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Auto Bailout Aimed at Unions, Not Companies

The billions in aid Congress is considering throwing at Detroit is less of a lifeline to the U.S. automobile industry than it is a bailout of the powerful union representing hundreds of thousands of workers.

The Big Three automakers on Wednesday pressed Congress for $25 billion in loans from the federal government. They stressed that the government will get paid back before shareholders receive a penny in dividends or bondholders get any of their money. What is the one entity that stands in line before the government? You guessed it. The UAW.

The bill circulating in the House of Representatives would allow the automakers to continue making payments to the trust fund established to fund obligations for retiree health benefits.

The automakers established the Voluntary Employee Beneficiary Association in 2007 to get the health plan funding off their books. VEBAs, a popular tool for distressed companies, also help protect retirees' benefits in case the companies go bankrupt, according to Voluntary.com. Obviously both the automakers and the union saw the writing on the wall last year and began making strategic moves to prepare for it.

The only problem is that the automakers ran out of cash to keep feeding the beast. Starting in July, the companies began requesting payment deferrals. The UAW granted the request, but the union is getting antsy for its money.

According to the Detroit News and the UAW Web site, General Motors (GM - Get Report) owes the fund $1.7 billion, plus 9% interest on top of the $5.3 billion payment scheduled for 2010. All said, GM owes $34 billion in cash and stock to the trust fund. Even if it gets a loan, the first payment will be to the trust fund. The government is only charging 5% interest to the automakers. Too bad the government didn't have the union negotiate its terms.

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