Citing danger to the national economy, President Bush approved an emergency bailout of the U.S. auto industry Friday, offering $17.4 billion in rescue loans in exchange for tough concessions from the deeply troubled carmakers and their workers.
The government will have the option of becoming a stockholder in the companies, much as it has with major banks, in effect partially nationalizing the industry.
At the same time, Treasury Secretary Henry Paulson said Congress should release the second $350 billion from the financial rescue fund that it approved in October to bail out huge financial institutions. Tapping the fund for the auto industry basically exhausts the first half of the $700 billion total, he said.
On Wall Street, stock prices rallied as investors cheered the government's action, though early gains eased later in the day.
Allowing the massive auto industry to collapse in the middle of what is already a severe recession cannot be allowed, Bush said.
"It would worsen a weak job market and exacerbate the financial crisis," he said. "It could send our suffering economy into a deeper and longer recession. And it would leave the next president to confront the demise of a major American industry in his first days of office."
The Detroit Three employ nearly 100,000 people at plants around Ohio. "I am grateful the president stepped in to help thwart a disaster that would have sent our state over the cliff," U.S. Sen. George Voinovich, R-Ohio, said in a statement Friday.
In Dayton, Ohio, the owner of Salem Chrysler-Jeep welcomed news of the bailout though she didn't expect immediate relief.
"We'll see probably a little bit of a bump from it, but it will take awhile," said Mary Kay Zappia.
President-elect Barack Obama, who takes office a month from Saturday, praised the White House move.
"Today's actions are a necessary step to help avoid a collapse in our auto industry that would have devastating consequences for our economy and our workers," he said. "With the short-term assistance provided by this package, the auto companies must bring all their stakeholders together — including labor, dealers, creditors and suppliers — to make the hard choices necessary to achieve long-term viability."
If the carmakers fail to prove viability by March 31, they will be required to repay the loans, which they would find all but impossible. A firm will be deemed viable only if it can show positive cash flow and can fully repay the government loans.
General Motors Corp. CEO Rick Wagoner said in Detroit that GM had much work ahead but he was confident it could reinvent itself with the government help and even lead an economic recovery in America.
The president of the United Auto Workers, Ron Gettelfinger, said, "This will keep the doors of America's factories open, keep Americans working and prevent the devastating economic consequences for millions of Americans and thousands of businesses that would have resulted from a liquidation of operations by one or more auto companies."
Bush said, "The time to make hard decisions to become viable is now, or the only option will be bankruptcy. The automakers and unions must understand what is at stake and make hard decisions necessary to reform."
Some $13.4 billion of the money would be available this month and next — $9.4 billion of it for General Motors and $4 billion for Chrysler LLC. GM is slated to receive the remaining $4 billion in loans after more money is released from the financial rescue account.
Not everyone was applauding the bailout.
House Republican leader John Boehner called the administration's plan "regrettable." He said that granting loans for automakers was never the intention when Congress passed the $700 billion plan to rescue financial institutions and that the new plan "has failed both autoworkers and taxpayers."
Bush said the companies' workers should agree to wage and work rules that are competitive with foreign automakers by the end of next year.
And he called for elimination of a "jobs bank" program — negotiated by the United Auto Workers and the companies — under which laid-off workers can receive about 95 percent of their pay and benefits for years. Early this month, the UAW agreed to suspend the program.
Under terms of the loan, GM and Chrysler must provide the government with stock warrants giving it the option to buy GM and Chrysler stock at a specific price.
In addition, the automakers would be required to agree to limits on executive pay and eliminate some perks such as corporate jets.
Paulson said that with the help for the carmakers, the government will have allocated the first half of the largest government bailout program in history.
He said he was confident that the Treasury Department, Federal Reserve and Federal Deposit Insurance Corp. have the resources to address a significant market crisis if one should occur before Congress approves the use of the second half of the rescue fund.
Paulson said he would discuss the process with congressional leaders and Obama's transition team "in the near future."
Friday's rescue plan retains the idea of a "car czar" to make sure the auto companies are keeping their promises and moving toward long-term viability.
The short-term overseer will be Paulson. But the White House deputy chief of staff, Joel Kaplan, said that if the Obama team wants someone else installed to bridge the administrations, Bush is open to that. Kaplan said there have been discussions with Obama's aides throughout the process and the White House believes Obama's view of the problem and the solution tracks with theirs.
The White House package is the lifeline desperately sought by U.S. automakers, who warned they were running out of money as the economy fell deeper into recession, car loans became scarce and consumers stopped shopping for cars.
The carmakers have announced extended holiday shutdowns. Chrysler is closing all 30 of its North American manufacturing plants for four weeks because of slumping sales; Ford will shut 10 North American assembly plants for an extra week in January, and General Motors will temporarily close 20 factories — many for the entire month of January — to cut vehicle production.
Bush said the automakers have faced serious challenges for many years: burdensome costs, a shrinking share of the market and plunging profits. "In recent months, the global financial crisis has made these challenges even more severe," he said.
"Under ordinary economic circumstances, I would say this is the price that failed companies must pay," the president said. "And I would not favor intervening to prevent the automakers from going out of business. But these are not ordinary circumstances.
"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."
Chrysler CEO Bob Nardelli thanked the administration for its help.
In a statement Friday morning, Nardelli said the initial injection of capital will help the company get through its cash crisis and help eventually return to profitability. He said Chrysler was committed to meeting the conditions set by Bush in exchange for the money.
Ford President and CEO Alan Mulally said his company would not seek the short-term financial assistance but predicted the aid would stabilize the industry.
"The U.S. auto industry is highly interdependent, and a failure of one of our competitors would have a ripple effect that could jeopardize millions of jobs and further damage the already weakened U.S. economy," Mulally said.