Proposed Funds to the Auto Industry

Because there’s a lot of confusion about who is advocating for what with regards to funding to the auto industry, I’m going to review what funds have been requested or proposed, and then review the stances various leaders have taken on those funds.

$25 Billion Retooling Fund

First, there is the $25 billion allocation–already awarded earlier this fall–designated to help auto-makers re-tool factories to build more efficient cars.

Automakers must show that they are financially viable and show that they have a "net present value that is positive" and that they have "financial projections demonstrating the applicant’s solvency through the period of time the loan is outstanding." They must also offer a first-lien or security interest in all property acquired with the funds, but that could be waived by the Energy Secretary.

The rule is written broadly enough that new factories might be eligible. The projects include "re-equipping, expanding or establishing a manufacturing facility in the United States to produce qualifying advanced technology vehicles, or qualifying components" along with "engineering integration performed in the United States."

The rule gives priority to plants that are 20 years or older. Money from the loan program could be used to reopen a shuttered factory.

The vehicles built must be at least 25 percent more fuel efficient than required by law. It also requires that at least $2.5 billion of the loans be set aside for automakers and suppliers with 500 or fewer employees.

This fund was originally going to take much longer to kick into place–as many as 18 months–but DOE rushed to establish guidelines to make these funds available in the shorter term.

$25 Billion Bridge

The auto industry is very credit driven. In addition to providing auto loans directly to consumers, the auto industry uses credit to purchase parts and offers credit to dealers which they use to purchase vehicles and parts. In other words, without sufficient credit, both production and sales would shut down.

Because of the credit crunch and because the US manufacturers have crummy debt ratings, the industry is having problems accessing that level of credit, particularly GM. And this credit crunch came on top of an awful end-of-product-year due to the oil price spike in the summer; all manufacturers were stuck with gas guzzling products that no one wanted to buy, which they had to get rid of on terrible terms. Finally, with consumer confidence tanking, car sales across the industry are down sharply.

Since this is a request tied, at least partly, to the freezing of credit, the auto industry requested funds from TARP to cover this bridge. But enough decision-makers are opposed to tapping into TARP to help the auto industry that such a bridge loan–if it was given–would probably have to come from somewhere else. Surely, if the auto companies get any money specifically allocated as a bridge, it will come with very strict requirements modeled on the Chrysler loan.

Obama Administration Energy-Focused Funds

Obama campaigned on promises to provide additional funds to make the auto industry more environmentally sound. He proposed $4 billion for retooling of factories (though he proposed this before the $25 billion loan was awarded above, so it may be redundant).

Barack Obama and Joe Biden will also provide $4 billion retooling tax credits and loan guarantees for domestic auto plants and parts manufacturers, so that the new fuel‐efficient cars can be built in the U.S. by American workers rather than overseas. This measure will strengthen the U.S. manufacturing sector and help ensure that American workers will build the high‐demand cars of the future.

In addition, Obama proposed $150 billion in investments into green technologies, some of which would go to develop superior battery technology, plug-in infrastructure, and other automotive-related technologies.

Barack Obama and Joe Biden will strategically invest $150 billion over 10 years to accelerate the commercialization of plug‐in hybrids, promote development of commercial scale renewable energy, encourage energy efficiency, invest in low emissions coal plants, advance the next generation of biofuels and fuel infrastructure, and begin transition to a new digital electricity grid. The plan will also invest in America’s highly‐skilled manufacturing workforce and manufacturing centers to ensure that American workers have the skills and tools they need to pioneer the green technologies that will be in high demand throughout the world. All together these investments will help the private sector create 5 million new green jobs, good jobs that cannot be outsourced

Now, as I’ll review in a later post, the most likely outcome in the short term is that some of the $25 retooling fund will be shifted into a bridge, though Pelosi and Obama want to avoid that. But if they had their way, there would be three different sources of funding to the auto industry.

