Senate drops loans, White House may reverse itself

The $14 billion “loan insurance” package that was created to meet Republican demands has failed to convince the necessary number of Republican Senators, despite UAW concessions to lower wages to non-union levels. Republicans in the Senate had demanded immediate changes while the UAW wanted to delay cuts until its current contracts ran out in 2011. Neither Senators nor the UAW were willing to be specific as to which non-union wages would be targeted, as there is a wide range of pay for non-union auto plants, even for factories run by the same company.

The original deal proposed by Democrats would have had the Federal government lend automakers $15 billion at 5% interest in return for limits on bonuses and salaries given to top executives and Federal oversight over large expenditures. The White House demanded and received the power to appoint someone who could send automakers into bankruptcy at will if they did not receive unspecified wage and creditor concessions. Congressional Republicans then demanded that the package be turned into an insurance package partly funded by automakers with unspecified interest rates and profits going to banks, and bankruptcy for any automaker whose creditors did not agree to let 70% of what they were owed be dismissed and which could not get unions to accept nonunion pay.

Pundits have enumerated various theories as to why Senators would not support the bill, after dismissing their expressed reasons (belief that government should not interfere with industry) because the same legislators supported taxpayer donations to foreign businesses opening plants in their own states. These theories ranged from revenge against the UAW for supporting their opponents to regional discrimination (both theories were in the Detroit News and Freep.) At least one group has taken the regional argument to boycott status. 

Markets fell on the news but the impact has not been as strong as predicted by some analysts, because the White House stepped in just before the markets opened to say that George W. Bush might consider providing some of the $700 billion in aid already approved by Congress to the automakers. This reverses statements made as late as yesterday, when the White House was firmly against using a small amount of the “TARP” funds for any purpose other than banking, housing, and “miscellaneous industry” support.