WASHINGTON (Reuters) - President George W. Bush announced $17.4 billion in emergency loans to faltering U.S. carmakers on Friday in a dramatic step to guard the industry from imminent collapse and save hundreds of thousands of jobs from falling victim to a deep recession.
Bush, seeking to bolster his legacy and bucking some fellow Republicans who would prefer the car industry work out its problems without government aid, said it would be irresponsible in a time of economic crisis to let carmakers die.
The government will offer up to $17.4 billion in loans to the ailing U.S. automakers and expects General Motors and Chrysler LLC to access the money immediately, a senior administration official said.
Ford Motor Co, the other firm in Detroit’s storied Big Three, said its liquidity is adequate for now and it did not need a loan at this point.
“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,” Bush said, warning that to do nothing would deepen and prolong the U.S. recession.
U.S. stocks rose on the news of the lifeline to the sector, with GM shares jumping 16 percent.
Some $13.4 billion of the total package will be made available in December and January from a $700 billion Wall Street bailout fund that was originally designed to rescue struggling financial institutions.
Democratic President-elect Barack Obama, who takes over from Bush on January 20, supported the move, calling it a “necessary step.”
A transition official said Obama was not part of the administration’s decision to grant the firms a lifeline. But Obama has been calling for short-term loans to the sector conditioned on steps toward long-term viability.
“Thank God! From an economic perspective, we were looking down the barrel of a gun. So I am happy that someone has the good sense to duck,” said Erich Merkle, an analyst with Crowe Horwath in Michigan, of the news.
“It’s a lifeline, but it doesn’t get them completely out of the woods. It takes them (GM and Chrysler) forward until March. Basically the next administration has to deal with it.”
The White House moved on its own after Democrats and Republicans in the U.S. Congress were unable to reach agreement after weeks of negotiations that included desperate pleas on Capitol Hill from the auto chiefs.
Bush attached a string of conditions.
He set a deadline of March 31 for the companies to prove they can restructure sufficiently to ensure their survival or else the loans will be called back.
The three-year loans would require limits on executive compensation. Auto companies must demonstrate how they would become viable. They must pay back all their loans to the government, and show that their firms can earn a profit and achieve a positive net worth. The automakers would also have to provide warrants for non-voting stocks.
GM’s CEO, Rick Wagoner, said the company would now focus on fully implementing its restructuring plan and was confident of meeting the government’s requirements.
Chrysler announced fresh cost-cutting measures.
Michigan Democratic Rep. John Dingell, whose state is the heart of the U.S. auto industry, expressed concern at the prospect of concessions by auto workers.
And some Republicans were dismayed over another move by the Bush administration — which has presided over massive bailouts to the financial industry — to buck market forces.
“It is deeply disappointing that the administration has chosen to use taxpayer dollars to delay the inevitable need to fundamentally restructure these companies,” said Rep. Tom Price, a Georgia Republican.
Bush announced the loan program just weeks before leaving office with low popularity ratings, an economy in recession and the country fighting two wars.
The collapse of the auto industry and its knock-on effect on the economy would have been another blow to his troubled legacy before he hands over to Obama.
Both GM and Chrysler have said a bankruptcy filing is not an option they would chose because of the risk that it would drive more consumers away from their brands. Both companies have been forced to idle plants and lay off thousands of workers across North America.
The automakers have warned that a bankruptcy filing by one could topple suppliers and endanger the remaining two companies because of the overlap in their key parts suppliers.
The Treasury said the move to help the automakers had effectively exhausted the initial $350 billion of the Wall Street bailout funds approved by Congress and that it now needs to access the rest of the $700 billion.
The remaining $4 billion in autos aid is contingent on the administration seeking access to the second half of the Troubled Asset Relief Program, an administration official said.
The loans would carry an interest rate of at least 5 pct but could rise to 10 pct if the carmakers default, Treasury said.
No automakers have been spared in the brutal global sales slump.
Following the U.S. government plan, Canadian Prime Minister Stephen Harper was set to announce an aid package for his country’s auto industry on Saturday. That aid could amount to several billion dollars.
Japan’s Toyota Motor Corp could report its first annual parent-only operating loss in 71 years in the year to end-March, and may issue a profit warning at a scheduled year-end news conference on Monday, Japanese media reported.
Toyota, which declined to comment on the reports, last posted an operating loss in its first year of operation in 1937/38.
Automakers everywhere are under huge pressure to cut costs as a global recession and tight credit strangle demand, and Japanese carmakers are feeling the extra pinch from a strong yen.
In perhaps the strongest protest since the dollar soared to a 13-year high recently, Honda Motor Co CEO Takeo Fukui warned a strong yen would cripple Japanese industry and trigger mass layoffs, forcing the automaker to shift production offshore if it persisted.
Chrysler is widely considered the weakest of the big three U.S. automakers.
Cerberus Capital Management, the private equity firm that bought 80 percent of Chrysler from Daimler AG, has retained advisors to study a range of options for the No. 3 U.S. automaker, including selling off its most valuable assets, including its Jeep brand and its minivan line.
Additional reporting by U.S. autos team and Tokyo bureau, writing by Steve Holland; editing by Frances Kerry.