[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
REVIEW OF INDUSTRY PLANS TO
STABILIZE THE FINANCIAL CONDITION
OF THE AMERICAN AUTOMOBILE INDUSTRY
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
DECEMBER 5, 2008
__________
Printed for the use of the Committee on Financial Services
Serial No. 110-147
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California DEBORAH PRYCE, Ohio
CAROLYN B. MALONEY, New York MICHAEL N. CASTLE, Delaware
LUIS V. GUTIERREZ, Illinois PETER T. KING, New York
NYDIA M. VELAZQUEZ, New York EDWARD R. ROYCE, California
MELVIN L. WATT, North Carolina FRANK D. LUCAS, Oklahoma
GARY L. ACKERMAN, New York RON PAUL, Texas
BRAD SHERMAN, California STEVEN C. LaTOURETTE, Ohio
GREGORY W. MEEKS, New York DONALD A. MANZULLO, Illinois
DENNIS MOORE, Kansas WALTER B. JONES, Jr., North
MICHAEL E. CAPUANO, Massachusetts Carolina
RUBEN HINOJOSA, Texas JUDY BIGGERT, Illinois
WM. LACY CLAY, Missouri CHRISTOPHER SHAYS, Connecticut
CAROLYN McCARTHY, New York GARY G. MILLER, California
JOE BACA, California SHELLEY MOORE CAPITO, West
STEPHEN F. LYNCH, Massachusetts Virginia
BRAD MILLER, North Carolina TOM FEENEY, Florida
DAVID SCOTT, Georgia JEB HENSARLING, Texas
AL GREEN, Texas SCOTT GARRETT, New Jersey
EMANUEL CLEAVER, Missouri GINNY BROWN-WAITE, Florida
MELISSA L. BEAN, Illinois J. GRESHAM BARRETT, South Carolina
GWEN MOORE, Wisconsin, JIM GERLACH, Pennsylvania
LINCOLN DAVIS, Tennessee STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota TOM PRICE, Georgia
RON KLEIN, Florida GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida PATRICK T. McHENRY, North Carolina
CHARLES WILSON, Ohio JOHN CAMPBELL, California
ED PERLMUTTER, Colorado ADAM PUTNAM, Florida
CHRISTOPHER S. MURPHY, Connecticut MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana PETER J. ROSKAM, Illinois
BILL FOSTER, Illinois KENNY MARCHANT, Texas
ANDRE CARSON, Indiana THADDEUS G. McCOTTER, Michigan
JACKIE SPEIER, California KEVIN McCARTHY, California
DON CAZAYOUX, Louisiana DEAN HELLER, Nevada
TRAVIS CHILDERS, Mississippi
Jeanne M. Roslanowick, Staff Director and Chief Counsel
C O N T E N T S
----------
Page
Hearing held on:
December 5, 2008............................................. 1
Appendix:
December 5, 2008............................................. 97
WITNESSES
Friday, December 5, 2008
Altman, Edward, Max L. Heine Professor of Finance, Leonard N.
