Proposed bailout conditions for the auto industry

According to Detroit News, Senator Majority Leader Harry Reid will shortly introduce a bill to set aside $25 billion of the $700 billion Troubled Asset Recovery Program for automakers. Unlike banks, automakers will have to agree to real limits on executive compensation; in addition, automakers will not be able to use loans to pay dividends, and would have to submit to an advisory board with veto power.

The government would, in return for loans, receive stock warrants or debt equal to 15% of the loans, and would pay 5% interest on the loans during the first five years, rising to 9% after the first five years. These terms are far less favorable than those given to banks.

Treasury Secretary Paulson, who pulled down $37 million in one year from Goldman Sachs when he was CEO (Goldman Sachs is expected to benefit greatly from the bank bailout), opposed using the TARP program for the auto industry. The White House has also opposed the loans, favoring an existing $25 billion loan program which the Energy Department has proposed to delay for two years (though the law required disbursement of funds within 90 days). This loan program would only apply to certain facility upgrades and automakers, and could not be used by suppliers or for cash flow.

The law would require Paulson to distribute loans based on size and impact of the companies applying for them, both automakers and suppliers; impact would take into account domestic manufacturing and jobs.

Michigan’s Senator Carl Levin suggested to Detroit CEOs that they consider resigning to make the loans more palatable to holdouts, mainly Republicans, who oppose any aid to the auto industry. Opponents of the loans have expressed disgust with the management of the domestic automakers, while proponents blame the lack of credit caused by banks for the crisis.