White House Approves $13.4 Billion in Loans for GM and Chrysler

General Motors Corp. (GM) and Chrysler LLC will receive $13.4 billion in loans from the federal government as part of an emergency measure to keep the companies operating at least until the spring.

“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 action,” said President Bush, who made the final decision to move ahead with the bailout after Senate Republicans last week balked at passing a House-approved rescue of the auto companies.

“Chapter 11 is unlikely to work for the American automakers at this time,” he added.

The $13.4 billion will be taken from the Troubled Asset Relief Program (TARP). GM and Chrysler will then get an additional $4 billion in February.

However, both companies are being forced to accept a number of conditions that include limiting executive pay, reducing debt obligations, and striking new agreements with the United Auto Workers union that bring employee wages and benefits down to levels that are more competitive with those of foreign-based automakers working in the United States.

The companies will also provide the government with warrants for non-voting stock, and federal officials will examine all of the companies’ financial statements. The government has the authority to block any transaction of $100 million or more.

The government’s debt will have priority over all other debts, and if the two automakers fail to demonstrate financial viability by March 31, the loans will be called and the money returned. That’s a tall order for GM and Chrysler, which are faced with plummeting sales and a harsh economic environment.

GM, the nation’s largest automaker, has suffered roughly $73 billion in losses since 2004, and its U.S. sales are down 22% this year, Bloomberg News reported. The company said earlier this month that light vehicle sales plunged 41% in November, dropping to 153,404 vehicles from 261,273 during the same month a year ago.

Chrysler sales were off 47% last month and down 28% through the first 11 months of the year. The company yesterday (Thursday) announced that it would close all 30 of its North American manufacturing plants for four weeks. GM followed suit temporarily closing 20 factories.

"I’ve been in this business since the time of Lee Iacocca and all the bad times we went through in the 1980s were nothing compared to this," Tim Finegan, owner of a Chysler dealership told The Associated Press. "But for now, our lights are still on and our bills are paid, so you just show up every morning and say maybe today will be a little better."

By Jason Simpkins
Money Morning