Stern School of Business, New York University.................. 60
Dodaro, Hon. Gene, Acting Comptroller General, U.S. Government
Accountability Office.......................................... 59
Friedman, David, Research Director, Clean Vehicles Program, Union
of Concerned Scientists........................................ 63
Gettelfinger, Ron, President, United Auto Workers (UAW).......... 15
Lester, Damon, President, National Association of Minority
Automobile Dealers (NAMAD)..................................... 65
Mulally, Alan R., President and Chief Executive Officer, Ford
Motor Company.................................................. 16
Nardelli, Robert, Chairman and Chief Executive Officer, Chrysler
LLC............................................................ 18
Rohatyn, Hon. Felix G., FGR Associates, LLC...................... 62
Sachs, Jeffrey D., Director, The Earth Institute, and Quetelet
Professor of Sustainable Development and Professor of Health
Policy and Management, Columbia University..................... 68
Wagoner, G. Richard, Jr., Chairman and Chief Executive Officer,
General Motors Corporation..................................... 20
APPENDIX
Prepared statements:
Barrett, Hon. J. Gresham..................................... 98
Kaptur, Hon. Marcy........................................... 100
Klein, Hon. Ron.............................................. 104
Lynch, Hon. Stephen.......................................... 106
Moore, Hon. Dennis........................................... 107
Perlmutter, Hon. Ed.......................................... 108
Roskam, Hon. Peter J......................................... 109
Altman, Edward............................................... 111
Dodaro, Hon. Gene............................................ 136
Friedman, David.............................................. 150
Gettelfinger, Ron............................................ 154
Lester, Damon................................................ 165
Mulally, Alan R.............................................. 169
Nardelli, Robert............................................. 210
Rohatyn, Hon. Felix G........................................ 220
Wagoner, G. Richard, Jr...................................... 225
Additional Material Submitted for the Record
Frank, Hon. Barney:
Letter to Hon. Nancy Pelosi and Hon. Harry Reid from
Attorneys General of the States of Vermont, California,
Connecticut, Maryland, Massachuestts, Oregon, and Rhode
Island, dated November 17, 2008............................ 262
Statement from Ford Motor Company entitled, ``Systemic Risk'' 264
Statement from General Motors Corporation entitled,
``Collateral Damage''...................................... 266
Capuano, Hon. Michael E.:
Written statement from the University of Oregon, dated
December 3, 2008........................................... 268
Waters, Hon. Maxine:
Letter to G. Richard Wagoner, Jr., dated December 5, 2008.... 271
Letter to Robert Nardelli, dated December 5, 2008............ 272
Letter to Alan R. Mulally, dated December 5, 2008............ 273
Letter to G. Richard Wagoner, Jr., from Hon. John Lewis,
dated December 1, 2008..................................... 274
Article from The New York Times entitled, ``Auto Dealerships
Teeter as Big Three Decline,'' dated November 30, 2008..... 279
REVIEW OF INDUSTRY PLANS TO
STABILIZE THE FINANCIAL CONDITION
OF THE AMERICAN AUTOMOBILE INDUSTRY
----------
Friday, December 5, 2008
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 9:30 a.m., in
room 2128, Rayburn House Office Building, Hon. Barney Frank
[chairman of the committee] presiding.
Members present: Representatives Frank, Kanjorski, Waters,
Maloney, Watt, Ackerman, Sherman, Moore of Kansas, Capuano,
McCarthy of New York, Lynch, Miller of North Carolina, Scott,
Green, Cleaver, Bean, Moore of Wisconsin, Hodes, Klein, Wilson,
Perlmutter, Donnelly, Foster, Speier; Bachus, Castle, King,
Royce, Lucas, Manzullo, Biggert, Capito, Hensarling, Garrett,
Brown-Waite, Barrett, Gerlach, Price, and McCotter.
Also present: Representatives Kaptur and Levin.
Also present: Senator Stabenow.
The Chairman. This hearing will come to order. We are going
to be very strict with time today. Because this is an important
issue, there is a lot to be done. Members will be held strictly
to 5 minutes, which means if you ask a question that takes 4
minutes and 47 seconds to ask, you will get a 13 second answer.
And we cannot accommodate, frankly, sloppiness in asking
questions, and then let that be an excuse for extending the
time. Under our rules, the minimum amount of time we can do for
opening statements is 40 minutes. The Minority has requested
the full allocation, so we will proceed immediately to our 40
minutes of opening statements. We started a half hour early, so
we will get started at 10:00.
We are going to dismiss this panel at 12:30. Because we did
not want it to be simply the auto industry itself, we have a
second panel as well, so we will move as quickly as we can
under the 5-minute rule.
I will begin with my opening statement, and the clock
starts now. Context is especially important this morning. A
failure to some extent of three of our major domestic
manufacturing entities would be a very serious problem in any
case, but in the midst of the worst economic situation since
the Great Depression, it would be an unmitigated disaster. The
Labor Department reported this morning that during the month of
November, there was an increase in unemployment that was quite
substantial; 533,000 jobs were lost. On a year-to-year basis
from December of last year to December of this year, we are
down 1.9 million jobs. We are on track now to lose well over 2
million jobs obviously in that period. We will lose close to 2
million jobs in this year alone. Given that, any effort to
denigrate the negative impact of substantial job loss and
economic cutbacks in this industry has to fall. We operate, as
we said, in this very difficult context.
