President Bush is preparing a last-ditch financial rescue of General Motors and Chrysler after the White House admitted that bankruptcy of either company would deliver a devastating blow to the US economy.
Emergency funding of $14bn (£9bn) is expected to come from the $700bn Troubled Asset Relief Fund, which the White House has said was off-limits to the auto industry until the collapse of bail-out legislation in the Senate last night forced its hand.
"The current weakened state of the economy is such that it could not withstand a body blow like a disorderly bankruptcy in the auto industry," said Dana Perino, White House press secretary. A spokeswoman for the US Treasury, which controls the TARP fund, said: "We will stand ready to prevent an imminent failure until Congress reconvenes and acts to address the long-term viability of the industry."
A source close to the situation told Guardian.co.uk that the manufacturers, who could be days away from filing for bankruptcy, were "working very hard with the administration" to secure a compromise today. GM indicated in a statement today that the TARP is its main hope.
"We are encouraged by the White House's willingness to consider other options, including the TARP programme, for immediate aid to the domestic auto industry. We are prepared to work closely with the administration on possible solutions that could prevent further damage to our nation's economy and also allow us to embark on an aggressive restructuring plan for long term viability," said GM.
President Bush and the US treasury secretary, Henry Paulson, have resisted using the TARP as a funding source for the auto giants, but GM and Chrysler's options are rapidly narrowing. Paulson has $15bn left to allocate in the first $350bn tranche of the fund, which was set up with the explicit mandate of helping troubled banks and financial services companies.
GM has already hired bankruptcy advisers and the New York Stock Exchange opened nervously this morning with the Dow Jones index shedding 109 points to 8456 in early trading – a fall of 1.3%.
GM, Chrysler and the third member of the so-called "big three" Detroit-based auto giants, Ford, employ around 250,000 people directly. Ford, which is the strongest of the three, has warned that it will be endangered if GM and Chrysler go bust because parts of their shared supply chain will also go under as a result.
GM, Chrysler and Ford warned in testimony to lawmakers in Washington last month that the auto industry accounts for one-in-10 jobs in the US.
Fears that a bankruptcy of GM and Chrysler will therefore have a ripple effect through the US economy were weighing on the Dow this morning.