The Bailout

President-elect Obama has issued a statement on this morning's announcement of the $13.4 billion loan to the beleaguered auto industry:

Today's actions are a necessary step to help avoid a collapse in our auto industry that would have devastating consequences for our economy and our workers.  With the short-term assistance provided by this package, the auto companies must bring all their stakeholders together -- including labor, dealers, creditors and suppliers -- to make the hard choices necessary to achieve long-term viability.  The auto companies must not squander this chance to reform bad management practices and begin the long-term restructuring that is absolutely required to save this critical industry and the millions of American jobs that depend on it.

This morning's announcement by George Bush, coming a week after he warned Congress that he would not let the auto industry collapse, is still light on details, but we do know  the following:

Amount: Auto manufacturers will be provided with $13.4 B in short-term financing from the TARP, with an additional $4 B available in February, contingent upon drawing down the second tranche of TARP funds.

Viability Requirement: The firms must use these funds to become financially viable. Taxpayers will not be asked to provide financing for firms that do not become viable. If the firms have not attained viability by March 31, 2009, the loan will be called and all funds returned to the Treasury.

Definition of Viability: A firm will only be deemed viable if it has a positive net present value, taking into account all current and future costs, and can fully repay the government loan.

Binding Terms and Conditions: The binding terms and conditions established by the Treasury will mirror those that were voted favorably by a majority of both Houses of Congress, including:

• Firms must provide warrants for non-voting stock.
• Firms must accept limits on executive compensation and eliminate perks such as corporate jets.
• Debt owed to the government would be senior to other debts, to the extent permitted by law.
• Firms must allow the government to examine their books and records.
• Firms must report and the government has the power to block any large transactions (> $100 M).
• Firms must comply with applicable Federal fuel efficiency and emissions requirements.
• Firms must not issue new dividends while they owe government debt.

What does this mean for the UAW? That it's time to negotiate:

The debt reduction and the cuts in wages were central components of proposal by Senator Bob Corker, Republican of Tennessee, who had proposed bailout legislation. Those talks had deadlocked on a demand by Republicans that the wage cuts take effect by a set date in 2009, while the union had pressed for a deadline in 2011.

The plan announced on Friday offered a compromise between the positions, by making the requirements non-binding and allowing the automakers to reach different arrangements with the union, provided that they explain how those alternative plans will keep them on a path toward financial viability.

And while we'll have to wait and see what the long term results are, in the hours since the announcement, Wall Street is seeing a bounce.

For more discussion, see TomP's diary