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Paulson Says Bailout Not Intended for Auto Industry

Treasury Secretary Henry Paulson told Congress today that he doesn't think Bailout money should be used to help the Big Three. He further noted the administration's firm opposition in general to dipping into the $700 billion fund for a $25 to $50 billion rescue package for Detroit's Big Three automakers.

"There are other ways" to help battered automakers, Paulson told the House Financial Services Committee. And he stated that the bailout money shouldn't be given to the auto industry no matter how badly they need the help, noting the $700 billion "is not a panacea for all our economic difficulties."

According to an AP report, Paulson said the $700 billion bailout plan enacted by Congress in October did not envision that the program would be used to help rescue nonfinancial companies. "I believe the auto companies fall outside of that purpose," he concluded. It would reason from that logic that the cities and state who want bailout cash shouldn't get any. And it might deter the insurance companies and credit card firms from begging for a loan.

Still, Paulson acknowledged that the failure of a car company "would be not a good thing, it would be something to be avoided, having one of the auto companies fail, particularly during this period of time."

The proposed legislation that Congress is considering comes from Michigan Senator Carl M. Levin. Reuters reported that the bill would provide low interest loans (5 percent initially) to the automakers and suppliers in exchange for equity stakes in the companies or warrants that would let the government profit from future gains. Loan applicants would also have to give the government a plan for how they will achieve "long-term financial viability."

Yet, the bill does stop short of giving the government a say over the firms' operations through an oversight board or hard limits on executive compensation. This will insulate some of the firm's operating practices from government intervention, though the equity states make the firms essentially GSEs (and we all saw how successful that was with Fannie and Freddie). While taking advantage of the new loans, car companies would not be allowed to pay dividends, award bonuses to executives making more than $250,000 a year, or give golden parachute payments to top people departing from the firms.

But there are other things that the auto companies can be doing to help themselves without taking bailout cash. Even Levin said that auto executives need to address the perception by some lawmakers "that there's still some quality issues with the Big Three, and they haven't begun to do the necessary restructuring–because they have."

The While House said, "We're surprised that Senate Democrats would propose a bailout that fails to require automakers to make the hard decisions needed to restructure and become viable."

And in a wonderful act of free marketism, Ford said it would sell a 20 percent stake in Japanese automaker Mazda Motor Corp. The sale will net Ford over $538 million, and the company will still remain Mazda's top shareholder with a stake of just over 13 percent.

As I noted in my commentary posted today, a bailout is not what is best for the car companies and other options exist that will lead to long-term prosperity.

Anthony Randazzo is Director of Economic Research


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