In the run up to George Bush’s announcement on Friday December 19th that he would bail out Detroit’s beleaguered carmakers rumours abounded that perhaps something more drastic was in the offing. Maybe the president would insist on an orderly transition into chapter-11 bankruptcy protection for Chrysler and General Motors—Ford, though also in dire trouble, is in slightly better shape. In the event he elected to do the minimum required to keep the cash-guzzlers on the road. Allowing the American car industry to collapse at the end of his presidency would have amounted to a bail-out for Barack Obama, the president-elect.
A bail-out bill that had swept through the House of Representatives failed to pass in the Senate on December 11th. So Mr. Bush instead has had to raid the $700 billion Troubled Asset Relief Programme (TARP), set up to bail-out Wall Street’s banks and other financial institutions. GM and Chrysler will get $13.4 billion in emergency loans with another $4 billion to come in February. Without the cash the pair might have collapsed by the end of the year. The terms of the loan could allow the government to become big shareholders.
Mr. Bush made it clear that the special circumstances of the credit crisis and economic downturn won the car firms this lifeline. Ordinarily they would have been allowed to fail as a just punishment for the bad management and business practices that had got them into their atrocious state. The carmaker were deemed too big to fail—but only for the moment. “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” reckoned Mr. Bush. He also accepted that bankruptcy was not an option. Customers would balk at buying cars from companies that had gone bust.
The loans should keep GM and Chrysler in business until the end of March. By then the decision about how important it is that they survive will fall to Mr. Obama. Perhaps they will be in the midst of a potentially successful restructuring by then. But, more likely, the loans will merely allow the American car industry to limp on until the conditions are more favourable for its demise. Although the loans come with a strict set of conditions the chances of restructuring in a short space of time are not high. Although the car industry has in the past shrunk itself and wrung concession from its unions as its market share has dwindled these efforts have usually amounted to doing too little too late.
A deal with the United Auto Workers (UAW) a year ago to transfer health-care liabilities to a union-run fund and to reduce the pay and benefits of newly hired workers to rates similar to those at the transplants by 2010 was a step in the right direction. But the bail-out bill foundered in the Senate after the UAW declined to take wage cuts in 2009, preferring to see out the remainder of the current contract, which expires in 2011. Mr. Bush’s bail-out deal requires the car companies to strike a new deal with the UAW that will make their workers competitve with those of he transplant factories in America of foreign car companies. But wage cuts, which the UAW have so far seemed disinclined to accept, are surely a necessity if America’s car companies are to have any chance of survival. The UAW have slammed this bail-out for the harsh conditions it imposes on workers.
The carmakers will also have to strike deals with creditors to turn debt into equity. Creditor might be persuaded to go along with this plan by the threat of bankruptcy. Much depends on whether creditors believe that Mr Obama is prepared to allow this to happen. So far he has given no indication about how long he might be prepared to prop up Detroit’s carmakers, though he called the bail-out a necessary step and implored the car firms not to “squander” this opportunity to restructure. But one thing is certain—it is now his problem. Mr. Bush has waved the carmakers goodbye and pointed them in the direction of Mr. Obama’s White House.