With the seemingly inevitable decision of the Government to appropriate $700 billion in aid of the mortgage industry looming ahead, the approval of $25 billion in loans by the U.S. House yesterday for the struggling U.S. auto industry received relatively little coverage. Remember when the $1.2 billion bailout of Chrysler in the late 70’s was a big deal? Well that is chump change compared to this. But hold on, there’s even more on the horizon.
Before the champagne had even had a chance to chill in Michigan, state lawmakers began maneuvering for an additional $25 billion loan for next year to subsidize the industry’s retooling. All three chief executives from the Detroit automakers successfully made a united plea in front of Congress over the last couple of weeks, which resulted in a bill that is expected to be passed by Congress today. Under the bill, the Bush administration will have two months in which to write the rules for the loans which will then start the flow of money to Detroit by the end of the year.
The industry had asked for up to $50 billion over three years, but took that idea of the table after meeting strong opposition. However, that will not end Detroit’s request for an additional $25 billion for the future that they say is needed to help them retool factories to produce efficiency required by new governmental legislation. The loans had been set up but not paid for in last year’s energy bill as part of the agreement to win the industry’s backing for raising fuel economy standards to 35 mpg by 2020. The government has estimated that the new standards will cost Detroit automakers $30.5 billion just through 2015. When the companies’ financial situations began to deteriorate earlier this year, the industry and the UAW turned to lawmakers to find the money to pay for the loans. Automakers say the loans could save them roughly $100 million on every $1 billion lent. The budget resolution includes $7.5 billion to pay for the estimated costs of the program, double the original estimate. Automakers defend their request as part of the deal to reduce U.S. dependence on foreign oil, and never directly tied the loans to their finances. Disappointingly, the industry warns that because the loans could only apply to vehicles that were 25% more efficient than direct competitors, few new models would qualify. Those rules are still in place, as are restrictions limiting the loans to covering no more than 30% of the costs for a single project.