Gene Dodaro, acting head of the GAO, said the Fed and Treasury could provide loans to the struggling U.S. automakers under an emergency loan designation.
The above ruling conflicts with the view of U.S. Treasury Secretary Henry Paulson, who has said that the $700 billion in TARP funds administered by the Treasury Department can only be used for financial companies.
However, Dodaro said the TARP legislation "is worded broadly enough" to allow Treasury to lend money to General Motors, Ford, and Chrysler, marketwatch.com reported.
Shares of GM (NYSE: GM) fell 33 cents to $4.57 while Ford (NYSE: F) fell 4 cents to $2.81 on Thursday at mid-day.
Dadaro's evaluation occurs as CEOs from the Big Three make a second case for a bail-out / rescue package in testimony before the Senate Banking Committee Thursday. At the hearing, the automakers are expected to submit business model revisions that outline their plan for viability, including salary and budget reductions by all stakeholders, the elimination of bonuses and needless expenses, and the development of next-generation vehicles. Congress is then expected to begin deliberation on a $34 billion assistance package.
Economist Richard Felson told BloggingStocks Thursday the GAO's advisory opinion may provide cover for Congress, should it be reluctant to allocate rescue funds, either in full or in part.
"Given the stress a cessation of auto operations would place on an already weak U.S. economy, my sense is that Congress will approve an assistance package, but one with performance-requiring teeth," Felson said. "But if Congress is seeking some political cover, it may appropriate only a portion of the funds, then the Fed or Treasury can fund the rest. One can see [U.S. Representative] Barney Frank working out a deal like that with [Federal Reserver Chairman Ben] Bernanke."
Auto Sector/Public Policy Analysis: As Felson noted, Congress most likely will approve temporary government funding for GM, Ford, and Chrysler, but it may seek to limit its political downside, in the event the Big Three don't succeed in the enormous overhaul and transformation of their operations, by cutting a deal to have the Treasury, through existing TARP funds, or the Fed, either backstop or partially fund the effort.
Further, a Fed/Treasury backing of existing/future Big Three bonds opens the door to longer-term private sector sources of capital. If that occurs, the vision and goal of a GDP-contributing, viable U.S. auto sector is achievable.