Uncle Sam Picks Up The Parts

DETROIT - The federal government's rescue plan for General Motors and Chrysler is still being worked out, but at least for now, an immediate collapse of the American auto industry has been averted.

The Obama administration said Thursday it would pAs the U.S. steps in to avoid Detroit's collapse, all eyes remain on Obama's auto task force.
DETROIT - The federal government's rescue plan for General Motors and Chrysler is still being worked out, but at least for now, an immediate collapse of the American auto industry has been averted.

The Obama administration said Thursday it would provide up to $5 billion in a revolving credit facility to guarantee payments owed to thousands of companies, employing some 500,000 people, that supply critical parts to U.S. automakers. Rather than injecting capital directly into parts suppliers, the support program provides liquidity that will allow those manufacturers to keep operating. General Motors (nyse: GM - news - people ) and Chrysler will also have skin in the game: They'll kick in 5%, or $250 million, each.

The help comes at a critical time for auto suppliers, many of which are teetering on the edge of bankruptcy because they cannot get financing to pay their workers and keep shipping parts. Both domestic and foreign-based carmakers have expressed fear of a total industry collapse in the coming weeks if the flow of parts is interrupted by a wave of supplier bankruptcies.

"This vicious cycle of frozen credit markets, growing supplier uncertainty and growing auto company uncertainty has the potential to unravel the industry and short-circuit restructuring efforts at companies like GM and Chrysler," according to a U.S. Treasury statement announcing the program.

Participating suppliers would pay a 2% fee for government-backed insurance that they will be paid for their components no matter what happens to the car manufacturers that receive them. For an extra 1% fee, the suppliers can trade those receivables to the government for quick cash instead of waiting the typical 45 to 60 days for payment.

Neil DeKoker, president of the Original Equipment Suppliers Association, a trade group, said he was pleased with the government's action, but noted that it addresses only two of suppliers' three requests for help. The third request--for government guarantees of commercial bank loans--was unworkable, because banks won't loan to auto suppliers under any circumstances, even with a government guarantee, DeKoker says.

"The banks said, 'Once we figure out what the government is going to do with GM and Chrysler, then we may reconsider.' But right now, they're not inclined to loan any more money to the auto industry."

That's why all eyes remain on the president's auto industry task force, which is continuing to weigh the viability plans of GM and Chrysler before it decides by March 31 whether to provide more money or to recommend a court-supervised bankruptcy reorganization.
rovide up to $5 billion in a revolving credit facility to guarantee payments owed to thousands of companies, employing some 500,000 people, that supply critical parts to U.S. automakers. Rather than injecting capital directly into parts suppliers, the support program provides liquidity that will allow those manufacturers to keep operating. General Motors (nyse: GM - news - people ) and Chrysler will also have skin in the game: They'll kick in 5%, or $250 million, each.

The help comes at a critical time for auto suppliers, many of which are teetering on the edge of bankruptcy because they cannot get financing to pay their workers and keep shipping parts. Both domestic and foreign-based carmakers have expressed fear of a total industry collapse in the coming weeks if the flow of parts is interrupted by a wave of supplier bankruptcies.

"This vicious cycle of frozen credit markets, growing supplier uncertainty and growing auto company uncertainty has the potential to unravel the industry and short-circuit restructuring efforts at companies like GM and Chrysler," according to a U.S. Treasury statement announcing the program.

Participating suppliers would pay a 2% fee for government-backed insurance that they will be paid for their components no matter what happens to the car manufacturers that receive them. For an extra 1% fee, the suppliers can trade those receivables to the government for quick cash instead of waiting the typical 45 to 60 days for payment.

Neil DeKoker, president of the Original Equipment Suppliers Association, a trade group, said he was pleased with the government's action, but noted that it addresses only two of suppliers' three requests for help. The third request--for government guarantees of commercial bank loans--was unworkable, because banks won't loan to auto suppliers under any circumstances, even with a government guarantee, DeKoker says.

"The banks said, 'Once we figure out what the government is going to do with GM and Chrysler, then we may reconsider.' But right now, they're not inclined to loan any more money to the auto industry."

That's why all eyes remain on the president's auto industry task force, which is continuing to weigh the viability plans of GM and Chrysler before it decides by March 31 whether to provide more money or to recommend a court-supervised bankruptcy reorganization.