Auto Industry Bailout (GM, Chrysler, Ford)
Was the Big 3 Bailout Worth It?
The U.S. government bailout of the auto industry lasted from January 2009 to December 2013. The Big Three automakers approached Congress in November 2008. They warned that, without the bailout, GM and Chrysler faced bankruptcy and the loss of one million jobs. Ford didn't need the funds since it had already cut costs. But it asked to be included so it wouldn't suffer by competing with subsidized companies.
The Treasury Department invested $80.7 billion from the $700 billion authorized by EESA. It recouped all but $10.2 billion.. It both lent money and bought stock ownership in GM and Chrysler. It also provided incentives to spur new car purchases. In effect, the government nationalized GM and Chrysler just as it did Fannie Mae, Freddie Mac, and AIG.
Here's the TARP funds bailout breakdown. It shows what the government invested. It then shows what it sold the shares for, including what it received in its debt repayment. It then calculates the taxpayer’s profit or loss.
|Company||Invested||Sold For||Profit/Loss||Date Bailout Ended|
|GM||$51.0 billion||$39.7 billion||-$11.3 billion||Dec. 9, 2013|
|GMAC (Ally)||$17.2 billion||$19.6 billion||+$2.4 billion||Dec. 18, 2014|
|Chrysler||$12.5 billion||$11.2 billion||-$1.3 billion||May 2011|
|TOTAL||$80.7 billion||$70.5 billion||- $10.2 billion|
(Source: "Key Facts," U.S. Department of the Treasury.)
Ford Credit received its bailout from the Term Asset-Backed Securities Loan Facility, not TARP. That was a government program for auto, student, and other consumer loans. (Source: "Automotive Industry Financing Program, TARP Transactions Report," U.S. Department of the Treasury, September 16, 2009. "GM Bankruptcy Timeline," Reuters, July 10, 2009.)
The federal government took over GM and Chrysler in March 2009. It fired GM CEO Rick Wagoner and required Chrysler to merge with Italy's Fiat S.p.A. The Obama administration used the take-over to set new auto efficiency standards. That improved air quality and forced U.S. automakers to be more competitive against Japanese and German firms.
Chrysler entered bankruptcy on April 3. GM followed on June 1. By the end of July, they emerged from bankruptcy reorganization. GM became two separate companies and spun off GMAC into Allied Financial. Chrysler became a brand owned by mostly by Fiat. The Treasury Department began selling off its ownership of GM in 2010. Chrysler paid off the last of its loans by 2011.
On December 18, 2014, the Treasury Department ended the bailout. That's when it sold its last remaining shares of Ally Financial (formerly GMAC). It had bought them for $17.2 billion to infuse cash into the failing GM subsidiary. The Treasury Department sold the shares for $19.6 billion, making a $2.4 billion profit for taxpayers. (Source: "Bank Bailouts Approach Final Reckoning," The Wall Street Journal, December 19, 2014.)
Congress refused the automakers' first request of $50 billion.
Senate Majority Leader Harry Reid supported the bailout. But he said the Big Three should return with "... a responsible plan that gives us a realistic chance to get the needed votes." It didn't help the public's opinion of the automakers that the three CEOs flew to DC in corporate jets. (Source: "Bush Signs Jobless Benefits Extension," Associated Press, November 21, 2008.)
Congress was willing to redirect a $25 billion loan program tied to the development of energy efficient vehicles. The automakers asked for an additional $25 billion to come out of the TARP fund. House Speaker Nancy Pelosi, other Democrats, and the auto unions supported the request.
Those who opposed using TARP said GM and Chrysler brought their near-bankruptcy on themselves. They didn't retool for an energy efficient era.
They should have cut production, jobs and dealerships years earlier. Columnist David Brooks said, "...if these companies are not allowed to go bankrupt now, they never will be." (Source: "Big 3 Carmakers Beg for $25 Billion," Associated Press, November 17, 2008.)
In December 2008, the automakers requested $35 billion. Congress first explored whether a planned bankruptcy reorganization without a bailout was a better alternative. It soon realized that would take too long to implement. President Bush and Treasury Secretary Hank Paulson then agreed to a $24.9 billion bailout using TARP. (Source: "Statement by Secretary Tim Geithner Before the Senate Banking Committee," U.S. Department of the Treasury, May 20, 2009.)
