Capital Markets

Rescue Me: Feds Hand Motown a Loan Package

Amid the Wall Street bailout, President Bush and Congress gave the Big Three automakers $25b in low-interest loans to build fuel-efficient cars.
Marie LeoneOctober 7, 2008

While Treasury Secretary Henry Paulson and Congress wrangled over Wall Street’s rescue plan last week, President Bush was signing a $630 billion spending bill into law that included a $25 billion loan package for Detroit’s automakers.

The program will provide the Big Three — General Motors, Ford Motor, and Chrysler — with direct loans to help the ailing carmakers develop technology and retool factories to make more fuel-efficient cars and trucks.

The law — the Disaster Relief and Recovery Supplemental Appropriations Act of 2008 — also keeps the government operating through the first quarter of 2009, and includes funding for Defense Department budget items, for aid to victims of natural disasters, and for additional health-care benefits for veterans who have served in Iraq and Afghanistan. Further, the law lifts the ban on offshore drilling in the U.S.

The law, which includes direct loans for the car companies and their suppliers, must be used to build vehicles that meet the new federal fuel-efficiency standards passed by Congress last year.

Commenting on the new law, Ford issued a statement saying that the direct loans would provide the company with “access to capital at a lower interest rate than available now,” thereby helping Ford “transform our U.S. manufacturing plants more quickly.” The statement continued: “This is an important step to providing access to capital for important investment in the future at a time when the capital markets are distressed.

“Congress clearly recognizes the need to move forward at this critical time to make available this source of capital for automakers and suppliers,” noted General Motors in a statement.

The law gives Congress the ability to use $7.5 billion in taxpayer funds to guarantee $25 billion in low-interest loans, according to the Associated Press. The $25 billion loan program is reportedly the largest federal subsidy provided to carmakers since the bailout of Chrysler in 1980, added the wire service.

The automakers have been trying to push through the loan package for over a year. In fact, the package was authorized in a 2007 as part of an energy law that mandated a 40 percent increase in vehicle fuel-efficiency standards by 2020. However, the loan package was never funded, said the Associated Press.