The Next Bailout: Detroit

With just two weeks in the current session of Congress left to land potentially life-saving federal loans, Detroit's car companies and Michigan's congressional delegation were in a state of chaos. Michigan lawmakers trying to sell the deal to a skeptical Congress were frustrated by what they saw as a lack of effort from the automakers, several congressional sources tell NEWSWEEK. Auto execs were annoyed that they were being lumped with the Wall Street bailout crowd, which didn't help Detroit's plea for $25 billion in low-cost federal loans to see it through its cash crisis. The acrimony came to a head in a tense conference call Sept. 11 involving 25 power brokers in Washington, D.C., and Detroit, including some of the Big Three CEOs, according to Congressional sources. As congressmen and their staffers debated the minutia of how to craft the legislation for the loans, the CEOs on the other end of the line kept asking everyone to speak up. "We were very much in the weeds, which is not a good idea with a conference call of 25 people," says Rep. Dave Camp, a Republican from Midland, Mich. "It's been difficult to get consensus [with the carmakers]. It's been very frustrating."

With bad bailout-buzz in the air, Detroit's difficult-sell job has become even more daunting. Despite GM CEO Rick Wagoner's insistence to a Senate panel last week that "I'm not here today asking for any bailouts," that's exactly how many in Congress—and throughout America—saw it. The auto bosses would like to cast the $25 billion as something that should be a done deal since Congress authorized that financial assistance in last year's energy bill, which required automakers to increase the car's average fuel economy by 40 percent, to 35 miles per gallon, by 2020. The only problem: Congress never actually funded the $25 billion, which is what Detroit is desperately seeking before Congress adjourns Sept. 26. But a common view in Washington and elsewhere is that Detroit drove itself to desperation with its dependence on SUVs and pickup trucks. And now, critics say, the not-so-Big Three don't deserve federal help to overhaul factories from churning out gas guzzlers to make mileage misers. "They're not too big to fail," Sen. Richard Shelby, the top Republican on the Senate Banking Committee, told CNBC last week. "I don't see [Detroit's woes] as a national problem. I see it as their problem."

It wasn't supposed to be this hard for Detroit. Federal aid for America's automakers became politically plausible this summer when Michigan emerged as a potential swing state in the presidential election. The economically ravaged state has gone blue in the last four presidential elections, but it also went for John McCain over George W. Bush in the 2000 Republican primary, giving the current GOP candidate a shot at turning the state. Polls show Michigan in a statistical dead heat. Detroit execs hoped to leverage Michigan's moment to land some of the largesse the federal government has lavished lately on the likes of Bear Stearns, Fannie Mae and Freddie Mac, so they dusted off the old argument about how important the auto industry is to the U.S. economy. Nearly 15 million people's livelihoods—one in 10 jobs in America—are connected to the auto industry, according to the Center for Automotive Research. And automakers also highlighted how many of those millions live in the toss-up states of the upper Midwest. Before long, Barack Obama and then McCain endorsed extending Detroit $25 billion in federal loans with interest rates around 5 percent, versus the up to 20 percent interest that the junk-rated companies would pay on the open market (savings: roughly $100 million on every $1 billion borrowed).

Then Wall Street imploded, and in this anemic economy, taxpayers likely aren't taking kindly to the idea of multibillion-dollar bailouts of Fannie, Freddie and, just this week, insurance giant AIG. When the federal government didn't step in to save Lehman Brothers from failure, sentiment hardened against helping Detroit. "The timing of these auto loans couldn't be worse with all these Wall Street issues," says Congressman Mike Rogers, a Republican from Howell, Mich. What's more, the cost to taxpayers of covering the auto companies' low-interest loans has doubled to $7.5 billion, the Congressional Budget Office said this week, because the risks are rising that the car companies could default. "These are very high-risk loans now," says University of Maryland business professor Peter Morici. "And they will just put off Detroit's day of reckoning."

Against those headwinds, Detroit's sputtering start in making its case to Capitol Hill could prove pivotal. Sure, Chrysler showed up on Capitol Hill a couple weeks ago with some golf-cart-like electric vehicles, and GM provided fleets of green vehicles for the delegates at the political conventions this summer. But the subtle symbolism of those moves—much like GM's introduction of its Chevy Volt plug-in hybrid in Detroit Wednesday—are not the kind of hardball politics necessary to win-over lawmakers who've run out of patience with Detroit. Michigan lawmakers have complained that Detroit lobbyists were on vacation in August when they should have been twisting arms in Congress. "It's difficult for the auto industry to understand how unsympathetic members [of Congress] are from other parts of the country," says Congresswoman Candice Miller, a Republican from suburban Detroit's Macomb County, home of the famous Reagan Democrats. "People look at them like they're the tobacco industry." Added another Michigan congress member, who asked not to be named for fear of hurting relations with Detroit's automakers, "People don't believe anymore that what's good for GM is good for America. I'm not sure that GM, Ford and Chrysler have caught up with that yet."

GM President Fritz Henderson contends that Detroit has been working hard to secure the federal loans and wonders who his lobbyists would have called on in August. "Congress just came back a couple weeks ago," he told NEWSWEEK. "Who was there in Washington in July and August?" He seemed perplexed that getting a $25 billion loan has become such a big deal, because it was authorized in the 2007 energy bill. "I thought this was part of the deal when the '07 legislation went forward," he said. "Why have something in the legislation if you don't intend to fund it? It doesn't seem logical. It's like you're just kidding. And this is deadly serious."