US Automaker Bailout Rejected By Senate

Markets are plunging worldwide tonight after a proposed multi-billion dollar bailout for the "Big 3" automakers fell apart.

The proposed $14 billion dollar bailout came unhinged late Thursday night after the United Auto Workers union refused to agree to reductions in pay and benefits. A Senate vote took place shortly after, where the bill failed by a vote of 52-35.

General Motors and Chrysler are now standing on the edge of oblivion, mere weeks away from running out of cash. Ford is in a slightly better position than the other two automakers - however, a bankrupt GM or Chrysler (or both) would very likely lead to the demise of Ford as well.

With the US Senate now rejecting the bill (the bill needed 60 votes to pass, but garnered just 52), the issue now falls at the feet of the president. Many are urging him to step in and provide support to the flat-lining auto industry.

Some are also recommending that the "Big 3" be able to tap the TARP funds that were initially intended to stabilize the financial sector.

Senate Republicans reportedly requested that the UAW agree to bring wages "in line" with US plants of Japanese carmakers. The UAW refused this option before their current contract expires in 2011, and the bailout deal fell apart.

General Motors has stated that its total hourly labor costs are $69, compared to the $48 per hour that Toyota says it pays. This includes wages, health care costs and pensions for both active and retired workers.

So what now?

There will now be intense pressure on President Bush to step in and bail out the industry. Senate Republicans are openly defying the president in this situation, as the White House was supportive of the bill that was rejected by Congress.

How did it get to this?

The rapid economic meltdown and clogging of the credit markets brought the situation to a head. Car and truck sales are WAY down right now due to a lack of credit and a poor economy. High gas prices helped to cripple the industry before the price of oil started to drop.

People are simply not confident about their employment situations and the economy in general right now, and they are delaying new car purchases altogether. In many cases, families are paring down the number of cars that they use in order to cut costs.

It is much harder to receive a car loan right now, especially if you don't have sparkling credit. Many willing buyers are simply not able to obtain financing, and this is just compounding the problem.

Costs are high and revenues are way down. It's a recipe for disaster, and even if these companies do receive bailout funds, they will almost certainly need even more money to survive in the very near future.

What's At Stake Here?

If one (or more) of the "Big 3" file for bankruptcy, we will be dealing with the loss of many, many jobs. This will very likely send the United States into an even deeper recession, or possibly worse. I've heard that as many as three million jobs are tied to the US auto industry. You would have a chain reaction of connected companies taking a hit if any of the "Big 3" went bankrupt.

President-elect Obama has said that he would support a bailout of the auto industry - however, GM and Chrysler simply don't have the funds to make it until Obama takes office. We are talking WEEKS before they ran out of cash, not months.

I expect that we will hear more news about this situation before the end of the weekend.

My guess is that the White House will OK the use of TARP funds to bail out the "Big 3", but we'll see what happens.

Filed under: The Economic Meltdown