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Likelihood of Big Three Bailout Boosts U.S. Markets

3 December 2008 - Markets - Editor

Confirming the general view that U.S. stock markets will continue to be volatile for some time yet, Tuesday saw a rally on Wall Street with the Dow Jones industrial average gaining 3.3 percent, while the Standard & Poor’s 500 climbed 4 percent and the Nasdaq composite index rose 3.7 percent. This follows Monday’s percentage losses of 7.7 for the Dow, 8.9 for the S&P 500 and 9 percent for the Nasdaq composite. The three major U.S. automakers were the center of attention throughout the session, which saw stocks rallying sharply in the early afternoon, only to drop back and then rally through the close.

After having their request for assistance turned down last month, the automakers have rethought their strategy and are again seeking assistance in the form of billions of dollars of taxpayer’s money. The end of session rally on Tuesday is mainly attributable to the growing likelihood that this time round automakers will be granted some form of bailout. Even the losses reported by automakers throughout the session did not serve to dampen investor enthusiasm at the possibility of a bailout. November sales results revealed that General Motors’ sales dropped 41 percent, Chrysler’s sales fell 47 percent, with Ford, Honda and Toyota each reporting a decline of at least 30 percent.

As part of the revised plan, and no doubt to appease those who believe high-paid executives should not benefit from taxpayer’s money, both Ford and GM announced that their CEOs would accept an annual salary of $1. Chrysler’s CEO is reportedly already being paid only $1 a year. GM will sell four of its seven corporate jets, and Ford will sell all five of its corporate jets, while Chrysler does not own a jet, but leases one when needed. Cost cutting measures will include streamlining product ranges and, unfortunately, cutting thousands of jobs.

Stating that bankruptcy is not an option for the big three automakers, House Speaker Nancy Pelosi is proposing that, in the event of Congress not convening next week to pass what is being termed as the Big Three Bailout, the Treasury Department should make money available from the original $700 billion Wall Street bailout to tide them over until early in the new year. It is not yet clear as to whether the Treasury Department would go along with this proposal as, although the Bush administration is in favor of aid for automakers, it had opposed using Wall Street bailout provisions to help them.

Irrespective of where the money comes from, Congress will want complete transparency with regard to just how much is needed, based on worst-case scenario, and how the money is to be spent. Late Tuesday afternoon the nation’s largest automaker, GM, stated that it is seeking up to $12 billion to ensure the company survives into 2010, with up to $4 billion being used this month alone to circumvent bankruptcy. Additionally, GM is requesting a $6 billion line of credit to allow them access to more funds in the event of an ongoing market downturn. Ford is hopeful that, due to cost saving measures implemented some time ago, it may cope without federal loans and anticipates that it will return to profitability by 2011. However, in view of the unprecedented changes taking place in the US economy Ford is asking for $9 billion as a backstop. Chrysler is requesting a $7 billion loan. Stock market players are no doubt anxious for a decision by authorities on the Big Three Bailout, the sooner the better.

 


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