Auto Industry Bailout (GM, Ford, Chrysler)

Was the Big 3 Bailout Worth It?

red car factory
The auto industry threatened the loss of 3 million jobs.. Photo: Getty Images

The government ended its $80 billion bailout of the U.S. auto industry on December 18, 2014. That's when the Treasury Department sold its last remaining shares of Ally Financial (formerly GMAC) for $19.6 billion. By selling when the stock market was high, Treasury made a $2.4 billion profit on its $17.2 billion initial investment in GM's former financing arm. (Source: "Bank Bailouts Approach Final Reckoning," WSJ, December 19, 2014)

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 SpA.  It took advantage of the take-over, setting new auto efficiency standard to force the companies to become more competitive against Japanese and German firms.

In return, it bailed out both companies by loaning them enough to stay afloat and providing incentives to spur new car purchases. In effect, the government nationalized the two auto-makers just as it did AIGFannie Mae, and Freddie Mac

In June 2009, GM and Chrysler emerged from bankruptcy. The bailout helped them create 340,000 additional jobs. Even Ford, which did not take a bailout, said it benefited. Without the bailout, the entire industry would have been severely disrupted. (Source: U.S. Treasury, Financial Stability in the Auto Industry)

Between January 2009 and December 2013, the U.S. Treasury invested a total of $80 billion, mostly in GM.

The bailout ended up costing taxpayers $9.2 billion. Here's the breakout:

Company Invested  Sold For  Profit/Loss Date Bailout Ended
GM$51.0 billion$39.7 billion -$10.3 billion December 9, 2013
GMAC (Ally)$17.2 billion$19.6 billion  +$2.4 billion December 18, 2014
Chrysler$12.5 billion$11.2 billion  -$1.3 billion May 2011
TOTAL$80.7 billion$70.5 billion - $9.2 billion 

Bailout Timeline

In November 2008, the Big 3 automakers asked Congress for $50 billion to avoid bankruptcy and the loss of three million jobs. GM had become so desperate for cash that it delayed incentive program reimbursements to dealers. Ford, on the other hand, didn't really need the funds. It only asked to be included so it wouldn't suffer by competing with subsidized companies.

Congress initially refused, saying the automakers needed to fine tune their request. Even supporters such as Senate Majority Leader Harry Reid said the Big 3 needed to come back and "...present a responsible plan that gives us a realistic chance to get the needed votes." It didn't help that the three CEOs flew to Washington in big corporate jets. (Source: AP, Bush signs jobless benefits extension, November 21, 2008)

Congress was willing to redirect a $25 billion loan program tied to development of energy efficient vehicles. However, the automakers wanted an additional $25 billion to come out of the TARP fund. They were supported in this by House Speaker Nancy Pelosi, other Democrats, and the auto unions.

Those who opposed using TARP said the automakers brought their near-bankruptcy on themselves by not retooling for an energy-efficient era. They should have cut production, jobs and dealerships years ago. Columnist David Brooks said "...if these companies are not allowed to go bankrupt now, they never will be." (Source: AP, Big 3 carmakers beg for $25B, November 17, 2008)

In December 2008, the Big 3 came back requesting $35 billion. Congress first explored whether a planned bankruptcy reorganization without a bailout was the best alternative for the companies, but realized that would take too long to implement. President Bush and Treasury Secretary Hank Paulson then agreed to a $23.4 billion bailout using TARP funds.

Bailout Details

In January 2009, the Federal government created the Automotive Industry Finance Program. Its first loans provided operating cash for GM and Chrysler, and made auto loans available for car buyers. Here's the breakout:

  • $13.4 billion for General Motors.
  • $6 billion for GMAC.
  • $4 billion for Chrysler

Ford Credit used funds from the Term Asset-Backed Securities Loan Facility (TALF), a government program for auto, student and other consumer loans. (Source: AP, Timeline)

In return, 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. They also won agreements from the UAW union to delay contributions to a health trust fund for retirees and reduce payments to laid-off workers. The three CEOs agreed to work for $1 a year and sell their corporate jets.

On March 19, 2009, Treasury approved $5 billion in loans to auto suppliers.

GM's Bailout

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 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 auto maker 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 $13.4 billion bailout was not enough. In April, GM borrowed another $2 billion, and in May another $4 billion to stay afloat. On May 2, 2009, GM stock fell below $1 a share for the first time since the Great Depression

On June 1, 2009, GM entered bankruptcy. It had $82 billion in assets and $172.8 billion in liabilities. That month, sales hit their low point of 9.545 million.

The government lent GM $30 billion to fund operations while it went through bankruptcy reorganization. It also guaranteed GM's extended warranties. In return, it bought 60% of the company in warrants for common stock and preferred stock, and Canada bought 12%. A union health trust received 17.5% stock ownership in lieu of the $20 billion needed to cover benefits for 650,000 retirees. Bondholders received 10% stock ownership in lieu of $27 billion in bonds. Stockholders lost all their investment. (Source:CNN, "Bankruptcy Judge Approves Sale of GM Assets," July 6, 2006; Washington Post)

GM promised to repay the $30 billion loan by 2012, when it anticipated it would again break even. The company pledged to cut its debt by $30 billion by converting debt ownership for equity. It agreed that union health-care benefits would be paid to retirees by 2010. It promised to sell its Saab, Saturn and Hummer divisions, reducing the number of models for sale to 40. GM shut-down 11 factories, closed 40% of its 6,000 dealerships, and cut more than 20,000 jobs.  (Source: Bloomberg, Chrysler Financial to Get $1.5 Billion to Aid Car Sales, January 19, 2009;  Propublica, General Motors Bailout; Reuters, GM Bailout Timeline

Government funding provided many 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. 
  • Part of the $700 billion EESA fund was used to subsidize zero percent financing for some Chrysler vehicles.