In January 2009, the federal government created the Automotive Industry Finance Program. It gave GM and Chrysler the operating cash they needed to survive. It made GMAC auto loans more available for car buyers. Here's the breakdown:
- $14.3 billion for General Motors.
- $5.0 billion for GMAC.
- $5.5 billion for Chrysler
The companies promised to fast-track development of energy-efficient vehicles and consolidate operations. GM and Ford agreed to streamline the number of brands they produced. The UAW union agreed to accept delayed contributions to a health trust fund for retirees. it also agreed to reduced payments to laid-off workers. The three CEOs agreed to work for $1 a year and sell their corporate jets. (Source: "TARP Transaction Report," U.S. Department of the Treasury, April 5, 2017.)
On March 19, 2009, the Treasury Department approved $5 billion in loans to auto suppliers.
GM and GMAC Bailout Timeline
In 1953, former General Motors President Charles Wilson said, "What's good for our country was good for General Motors, and vice versa." GM sales hit a peak of 17.296 million vehicles in September 2005. But, as gas prices soared, GM's sales plummeted.
By 2007, Americans found Wilson’s statement was no longer true. That's the year Toyota beat GM to become the world’s leading automaker. It did so by supplying meeting global demand for smaller cars. While Toyota was building plants in the United States, GM was closing them. Instead of changing, it offered zero percent financing to sell SUVs and other large vehicles.
The initial $14.3 billion bailout was not enough. In April, GM borrowed another $2 billion. On May 2, 2009, GM stock fell below $1 a share for the first time since the Great Depression. That forced it to require another $4.4 billion to stay afloat.
On June 1, 2009, GM entered bankruptcy. It had $82.0 billion in assets and $172.8 billion in liabilities. That month, sales hit their low point of 9.545 million cars and trucks.
The government lent GM $30.1 billion to fund operations through June and July while it went through bankruptcy reorganization. It also guaranteed GM's extended warranties. In return, it bought 60 percent of the company in warrants for common stock and preferred stock. The Canadian government bought 12 percent. A union health trust received 17.5 percent stock ownership. That was in lieu of the $20 billion needed to cover benefits for 650,000 retirees. Bondholders received 10 percent stock ownership in lieu of $27 billion in bonds. Stockholders lost all their investment. (Sources: "Bankruptcy Judge Approves Sale of GM Assets," CNN, July 6, 2006. "GM Files for Bankruptcy Protection," The Washington Post, June 1, 2009.)
GM promised to repay the $30 billion loan by 2012 when it planned to break even. The company pledged to cut its debt by $30 billion by converting debt ownership for equity. It agreed to pay union health care benefits to retirees by 2010. It promised to sell its Saab, Saturn and Hummer divisions, reducing the number of models for sale to 40. It shut down 11 factories, closed 40 percent of its 6,000 dealerships and cut more than 20,000 jobs. (Sources: "Chrysler Financial to Get $1.5 Billion to Aid Car Sales," Bloomberg, January 19, 2009. "General Motors Bailout," ProPublica. "GM Bailout Timeline," Reuters.)
Government funding also provided the following incentives for new car buyers.
- The government backed all new car warranties.
- The economic stimulus bill allowed new car buyers to deduct all car sales and excise taxes.
- Congress approved TARP-funded subsidies of zero percent financing for some Chrysler vehicles.
The government intended to make GM more efficient. That would allow it to become profitable when sales returned to ten million vehicles a year. That happened in July 2009, when sales hit 10.758 million.
GM emerged from bankruptcy on July 10, 2009, as two separate companies. Old GM held most of the debt. New GM held the assets, $17 billion in debt, the contract with unions and its underfunded pension funds. This allowed it to move forward as a profitable company. The new company only has four brands: Chevrolet, Cadillac, GMC, and Buick. The company sold Saab and discontinued Saturn and Hummer. (Sources: "Auto Sales Historical Chart," Macrotrends. "GM Bankruptcy: End of an Era," CNN, June 2, 2009. "How GM Was Really Saved," Forbes, October 30, 2013.)
