US Treasury Working on Aid for GM, Chrysler Merger

The U.S. government is considering direct financial assistance to facilitate a possible merger between General Motors and Chrysler, a private sector source familiar with Treasury discussions told Reuters on Monday.

The Treasury Department is weighing aid of at least $5 billion, which could include capital injections and government purchases of bad auto loans, according to the source, a financial policy executive, who spoke anonymously because the discussions are private.

Emergency financing, at least initially, most likely would be focused on GM and Chrysler and not Ford Motor , which is struggling but still better off financially than its U.S. rivals, the source said.

A Treasury decision could come this week, the source said.

Any direct infusion of billions in capital would reverse the administration's long held reluctance to bail out the failing domestic automobile industry.

But Detroit's problems have become more acute during the global credit meltdown although GM, Ford and Chrysler have ruled out bankruptcy as an option. They are burning through cash and their performance outlook has worsened. On Monday, Moody's Investors Service downgraded GM's credit rating on continuing liquidity concerns.

Industry supporters inside and outside of government have mounted a furious lobbying campaign to tie the health of automakers to the needs of the general U.S. economy, and have elevated the bailout discussion to the presidential campaign, which concludes Nov. 4.

Carly Fiorina, an economic adviser to Republican presidential candidate John McCain, said on Monday that the government can assist automakers but not save the industry, meaning that taxpayers should not be on the hook for a long-term investment.

Federal aid is considered a requirement for completing the GM/Chrysler deal since larger GM has failed to find an outside investor to help fund its acquisition with sales plummeting, other sources have said.

GM chief executive Rick Wagoner was in Washington in recent days to lobby administration officials. Former Treasury Secretary John Snow is the chairman of Chrysler owner, Cerberus Capital Management.

Key congressional lawmakers have also pressured Treasury.

GM had no comment on any Treasury aid plan. Its shares closed off 8.4 percent.

People briefed on the merger discussions previously have said GM would need a minimum of $5 billion to start restructuring Chrysler's operations. The total amount needed could reach $10 billion, the sources have said.

Terms of any assistance for GM were not immediately apparent, according to the source knowledgeable about the government's thinking. However, Treasury has taken equity stakes as part of its $250 billion capital injection program for several U.S. banks.

(Economists debate whether the government should help the struggling auto industry. Watch the accompanying video for more...)

Treasury representatives were not immediately available for comment.

White House spokeswoman Dana Perino said officials from the Treasury, Energy, and Commerce departments have been in contact with automakers. The focus of their efforts so far have been on a package of $25 billion in government-backed loans to retool factories and develop new technologies to make more fuel efficient cars. The concern in Detroit is that the loans may not be available in time to help them.

At the same time, GM, Ford and Chrysler have faced increased scrutiny from creditors and investors about whether they have the cash to ride out a deepening downturn in sales.

GM, which burned through over $1 billion a month in the second quarter, is in danger of running its cash holdings below the minimum of $11 billion it says it needs to run its far-flung business by late 2009, analysts have said.

Moody's Investors Service on Monday cut its rating on GM deeper into junk territory on the expectation that the automaker's liquidity will continue to erode into 2009 despite any benefit from the U.S. government's $25 billion low-cost loan program.

The ratings reflects the risk that "despite all of GM's business restructuring and liquidity-raising efforts to date, the magnitude of cash outflows due to ongoing operating losses, debt repayments and other uses will consume the company's available cash during 2009," said Bruce Clark, senior vice president with Moody's.

Moody's cut GM ratings one notch to "Caa2," eight levels below investment grade.

The automaker's plan to sell assets have been slow-moving and the debt markets have been effectively closed to it borrowing more, putting in jeopardy its plan to raise $5 billion from asset sales and new borrowing through 2009.

"Given the deteriorating circumstances in global demand, they could reach minimum cash levels at some point in 2009, barring a recovery," said S&P equity analyst Efraim Levy.

Underscoring its need for cash, GM's bid for Chrysler has been motivated in part by a view that an acquisition would allow it to take whatever cash is left on the smaller automaker's balance sheet, people briefed on the talks have said.

Chrysler ended the second quarter with $11.7 billion, according to Cerberus.

"Obviously the automakers need as much support as possible," said Pete Hastings, a fixed income analyst at Morgan Keegan. "Without assistance, the transaction only makes sense for GM because of the cash on Chrysler's balance sheet."

The Financial Services Roundtable, representing auto finance arms like GMAC and Ford Motor Credit, have also pushed Treasury to help industry.

Copyright 2008 Reuters. Click for restrictions.