It is important to note here that--and, again, I guess the
issue is, should we just be very hard-nosed and say let them go
bankrupt? There is a consensus that substantial reorganization
is needed, there is a consensus that a change in the product
mix is needed, there is a consensus, and I congratulate Mr.
Gettelfinger in the Union that economic times being what they
are, everything has to be looked at, including further
concessions which the Union had already made, and there was
some very important ones that were put out there. All of that
can be done by rational people in a sensible atmosphere. What
bankruptcy adds is the ability to walk away from debt. The fact
is that while we have this serious job loss, we continue to
have a serious credit crisis in this country. We have a double
whammy. And permission to these three large entities to stop
paying their debts, that is called bankruptcy, would greatly
exacerbate the credit crisis.
I was given by my colleague from Michigan, Mr. Levin, who
has been, along with the other Members from Michigan, both
Democratic and Republican obviously, very much involved in
this, as well as the Members from Ohio, very important numbers
about what the impact would be if we were to have these
entities stop paying their debts. Now, we have had a pattern of
intervention that this Administration has led of trying to
prevent people from not paying their debts. Not because of
concern for them, but because of the impact it would have on
other people, on the creditors. We have not, on the whole,
bailed out debtors. We have gone to the rescue of creditors.
In every one of those cases, there have been restrictions
imposed on the debtors. That will clearly have to be done here,
and everyone should understand that. The companies have made
some proposals. I hope we will do something, because I think
for us to do nothing, to allow bankruptcies and failures in 1,
2, or 3 of these companies in the midst of the worst credit
crisis and the worst unemployment situation that we have had in
70 years would be a disaster. And one of the things that I do
want to note, that people have said, well, you know, a lot of
mistakes were made, the companies made mistakes, Congress made
some mistakes, we didn't increase CAFE standards, etc. Yes, a
lot of mistakes were made. The relevance of that it is partly
this.
It would be nice if we could line up all the people who
made the mistakes and punish them in a way that would make no
impact on the innocent. I think all of us remember in school
the teachers we hated most were the teachers who said if one
person misbehaved, the whole class would get extra homework. I
don't want to give the whole country extra homework because
automobile executives in the past misbehaved. We have to
separate out unhappiness and anger over things not done in the
past from the consequences now, and that is what we have
focused on. Yes, a lot of mistakes were made. The auto
companies made mistakes, unions made mistakes, politicians made
mistakes. The media hasn't always distinguished itself,
although you are not supposed to say that. The consequence of
all those mistakes is that the country is to some extent held
hostage. We need to free the country. And that is the focus.
Yes, there have to be changes that are made and sacrifices
made. But the focal point is not to punish those who made the
mistakes. It is to prevent further damage to the country, and
it is in that context that this committee will proceed. The
gentleman from Alabama is now recognized for how many minutes?
Mr. Bachus. Five.
The Chairman. Five minutes.
Mr. Bachus. Thank you, Mr. Chairman. Mr. Chairman, I want
to begin by noting that before the present financial crisis
hit, many of the trends in the domestic automobile industry
were positive. The unions had made concessions, the cost had
come down, the quality was up. Perception, I don't think, has
caught up with reality in that regard. The reality is that
Detroit is making good cars. Having said that, our number one
obligation must be the taxpayer. But we must also recognize
that a failure of GM or Chrysler would have a detrimental
effect on America, particularly at a time when our economy is
under such stress. All of us should remember that government
has no money of its own. In order to give, it first has to take
from the American people. As I have said since day one, taking
from the vast majority of citizens whose wages, health
benefits, and pensions plans are less generous than those of
the management and labor force at the Big 3 appears neither
right nor fair.
Personally, the only course I could possibly endorse would
be limited transitional assistance to allow the American
domestic automobile industry to return to solvency and
profitability. But then, only if there is a reasonable
expectation of success. I am convinced that short of a
protected restructuring of General Motors or Chrysler, the
domestic automobile industry will not be successfully remade
and there will be no lasting solution to the considerable
challenges that it faces.
