lead to their liquidation as buyers flee.

One danger for auto makers is exposing the industry to congressional meddling as it attempts to build a new business model. The legislation, among other things, would bar the companies from participating in legal challenges to state laws designed to impose limits on greenhouse-gas emissions. The White House opposes that provision, congressional aides said.

If the car companies don’t make satisfactory progress toward fixing their long-term problems by the end of March, the auto czar could submit to Congress a plan “and request legislative implementation,” according to the draft bill.

The short-term loans would be financed out of an existing $25 billion program created to help the industry meet fuel-economy standards. Under the terms of the bill, the loans would mature in seven years. For the first five years the companies would pay a 5% interest rate; after that, a 9% rate would be levied, the bill says.

The bill doesn’t specify what would happen to a company’s existing management. GM Chief Executive Rick Wagoner has come under pressure from top lawmakers to step down. He was defended Monday vigorously by GM Vice Chairman Bob Lutz, who said in an interview that Mr. Wagoner has “total support of the board of directors” and shrugged off criticism from lawmakers.

“To blame the American automobile executives for this frankly is ridiculous,” Mr. Lutz said, suggesting an unforseen downturn in the economy and housing market are the culprits. “How were we supposed to forecast this when the government doesn’t forecast it and the financial institutions couldn’t?”

In a sign of how messy the reorganization could become, the United Auto Workers union is seeking to attach strings to any concessions it makes for the Big Three. Marc McQuillen, president of UAW Local 2404 in Charlotte, N.C., said the union is looking for an equity stake in GM and likely a seat on the company’s board. UAW officials in Detroit couldn’t be reached for comment.

A coalition of about 30 mayors from Michigan, Ohio, Kentucky, Indiana and other auto-producing states were scheduled to meet Monday night in Washington to discuss strategy for several meetings with lawmakers and legislative aides Tuesday. “Every community that has a plant lives under the sword,” said Lordstown, Ohio, Mayor Michael Chaffee. He said a plant closure in his town would “be the death knell for this area.”

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