Congressional Democrats are poised to file legislation that would make the big three U.S. auto manufacturers eligible for a loan package from the $700 billion dollar financial bailout package they passed earlier. Such an action would set them on a collision course with President Bush, who remains opposed to any additional loans to the auto industry. From the Washington Post:

The Bush administration signaled yesterday that it would reject a proposal by congressional Democrats to immediately advance $25 billion in government loans to ailing Detroit automakers.

The White House and Treasury Secretary Henry M. Paulson Jr. made clear that while they are open to helping the auto industry, they are strongly opposed to Democrats’ plans to carve cash out of the government’s $700 billion financial rescue program. Despite those warnings, Rep. Barney Frank (D-Mass.) said he would move ahead and draft legislation, setting up a final showdown with the Bush administration.

The Administration has said that any aid should be contingent on a corresponding plan that would address the long term viability of the auto companies.

Paulson said the auto industry is “critical to the country,” but that any federal aid must promote the “long-term viability” of the car companies, which are hemorrhaging cash in the face of the sharpest drop in auto sales in two decades. He said Congress could consider speeding delivery of $25 billion in low-interest loans that it approved for automakers in September.

With G.M. on a $two billion a month cash burn an additional 25 billion between the big three (if G.M. got 14 billion of it) would buy them an additional seven months. The idea that in this business environment that the big three are going to retool all of their plants to begin producing a new line of green cars with $25 billion is so ridiculous that it could only be considered in Congress. They would need a whole lot more than a paltry $25 billion, and the U.S. auto industry does not turn on a dime. It would take years of planning. The Democrats want to attach some standard provisions on CEO pay and other items, none of which would address the failed business model currently in place.

In exchange for federal aid, the car companies would be subject to the same penalties as other firms that participate in the Treasury program, Democrats said, including limits on executive compensation and severance packages known as golden parachutes. The car companies also would have to provide stock to the government so taxpayers could benefit when the firms returned to financial health, aides said, and they could be barred from using public funds to pay dividends.

Key Democrats said they also want to impose conditions to ensure that the emergency loans support the car companies’ shift from gas-guzzling models toward hybrids in an effort to help reduce the nation’s dependence on foreign oil.

Democrats are discussing attaching additional strings to the money. For example, Sen. Charles E. Schumer (D-N.Y.) said he wants “some assurance that they’re not going to come back and ask for more money six months from now.”

Two comments here: The taxpayers will end up joining other equity holders in seeing their investment zero out if stock is to be given for the loan package. (G.M. stockholders have lost over 90 percent of value in the last year.) Senator Schumer should prepare for the return of the big three sometime next year if this money is given unconditionally.

Today’s New York Times talks of the bankruptcy vs bailout argument, and it is pretty one sided in favor of bankruptcy.

And as companies in industries like airlines, steel and retailing have shown, bankruptcy can offer a fresh start with a more competitive cost structure to preserve a future for the workers who remain.

“Just let market forces play out,” said Matthew J. Slaughter, associate dean at the Tuck School of Business at Dartmouth. “And if G.M. or one of the other companies files for bankruptcy, support the workers and the communities that would affected by a bankruptcy filing.”

William Ackman, a prominent activist investor who runs Pershing Square Capital, said Tuesday that G.M. should consider bankruptcy. “The way to solve that problem is not to lend more money to G.M.,” he said in an interview with Charlie Rose on PBS.

Instead, G.M. should submit a prepackaged bankruptcy, laying out steps it plans to enact once in Chapter 11 protection, said Mr. Ackman, who is not a major holder of G.M. shares.

“I’d rather the government’s money be used to train people for other jobs,” Mr. Ackman said. “The bankruptcy word scares people. It’s simply a system.”

And for those on the record in favor of a bailout the argument has plenty of social merit, but little financial merit:

But the United Automobile Workers union, which has joined the automakers to push for a bailout, might find grounds for a strike if a bankrupt G.M. asked a court to throw out its labor contracts.

A bankruptcy also could jeopardize the fate of a health care fund created in 2007 that was supposed to shift a $100 billion burden off the companies’ backs. The U.A.W. recently agreed to let G.M. delay payments to the fund.

Professor Helper, of Case Western Reserve, said the social cost to communities in Michigan, Ohio and other states where its 55 plants and other operations are located could be devastating, if G.M. were to liquidate or significantly cut its work force.

“Even if they go bankrupt in a year, it is better than going bankrupt now,” given the state of the national economy, she said. “From a social point of view, even if G.M. is not providing a return on investment, it is still providing a lot of good jobs.”

A difficult conundrum for the incoming administration. Bankruptcy is likely unavoidable for G.M. It is only now a matter of timing.

Read the New York Times story here

Correction:
In my last posting on G.M. I raised the issue of the potential default of G.M. pension obligations, which would leave the federal Pension Guaranty Fund liable for those obligations. G.M., in today’s New York Times, says it is close to full funding of those obligations, and on that basis the fund would be able to pay its pension obligations without the federal government even after a bankruptcy filing.