In October 2010, GMAC, JPMorgan Chase and Bank of America agreed to halt new foreclosure proceedings until the Federal Reserve and FDIC completed their investigation. GMAC stands for General Motors Acceptance Corporation. It was formed in 1919 to provide loans to General Motors' auto purchases. Since then, it expanded to include insurance, online banking, mortgage operations and commercial finance. Its mortgage operations were full of toxic debt. That's why it received a $5 billion bailout in December 2008. Thanks to the investigation, title insurer Old Republic announced it would stop insuring GMAC's mortgages. In 2010, GMAC was folded into Ally Financial.
On November 17, 2010, the Treasury Department announced it would sell half its ownership of GM. That sale allowed an initial public offering on the stock market of $33 a share. (Source: "Treasury Announces Pricing of Public Offering," U.S. Department of the Treasury.)
In November 2013, the Treasury Department announced it would sell its remaining 31.1 million shares. It had already gotten back $37.2 billion by selling its ownership in GM. (Source: "U.S. to Sell Rest of GM Stake by Year-End," The Wall Street Journal, November 22, 2013.)
On January 16, 2009, the Treasury Department approved a $1.5 billion loan for Chrysler Financial. The interest rate for the loans was one point above LIBOR. In addition, Chrysler Financial promised to pay the government $75 million in notes and reduce executive bonuses by 40 percent. As a result, car buyers got zero percent financing for five years on some models.
Chrysler received $4 billion of the $7 billion bridge loan it originally requested. In return, its owner Cerberus vowed to convert its debt to equity.
It had also asked for $6 billion from the Energy Department to retool for more energy efficient vehicles. Chrysler wanted the Big Three to partner with the federal government in a joint venture to develop alternative energy vehicles. That didn't happen, and Chrysler didn’t get the loan from the Energy Department. Instead, it pledged to debut an electric vehicle in 2010, ramping up to 500,000 by 2013. (Source: "U.S. Expands Aid to Auto Industry," The Washington Post, January 19, 2009.)
On April 30, 2009, Chrysler filed for bankruptcy. Treasury Secretary Tim Geithner agreed to lend it $6 billion to fund operations while in bankruptcy. It emerged as a new company partly owned (58.5 percent ) by automaker Fiat S.p.A. of Italy, creating the world's sixth-largest automaker. The rest is owned by the United Auto Workers Retiree Medical Benefits Trust. Chrysler closed underperforming dealerships as part of its bankruptcy proceedings.
In May 2011, Chrysler repaid $11.2 billion of its outstanding $12.5 billion in TARP loans six years ahead of schedule. Total cost to taxpayers was $1.3 billion.
In 2013, Fiat CEO Sergio Marchionne announced plans to take Chrysler public on the New York Stock Exchange. This allowed Fiat to purchase the rest of the company and merge the two into a more competitive global automaker. In October 2014, it was listed under the ticker symbol "FCAU." The new company was called Fiat Chrysler Auto Company N.V. Its 2017 market capitalization was $17 billion. (Source: "Chrysler Delays IPO Until Next Year, The Wall Street Journal, November 26, 2013.)
In 2016, Chrysler spun off its Ferrari division. In 2017, there were rumors that Chrysler might sell its flagship Jeep brand to a Chinese automaker. The company also switched its U.S. plants from cars to trucks and Jeep sport utility vehicles. There are no plans to build electric or self-driving vehicles. (Source: "Fiat Chrysler Is at a Crossroads. It’s Looking to China for a Solution," The New York Times, August 22, 2017.)
Although Ford did not receive TARP funds, it did receive government loans. These were critical because banks were not lending during the financial crisis. It requested a $9 billion line-of-credit from the government. In return, it pledged to spend $14 billion on new technologies. (Source: "Ford to Congress: Keep $9 Billion Handy for Us," Politico, December 2, 2008.)
