Auto Bailout to Be Taken Up By Congress Next Week

The push for an auto industry bailout gained momentum as House Speaker Nancy Pelosi said she would bring the House back in session next week to approve "emergency and limited financial assistance" for the battered industry.

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Before adjourning for the elections, Congress passed legislation providing for $25 billion in government-backed loans to the automakers to prod them to retool their factories to make more efficient vehicles.

Since then, executives from General Motors , Ford and Chrysler have called for at least $25 billion more in emergency loans to help the auto makers survive a cash crisis.

The Bush Administration believes the $700 billion bailout bill that Congress passed in October does not permit loans to the auto industry. But lawmakers are expected to return to the Capitol next week to try and change that.

The Senate is scheduled to meet next week in a postelection session, but until Pelosi issued her statement, it was not clear the House would follow suit.

In her statement, Pelosi said any assistance to the industry should include limits on executive compensation, rigorous government review authority and other taxpayer protections.

Watch Mike Jackson, AutoNation CEO, on automaker bailout, at left.

Indeed, any US government help for the auto industry will likely come with significant strings attached, including sharp cutbacks in operations and workers, analysts say.

"We believe that political pressure to protect taxpayers may lead to a solution similar to the 1979 Chrysler bailout, which was accompanied by concessions from debt holders, labor, suppliers and management,'' according to a Barclays Capital note issued Monday. 

Under the “shared sacrifice” model of the Chrysler bailout, shareholders would see most of their equity transferred to the government as compensation for government guarantees.

Under the present situation, “we believe current shareholders might be left with under 5 percent of their newly recapitalized firm,” said analyst Brian Johnson.

There also is talk of having the entire industry file for bankruptcy protection.

“A general industry-wide solution of Chapter 11 might be an option as one way to restructure the whole industry,” Philippe Houchois, an industry analyst with UBS said on CNBC. This coordinated approach would be necessary, he said, because “if just one player were to go in that direction, I think the damage to competitors and suppliers would be huge.”

The US industry needs to get used to a significantly smaller market of about 11-12 million new units sold per year, Houchois added, compared to 17 million a year in recent years.

See entire Houchois interview, left.

“The whole industry needs to look at a downsizing in its capacity to a much lower level of sales,” he said, adding that the availability of easy credit had delayed this inevitable adjustment..

Industry executives insist they were well into painful restructuring even before the credit meltdown caused a collapse of sales and pushed the companies into a liquidity crisis.

Michigan Governor Jennifer Granholm told CNBC that her state had lost 400,000 jobs in the last eight years as a result of this restructuring.  She argued strongly against any form of bankruptcy because of the studies that have shown that customers will not continue to buy cars from companies in Chapter 11.

But there are a growing number of industry critics who insist management has not done enough to overhaul the industry. Some argue that the government needs to appoint an oversight board to replace the current auto company managements and the boards.

Advocates argue that the airlines industry, placed under similar government stewardship after the crushing blow to the travel industry caused by 9/11, eventually emerged stronger.

There are plenty of skeptics, however, of putting government in a position to second-guess and even over-rule private management.

Louis Lataif, dean of Boston University's School of Management, and a former Ford executive, said the “cleanest way” for Washington to help Detroit would to simply act as “the banker of last resort.”

The government should offer a low-interest (between 5-6 percent), he added, and there was a reasonably good chance that this would be paid back after the industry’s sales rise with an economic recovery in 24 months or so.

“To wipe out the board and the management people is pretty presumptuous that there is anybody on the planet who could by their magic make this thing work [now],” says Lataif,  a 27-year industry veteran, who retired as president of Ford Europe.

"We'll have to go through a shake-out—a couple of years of very weak demand and then the industry will benefit from the pent-up demand that will inevitably follow."

Whatever Washington decides to do, however, many analyts think it needs to be soon.

GM and Ford  burned through more than $2 billion per month, during the third quarter, the companies revealed Friday and the Barclays note said: “We now believe GM is likely to exhaust its cash around February 2009, without government assistance.”  

These reports led to a series of analyst downgrades Monday, including from Deutsche Bank which put its new target share price at zero.

—Reuters and AP contributed to this report.

© 2009 CNBC.com