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TARP to fund GM, Chrysler warranties; bill offers cash for clunkers

November 15, 2010
Government help for auto industry

The warranties of new domestic vehicles will be backed by the federal government until the carmakers are viable without government help or emerge from a bankruptcy, in a step announced March 30.

Using funds from the government’s Troubled Asset Relief Program, the move is designed to signal that it is safe to purchase a U.S.-made auto or truck despite the distress of the industry.

And a bill introduced March 17 called the CARS Act (the Consumer Assistance to Recycle and Save Act of 2009) would provide TARP cash to buyers of new fuel-efficient cars — if they trade in a clunker.

Overseas incentive programs similar to House Resolution 1550 have lifted automobile sales despite the awful economy. In Germany, an offer of about $3,290 for trade-ins helped to increase February car sales there by 21.5 percent from a year earlier, a 10-year high, according to the German Association of the Automotive Industry.

Both measures add to the economic stimulus bill adopted in February that provides a tax incentive for the purchase of new cars this year.

Domestic vehicles purchased before March 30 are not eligible for a government-backed warranty during the "restructuring period" of General Motors and Chrysler, which the Treasury defined as beginning March 30.

Any U.S. manufacturer is eligible to participate in the Warranty Commitment Program, though Ford Motor Co., which is not seeking government aid, is not expected to do so.

"Ford does not plan to participate in the program as we see no issues honoring warranties for current and future customers," said company spokesman MarkTruby.

The Treasury wouldn’t say how much money it’s putting up for the program, but it is expected to be in the millions—significantly less than the $17.4 billion that GM and Chrysler have already received.

Some economists say court-ordered bankruptcy for the automakers likely would have a quick turnaround, versus the years of court proceedings often associated with bankruptcy. If so, it is unlikely that taxpayer funds would have to be used to pay for warranty repairs.

The move intends to stanch consumer worries about buying a new vehicle from automakers teetering on the brink of bankruptcy. Foreign automakers are not eligible to participate.

"The government’s main responsibility here is to restore consumer confidence—that their job, home, and investments are secure. Whether or not that’s going to make a difference remains to be seen," said Aaron Bragman, research analyst for HIS Global Insight in Troy, Mich.

The government would finance the companies’ cost to repair covered vehicles at the dealership or through a third party. The funds will be set aside in a separate federal account. The companies will provide 15 percent of their expected warranty costs, with the government covering the rest.

The CARS Act would offer incentives to owners who replace cars built before the 2001 model year — a $4,000 voucher if the new vehicle is assembled in the U.S. and gets 27 mpg, or if it is assembled elsewhere in North America and gets 30 mpg; or $5,000 if the vehicle is both assembled in the U.S. and is rated at 30 mpg.

A similar bill in the Senate would provide slightly less generous subsidies, and is aimed more at protecting the environment than spurring car sales.

The Senate measure would offer up to $4,500 for the trade-in of gas guzzlers up to seven years old, $3,000 for cars that are eight to 10 years old and $2,500 for cars older than that. The Senate bill is not limited to cars assembled in North America.

"Such fleet modernization programs, which provide a generous credit to consumers who turn in old, less fuel-efficient cars and purchase cleaner cars, have been successful in boosting auto sales in a number of European countries," President Obama said March 30.

"I want to work with Congress to identify parts of the Recovery Act that could be trimmed to fund such a program and make it retroactive starting today."

But Obama called for using money already allocated in the $787 billion economic recovery legislation, meaning that other programs would have to be cut to provide the new vouchers to car buyers, a process that could face political opposition.

Limiting the program to cars built or assembled in North America also could draw protests from trading partners, who may contend that the rules violate international trade agreements.

Nearly a dozen European countries have adopted programs offering cash to drivers who trade old cars for more energy-efficient models. Those programs are not limited to vehicles manufactured in Europe or any specific country.

American auto dealerships, which have been going out of business steadily in the last six months, were generally supportive of the trade-in incentives.

"The Germans started this a few months ago, and it did help stimulate their auto business," noted Annette Sykora, a past chairwoman of the National Automobile Dealers Association and owner of two dealerships outside Lubbock, Tex.

Sykora added, however, "The No. 1 thing dealers need is a freeing up of credit, and I didn’t see that in the (March 30) announcement."