GM, Chrysler Merger Could Get Government Backing

By Jason Simpkins
Associate Editor
Money Morning

The U.S. government is looking for ways to facilitate a merger between General Motors Corp. (GM) and Chrysler LLC, in the hopes of keeping the once vibrant industry afloat during a time of crisis. But Uncle Sam’s credit card is close to maxed out and a bailout for the auto industry could open the door for other troubled industries to come calling.

Detroit’s “Big Three” automakers – GM, Chrysler, and Ford Motor Co. (F) – are in need of government assistance after being pushed to the brink of bankruptcy by slumping sales and increased foreign competition.

GM has been in talks with Cerberus Capital Management LP about buying Chrysler since September. But GM’s inability to secure financing at a time when credit is hard to come by and auto sales are in decline has left GM with few options other than appealing to the government.

GM spokesman Greg Martin said Monday that the company has asked the U.S. Treasury to broaden recently passed legislation, intended to bolster banks and financial institutions, to include auto companies.

We believe the federal government should consider using all the tools available to it, including some recently enacted, to support industries that are in distress and that are essential to the U.S. economy,” Martin told the New York Times.

Earlier this month, Congress gave the Treasury Department the authority to spend up to $700 billion to take equity stakes in ailing financial institutions and buy up troubled assets. While automotive companies would not be eligible for cash injections, the government could end up purchasing bad auto loans from the financing subsidiaries of Detroit’s automakers, an anonymous source told Reuters.

Meanwhile, the Energy Department could release $5 billion in loans to GM to help it finance the merger. The money, according to The Wall Street Journal, would come from the $25 billion approved by Congress last month to help domestic manufacturers make more fuel-efficient cars.

The White House yesterday (Tuesday) confirmed that the Bush administration has been in talks with GM.

"I can tell you we've been in contact with automakers, GM and others," said White House spokeswoman Dana Perino. "And beyond that, I'm just not able to comment on any of those discussions."

GM desperately needs funding, as the company lost $18.8 billion in the first six months of the year, and is hemorrhaging about $1 billion in cash each month. That has raised the prospect of bankruptcy for the company. GM had $21 billion as of June, but a merger with Chrysler would give the company access to another $12 billion in cash.

Should any of Detroit’s Big Three go bankrupt the consequences for the U.S. economy would be severe. Together, the companies employ more than 200,000 Americans, and support millions more U.S. workers indirectly through suppliers and dealerships, The Times reported.

The unemployment rate hit 6.1% last month and continues to rise. Some analysts anticipate the jobless rate could climb as high as 8.5%-10% next year. With a jobless rate that reached 8.7% in September, Michigan has the highest unemployment rate in the country.

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