Business - White House explores aid for merger between GM & Chrysler

Edmund L. Andrews and Bill Vlasic

WASHINGTON: The Bush administration is examining a range of options for providing emergency financial help to spur a merger between General Motors and Chrysler, according to government officials.

People familiar with the discussions said the administration wanted to provide financial assistance to the deeply troubled Big Three Detroit automakers, possibly by using the Treasury Department's wide-ranging authority under the $700 billion bailout program that Congress approved this month.

Another option under consideration is to tap a $25 billion loan program that Congress just created to help the auto companies modernize their plants. A third option would involve going back to Congress, immediately after the Nov. 4 election, for authority to spend funds aimed specifically at the auto industry. But officials have not yet decided how much assistance to provide or how to structure any aid program.

GM and the parent of Chrysler, Cerberus Capital Management, are in talks to possibly merge the two companies, which are losing sales and hemorrhaging cash. People close to the talks said GM needs between $5 billion and $10 billion in assistance, mainly to cover GM's own needs between now and the time of the merger.

Any financial help from the government could help provide a level of confidence to investors in such a deal, and possibly cover some of the revamping costs of a merger, which would be substantial.

The government's bailout program was originally created to rescue banks and other financial institutions, but the Treasury Department decided last week to allow some insurance companies to participate as well.

A bailout for carmakers would be the latest in a series of government-financed rescue efforts for banks, Wall Street firms and an insurance conglomerate. While few experts dispute the car industry's troubles, rescuing them would also increase political pressure to help ailing industries like airlines and steel producers.

The automobile industry and lawmakers from Michigan are now arguing that the car companies should be included, because their financing subsidiaries, which have been starved for credit, represent an important channel for consumers to obtain loans to buy cars.

Any U.S. government help for the financing units could be used to provide car loans, which is seen as crucial to increasing car sales. Many dealers have had trouble closing sales with car buyers because of tighter lending standards.

On Monday, White House officials said the car companies might well be eligible for some sort of help under the broader financial rescue program, known as the Troubled Assets Relief Program, or TARP.

"It's clear that the automakers are dealing with a very serious situation, they have for some time," Dana Perino, the White House press secretary, told reporters on Monday.

"Automakers do have financing arms — many of them do — and it's possible that some of those financing arms could be a part of the rescue package," she continued. "We're trying to work with them as much as we can. There are some things we may or may not be able to do."

A spokesman for GM, Greg Martin, said Monday that the company had been asking the Treasury Department to extend aid to automakers as it had to other troubled industries.

"We believe the federal government should consider using all the tools available to it, including some recently enacted, to support industries that are in distress and that are essential to the U.S. economy," Martin said.

A spokeswoman for GMAC Financial Services, Gina Proia, said the auto finance operation was also seeking assistance from Treasury.

"At this point we are working with the government officials to understand the application process of TARP and other programs to determine any potential participation by GMAC," she said.

All three of the major American car companies were already struggling with slumping car sales, soaring gasoline prices and huge losses. But their financial conditions became much worse in the last two months as the credit markets became frozen, unemployment jumped sharply and the economy reached the brink of a recession.

With only a week left before the presidential election, the political and economic stakes have increased. The Republican nominee, Senator John McCain, several weeks ago abandoned hope of winning in Michigan, which has the highest unemployment rate in the country. But the collapse of a major car manufacturer would send shock waves through Indiana, Ohio and potentially other crucial states with large auto plants or suppliers.

The Treasury Department, which oversees the rescue program, warned on Monday that the car companies would not be eligible for the capital injections that the government was offering to banks and some insurance companies. Under that program, the government hopes to invest $250 billion in banks and would receive nonvoting preferred shares in exchange.

"The capital purchase program is available only to federally regulated banks and savings institutions," said Michele Davis, a spokesperson for the Treasury.

But Treasury officials did not rule out other forms of assistance. Under the law that Congress passed in early October, the Treasury Department has almost unlimited discretion to buy up any kind of assets from any kind of financial institution.

Ford and Chrysler both have financing units, mainly for the purpose of providing car loans, and those subsidiaries might qualify as financial institutions.

General Motors is in a more complicated situation, however, because it spun off 49 percent of its financing unit, the General Motors Acceptance Corp., to Cerberus, the same private-equity firm that acquired Chrysler after the breakup of DaimlerChrysler last year.

Both GM and Chrysler are in desperate need of cash to stave off possible bankruptcy filings. GM, the nation's largest automaker, lost $18.8 billion in the first six months of the year, and is burning through more than $1 billion in cash each month.

The company had $21 billion in cash as of June, but is rapidly depleting its reserves to offset declining revenues. Analysts said that at its current cash-burn rate, GM would fall below its minimum operating requirements by sometime next year.

A merger with Chrysler would give GM access to about $11.7 billion in cash that was on Chrysler's books as of June.

Talks between GM and Cerberus are continuing, and the sides are said to be committed to reaching a deal soon, according to people close to the discussions.

The failure of General Motors, the Ford Motor Company or Chrysler would have broad consequences for the economy. The companies combined employ more than 200,000 people in the United States, and indirectly support jobs for millions more Americans through their suppliers and dealerships.

If any of the three companies were to go bankrupt, it would probably leave behind huge liabilities for federal and state governments. Shortfalls in their pension plans would become the responsibility of the Pension Benefit Guaranty Corp., and its reserves are already stretched.

GM has been in merger talks since September with Chrysler's majority owner, the private equity firm Cerberus Capital Management. But the two sides have been unable so far to secure new financing from banks and other lenders, according to people with knowledge of the talks.