Such a restructuring is essential, not only for GM and
Chrysler, but for the future of Ford and the hundreds of
companies which supply and support all automobile makers in the
United States, foreign and domestic. That is why I have invited
Professor Edward Altman to testify at today's hearing. He
proposes not a bailout, not a bridge loan, but a restructuring
that promises to place the U.S. automobile industry on a path
to long-term viability. Professor Altman's solution--or ones
like it--certainly appears to be preferable to the continued
deterioration and ultimate failure of the domestic automobile
industry with its devastating consequences for the country, the
economy, and the workers and families whose jobs, pensions, and
health care benefits are dependent on the industry.
Let me close by saying it is a solution not by Congress
that I am proposing, but by the industry itself, but with a
supporting role by the U.S. Government, preferably through the
participation of those financial institutions which received
hundreds of billions of dollars of taxpayer money under TARP or
various Federal Reserve credit facilities intended to be used
for loans to the American businesses and manufacturers like GM
Ford and Chrysler and their suppliers. In the event--and I am
very disappointed that lending has not been available--that
taxpayer monies are still necessary to support the
restructuring, monies already appropriated under the 136
program could be utilized. What we need is a solution, not a
first installment. Mr. Chairman, I would like to reserve the
balance of my time.
The Chairman. The gentleman has used 4 minutes. The
gentleman from Pennsylvania is recognized for 5 minutes.
Mr. Kanjorski. Mr. Chairman, we meet today again with
familiar faces, and I hope we are truly driven to success, all
of us today. It is not a question of whether or not we want to
have an automotive industry. I have not met too many people who
think America does not need one. It is a question of whether we
can, and if we can, how do we get to that resolve. I just want
to say that over these last troubling 2 weeks of preparing for
this hearing, I have come to the conclusion that we are still
talking at each other instead of to each other. I am a little
disappointed with the plans submitted because although they are
much better than the plans submitted 2 weeks ago, they are
still tentative and not final.
I listened intently to the testimony yesterday before the
United States Senate, and several elements of that testimony
struck me as being very important and something we should carry
on here. One part of it was the testimony of the expert on the
question of how much would it really cost. In his analysis, I
believe it was Dr. Anders or Ambers, indicated his estimate was
$75 billion to $125 billion. You know, I think at least we have
one realist and that is pretty good. Nothing wrong with that.
At least we know when we buy into this picture, what we are
buying into. As the folks left here 2 weeks ago, it was a $25
billion request. The new submission is a $35 billion request,
and they are adding on the additional $25 billion that is in
the energy bill. That is already $59 billion, so we are not too
far from the good doctor's estimates. He is giving us another
$15 billion to $55 billion. I think that is a reasonable range.
Now, the question is whether we should. As I have concluded
in my own mind, we should maintain an American automotive
industry. There is no question about that. I hear some
arguments made, particularly by Labor, who are friends of mine,
and they said, well, if you could give $200 billion or $700
billion to Wall Street why can't you give $34 billion to the
automotive industry? If we made a mistake in giving $700
billion to Wall Street, and I don't think we did, I think we
made a mistake in how we gave it to them. I don't think the
conditions were sufficient to make sure we accomplish the ends
that we should have had in providing that kind of liquidity to
the market. But that is--even if we made a mistake, it is not a
justification for this Congress to make a second mistake. And
it is time to me that we don't set this off. I think the
automotive industry is as important as Wall Street. And I think
it is all part of the total picture that we have to get to and
correct.
So I wish that argument was not made in terms of, well, you
gave it to them, you now have to give it to us, and then we
have a line out in front of the building here of 432 other
industries, corporations, and others that have needs. Some of
them are going bankrupt in my district, and I am sure they are
going to ask me, ``Well, Congressman, if you gave the
automotive industry all that money why can't you take care of
me and allow me to continue to operate my business and take
care of my family and have a reasonable existence.'' We are not
going to be able to do that. Whether we can take care of the
automobile business really should be determined here and in a
very short few days ahead. I do not think we have time to right
the real conditions and the real provisions that are necessary
for the total recovery of the automobile industry. However, I
suggest we do have time to come up with the $4 billion
necessary for General Motors and potentially $4 billion
necessary in a very short, very small bridge loan for the next
60 or 90 days to give this Congress a chance to return in
January, continue working now until January, but in January in
the new Congress to enact the type of legislation necessary to
accomplish this end.