27 replies
  1. NMvoiceofreason says:

    The 25B$ will do little more than let the automakers survive until Jan 20th. We need to have legislation ready to go to loan them what they really need (175B$ for GM alone). But we have got to change things, and now is the time. Just as the buggy whip manufacturers need a bailout – uh, their time passed and nobody saved them – we need to save the top heavy dinosaur gas guzzling SUV manufacturers. Not so much. We can let them fail or we can get what we need.

    A)3000$ per vehicle LNG conversion guarantee;
    B)10% additional sales price tax credit for American Manufactured (90% content) hybrid vehicles;
    C)15% additional sales price tax credit for American Manufactured (90% content) electric vehicles.

    As terms, we need the American management to worker ratio to increase, 90% of production to be hybrid and electric, and 10% to be LNG. We need to keep the plants open and the workers working, or it will cost us much more than if the loan had failed. We need the automakers to share designs until all the types of vehicles have hybrid/electric content which meets the specs (cans, vans, light trucks, heavy duty trucks, commercial, etc). LNG can be used for semis and other heavyweight trucks. The money we spend to do this will pay off very quickly. Incentives and loans don’t really kick the kitty that hard. Job losses and industry losses do.

    • Arbusto says:

      Good post.

      Three ways to expand electric and hybrid fleet is 1) mandate the all Government agencies buy electric/hybrid as replacement vehicles, where practical, 2) mandating the USPS UPS and FedEx to convert to electric or hybrid delivery vehicles with tax incentives and 3) accelerated EPA approvals for after market LNG and propane conversions. This could bridge the time to market for new vehicles and partly shelter those who can’t afford new cars. The conversions should also have a tax incentive for tax payers

      I hope our ADD public continues to remember $4.00+ gas and will dump the guzzlers, given enough incentives.

      • NMvoiceofreason says:

        They will remember 4$/gal. gas, because soon it will be back (next summer).

        Thanks for your excellent points, Arbusto, and to EW for everything here. I come back almost every day, even if I don’t comment, just to see her brilliant mind at work.

        Our government built the Interstate system, even when drivers hadn’t requested it. But when people are scared by a heart attack, they will make lifestyle changes they would not otherwise make (ask my wife about diet/gym 4 days/wk.) When faced with corporate death, a slimming program for management and new product development doesn’t seem so bad, does it?

        I agree with a “Manhattan Project” type of effort for Boxturtle. But the Chevy Volt will work in the short term, and they could all three have it in production this year (maybe with body style changes). Another problem our industry has had is a slower design cycle time. Japanese manufacturers may get designs started today into production up to a year earlier than the best that the Big Three have ever achieved. If we are going to stay slow, fat, and ugly, maybe it is better to go bankrupt now than to waste Billions of taxpayer dollars.

        I wasn’t aware EPA approvals for LNG conversions was a problem. If so, rapid approval of candidates must be a priority. My point was to add a 3000$ Government backed loan convertible to a tax credit to ease the pain.

        But whether the Big Three choose to live or die, we still have an auto industry, perfectly capable of making Priuses and getting the tax credit THIS year. So we ought to remind them of that. We don’t have to wait for them to join the 21st century. We can let the Japanese rebuild our industry after they are gone (kind of a nice karmic circle for the post WWII reconstruction, don’t you think?).

  2. emptywheel says:

    One thing I didn’t point out in the post–which I don’t think Pelosi and Obama have really emphasized enough–is that the later plan, to build these new technologies–is really premised on the former working. If the Big Three don’t survive in some way, then the ability to really make drastic changes in the way we use energy needs to be reworked.

    • readerOfTeaLeaves says:

      Looking forward to catching up with this one later in the day, but just wanted to put in a quick ‘thank you‘ — for your very useful perspective! Thx again.

  3. BoxTurtle says:

    The problem with all the above is that I’m simply not seeing how they get the big 3 and GM in particular back to being able to make a profit.

    Does the government plan to pay for retooling every ten years or so? Further, aiming at the older plants is aiming at the least efficient plants in general. Let the big three retool where it makes economic sense, we know there are going to be plant closings so lets close the worst.

