Christmas Comes Early in Detroit - December 19, 2008

Have no fear Underdog is here….well not exactly. In an announcement made early Friday morning, the well anticipated bailout relief from the government for the auto industry has finally arrived.

As one of the nation’s largest employers, Detroit’s auto industry got an early, and very expensive, holiday gift, $17.4B. Following last week’s rejection of a $14B plan by Congress, today’s news was well received and even played a hand in the surge in morning trade on the major indices.

The final say on the matter came from President Bush, which singed the agreement with the understanding that the companies involved would radically restructure their business model and show signs of profitability in the near-term.

“If we were to allow the free market to take its course now, it would almost certainly lead to disorderly bankruptcy and liquidation of the automakers," Bush said at the White House, in remarks carried live by the national broadcast networks. "In the midst of a financial crisis and a recession, allowing the U.S. auto industry to collapse is not a responsible course of action. The question is how we can best give it a chance to succeed."

The total amount of the loans, $17.4B, will come from the bailout program passed by Congress in October. In it, $13.4B will be paid out by the end of this month, and into January. General Motors (GM) is slated to receive $9.4B, with Chrysler receiving the remaining $4B.

The last $4B in funds will remain contingent on Congress discretion on when and how much of the remaining balance will be disbursed.

Under the current terms, GM and Chrysler are obligated to provide the government with company stock warrants, which will entitle the government to purchase shares of the companies at a specified price.

If the companies cannot show a new and implements plan of action by March 31, the government will call in their loans to the automakers, which would prove nearly impossible for the companies to pay. The company will only be deemed profitable if their net present value is positive by the set deadline.

One of the major addendums to the agreement will be the elimination of job banks that the companies provide. A job bank, negotiated by the United Auto Workers (UAW), is a program that provides laid-off employees with unemployment benefits and supplemental pay from their company for upwards of 48 weeks.

If a worker remains unemployed after those weeks, they move into a job bank, which then provides nearly 95% of their pay and benefits. One could technically stay in a job bank for years on end.

Of the Big Three, Ford (F) was left out of the emergency aid. The reasoning, Ford had established a line of credit already, before the financial lending crisis really took hold.

In closing, the president went on to say that the government has a responsibility not to intervene or undermine the private business sector. However, he also has the duty to safeguard the country in regards to the health and stability of the economy as a whole.

"Under ordinary economic circumstances, I would say this is the price that failed companies must pay," the president said. "And I would not favor intervening to prevent the automakers from going out of business. However, these are not ordinary circumstances.”

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