Auto Bailout’s Call Option Raises Questions

The White House today unveiled a plan to inject $17.4 billion into General Motors and Chrysler LLC to prevent the companies for pursuing bankruptcy protection.

The capital infusions come with a host of conditions, among which is, as described by Bloomberg:

Under the terms of the plan, if the companies can’t demonstrate financial viability by March 31 the loans will be called and the money must be returned, the statement said.

Here’s how the Wall Street Journal describes it:

Viability Requirement: The firms must use these funds to become financially viable. Taxpayers will not be asked to provide financing for firms that do not become viable. If the firms have not attained viability by March 31, 2009, the loan will be called and all funds returned to the Treasury.

The key question is, will there be $17.4 billion left in the companies for the federal government to retrieve? I don’t think that’s a given.

I am also of the opinion that GM and Chrysler face a troubling future regardless of the capital infusion. President Bush has savvily pushed the problem on President-Elect Obama’s plate. By Jan 20, I foresee GM and (more likely) Chrysler will face new liquidity challenges. And those challenges will be more acute because taxpayers have already dumped $17.4 billion into the problem.

“What we are interested in is viable US auto manufacturing,” a White House press officer said this morning.

Whether they are truly viable — bailout or not — is a worthy discussion indeed.

See coverage of the bailout from Bloomberg, the Washington Post, The New York Times, and The Wall Street Journal.