    The bridge loan is needed, unless we’re just going to let ‘em die. The dependency on credit means that even if we used pixie dust and fixed the big three today, they’d still need that bridge to get them through what the rest of the economy is doing.

    The other thing that bothers me is that people buy what they want. Detroit could have made Eco-cars long ago, nobody wanted them. The only reason the SUV’s are in trouble now is gas price shock, once that wears off and the economy improves people will go back to them.

    People take their cars seriously. The 55mph speed limit was the most violated the nation ever had. Detroit did what they could to game the gas guzzler tax and we paid the rest. As a nation, we’re simply not going to buy cars we don’t like and we’re not going to obey speed limits for energy conservation. What industry do you think makes more money, the LNG conversion industry or the radar detector industry?

    We need to define a rational set of car specs for a car that people will actually WANT, as oppose to reluctantly use. Top speed of 80MPH for at least 250 miles, fast enough to recharge during a normal pitstop, A/C, room for kids, dogs, and luggage. 0-60 in under 15 seconds. No $12K battery replacements. And so on.

    I’m gonna be against anything that doesn’t get the auto industry back on it’s feet, even if that means that one must die. Otherwise we’ve just got ourselves an enormously expensive Conrail.

    Boxturtle (A “Manhatten Project” to develop the above car seems like the best bet)

    • emptywheel says:

      All very good points. I guess I should have included Obama’s goal of providing universal health care, because that’ll have as much to do with whether these guys can turn it around or not.

  4. readerOfTeaLeaves says:

    FYI, since it’s on the topic of this thread — Jeffrey Sachs “Common Wealth” on this a.m. saying that failure to bail out is disastrous, and looking at the global auto industry picture.…..4#27767774

  5. CasualObserver says:

    Klein believes that the current bailout of the financial sector is, more and more, looking “not merely incompetent. It is borderline criminal.”

    The devil of an auto bailout is in the details. Would a bridge “turn around” the industry, or simply delay the demise? How would the govt. insure that this bailout is not the total disaster that the Wall Street bailout appears to be?

      • CasualObserver says:

        So is Barney Frank–but apparently not angry enough to actually do anything about it. Treasury is out of control, but the Democrats in congress, at least so far, do not show any sign that they will do a thing about it.

        All this makes Gordon Brown look like a freaking genius.

        In a way, the bailout/no-bailout argument is a false, ideological argument. Those proposing the bailout should specify what that bailout actually is–what it entails, what the provisions are, and how those provisions are enforced. Until that happens, we’re arguing about…nothing.

  6. bell says:

    >>Automakers must show that they are financially viable and show that they have a “net present value that is positive” and that they have “financial projections demonstrating the applicant’s solvency through the period of time the loan is outstanding.”

  7. bell says:

    last part of my post chopped off.. not sure why that happens here so often..

    how do they prove that? i don’t see how they ”honestly” can…

  8. Leen says:

    25 billion to the auto industry compared to 7oo billion to Wall Street seems like peanuts these days.

    Still do not understand why they would not use a bailout to force the changes in the U.S. auto industry?

  9. behindthefall says:

    *growl* I suppose the car companies have to be pulled out of the water, but they have been blind and greedy entities for the last, what, 10 or 15 years. Now they wake up and say, oh lordy, we’re drowning. Well, yeah, you threw away all your knowledge and built tarted-up pickups for half a generation. What did you think was going to happen? Oh. Right. You didn’t think.

    Throw ‘em a line. Pull ‘em out. Dry ‘em off. And think of some way to bash a modicum of intelligence and foresight into their greed-paralyzed, rigid hearts and brains.

  10. Leen says:

    Here is what Tavis Smiley had to say on Meet The Press yesterday about the Auto bailout or bankruptcy. I thought he had the most insightful perspective that reflected real CHANGE

    MR. BROKAW: And, Tavis Smiley, he did campaign very hard that “I’m the guy who can bring jobs back to America.” He spoke to the working class primarily. Can he say to Detroit, “I’m sorry, no help here or there’re going to be some really draconian changes,” and that, too, will hurt the workers. UAW members are going to have to take pay cuts and look at reduced pensions.

