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Applause please, for the president. On Friday morning George W. Bush neatly sidestepped a problem that had threatened to add a disastrous coda to his time in office. General Motors and Chrysler will, after all, get loans from the pool of federal cash intended for the banking system, and in return must come up with comprehensive plans to restructure their businesses by February 17. Detroit, then, does not collapse before Christmas. Mr Bush gets to look magnanimous but stern.
Nobody should be under the illusion, however, that this is anything more than a way to hand a troublesome issue over to his successor. The two carmakers will get $13.4bn in short-term funds, with a further $4bn available for GM in February. That is enough to keep their operations going, but no more. Conditions attached to the loans are politically expedient – executive bonuses and the corporate jets must go – but are equivalent to polishing a grand piano before it is pushed down the stairs. There is simply no way to force all the interested parties to make the concessions necessary for the car companies’ survival on the proposed timescale.
For instance, the terms of the loans call for “best efforts” to swap two-thirds of outstanding debt for equity or new debt. GMAC, the finance arm crucial to GM’s future, has repeatedly had to extend the deadline for lenders to back its transformation into a bank holding company, illustrating the difficulty of such a move. Similarly, it would be a feat of brilliance to persuade car workers to give up benefits when a more pliable administration will shortly arrive in Washington.
Yet if the car companies fail to come up with a credible plan, they will have to repay the government in March. By then, of course, they will lack the funds to do so. Bankruptcy will at that point be inevitable, unless Washington turns out to lack the stomach for it. Either way, this is a deft hospital pass to president-elect Barack Obama.
Lex is the FT’s agenda-setting column, giving an authoritative view on corporate and financial matters. It is also one of the few parts of FT.com available only to Premium subscribers. This article is provided for free as an example. A Premium subscription gives you unlimited access to all FT content, including all Lex articles and the FT mobile Newsreader.
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