On June 23, 2009, Ford received a $5.9 billion loan from the Energy Department's Advanced Technology Vehicles Manufacturing program. In return, it pledged to accelerate development of both hybrid and battery-powered vehicles, close dealerships and sell Volvo. It upgraded factories in Illinois, Kentucky, Michigan, Missouri, and Ohio to produce hybrid vehicles.
Ford used the funds to switch its focus to commercial electric vehicles. In 2016, CEO Mark Fields said, “"We want to become a top player in electrified solutions.” The company wants to lead, “…we can win such as with our commercial vehicles." (Source: "Trump Should Be Asking: Will Ford Pay Off Its Loan Before Moving Small Car Production to Mexico?" Forbes, September 21, 2016.)
Eighty-one percent of the funds went to create new efficiency technologies for gas-powered vehicles. For example, they helped fund Ford's aluminum bodies in the F-series pickups. The Congressional Research Service estimated the loans saved 33,000 jobs. Ford will repay this loan by 2022. (Source: "The Advanced Technology Vehicles Manufacturing Loan Program: Status and Issues," Congressional Research Service, January 15, 2015.)
Many argue that Ford needed the funds to sustain its cash flow during the recession. Ford says it was in better shape than the other two because it had mortgaged its assets in 2006 to raise $23.6 billion. It used the loans to retool its product lineup to focus on smaller, energy efficient vehicles. It got the United Automobile Workers to agree it could finance half of a new retiree health care trust with company stock. By April 2009, it retired $9.9 billion of the debt it had taken out in 2006. (Sources: "Obama Administration Awards First Three Auto Loans," Energy.gov, June 23, 2009. "How Ford Avoided the Meltdown that Hit GM, Chrysler," CNBC, April 9, 2009.)
By December 2008, auto sales were 37 percent lower than a year earlier. That was 400,000 fewer vehicles or the equivalent of two factories' annual output. GM and Chrysler had the worst decline, while Ford's loss was about the same as industry leaders Honda and Toyota.
Many in Congress accused the automakers of not operating competitively for years. The companies had delayed making alternative energy vehicles. Instead, they focused on reaping the profits from gas-guzzling SUVs and Hummers.
When sales declined in 2006, they launched zero-percent financing plans to lure buyers. Union members were paid $70 per hour, on average, while new hires made $26 per hour. GM had twice as many brands as needed. It also had twice as many dealerships, thanks to state franchise regulations. (Sources: "Big Three Seek $34 Billion Aid, The Wall Street Journal, December 3, 2008. "UAW Offers Cuts," Bloomberg, December 3, 2008. "Back Again," The Economist, December 3, 2008.)
The Impact of the Automakers on the U.S. Economy
Despite some criticisms, the bailout helped create 340,000 additional jobs. (Source: "Financial Stability in the Auto Industry," U.S. Department of the Treasury.)
At the time of the bailout, the auto industry contributed 3.6 percent, or $500 billion, to U.S. gross domestic product. A 30 percent decline in auto sales translated directly into a 1 percent decrease in economic output.
Automobile and parts manufacturing employed 1.091 million workers at its April 2006 peak. By June 2009, that number had plummeted 43 percent to 624,000 workers. Dealerships laid off 16 percent of their workforce. Dealership employees fell from a peak of 1.926 million in September 2005 to 1.612 million in February 2010. These figures include foreign automakers as well as the Big Three. (Source: "Nonfarm Payroll by Establishment (Table B-1 History)," Bureau of Labor Statistics .)
Many analysts disapproved. They felt that Chrysler would go bankrupt even with a bailout and that Ford didn't really need it. The main impact of the bailout was to save jobs at GM. But the recession caused GM to slash its employment and production, despite the bailout. Furthermore, once the recession was over, Toyota and Honda would continue to increase their U.S. factories, providing jobs for U.S. auto workers.
If there had been no bailout, Ford, Toyota, and Honda would have picked up market share. That would have increased U.S. factories and jobs once the recession was over. The loss of GM would be like the loss of Pan Am, TWA and other companies that had a strong American heritage but lost their competitiveness. It would have perhaps tugged at the heartstrings of America, but not really hurt the economy. As a result, the auto industry bailout was not critical to the U.S. economy, like the rescue of AIG or the banking system.