    MR. SMILEY: I’m glad you raised the issue of the working class because my approach on this is a bit different. While I agree with everything, as we’d say in the black church, since it’s Sunday morning, to Tom Friedman, “Amen.” But I’m glad you raised the working class, Tom, because I, I, I look at this from a different perspective. I think that government has to always be challenged to be responsible to its citizens who are disadvantaged and disenfranchised. And the truth of the matter is that this entire economic crisis has been a top-down conversation and not a bottom-up conversation. Detroit, the city, is the poorest city in the country. In some, in, in some economic areas and categories, the unemployment rate in Detroit is three times, triple the national average. And so everyday people, the working poor and the very poor, cannot be left out of this conversation. And so I don’t think that poor people–although we had three presidential debates, let’s be honest about it, where the word poverty never came up, where the working poor and the very poor were never discussed in three presidential debates. I don’t think, Tom, that the working poor and the very poor in this country begrudge people who are better off. They understand, I think, that there are three million jobs tied into this auto industry. At the same time, where is the conversation about corporate mendacity? Where is the conversation about everyday people and how this government is responsible to those persons who are disadvantaged, disenfranchised? I’ve not seen enough of that conversation yet. We’ve been talking about bailing out industry, talking about bailing out Wall Street. Every now and then, some conversation about Main Street. But no conversation about the side street, and that’s where too many Americans live these days.


  11. LabDancer says:

    Your “three different sources” phrase threw me.

    Do you mean effectively “three different purpose streams”?

    Because unless there’s a yard sale taking place, or there’s a lot of dipping into the cookie jars of dedicated trust funds like social security

    [which theoretically should contain over 2 trillion bucks; except for some reason the Bush administration won’t commit to any number or allow Congress to conduct an audit] the only current source is increased debt.

    Now, it seems to me that if I’m about to head off to see my friendly neighborhood banker/loan shark [Call him Ha nk the Banker.] and I’ve got a current financial profile that shows I’ve been getting almost 80% of my income from waiting on tables [The US is way up there with the combination funny financial instrument centers-vacation spots-emigration staging areas of Hong Kong, Luxembourg, the Bahamas and Fiji.], run on cheap, fatty fast food [The US is near the absolute bottom in agricultural GDP at less than 1% – whoa], and get the remaining fifth of my income from “industrials”, of which historically somewhere around a half has been connected to automobiles, I’ve gotta be prepared for the possibility that Hank might well tell me it’s all too messy, I need to get my act together, and don’t come back until I’ve gotten some serious financial counsel and frickin’ PLAN.

    And I can expect Prudence the FinancialPlanner to tell me:

    [1] if I’m hoping to get back on my feet waiting tables in THIS world economy, I oughtta shake my sillies out and get onto a regime of Reality Pills, pronto;

    [2] I have to go to gym, cut the fat out my diet, and turn dramatically towards the arugula section, and if that costs too much at the supermarket, it just means I’m gonna have to grow my own; and

    [3] since the only ‘growth’ potential is in industrials, but it’s gonna take a lot of time and energy and patience to get that up to where it can support the downturn in the tips jar from my waiter gig, fergawdsake don’t let the damn thing go down the toilet.

    Given all that, I think it’s kind of reassuring to hear the incoming IC [that guy who’s coming IN to take CHARGE, and says he’s looking forward to it] say on 60 Minutes no less that if outgoing CI [that guy who’s such a COMPLETE IDIOT even members of his own party don’t trust him not to throw the rent money away at the dog track and on crack]: Hold On [auto workers] I’m Coming.

    So, while if the current lame duck Congress and dead duck CI don’t get their acts together in the next couple of weeks, there’s gonna be some serious pain, it looks like there’s enough HOPE out there that things MIGHT get started in the right direction.

    So, since it’s clear that the Big 2.5 ARE about to get some serious dough – what strings should be attached?

