The Detroit-based Big Three automakers – a foundation of American industrial might for a century – are going to be altered under any US government bailout. The question now may be only how profound those changes will be.

It’s possible that the Bush administration still may offer a simple bridge loan to the desperate industry, postponing tough decisions until President-elect Obama takes office. But Bush officials ultimately could also decide on a rescue plan that puts the most troubled firms, General Motors and Chrysler, through something resembling a managed bankruptcy, according to administration officials.

“There’s an orderly way to do bankruptcies that provides for more of a soft landing. I think that’s what we would be talking about,” said White House press secretary Dana Perino on Thursday.

Any federal offer of aid would come attached to more Washington oversight, via an “auto czar” or some other mechanism. That means Woodward Avenue, metro Detroit’s main drag, in essence would then run through D.C.

Under the more involved plans under discussion, unions would have to make concessions, as would other stakeholders in the industry, such as bondholders. Plans would call for the number of dealerships to be trimmed.

Some suppliers are likely to go bankrupt, whether or not the United States provides the industry with aid.

As recent announcements of lengthy holiday plant shutdowns demonstrate, the industry has reached a turning point in its history. Ford has said it can shoulder along without US help. But GM and Chrysler can see a river from where they’re standing, metaphorically speaking – the Rubicon.

“The auto industry is on very delicate financial footing. The situation is quite dire,” says Dennis Virag, president of the Automotive Consulting Group, based in Ann Arbor, Mich.

The Big Three have long closed their US factories around the holidays. Typically, the seasonal shutdown lasts about two weeks.

But on Wednesday, Chrysler announced it was closing all its North American manufacturing plants for at least a month. The plants employ some 46,000 union workers. Ford announced that it would extend the holiday shutdown at 10 of its plants to three weeks, instead of the previously planned two.

The closures come at a time when sales of vehicles in the US are as low as at any time in the past quarter-century. Over the past three months, car and truck sales have declined at a “stunning” 43.7 annual rate, according to a Wachovia Economics Group analysis.

“The one bit of good news in these data is that the rate of decline in motor vehicle sales has clearly slowed, with the sales for motor vehicles now coming below replacement demand,” concluded the Dec. 15 analysis.

Meanwhile, in Washington, an aid plan for the industry has been longer in coming than many expected. After the Senate voted down a rescue plan last week, the White House announced that it would offer some kind of aid on its own authority.

At press time, the administration had yet to release a detailed bailout strategy.

President Bush said at an appearance Thursday at the American Enterprise Institute that he had not yet decided what to do. Under normal circumstances, bankruptcy court would be the best way for auto firms to work through credit and debt restructuring. “These aren’t normal circumstances. That’s the problem,” he said.

Mr. Bush said he was worried about the effect of an auto-industry collapse on financial markets. At the same time, he said, he was worried about throwing good government money into a bad situation.

On one matter, Bush was definite: He did not want to punt the problem to Mr. Obama. “I believe that good policy is not to dump him a major catastrophe on his first day in office,” Bush said.

The policy of not wanting to use taxpayer dollars to prop up enterprises that are going to collapse anyway is a good one, according to one economic expert. And that’s a likely reason that an aid decision has been delayed. Government officials are poring over GM and Chrysler financial records and talking to firm stakeholders in an attempt to understand the firms’ way forward.

“There is no reason to give credit if the firms have business plans you think are likely to fail. It’s better to say ‘no’ at the outset,” says Gary Burtless, a senior fellow in economic studies at the Brookings Institution.

But simply allowing GM and Chrysler to go bankrupt on their own risks their liquidation, according to Mr. Burtless. Foreign auto firms might buy some of GM and Chrysler’s assets, but not all.

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General Electric Co., the biggest issuer of U.S. corporate bonds, has a one-in-three chance of losing its AAA credit rating in the next two years as earnings deteriorate, Standard & Poor’s said.

S&P cut the outlook on the company and that of its GE Capital finance arm to negative from stable. While the AAA ratings were left intact, S&P said in a statement today that it was concerned about cash flow and funding for the finance unit as global conditions worsen. GE Capital’s stand-alone rating, without parent support, would be A+, four levels below, it said.

GE Chief Executive Officer Jeffrey Immelt said Dec. 16 that the company’s industrial businesses, which include NBC-Universal, will rise no more than 5 percent next year. That’s less than a range of 10 percent to 15 percent given in September. Profit at GE Capital will decline to $5 billion in 2009 from about $9 billion excluding restructuring expenses, he repeated.

