Bailout rejection plunges US car industry into crisis

US car giants General Motors and Chrysler could run out of cash within weeks after the Senate rejected a $13bn (€10bn) bailout to rescue the automobile industry.

The defeat late last night happened after talks broke down over the refusal of the United Auto Workers union to meet Republican demands for aggressive wage reductions.

The Senate rejected the bailout 52-35 on a procedural vote – well short of the 60 required – after the talks fell apart.

Stock markets in Asia and Europe dropped sharply today after getting word of the bailout’s failure, and US markets were set to plunge when trading opened. Dow Jones industrial futures were down more than 200 points.

Politicians from both parties called for the Bush administration to tap into the $700bn Wall Street bailout to rescue the beleaguered auto industry.

The Bush administration has repeatedly opposed using a bailout fund being administered by the executive branch, saying it should not be used for emergency aid to the automakers because it was designed specifically to restore stability to the financial sector. Following the vote, the White House said it was studying its options.

“Due to this colossal failure by the US Senate, now it’s up to the president and the Treasury secretary,” Virg Bernero, mayor of Lansing, Michigan said.

“Working Americans will appreciate the president stepping in – and pull us back from the precipice, pull us back from the economic cliff.”

Politicians, who aren’t scheduled to return to legislative work until early January, were looking to the president, as well.

“Plan B is the president,” said Senator Carl Levin, a Michigan Democrat. House Speaker Nancy Pelosi said action by President George Bush was the “only viable option”.

General Motors and Chrysler are in the most immediate danger while Ford has said it does not need federal help now, but could face collateral damage if one of its domestic rivals fell. With the economy in recession, the auto industry has struggled with lacklustre sales and choked credit markets.

Detroit’s carmakers employ nearly a quarter-million workers, and more than 730,000 others produce materials and parts for cars. If one of the automakers declared bankruptcy, some estimate as many as three million US jobs could be lost next year.

The White House said it was disappointed by failure of legislation that “presented the best chance to avoid a disorderly bankruptcy while ensuring taxpayer funds only go to firms whose stakeholders were prepared to make difficult decisions to become viable.”

Many congressional Republicans and some economists said the companies would be best to pursue a prearranged bankruptcy that would allow them to restructure quickly. But most Democrats and the carmakers rejected that, arguing it would quickly lead to liquidation because consumers would never buy cars from a bankrupt auto company.

As it lobbied unsuccessfully on Thursday, White House officials said the weak economy couldn’t afford the collapse of the auto industry. President-elect Barack Obama said an industry shutdown would have a “devastating ripple effect” on the already battered economy.

GM said in a statement is was “deeply disappointed” that the bipartisan agreement faltered. Chrysler said it was also disappointed and would “continue to pursue a workable solution to help ensure the future viability of the company.”

The companies efforts for funding failed after a marathon set of negotiations at the Capitol among labour, the auto industry and lawmakers who bargained into the night to salvage the auto bailout at a time of soaring job losses and widespread economic turmoil.

The group came close to agreement, but it stalled over the UAW’s refusal to agree to wage cuts before their current contract expires in 2011. Republicans, in turn, balked at giving the automakers federal aid.

Aid to the automakers gained urgency last week when the government reported the economy had lost more than a half-million jobs in November, the most in any month for more than 30 years.

The stunning disintegration of the auto bailout proposal was eerily reminiscent of the defeat of the $700bn Wall Street bailout in the House, which sent the Dow tumbling and lawmakers back to the drawing board to draft a new agreement to rescue financial institutions and halt a broader economic meltdown. That measure ultimately passed and was signed by Mr Bush.