Heated debate over auto bailout

Skeptical lawmakers grill auto execs, who make the case for taxpayer help to keep industry from collapse.

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By Steve Hargreaves, CNNMoney.com staff writer

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Which should be the Obama administration's priority?
  • Stimulating the economy
  • Reducing the budget deficit

NEW YORK (CNNMoney.com) -- The case for a bailout of U.S. automakers came under sharp scrutiny on Tuesday at a congressional hearing that portrayed the Big Three as both short-sighted in their business strategies and central to the economy.

"Their board rooms in my view have been devoid of vision," said Sen. Christopher Dodd, D-Conn. "They have promoted and often driven the demand of inefficient, gas guzzling vehicles, and dismissed the threat of global warming."

Dodd, chairman of the Senate Banking Committee, spoke as Congress kicked off the first of two days of hearings over whether the government should extend a lifeline to the nation's troubled automakers.

The head of the powerful United Auto Workers union, testifying side by side with the industry's top CEOs, said the failure of one automaker would shatter consumer confidence in the other two.

"If one of these companies goes into bankruptcy, I'd be willing to bet it takes two, or possibly all three, with them," said Ron Gettelfinger , president of the autoworkers' union, said during questioning.

The industry, already struggling because of high labor costs and weak sales, is being stung as car buying grinds to a halt amid credit difficulties, job losses and fears of a recession. The industry has been lobbying hard for a $25 billion loan from the $700 billion bailout slated for the finance sector.

One Republican lawmaker, Sen. Michael Enzi of Wyoming, said he was uncertain a bailout would work.

"We have little evidence this $25 billion will do anything to promote long-term success," Enzi said.

But the industry and its advocates, as well as many experts, say that without federal help, General Motors (GM, Fortune 500) will likely go bankrupt within months, and that Ford (F, Fortune 500) and Chrysler LLC could soon follow.

General Motors boss Rick Wagoner said his company was attempting to transform itself. He ticked off a long list of innovations - from developing nine hybrid models for next year to rapid development of the Chevy Volt, a car that runs on just electricity.

"We felt we were well on the road to turning around the North American business," said Wagoner. "Since then, the industry and the economy has been hit hard by the global financial crisis. It threatens the turnaround and GM's financial survival."

Chrysler Chief Executive Robert Nardelli, echoing Wagoner's remarks, said the industry is suffering a "critical lack of liquidity" because of nation's financial meltdown.

Nardelli said that closely-held Chrysler was burning through $1 billion a month in capital.

Ford's chief executive, Alan Mulally, said he understands the need for the industry to reorganize and that Ford has been doing just that.

"Few companies have restructured more aggressively," he said, adding that Ford has closed 17 plants and reduced its workforce by 51,000 workers.

"As a result of all of our actions, we were profitable in the first quarter of this year and well on our way to sustainable profitability before the economic and credit crisis hit," said Mulally.

Ripple effects of a meltdown

Supporters of a bailout say that a bankruptcy could prove devastating to the economy. They say nearly 2 million jobs are either directly or indirectly tied to the auto sector, and that Detroit is a pillar of American manufacturing.

"We can't afford to lose thousands of jobs," said Sen. Robert Casey, D-Pa. "What is a recession could become a depression if these companies fail in the next couple of months."

Supporters also claim a loss in tax revenue of more than $100 billion over the next few years if the auto industry goes belly-up.

The industry says it needs the loans to hold it over until the economy improves, their new models can woo consumers and savings from labor contracts have a chance to kick in.

But critics say problems with the U.S. auto industry are systemic, and giving it $25 billion would only delay the inevitable. They also say it would encourage other mismanaged businesses to seek government rescues.

They say bankruptcy would be the best option and allow automakers to shed expensive labor contracts and reorganize as smaller, more efficient firms.

So far, it appears unlikely the current Congress will let the industry borrow $25 billion under the bailout program. While many Democrats support the move, most Republicans and some Democrats are against it.

Rather than grant $25 billion in new loans from the bailout, the Bush administration wants to modify $25 billion in loans originally targeted for automakers to use to make more fuel-efficient vehicles.

Some think the White House proposal stands a better chance of passing Congress.

"I think the proposal that the administration has made - to basically change the qualifications of the money that we have already appropriated - is a sound way to go forward," Senate Minority Leader Mitch McConnell, R-Ky., said Tuesday.

Are they good for it?

One of the sharpest critics of an auto bailout, Republican Sen. Richard Shelby of Alabama, drilled into the CEOs about the outlook for their businesses and how they would use bailout funding.

"Why should we believe your firms are capable of restructuring now when you weren't able to do it under more begin conditions?" Shelby asked. "What would you do with the money if you were able to get $25 billion, and how would you pay this money back?"

GM's Wagoner said the company's current business model can work. GM would continue with the Volt program and would use bailout funds to pay suppliers, he added.

Ford's Mulally said his company has focused on building higher quality cars that get better gas mileage. "We'll come out the other side - we'll be a turbo machine," said Mulally.

For his part, Chrysler's Nardelli said his company will soon be able to build cars as fast as Toyota. "We will generate a profit," Nardelli said.

Others weren't so sure a bailout was a good use of taxpayer dollars.

"I'm skeptical you'll get it back," said Peter Morici, a business professor at the University of Maryland. To top of page

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