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Over the weekend, US President George W Bush was weighing several options about how to save the auto industry. The Big Three - General Motors, Chrysler and Ford - have warned that they would run out of cash within weeks if they fail to get a federal bail-out. What would happen to the US economy in general if one of the car companies were to file for bankruptcy? The scene would be rather nasty.

The US authorities made a mistake earlier when they allowed Lehman Brothers to collapse. The fall-out of the Lehman Brothers bankruptcy has undermined confidence in the US financial system and has had a spill-over effect on financial institutions in Europe and elsewhere. We all are in financial distress deeper than it should have been because of the collapse of Lehman Brothers.

Both Bush and President-elect Barack Obama are in favour of saving the auto industry. The devil is in the details. Obama, in particular, does not want to see any one of the auto companies file for bankruptcy while he is about to swear the oath of office in January 2009. GM might not have enough oxygen to live until then.

The White House and congressional Democrats had agreed on a US$15-billion measure that would have extended short-term financing to the industry and set up a "car czar" to make sure the money was used to turn the Big Three into competitive companies.

The bail-out bill set out the terms of the proposed US$15-billion loan, including 7-year (or possibly longer) maturity, 5 per cent rate for the first 5 years (9 per cent thereafter), and the issuance of warrants equal to 20 per cent or more of loan value.

The funds would be made available with a presidential designee working with the three auto companies on their reorganisation. \

This task should be completed by March 31. By which time the government would be offering long-term financing.

On the warrant agreement, the government will receive warrants equal in value to at least 20 per cent of the amount of any loans with the 15-day stock price average prior to December 2, or about $3.47 for GM. If GM received $10 billion, the warrants would roughly double GM's share count, or result in roughly 50 per cent earnings per share dilution.

The bill also called for the creation of a team of one or more executive branch officers ("the president's designee") to facilitate restructuring. Wide powers are delegated to the president's designee, including whether to make and the amount of any disbursement, with the aim of facilitating agreement among key interested parties (like unions, creditors, shareholders) and protecting the public's interest.

The legislation, however, died when Senate Republicans demanded upfront pay and benefit concessions from the United Auto Workers that union officials rejected. The Senate votes were shy by seven.

An agreement was nearly sealed following an amendment introduced by Republican Senator Bob Corker that seemed to bridge many differences. Apparently, the stumbling block was a dispute with labour over the timing of agreed-upon hourly wage/benefit reductions.

Now the buck might be passed on to the Treasury Department to act because Congress has failed in its legislative endeavour. How can the Treasury extend the life support for the auto industry? First, it could provide a bridge loan until Obama steps into the White House and works on a broader legislative bail-out with the Congress again. Second, it might use the money from the $700-billion rescue package for the financial institutions.

For weeks, the White House has insisted that the $700-billion financial industry rescue plan enacted in October should be used solely to help financial institutions. But it made a U-turn on Friday by hinting that it might need to dish out the money from the US$700 billion Troubled Assets Recovery Programme to prevent auto manufacturers from collapsing.

This represents only a short-term solution.

Nobody can guarantee whether the auto companies can recover and have enough money to pay back to the government. If the recession in the US prolongs, chances of the auto companies' survival would be bleak. The broader question of the US car companies' competitiveness must also come into consideration. The Japanese car companies are more competitive at the global level. Imagine that the US auto industry is being taken over by the Japanese carmakers.

Another possibility is to use part, but not all, of the $15 billion left of the first $350 billion allocated to the TARP to back up loans the auto-makers could get from the Fed Reserve's emergency lending programme. That would leave some money to help troubled financial institutions, which Bush has long argued should be the first in line for TARP money.

GM announced on Friday that it would cut an additional 250,000 vehicles from its first-quarter production schedule - a third of its normal output - by temporarily closing 20 factories across North America. The move affects most plants in the US, Canada and Mexico.