Barack Obama, the US President-elect, has thrown his weight behind a plea to Henry Paulson, the Treasury Secretary, to use some of his $700 billion bailout fund to rescue America’s car companies.
Nancy Pelosi, the Democrat Speaker of the House of Representatives, and Harry Reid, the Senate Majority Leader, are believed to have sent a letter to Mr Paulson asking him to offer a financial lifeline to General Motors, Ford and Chrysler.
It is believed that Mr Obama is supportive of their request, but it is also understood that he is drawing up his own plans to provide federal assistance to help the American car industry to survive.
The developments in Washington come days after General Motors gave warning that it was in danger of running out of operating funds by the end of the year, and certainly by early next year. It also pointed out that federal funding could be critical.
Ms Pelosi’s request marks the second time that the motor industry has pleaded with Mr Paulson for emergency funds. Soon after Mr Paulson’s $700 billion rescue fund was approved by Washington, the car companies asked for assistance and were turned down. Mr Paulson had told them that he believed that the fund’s purpose was to mend America’s broken credit markets and to assist the banks, rather than to bail out other struggling industries.
However, since the election of Mr Obama last week, the appetite for throwing a lifeline to the car manufacturers appears to have grown.
In his first post-election news conference, Mr Obama said that his transition team was compiling “policy options to help the auto industry adjust, weather the financial crisis and succeed in producing fuel-efficient cars here in the United States”.
Mr Obama defined the failing car industry as “the backbone of American manufacturing” and indicated that he would be more aggressive in rescuing it than the Bush Administration has been.
Yesterday, the White House indicated resistance to allowing car companies, as well as banks, to tap the fund, which could lead to the American taxpayer taking a stake in the manufacturers. Tony Fratto, President Bush’s spokesman, said: “It was not set up for anything else.”
This summer Mr Bush signed legislation to lend $25 billion to the three car companies to help them to pay for vehicle modifications to meet new fuel-efficiency standards. The business climate for car manufacturers has deteriorated rapidly since, however. Many banks have sharply reduced unsecured lending and have withdrawn from student loans and car finance. It is estimated that such reticence will have cost the American motor industry six million new car sales by the end of the year.
The American economic climate has also become far more gloomy. Last week, unemployment increased rapidly, with about 6.5 per cent of the workforce out of a job, marking the highest rate since 1994.
On Friday, Rick Wagoner, the chief executive of General Motors, said that its car sales in the United States had fallen by 45 per cent last month and that GM had made a loss of $2.5 billion in the third quarter alone. Revenue for the period sank from $43.7 billion to about $37.9billion and the company gave warning that it had sold only about 2.1 million vehicles in the third quarter, down by 11 per cent from the same period a year earlier.
Wall Street became even more worried after Mr Wagoner admitted that General Motors had burnt through $6.9 billion of cash reserves in the quarter, leaving the group with a $16.2 billion cash pile. The company needs to have a cash cushion of at least $11 billion to operate.
Mr Wagoner, who said that the liquidity crisis has put an end to GM’s merger talks with Chrysler, also gave warning that banks had stopped offering credit to car companies to fund their restructurings.
At the same time, Ford reported a $2.75 billion third-quarter operating loss, against a $380 million loss for the corresponding period a year earlier. Revenue fell $9 billion to $32.1 billion. Ford conceded that it had used up $7.7 billion of its cash reserves in the third quarter, leaving $18.9 billion. At that rate, Ford would run out of money by April, but it could extend the period by four months with available credit lines of $10.7 billion.
