UPDATE 2-Lawmakers say auto bailout should be considered

(Recasts: company, Fed reaction; details from call)

By John Crawley

WASHINGTON, Oct 23 (Reuters) - The Bush administration should consider dramatic steps to prop up the ailing U.S. auto industry, including bailouts similar to the initiatives underway now for banks or the remedy that saved Chrysler nearly 30 years ago, key lawmakers said on Thursday.

The appeal by Rep. John Dingell, a Democrat and chairman of the House of Representatives Energy and Commerce Committee and other members of the Michigan delegation, conveyed new urgency in Washington for gasping Detroit manufacturers and their affiliated finance companies and dealers.

"The Michigan delegation is pursuing all options and asking that the Bush administration -- Treasury, Fed, FDIC -- also consider all available options," Dingell said in a conference call with most of Washington's staunchest industry allies.

Lawmakers did not advocate a specific solution for General Motors Corp GM.N, Ford Motor Co (F.N) and Chrysler LLC, which is mostly owned by Cerberus Capital Management LP [CBS.UL]. They said the manufacturers and relevant agencies should sort that out, along with Congress, if necessary.

Suppliers and dealers also should have a say, the industry's staunchest political allies said.

But they suggested the response could include direct short- term capital injections, loan guarantees, or intervention similar to the cash heavy moves made in recent weeks to shore up U.S. banks and other financial services firms.

Rep. Sander Levin, a Democrat, noted the government "rose to the occasion" to bail out bankrupt Chrysler in 1980 with $1.2 billion in loan guarantees.

"If we lose this opportunity, we'll pay for it in terms of jobs and in terms of the basic manufacturing structure of this country," Levin said. "Inaction is unacceptable."

Ford, GM and Chrysler have all said recently that bankruptcy is not an option. On Thursday, the companies said they supported efforts to bolster liquidity, but did not address specific steps the government should take. GM previously said all options should be on the table.

The Federal Reserve declined comment.

Both GM and Ford shares closed lower on Thursday.

Automaker financing arms such as GMAC are expected to benefit from recently approved Bush administration efforts to buy up distressed mortgages. The U.S. financial sector implosion severely narrowed the pipeline last month for consumer loans for car and truck purchases.

The Michigan lawmakers urged the government in a letter to Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke on Thursday to at least purchase bad auto loans to further boost liquidity.

But Dingell suggested direct emergency loans to the manufacturers from the Treasury or Fed might be worth considering to arrest the downward spiral of the American auto giants.

Dingell said industry is considering approaching the Federal Reserve or Treasury for a capital infusion, but has not done so yet.

He did not object to the government taking an equity stake in the industry -- if that was deemed appropriate.

The government is assuming corporate equity as part of the steep financial services bailout.

Near-term legislative options are limited although Congress is expected to return for a short period following the Nov. 4 election and may consider an economic stimulus package. Lawmakers have said they may leverage a stimulus bill to help Detroit.

They chiefly are focused on trying to expedite $25 billion in low interest loans approved by Congress last month for the industry to meet new federal fuel efficiency requirements. The financing may not be available for several months to more than a year due to regulatory hurdles.

Dingell and others would not comment on the prospect of a merger between Chrysler and larger GM, which are pushing ahead with talks.

The potential deal is politically sensitive -- especially ahead of the election -- considering a combination would likely result in plant closings and wholesale job cuts in their state.

The Bush administration has been cool in the past to overtures from Detroit manufacturers on various issues, urging them more than once to get their own houses in order.

The point was not lost on Rep. Joe Knollenberg, a Republican.

"In fact, they have been ignoring the auto industry," Knollenberg said. "There should be more pressure on them." (Reporting by John Crawley)