  12. skippy says:

    i’ve said this elsewhere, and i believe i might have said it on your blog page, marcy, but i am furious but not surprised that repubbbs are happy to bail out white collar industries like investment banks and brokerage houses, but balk at bailing out real hands on industries like the auto makers.

  13. muleboy303 says:

    how many police cars (not trucks just cars) does the US have on their combined city/county/state leo forces ? avg cost per ? etc.

    how ’bout Congress establish a fund (say $50 Billion over 5 years) to “match” (similar to Highway Trust Fund) the dollars any city, county, or state raises to purchase new police cars that are made in the US that are either hybrids or get 35 MPG (with an increasing minimum over time?) so that the $25 Billion already allocated to retool the Big 3 would have a sort of ‘guaranteed’ future market for at least one particular line of vehicles ???

    with such a program and pledges from the corps mgmt & unions, the way would be greased for serving them with a ‘bridge’ loan to get to 2010 or 2011 (a kind of alternate/addendum to Neil Young’s proposal)

    • muleboy303 says:

      oops, shot high on $$$
      more like $15 Billion over 5 years (to match city/county/state money)
      and maybe extend the offer to cab companies ? (or ‘fleet’ purchasers?)

  14. quietpc3400 says:

    Don’t know if anybody’s mentioned it on other threads, but “bailing out” the Big 2.5 prior to bankruptcy won’t do a thing to keep them in business. That’s because the problems with GM and Ford (Chrysler is totally unsalvagable and is better corporately and societally to file C7) are such that:

    a) Any money we give them will only go to bailout bondholders and creditors, both of whom shouldn’t be bailed out under any circumstances, since they acted as enablers in this fiasco. To recapitalize them without discharging debts would, as mentioned by someone above, cost $100’s of billions.

    b) Structurally they are both permanently impaired; they can’t shed dealers except at high buyout cost, they can’t shed workers or entitlement obligations, and they can’t shed/shutdown brands without buying out dealers, and P.O’ing customers no matter what they do. This self-constructed straitjacket is mostly why they can’t remain viable even if we give them $100B – they’ll just be back for more in another year or two.

    Unfortunately, the only way to for them to remain viable going forward is a federally supported pre-packaged C11 bankruptcy with gov’t help for pension/healthcare obligations as well as interim Debtor in Possession financing. Both can be fully rehabilitated as highly competitive companies with good worker wages/benefits, but only after they shed excess debt, unnecessary product lines and dealers, excess labor (the literally insane ‘jobs bank’), and offload (BK reduced) legacy benefit costs to the gov’t where they belong anyway. That still doesn’t get them whole, because many of their key parts suppliers (Delphi/Visteon) are just as screwed up (Delphi in particular is still in C11 after a year due to extended wrangling over legacy employee benefits).

    The management teams at Ford and GM have screwed up for the last 30yrs, and deliberately choose not to file C11 when they could/should have more easily 1-2yrs ago, specifically to force the gov’t to bailout their criminal stupidity. It would be the quintessence of moral hazard to reward this fraudulent behavior. I agree w. Krugman that we can’t let them liquidate because they are systemically important, but without fundamental C11 restructuring/reform they can’t be fixed.

    No. F’ing. Way. to a non-C11 bailout.

    • bmaz says:

      Wow. What a comment. It is literally amazing how you have managed to get so much, so consistently, so utterly, so completely wrong. Congratulations on that; quite an accomplishment.

  15. Blue says:

    No money for the big three unless it comes from big oil and their record profits. Institute (immediately) a huge windfall tax assessment to oil (deal with the restructuring of royalty fees etc. later) and use it to conditionally rescue big 3 (conditions need include more than re-tooling their business model relies on unacceptable (high) number of vehicles per year for one thing – need to look a whole vehicle cycle – more cradle-to-cradle development.

  16. TJ11 says:

    Buy them all for 7 bil. and give the whole lot of it to Tesla motors. Tesla has the product, it just needs the production operation. Wagonner and his bunch wouldn’t know cars if their lives depended on it.

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