Washington, D.C. – The U.S. House of Representatives has passed the Auto Industry Financing and Restructuring Act, by a vote of 237 to 170, to provide up to US$14 billion in short-term bridge loans for the auto industry. The legislation now goes to the Senate for consideration, where it is expected to face considerable opposition from the Republican party, although the White House is urging passage of the bill.

If passed, the bill calls for the President to designate one or more individuals to carry out the Act’s requirements and hold the car companies accountable for implementing long-term restructuring plans. The designee has veto power over industry expenditures in excess of $100 million, and allocates the funds on a priority basis to protect the economy. The money is to be taken from funds already approved for retooling to produce fuel-efficient automobiles.

No new funds will be available for bridge financing once the designee approves the automaker’s restructuring plan. He or she must establish appropriate measures to assess the progress of each company in developing a restructuring plan no later than January 1, 2009, and must evaluate the progress of each against those measures in 45 days. Automakers must submit restructuring plans by March 31, 2009, outlining plans for long-term viability, international competitiveness, energy efficiency, repayment of government financing, compliance with applicable fuel efficiency and emissions requirements, achievement of positive net present value, rationalization of costs and capacity, and proposals for restructuring existing debt. The designee may provide financial assistance to help an automaker implement an approved plan.

If the designee determines that adequate progress is not being made to reach agreement on a restructuring plan, the designee will submit his own plan to Congress to achieve long-term viability for the automaker. The automaker’s plan will not be approved unless the designee determines that it will result in the company’s ability to comply with applicable fuel efficiency and emissions requirements. If the automaker fails to comply with these requirements, the designee may accelerate repayment of a loan, or cancel other financial assistance.

Taxpayer protections in the bill include:

– Warrants which instruct the designee not to provide any loan unless he receives warrants for non-voting common stock or preferred stock, equal to 20 per cent of the loan amount. In Chrysler’s case, the government will receive warrants or their economic equivalent in Chrysler’s holding company or in Cerberus.

– There will be no bonuses or incentives to each automaker’s 25 most highly-paid employees, stringent prohibition on “golden parachutes”, and no compensation plan that could encourage manipulation of reported earnings to enhance compensation.

– Automakers receiving financial assistance generally may not pay dividends, distributions, or their economic equivalent for the duration of the assistance.

– The automakers will pledge all available security and collateral against the loans.

– In the event of a subsequent bankruptcy, the debts to the government from the financial assistance will not be dischargeable.

– The automakers must divest and may not own or lease any private passenger aircraft while financial assistance is outstanding.

Bridge loans will be based in order on necessity of the financial assistance, the potential impact of failure of the manufacturer on the U.S. economy, and the ability to use the assistance optimally. Any long-term financial assistance will be based in order on the ability to use the assistance optimally, the potential effect of failure on the U.S. economy, and the necessity of the assistance.

The loans have a seven-year term, or longer as may be determined by the designee, with interest rate of five per cent for the first five years, and nine per cent thereafter. There is no prepayment penalty. For the duration of the loan, the designee may review and prohibit any asset sale, investment, contract, or commitment proposed to be entered into by the automaker valued in excess of $100 million, if it is deemed inconsistent with, or detrimental to, the company’s long-term viability.

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