Publication Date

12-3-2008

Abstract

[Excerpt] The three domestically owned U.S. manufacturers of cars and light trucks are requesting federal financial assistance in the form of “bridge loans” to assure their ability to continue in business. The companies, General Motors (GM), Ford and Chrysler (collectively known as the “Detroit 3”), have directly appealed to Congress for aid in a series of hearings that began in November 2008. The companies have been affected by a long-term decline in U.S. market share, the impact of a general decline in U.S. motor vehicle sales in 2008 that has impacted all producers, and the effects of a severe constriction of credit, resulting from problems in U.S. and global financial markets. The rise in gasoline prices to more than $4.00 a gallon in July 2008 caused a significant fall in vehicle use and miles driven, and a structural shift in motor vehicle consumption patterns. The subsequent decline in gas prices in Fall 2008 has not led to increased consumer spending on autos and light trucks, in spite of numerous incentives by American and foreign-owned motor vehicle companies.

A bill to provide up to $25 billion in direct loans to the companies was introduced on November 17, 2008, by Senate Majority Leader Harry Reid (S. 3688). This bill would make these loans available from $700 billion already set aside by Congress in the Troubled Asset Relief Program (TARP) established under the Emergency Economic Stabilization Act of 2008 (EESA, P.L. 110-343). Earlier, Secretary of the Treasury Henry Paulson rejected requests to use his existing authority to designate TARP funds for this purpose. The Bush Administration instead proposed that bridge loans to the auto industry could be taken from the direct loan program for advanced technology vehicle production set up under Section 136 of the Energy Independence and Security Act (EISA, P.L. 110-140). This bill had become law in December 2007, and had been funded under P.L. 110-329, legislation that included continuing appropriations for FY2009.

A number of other draft bills have been discussed in both houses, but none has been introduced. Senator Reid and House Speaker Nancy Pelosi have said that funding for bridge loans to the industry will be considered at a session of Congress to be convened in early December 2008, after the Detroit 3 present detailed plans to Congress as to how they would use the funds to assure their long-term financial viability.

This report reviews the U.S. automotive industry at present, aspects of the industry’s financial situation, and relief options. It includes an analysis of the current situation in the U.S. automotive market, including efforts to address problems of long-term competitiveness and the impact of the industry on the broader U.S. economy. It focuses on financial issues, including credit questions, and legal and financial aspects of government-offered loans or loan guarantees. This further includes consideration of legacy issues, specifically pension and health care responsibilities of the Detroit 3. It also reviews potential solutions to the financial crisis, including options of government receivership and participation management, and various forms of bankruptcy. Finally, the report reviews stipulations that Congress might impose on auto manufacturers as conditions of providing assistance.

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Suggested Citation
Cooney, S. (2008). U.S. motor vehicle industry: Federal financial assistance restructuring (RLXXXXX). Washington, DC: Congressional Research Service. http://digitalcommons.ilr.cornell.edu/key_workplace/570/

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