Administration Cool To Automaker Bailout

In this April 29, 2008 file photo, a group of GMC Yukons sit on a lot at the Ray Laethem GMC Trucks dealership in Detroit. General Motors Corp.'s top managers are working on additional restructuring measures to deal with a declining U.S. auto market and an accelerated shift from trucks to more fuel efficient vehicles, a person familiar with the plan told The Associated Press late Wednesday, May 28, 2008. AP Photo/Gary Malerba

Treasury Secretary Henry Paulson called autos a "critical industry" Wednesday but said a $700 billion financial rescue program wasn't designed for them. The White House was noncommittal, but said it was open to new ideas.

Asked about a Democratic congressional leadership plan to rush financial aid to the industry, Paulson cautioned that "any solution has got to be leading to long-term viability" for auto companies.

He said Congress could try to make funding more available to the auto industry as part of a $25 billion loan program approved in September to develop fuel-efficient vehicles.

At the White House, press secretary Dana Perino said the administration is not responsible for the automakers' woes but understands the importance of the industry. But officials there are reluctant to make any proposals for new aid, suggesting the car companies hold much of the responsibility for their own survival.

House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid are pushing for something more sweeping to help the industry, which is suffering under the weight of poor sales, tight credit and a sputtering economy.

Pelosi said Tuesday she was confident that lawmakers meeting next week in a lameduck session would consider "emergency and limited financial assistance" for the auto industry under the $700 billion bailout measure that passed Congress in October. She urged the outgoing Bush administration to support a compromise.

"In order to prevent the failure of one or more of the major American automobile manufacturers ... Congress and the Bush administration must take immediate action," said Pelosi, D-Calif.

Reid, D-Nev., said that Democrats were "determined to pass legislation that will save the jobs of millions" as part of a postelection session. "This will only get done if President Bush and Senate Republicans work with us in a bipartisan fashion, and I am confident they will do what is right for our economy," he said.

But, if recent history is any judge, an auto industry bailout may not have the desired effect. In the 1990s, Japan tried the same thing, reports CBS News business correspondent Anthony Mason.

"And what that resulted in that was this sort of quote unquote 'Zombie Economy,'" Steve Massocca, of Pacific Growth Equities, told CBS News. "You had these zombie companies that were kept alive simply by the fact that the government was able to support them."

The Bush administration has concluded that the bailout bill that passed earlier does not allow loans to the auto industry.

White House spokeswoman Dana Perino said the companies had made business decisions "over the years that have led to this situation, but we have gone as far as we can with the authority Congress has given in order to help industries." But she said the White House was open to helping the auto industry.

Lawmakers are expected to take up the issue when they return to the Capitol for a postelection session beginning next week.

Democratic leaders will need to convince some skeptical lawmakers who question whether a bailout would cause changes in the auto industry or simply lead to more handout requests from other industries.

"Once we cross the divide from financial institutions to individual corporations, truly, where would you draw the line?" asked Sen. Jeff Sessions, R-Ala.

In 1979, the government famously bailed out Chrysler with a $1.5 billion loan, which the company paid back just four years later. But this time, critics complain General Motors, Ford and Chrysler should not be rewarded for bad management, reports Mason.

"The Big Three make products that Americans don't want to buy," Dan Ikenson, of the Cato Institute, told CBS News. "So shouldn't you at least do that before you ask for a subsidy from the U.S. taxpayer?"

Michigan Gov. Jennifer Granholm said Wednesday that the crisis in the auto industry is urgent, arguing that "the national economy rests on this."

"This industry supports one in 10 jobs in the country," Granholm told CBS' The Early Show on Wednesday.

"If this industry is allowed to fail, there will be a ripple effect throughout the nation," she said. "This government decided that it was going to step in and throw $700 billion at the financial sector. We're just asking for a fraction of that."

Pelosi said any assistance to the industry should include limits on executive compensation, rigorous government review authority and other taxpayer protections.

Her request for legislation came less than a week after General Motors Corp. and Ford Motor Co. posted bleak third-quarter earnings reports. GM, the nation's largest automaker, posted a $2.5 billion quarterly loss Friday and warned that it may run out of money by the end of the year without government aid.

"We're in a situation where there's a great unknown about what will happen," said Sen. Debbie Stabenow, D-Mich. "And a great concern that at least one of the companies will find themselves in a situation where they cannot make it until January 20," when President-elect Obama is inaugurated.

GM spokesman Greg Martin said the automaker was "ready to work with Congress and the administration to secure the immediate support we need to bridge the current economic crisis."

Mr. Obama has urged the Bush administration to do more to help the industry and aides said he raised the issue with President Bush on Monday in an Oval Office meeting. Officials familiar with the conversation said the president replied he was open to the idea.

Congress approved legislation in late September to provide $25 billion in loans to domestic automakers and suppliers to upgrade factories to build more fuel-efficient vehicles. But the funding has stalled and supporters of the industry say it will not be sufficient to help the companies with their immediate financial problems.

Executives with GM, Ford and Chrysler LLC and the president of the United Auto Workers union pressed Pelosi and Reid to provide an immediate $25 billion loan to keep the companies operating and a separate $25 billion to help cover future health care obligations for retirees and their dependents.

"We are down to days; maybe a couple of weeks," Rebecca Lindland, an auto analyst at Global Insight, Inc., told CBS News.

If even one of Detroit's Big Three fails, according to a new study, 2.5 million jobs could be lost as the impact spreads from workers to dealers to suppliers, reports Mason.

"This is not a vacuum," said Lindland. "This is not just one company. This is a domino effect. Where one company goes down, you're going to see the industry go down as well."

Pelosi's statement did not specify the size of the aid package. She has tasked Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, to draft legislation, and a companion effort is under way in the Senate.

Sen. Carl Levin, D-Mich., said lawmakers from his state are crafting legislation that would allow the auto industry to receive $25 billion in loans under the $700 billion bailout program.
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