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Friday, December 19, 2008
Treasury to Provide $17.4B Aid Package to Auto Makers
Kathryn Elizabeth Tuggle
FOXBusiness
On Friday morning, the White House announced its highly-anticipated decision on the auto industry rescue, stating that auto manufacturers will be immediately provided with $13.4 B in short-term financing from the TARP, and an additional $4 B in February.
Only “financially viable” companies that have a positive net present value will be given a bailout, according to the release. This includes GM and Chrysler. If the companies have not reached viability by March 31, 2009, the loan will be recalled and all funds will be due back to the treasury.
Read: Terms of the auto maker aid package
Watch: Ron Paul: Auto Rescue is Damaging to the Economy
At the press conference, President Bush said that the legislation passed with bipartisan majority support. He also addressed concerns that perhaps the auto industry should be left to file for Chapter 11 bankruptcy and restructure without government assistance.
“The current financial crisis has brought the auto companies to the brink of bankruptcy much faster than they could have anticipated,” President Bush said. “They have not made the legal and financial preparations necessary to carry out an orderly proceeding that could lead to a successful restructuring.”
If the auto companies were to file for bankruptcy now, it would lead to a “disorderly liquidation” of American auto companies, President Bush said. “Such a collapse would deal an unacceptably painful blow to hard working Americans far beyond auto industry it would worsen a weak job market, and exacerbate the financial crisis.”
The auto companies receiving the funds will be held to different standards than the financial companies that were given money. Firms must accept limits on executive compensation and eliminate perks like corporate jets. Firms must report any transactions over $100 million, and the government has the authority to block any transactions it does not deem reasonable. The firms must also provide warrants for non-voting stock, and are not allowed to issue any new dividends if they are still indebted to the government.
To aid employees, the auto makers must put in place salaries that are equal to or competitive with those of foreign automakers that are based on American soil by the March 31 deadline.
Senior administration officials have said that the current auto industry loans are for manufacturing companies only, not for finance companies like GMAC. However, officials have indicated that the Treasury is working on assistance for the finance companies at a later date.
AUTO LOAN BREAKDOWN
$9.4B for GM
$4B for Chrysler
TOTAL: $13.4 Billion in Jan-mid Feb
$4B more for GM only in Mid Feb.
As for Chrysler, sources close to the discussions said that Cerberus Capital, which controls 80% of Chrysler, has told administration officials it would be willing to surrender equity in the auto company as part of a restructuring involving government assistance. The move could allow the government, the United Auto Workers or another auto company to end up with a stake in Chrysler.
Under ordinary economic circumstances, this is the price failed companies must pay, and I would not favor intervening to prevent the auto companies going out of business, but these are not ordinary circumstances. In the midst of a financial cri and recession, allowing auto industry to collapse is not a responsible course of action.
Although Ford did not receive the short-term loans from the government, it is still seeking a $9 billion bridge loan from the government. Also, the company has stated that the shoring up of Chrysler and GM helps prevent its own bankruptcy.
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Some mutual funds want you to pay for the privilege of them (or your investment adviser) taking your money to invest. It's called a load, and it works like a cover charge to get into a nightclub. Luckily, there are such things as no-load funds. As the name implies, shares of these funds are sold without a fee paid to a broker or investment advisor.
The entire amount you invest in no-load funds goes to work for your returns. On the other hand, with load funds, right off the bat you're charged commission (not to mention other fees incurred over the life of the investment). Let's say, for example, you invest $25,000 into a load fund that charges a 5% commission. This costs you $1,250 off the top, bringing your actual investment down to only $23,750.
The often-cited horse race analogy argues against investing in load funds. Here's the logic behind it: Would you place a bet on a horse that had to start a race 200 yards behind the others? Well, maybe you would if you got a tip from a sketchy, trench coat-clad man in a dark alley. However, under most circumstances, it's not smart to put your money on that handicapped horse.
But some argue that at times that man in the trench coat (aka your broker) knows more about the horses than you do, and has a better shot at picking a winner. Also, sometimes these fees are unavoidable because some funds are available only through investment advisers.
Cost-benefit analysis can help determine when a load fund is worth it (in other words, when it will score you a load) and when it is better to "do it yourself" and avoid the fees. Load-fund fees range depending on share class and can cover a variety of costs, such as paper work and fund management.
