Congress near a Big Three deal, with strings attached

US automakers are likely to get $15 billion in federal loans, but lawmakers insist on industry restructuring.

Congress this week returns for a second lame-duck session to help the US auto industry reinvent itself – or at least get through the next few months.

Without billions in government loans, two of the Big Three assert that they won't make it into the new year. News that the US economy lost more than half a million jobs in November is also driving lawmakers toward an agreement that is expected to give General Motors Corp., Chrysler, and, if needed, Ford Motor Co. access to some $15 billion in federal loans.

"We're very close to a deal," said Sen. Carl Levin (D) of Michigan on "Fox News Sunday." While not all Democratic and Republican lawmakers are on board, "there's a consensus that there must be conditions attached," he said.

Stung by the failure of a $700 billion US bailout of the financial industry to quickly show results, especially relief for the ailing housing market, lawmakers want to demand more accountability from any new recipients of government help.

The expansion of a government bailout from Wall Street to the auto industry also moves Congress squarely into the business of setting industrial policy for the nation. The notion that government would pick economic winners and losers gained support among Democrats in the early 1980s, when it appeared that Japan, with its well-developed industrial policy, was America's No. 1 economic rival. The approach later lost its luster as the Japanese economy settled into a deep slump.

Last week, though, US lawmakers appeared anything but reticent to tell auto executives what to do to revive the troubled American industry.

President-elect Obama, moreover, signaled Sunday that strings are likely to be attached to any federal dollars the auto industry gets – and he implied that US officials won't be shy about giving instructions about what needs to change.

"Assistance is conditioned on them making significant adjustments," Mr. Obama said on NBC's "Meet the Press," noting that it is not an option to allow the American auto companies to collapse. "They are going to have to restructure and all of the stakeholders are going to have to restructure."

In a key compromise, House Speaker Nancy Pelosi agreed to allow funds from the Department of Energy's advanced technology program, targeted to help develop more fuel-efficient vehicles, to be redirected to bridging loans for the auto industry – on the condition that those funds be replenished.

The fact that lawmakers are demanding a role in decisions on the auto bailout opens the door to a new role for Congress in industrial policy, say financial analysts.

"If you give them a lot of money and an oversight board to keep them solvent, we are on the path to an industrial policy, and I'm not sure that's a good thing," says Peter Morici, a professor at the University of Maryland School of Business. "It's management by committee."

"You can keep them going a while, but sooner or later they are going to have to straighten out their labor costs or they'll keep coming back," he adds.

In two days of hearings last week, lawmakers from both parties discussed the nuts and bolts of plans to help industry, as a condition for government help.

"We're not going to write a check, for any amount of money, without some serious conditionality associated with it," said Sen. Christopher Dodd (D), chairman of the Senate Banking Committee, after a hearing with Detroit CEOs and the head of the United Auto Workers (UAW).

Conditions proposed during the hearings ranged from changes in the automakers' product mix to a government-required merger between Chrysler and General Motors (GM) to a mandate for new contract negotiations that would put compensation for Detroit auto workers on par with nonunionized workers at Nissan or Toyota plants in the US.

Sen. Bob Corker (R) of Tennessee proposed requiring GM to restructure its debt, buy out bondholders at a rate of 30 cents on the dollar, and renegotiate labor agreements to put United Auto Workers on a par with workers for foreign-owned auto companies with plants in the US.

"I know that you haven't invested in product development. I know you don't have the technologies to really compete as a stand-alone. I know that your dealership levels all across the state might be really valuable to a foreign company coming in," Senator Corker said at Thursday's banking panel hearing.

On the Democratic side, Sens. Jon Tester of Montana and Sherrod Brown of Ohio pressed the auto executives for commitments that they would not use taxpayer dollars to invest in overseas operations.

"Why give American taxpayer dollars to somebody who is going to invest it in some other country than this country? That's been a problem," Senator Tester said, referring to reports that GM is planning to expand operations in Mexico.

In response, GM Chairman and CEO Richard Wagoner said: "No funding that comes out of this would go to fund a facility overseas."

Opponents of a bailout say it won't solve the structural problems in the US auto industry. If a bridge loan is granted, they warn, CEOs will be back for more.

"This is a bridge loan to nowhere," says Sen. Richard Shelby (R) of Alabama, the top Republican on the Senate Banking Committee. "They need 60 percent of the management to go and about a 40 percent downsizing of the workforce."

Rep. Spencer Bachus (R) of Alabama, the ranking Republican on the House Financial Services Committee, says any bailout of the auto industry won't be fair to "the vast majority of citizens whose wages, health benefits, and pension plans are less generous than those of the management and labor force of the Big Three."

But Senate GOP leaders are not threatening to block consideration of legislation on a bailout. "I look forward to reviewing the legislation ... to address the difficulties in our auto markets. Our first priority must be to protect the hard-earned money of the American taxpayer," said Senate Republican leader Mitch McConnell on Saturday.

• Reuters material was used in this report.