“The priority concern from our perspective are the earnings prospects of” GE Capital Corp., S&P analyst Scott Sprinzen, who follows the finance arm, said in an interview. “And we know that they operate in a cyclical business, and that we’re in the midst of a cyclical decline. To some extent, that’s factored into the ratings. It seems that this is unfolding as an extraordinarily severe downturn.”

GE Capital would have to fall “well short” of the $5 billion in net income forecast for next year for S&P to reconsider the rating, Sprinzen said in the interview.

GE declined $1.43, or 8.2 percent, to $15.96 at 4:15 p.m. in New York Stock Exchange composite trading. Credit-default swaps on GE Capital rose 20 basis points to 415 basis points after reaching a one-month low of 395 earlier today, according to broker Phoenix Partners Group.

Known Risk

“The institutional investors that really make the market for GE’s debt, they already know the level of risk, regardless of what you call it, AAA or AA+,” said Guy Lebas, chief economist at Janney Montgomery Scott LLC in Philadelphia. “They’re trading with yields that are not reflective of a AAA credit rating. That’s largely because the company has exposure to the financial world.”

GE’s 5.875 percent bonds due in 2038, its most actively traded securities, rose .105 cents to 96.424 cents on the dollar at 3:40 p.m. in New York, according to Trace, the bond price- reporting system of the Financial Industry Regulatory Authority.

GE Capital’s “earnings deterioration in 2009 and 2010 could be greater than we previously assumed,” S&P said in today’s statement. “The outlook revision reflects the continuing risks posed by GECC’s reliance on confidence-sensitive wholesale funding, despite the benefits of temporary U.S. government support programs and of management’s ongoing efforts.”

Immelt’s Plan

Immelt outlined a plan to use capital to support the AAA rating, the highest available, and the $1.24 a share annual dividend, which the company has committed to paying in 2009, the same level as in 2008.

“If we successfully execute on our plan, S&P will reconsider its outlook,” Russell Wilkerson, spokesman for Fairfield, Connecticut-based GE, said in an interview. “We’re confident in our plan as laid out on Tuesday and we’ll execute in 2009.”

Immelt is shrinking GE Capital to less than 40 percent of the parent company’s profit next year from about half in 2007. On Dec. 2, the company said it planned to issue about $45 billion in long-term debt next year, less than the $66 billion it has maturing, and reduce commercial paper to $50 billion in 2009, less than the $75 billion it said previously. GE is reducing its leverage ratio to 6 to 1.

Dividend Cost

The company, which was approved to sell Federal Deposit Insurance Corp.-backed bonds up to $132 billion under that program, has issued about $12.5 billion so far this year to “prefund” the $45 billion it plans to refinance next year. The parent company added $5 billion in funds to GE Capital to help meet the new leverage ratio, Immelt told investors on Dec. 16.

“If we need to do more in that context as time goes on, we’ll do more,” Immelt told investors. “Because I think the AAA’s important.”

GE said in September it would keep its $1.24 annual dividend the same for 2009, the first time in at least 32 years with no increase. The dividend costs GE about $13 billion a year based on the number of shares outstanding on Oct. 2. That payout will be covered by cash generated from operations and dispositions this year of about $18 billion, according to a chart from the CEO’s presentation.

In 2009, a $13.4 billion dividend payout should be covered by cash generation, the GE Capital payment to the parent company and dispositions totaling about $16 billion, the chart said.

Vulnerable

The S&P outlook change is “another piece of evidence that the economic outlook is extremely negative,” said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. “They’re an extremely diversified company. Their financial aspects have always been hard for investors to fully get their arms around. They’re so big, involved in so many things, their financial exposure does make them vulnerable to a downgrade in this environment.”

Moody’s Investors Service Dec. 2 affirmed its AAA rating and “stable” outlook designation for both the parent company and finance unit. Today, it repeated that assertion for GE Capital.

In its Dec. 2 note, Moody’s said it expects GE Capital to earn at least $5 billion in each of the next several years; that GE Capital can restore its historic payment level to the parent company in 2010; and that the non-finance units will generate cash flow that exceeds $16 billion in 2010.

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Mitsubishi Estate Co. gained 10 percent in Tokyo as traders increased bets the Bank of Japan will reduce borrowing costs this week, while Sun Hung Kai Properties Ltd. added 4 percent in Hong Kong. Angang Steel Co. jumped 12 percent after China said it will boost reserves of raw materials. Honda Motor Co. fell 4.2 percent in Japan, where shares retreated from earlier highs on concern the yen’s advance to a 13-year high against the dollar will shrink exporters’ profits.

