Chrysler, GM Auto Industry Bailout is a "Corker"

(MoneyWatch)  Chrysler and GM won a $17.4 billion bailout from President Bush, but as expected the terms are tough, with all stakeholders sharing the pain.

If there's any winner in the bailout, politically it could be Sen. Bob Corker, R-Tenn., because the bailout terms resemble a last-minute proposal he made shortly before the Senate balked at passing a bailout earlier this month.

The auto industry bailout announcement today, Dec. 19, represents an eleventh-hour reprieve. Both Chrysler and GM warned they could go broke if they didn't receive government loans by Dec. 31.

Chrysler gets a $4 billion loan. GM gets a first installment of $4 billion, then additional installments for a total of $13.4 billion. The money comes out of the U.S. Treasury Department's $700 billion Troubled Asset Relief Program. Treasury Secretary Henry Paulson said the auto industry loans mean Treasury has now committed the entire first half of the $700 billion, and he called on Congress to release the second half of the money.

Meanwhile, Ford reiterated in a written statement that unlike Chrysler and GM, Ford was not looking for a short-term loan, but repeated that it was interested in access to a $9 billion line of credit. Details are still emerging, but possible funds for Ford do not appear to be part of today's accouncement.

So Chrysler and GM got their wish, but at a high price for all concerned:

• Compensation for UAW workers must be cut to the average of compensation for non-union U.S. workers for Honda, Nissan and Toyota.
• The terms also eliminate any compensation for laid-off workers "other than customary severance pay." That eliminates notorious "jobs banks," where laid-off workers got nearly full pay and benefits. To be fair, the jobs banks were already being phased out by mutual agreement, but they were an irresistible target for critics of the union and of the industry.
• Retirees will have to accept at least one half of company payments into the trust that administers healthcare benefits, the Voluntary Employees Beneficiary Association, in the form of company stock.
• Bondholders will have to surrender debt for equity in the companies, so that the automakers reduce their publicly held debt by two-thirds.
• The companies themselves must accept oversight by a presidential "designee," commonly called the "car czar." Company executives will have strict limits on bonuses and other compensation.

Chrysler and GM have until Feb. 17 to submit business plans to the still-unnamed car czar that embody these demands. If the companies don't come up with a plan that satisifes the car czar by March 31, he or she can demand immediate repayment of the loans.

President Bush said he was reluctant to approve the bailout, but felt there was no choice. "If we were to allow the free market to take its course now, it would almost certainly lead to disorderly bankruptcy and liquidation for the automakers," the president said in a written statement.

"Under ordinary economic circumstances, I would say this is the price that failed companies must pay -- and I would not favor intervening to prevent the automakers from going out of business," he said.

"But these are not ordinary circumstances. 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 president said.