Page last updated at 00:59 GMT, Thursday, 13 November 2008

Car wrangle looms in US bail-out

General Motor Corp in Pennsylvania on 7 November 2008
America's big three car-makers have suffered huge falls in sales

Leaders of the US Democratic Party, which now has a majority in both houses of Congress, have confirmed they are working on a car industry rescue plan.

Democrat congressman Barney Frank said his draft bill would include a $25bn (17bn) loan for carmakers.

He said the money would come from the $700bn (494bn) bail-out package already approved by Congress.

But US Treasury Secretary Henry Paulson said that the money was intended only for helping the financial sector.

He said on Wednesday the bail-out package had already "clearly helped stabilise" the financial system.

Intense lobbying

America's big three car makers - Ford, General Motors and Chrysler - have suffered huge falls in sales.

A vote upon the bill being put forward by Mr Frank, who is chairman of the Financial Services Committee of the House of Representatives, could come as early as next Thursday.

Once we cross the divide from financial institutions to individual corporations, truly, where would you draw the line?
Jeff Sessions
Republican Senator for Alabama

Next Wednesday, automobile industry representatives will have an opportunity to make their case when they testify at a hearing before Mr Frank's committee.

The Massachusetts congressman's spokesman said his proposal would allow the government to take an equity stake in car-makers in exchange for the loans.

He said it would seek to ensure car firms faced tough curbs on pay packages for executives and shareholder dividends.

Automobile executives and union leaders have been mounting an intense lobbying effort for a bail-out, warning of dire consequences for the US economy if just one of the big three goes down.

House of Representatives Speaker and leading Democrat Nancy Pelosi said on Tuesday night: "In order to prevent the failure of one or more of the major American automobile manufacturers... Congress and the Bush administration must take immediate action."

But there is a great deal of opposition to any bail-out for the car industry.

3 October - $700bn rescue bill passes through Congress
14 October - Plans announced to buy $250bn in banking stock
26 October - First $115bn spent buying shares in eight lenders
10 November - $40bn to buy stake in insurer AIG

"Once we cross the divide from financial institutions to individual corporations, truly, where would you draw the line?" said Jeff Sessions, Republican Senator for Alabama.

At the start of October, President George W Bush signed legislation giving the big three US car-makers access to $25bn of cheap government-backed loans.

But Democrats say those loans were designed to help automakers develop less-polluting cars, not to stave off the financial disaster the companies now say is imminent.

General Motors last week announced a third-quarter loss of $4.2bn and warned it would run out of cash early in 2009 if market conditions did not improve. The firm also plans 5,400 job cuts.

Last week, Ford also reported a $2.98bn loss for the third quarter.

Sales at GM fell by 45% in October compared with the same month last year, while sales at Ford fell 30% and at Chrysler by 35%.

Dow down

Mr Paulson said on Wednesday that although the bail-out was working there were still many challenges ahead and that market turbulence was likely to continue for some time.

He said authorities had abandoned plans to use some of the $700bn to buy up banks' bad debts.

Instead of buying the debts, as first proposed by the rescue deal, the bail-out fund will continue to be used to buy shares in the lenders to help boost their balance sheets.

Mr Paulson's comments did little to ease continuing investor jitters, and Wall Street's main Dow Jones index ended Wednesday trading in New York down 4.7%.

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