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Business Law Research Paper

Essay by   •  July 25, 2012  •  Research Paper  •  2,127 Words (9 Pages)  •  1,583 Views

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In the month of December 2008 the auto sales in the U.S. dropped 37% compared to sales in the previous year. Less 400,000 vehicles had been sold that year, and this is equivalent to; two factories' annual output. GM and Chrysler had the worst decline. Congress standpoint is that the auto makers have not been operating competitively for years, thus causing sales to decline. Auto sales began to decline in 2006 despite the fact that many auto makers began to offer 0% financing plans to lure buyers.

This decline in auto sales has had a drastic effect on the economy because the auto industry contributes $500 billion to the total U.S. GDP output. This means that the current 30% decline in auto sales will decrease the economic output by 1%. The auto industry employees 850,000 workers in manufacturing and 1.8 million workers in auto dealerships, therefore this decline will result in direct job losses, as well as auto industry related losses (Auto Industry Employment).

Many analysts feel that Chrysler will go bankrupt, even with a bailout, and Ford doesn't really need a bailout. Therefore the main purpose of the bailout would be to save jobs at GM. The current economic state has already caused GM to slash its employment and production, whether it receives a bailout or not.

As of January 2009 the government had used 24.9 billion of the 700 billion bailout fund for the big three auto companies. 17.4 billion for GM and Chrysler, 6 billion for GMAC, and 1.5 billion for Chrysler. The overall purpose of the loans was to provide operating cash for GM and Chrysler, and to keep making auto loans available for car buyers. In December 2008 the auto industry asked the government for 34 billion to bailout in order avoid bankruptcy. The auto companies stated that if they did not receive the money they would be forced to lay off 3 million workers within a year, putting the economy into a deeper recession. Polls done in February have found that most Americans oppose giving the government funds to the struggling auto makers. The New York Times and CBS news, found that nearly 70 percent of Americans believe struggling automotive companies are seeking billions of dollars in additional loans from the government and which are shedding tens of thousands of workers, should not receive any more taxpayer money to help them survive. A Washington Post-ABC news poll reported similar findings as well. In my opinion I believe that the Obama administration is committed to saving the auto makers even though he knows that the bailout is unpopular with the majority of Americans. However if the President chooses to ignore the crisis that they are facing it could be crucial to the economy.

As a part of the bailout plan the Government plans to guarantee warranties on GM and Chrysler vehicles to help mitigate any drop in sales that could occur as they undergo the restructuring measures that the government recommends. Under the Government's proposed warranty program it will cover all warranties on new vehicles purchased from participating auto manufacturers during the period in which those manufacturers are restructuring. The program would create a separate account that will be funded with cash contributed by the manufacturer and a loan from the US Government to for repairs covered by the manufacturer's warranty on each new vehicle sold by a participating domestic auto manufacturer during this restructuring period.

Even auto parts suppliers have been raising alarm of their finances in recent months. The Motor & Equipment Manufacturers Association submitted a proposed rescue plan to the Treasury Department in February; they also sent a personal letter to President Obama asking for "immediate attention" is paid to their plight, saying that at least a million jobs were at jeopardy. The auto parts suppliers are requesting 25.5 billion in order to avoid collapse and stay afloat (Fox News). The auto parts suppliers also stem from the credit crisis. Due to the fact lenders are refusing to extend credit to parts makers that do major business with the three US car makers, which in turn can't afford to rescue the suppliers. GM submitted a plan to the Treasury to help suppliers and keep the assembly lines running. The proposed plan through the government would create a credit insurance program for the receivables that supplier's book from their business with US auto makers. This would provide insurance for the receivables and would encourage banks to keep credit flowing to parts suppliers (US News Car rankings and reviews).

The auto companies are asking for the government's help because they have been hurt by the weakened economy, the credit crunch and consumers' shift away from profitable sport-utility vehicles. The sales are at an all time low; the lowest level in more than 17 years. GM and Ford are asking for a combined 50 billion in government funding. 25 billion would go toward loans to help survive the economic decline, while the other 25 billion would be to help cover some of its health-care obligations for over 780,000 retirees and dependents.

Congress feels they have to bailout the auto companies to save jobs. For every job in an assembly plant, there are 7.5 jobs with auto part suppliers and other companies, meaning the industry accounts for millions of jobs. In a grim prediction the Automotive Research estimated that about 2.5 million jobs across the economy would disappear in the first year if the US auto industry shrunk by 50 percent (Auto Industry Employment).

When looking at the overall pictures there are pros and cons if the US bails out the auto industry. Pro 1: if the bailout money works the way the government would like for it to work it would pull the auto companies out of the hole, and good things could

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