The government's goal was to make GM more efficient, allowing it to become profitable when sales returned to 10 million vehicles a year. That happened in July 2009, when sales hit 10.758 million. GM emerged 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. Saab was sold, while Saturn and Hummer were discontinued. (Source: Macrotrends, Auto Sales Historical Chart; CNN, GM bankruptcy: End of an era, June 2, 2009;  Forbes, How GM Was Really Saved, October 30, 2013)

In October 2010, GMAC, JPMorgan Chase and Bank of America announced they were halting any new foreclosures until investigations by the Federal Reserve and FDIC was complete. 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. In December 2008, it received a $6 billion bailout from the Federal Government. Thanks to the investigation, title insurer Old Republic announced it would stop insuring GMAC's mortgages. In 2010, GMAC was folded into, and renamed, Ally financial.

On November 17, 2010, Treasury announced it would sell half its ownership of GM to allow an initial public offering on the stock market of $33 a share. (Source: U.S. Treasury, Treasury Announces Pricing of Public Offering)

In November 2013, it announced it would sell its remaining 31.1 million shares. It had already gotten back $37.2 billion by selling its ownership. (WSJ, U.S. to Sell Rest of GM Stake by Year-End, November 22, 2013) 

Chrysler's Bailout

On January 16, 2009, Treasury approved a $1.5 billion loan for Chrysler Financial, set up for that purpose. The interest rate for the loans was 1 point above LIBOR. In addition, Chrysler Financial promised to pay the government $75 million in notes and reduce executive bonuses by 40%. As a result, car buyers got  0% financing for five years on some models.

Chrysler received $4 of the $7 billion bridge loan it originally requested. It also asked for $6 billion from the Energy Department to retool for more energy efficient vehicles. In return, its owner Cerberus vowed to convert its debt to equity. Chrysler wanted the Big 3 to partner with the Federal government in a joint venture to develop alternative energy vehicles. It pledged to debut an electric vehicle in 2010, ramping up to 500,000 by 2013. (Source: Washington Post, U.S. Expands Aid to Auto Industry, January 19, 2009)

On April 30 2009, Chrysler filed for bankruptcy. Former U.S. Treasury Secretary Tim Geithner lent it $6 billion to fund operations while in bankruptcy. It emerged as a new company partly owned (58.5%) by automaker Fiat SpA 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 would allow Fiat to purchase the rest of the company, and merge the two into a more competitive global automaker. It may be listed under the ticker symbol "CGC" as early as the first quarter 2014. Its market capitalization would be between $9 - $12 billion. (Source: WSJ, Chrysler Delays IPO Until Next Year, November 26, 2013)

Ford's Bailout Proposal

Ford requested a $9 billion line-of-credit from the government, and a $5 billion loan from the Energy Department. It pledged to accelerate development of both hybrid and battery-powered vehicles, retool plants to increase production of smaller cars, close dealerships, and sell Volvo. Ford is in better shape than the other two because it had already mortgaged its assets in 2006 to raise $24.5 billion. 

Bailout Causes

By December 2008, auto sales were 37% lower than a year earlier. This 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.

However, many in Congress accused the auto-makers of not operating competitively for years. The companies delayed making alternative energy vehicles, instead reaping profits from sales of SUV's and Hummers. When sales declined in 2006, they launched 0% 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, and twice as many dealerships, thanks to state franchise regulations. For them, the bailout was needed to restore the U.S. auto industry to global competitiveness. (Source:, Big Three Seek $34 Billion Aid, December 3, 2008; Bloomberg, UAW Offers Cuts, December 3, 2008; The Economist, Back Again, December 3, 2008)

The Impact of the Automakers on the U.S. Economy

At the time of the bailout, the auto industry contributed 3.6%, or $500 billion, to total U.S. GDP output. A 30% decline in auto sales translated directly into a 1% decrease in economic output. Automobile and parts manufacturing employed 1.091 million workers in April 2006, its peak. Three years later, that number had plummeted 43% to 624,000 workers (June 2009). Dealerships laid off 16% of their workforce, from a peak of 1.926 million (September 2005) to 1.612 million five years later (February 2010). (Source: BLS, Nonfarm Payroll by Establishment (Table B-1 History)

These figures included foreign-owned as well as the Big 3 auto makers. At the time of the bailout, many analysts felt that Chrysler would go bankrupt, even with a bailout, and Ford didn't really need it. Therefore, the main impact from the bailout was to save jobs at GM. However, the economic slowdown caused GM to slash its employment and production, whether it received a bailout or not. 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 picked up market share, increasing 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 -- perhaps a tug on the heartstrings of America, but not really bad for the economy. As a result, the auto industry bailout is not seen as critical to the U.S. economy, like the rescue of AIG or the banking system.

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