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President Bush sanctioned a last-ditch financial rescue of General Motors and Chrysler yesterday after the White House warned that the bankruptcy of either company would deliver a devastating blow to the US economy.
Emergency funding of $14bn (£9.4bn) is expected to come from the $700bn troubled asset relief programme, (Tarp) which the White House had said was off-limits to the auto industry until its hand was forced by the collapse of bail-out legislation in the Senate on Thursday night.
GM and Chrysler have hired bankruptcy advisers as the rescue goes to the wire, amid warnings from executives at both companies that their collapse could imperil millions of jobs.
"The current weakened state of the economy is such that it could not withstand a body blow like a disorderly bankruptcy in the auto industry," said Dana Perino, White House press secretary, who added that the Tarp fund might be used. A spokeswoman for the US Treasury, which controls the Tarp fund, said: "We will stand ready to prevent an imminent failure until Congress reconvenes and acts to address the long-term viability of the industry."
GM announced yesterday that it will slash production by a third in the first quarter of next year and temporarily close 21 factories as it scrambles to conserve costs in the worst sales market for 26 years. As result it will make 250,000 fewer vehicles in the first three months of 2009.
A source close to the situation told the Guardian that the manufacturers, who could be days away from filing for bankruptcy, were "working very hard with the administration" to secure a compromise. GM indicated in a statement yesterday that the Tarp is its main hope.
"We are encouraged by the White House's willingness to consider other options, including the Tarp programme, for immediate aid to the domestic auto industry," said GM.
President Bush and the US treasury secretary, Henry Paulson, have resisted using the $700bn Tarp as a funding source for the big car groups, but they blinked yesterday as it became clear that GM and Chrysler had no other outlet. Paulson has $15bn left to allocate in the first $350bn tranche of the fund.
Under one scenario outlined by analysts yesterday, the Tarp money could be used as a government guarantee that would underwrite bank loans to the ailing manufacturers.
"The government can ask the banks to make these loans to the industry and pledge that it will guarantee them. That safeguards the original purpose of the Tarp and it is more palatable than giving the money directly," said Aaron Bragman, autos analyst at IHS Global Insight.GM, Chrysler and Ford the so-called "big three" Detroit-based carmakers, employ about 250,000 people directly.
Republican senator Bob Corker, said he regretted the collapse of the rescue legislation in the Senate on Thursday night. "We were three words away from a deal. That's what kills me," he told CNBC.
Corker said those words were a date for when GM and Chrysler workers would accept wage reductions to bring them in line with rival manufacturers such as Toyota. Republicans had demanded reductions by next year and accused the United Auto Workers of rejecting that deadline.
Ron Gettelfinger, President of the UAW, said "working for nothing" would not help GM avoid bankruptcy but he admitted that the union would have to make concessions in order to secure a federal bail-out. If the White House intervention succeeds it will tide over GM and Chrysler until March 31. That would leave the drafting of new bail-out legislation to the incoming president.