“This is a strong statement that the U.S. is doing all it can to support the market and prevent a sharp economic deterioration,” said Masahiko Ejiri, who manages Asian equities at Tokyo-based Mizuho Asset Management Co., which oversees $26 billion. “It’s also a sign that things are getting worse. There will be less room for them to maneuver from here.”

The MSCI Asia Pacific Index added 2.7 percent to 89.82 as of 7:22 p.m. in Tokyo, its highest close since Nov. 10. The gauge has rallied 19 percent since reaching a five-year low four weeks ago as governments from the U.S. to Australia took steps to buttress their economies from the worst financial crisis since the Great Depression.

Japan’s Nikkei 225 Stock Average gained 0.5 percent to 8,612.52. Hong Kong’s Hang Seng Index added 2.2 percent, led by a 4.2 percent advance in China Unicom (Hong Kong) Ltd. after the nation’s second-biggest mobile-phone carrier agreed to buy telecommunication assets from its parent.

Futures Drop

The Standard & Poor’s 500 Index rallied 5.1 percent yesterday after the Fed cut its target rate for overnight loans between banks to a range of zero to 0.25 percent. A senior Fed official indicated that the bank will now shift its policy focus to asset purchases as a means of providing liquidity. Futures on the S&P 500 Index fell 1.8 percent recently.

The Fed’s move came as simultaneous recessions in the U.S., Japan and Europe dragged global equity markets lower, with MSCI’s Asian index down 48 percent from its 2007 peak. Shares on the index trade at an average 12.6 times estimated earnings, a quarter less than the level at the start of the year.

In Japan, expectations the Bank of Japan will cut interest rates rose after the government urged the central bank to do more to support the economy.

Mitsubishi Estate soared 10 percent to 1,450 yen, while Mitsui Fudosan Co., the largest, added 4 percent to 1,342 yen. Sumitomo Mitsui Financial Group Inc., Japan’s third-largest bank, rallied 4.4 percent to 354,000 yen. Lower borrowing costs may increase the attractiveness of property to prospective buyers.

Rate Cut Likelihood

Investors see a 52 percent chance that the BOJ’s policy board will reduce the overnight call rate from 0.3 percent at this week’s meeting, according to calculations made by JPMorgan Chase & Co. based on interest-rate swaps trading, up from 20 percent yesterday morning. The meeting ends on Dec. 19.

Sun Hung Kai, Hong Kong’s largest developer by market value, added 4 percent to HK$68.70. Henderson Land Development Co. climbed 7.8 percent to HK$33.05.

The Hong Kong Monetary Authority lowered its base rate to 0.5 percent from 1.5 percent and asked lenders to follow suit to help prop up the economy. Movements in Hong Kong rates typically track U.S. credit policy because the city’s currency is pegged to the dollar.

“You can see that Hong Kong is reacting and Japan is under a lot of pressure to follow suit in cutting rates,” said Scott Lim, who helps manage the equivalent of $710 million as chief executive officer of MIDF Amanah Asset Management Sdn. in Kuala Lumpur. “The whole region will follow suit.”

Yen Advances

The Fed’s move drove the yen above 88.53 against the dollar for the first time since August 1995, as the rate cut made the greenback the lowest-yielding currency among industrialized nations. A higher yen shrinks repatriated profits for Japanese companies.

Honda, which gets more than half its sales in North America, fell 4.2 percent to 1,891 yen. After the market closed, Japan’s second-largest automaker cut its annual operating profit forecast to 180 billion yen ($2.03 billion) from its previous estimate of 550 billion yen. The Nikkei newspaper earlier said the carmaker would cut its goal to 300 billion yen.

Nissan Motor Co., the nation’s third-biggest automaker, lost 4.1 percent to 302 yen. The company will cut local production by 78,000 vehicles from next month.

China Reserves

Angang Steel, China’s second-largest steelmaker, surged 12 percent to HK$8.65. Zijin Mining Group Co., China’s biggest gold producer, surged 8 percent to HK$4.63. China Oilfield Services Ltd., a unit of the nation’s largest offshore oil producer, rallied 15 percent to HK$6.52.

China’s plan to bolster its materials inventories is among several measures to help the steel, metal and petroleum industries, which have suffered from losses as prices plunged, the Ministry of Industry and Information Technology said yesterday. It didn’t specify the materials to be purchased.

The government also said it will order banks to increase loans to developers of low-priced houses as well as ease ownership limits and lending caps, allowing owners of smaller- than-average apartments to buy a second apartment.

China Unicom climbed 4.2 percent to HK$10.46 after agreeing to buy fixed-line assets for 6.43 billion yuan ($940 million) from its state-owned shareholders. The acquisitions are part of a government plan to let carriers offer both wireless and landline services.

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