If we are being practical that is what we should be doing.
This idea that it is late guys, and you have to pass it, you
have to do it, or nothing; I am afraid a lot of people are
overestimating the willingness of a goodly number of Members of
Congress to play chicken. And I think it would be terrible to
experience that game of chicken and see the automotive industry
go down because of it. So I suggest that we need some very
strong activity here to work in conjunction with the Executive
Branch, both the existing Administration and the future
Administration, and the Congress to come up with the conditions
necessary to accomplish an end and finance long-term, for
viability, the automotive industry of America.
The Chairman. Next, the gentleman from Delaware is
recognized for 2 minutes.
Mr. Castle. Thank you, Mr. Chairman. I have no doubt the
extended immediacy of the problem. You don't have to spend a
lot of time, as far as I am concerned, trying to convince us of
that. I think we all know it is there. I also have little doubt
that we as Republicans and Democrats in the House and Senate
would be willing to save the automobile industry in America if
we can, but we need some sort of assurance it will work, not
just your words, but plans, and we are trying to work through
all that now. Then the question becomes, how do we make this
work? Do we go to the bailout situation numbers, some $25
billion to $35 billion? Mr. Kanjorski has just talked about
doing something less on an immediate basis. Do we use the
Financial Services' bailout dollars which have been discussed?
Could the Federal Reserve get involved in that?
Personally, I don't think that you are going to be able to
borrow from the large financial institutions. In spite of the
fact they have gotten advances on money, they don't want to get
into dubious situations themselves at this point, so I think
that is probably not correct. And I tend to agree with the
statements about bankruptcy being probably more negative than
positive in the long-term. So we have to come to closure as far
as all of this is concerned.
I am also concerned, as I think we all are, about the other
jobs out there, the suppliers and the auto dealers. As I look
at it, just based on your numbers, that is more than half of
the jobs involved with the automobile industry before you get
into the related things, such as those who supply those people
and those kinds of issues. So one question I am going to have
for you is the financial stability of those entities, and are
they totally dependent upon you or are there other ways in
which they are going to need help as well? I think that is an
important measure in terms of what we have to worry about here.
And finally, I think we have to worry about oversight and
accountability. If we go back and look at the Financial
Services bailout, that is an area where perhaps we did not
distinguish ourselves, and that is probably not something you
really want to hear. But we may need to be more involved in
sitting down with your people and determining are these plans
which are working, are the steps which are being taken pursuant
to those loans actually working, are we turning this around?
That is a significant part of it. And I hope you would not be
dismissive of that, but embracing of it in a way that we can
all work together. This is taxpayers' money we are dealing
with. We want to protect jobs. We want to make darn sure we
protect those dollars as well with some repayment as far as the
future is concerned. I yield back the balance of my time.
The Chairman. The gentlewoman from California is recognized
for 2 minutes.
Ms. Waters. Thank you, Mr. Chairman, for arranging this
second hearing on America's automobile industry. Several weeks
ago, the automakers came before this committee and spoke in
generalities on why they need assistance from the Federal
Government. At that time, there was no plan for long-term
viability. Now that the automakers have submitted a plan, I am
concerned--they have submitted a plan, but I am concerned about
the plans that will be discussed today and how they will impact
those, such as small car dealers, who are dependent on the auto
industry to earn a living.
Several weeks ago, we were told that a collapse of the Big
3 would lead to the loss of 3 million jobs. Yet it seems that
these plans still involve some paying for workers employed by
the Big 3. GM, for example, states in their plan that they plan
to cut at least 30,000 jobs by 2012. In bailing out the Big 3,
we can't forget the needs of Main Street and the impact these
plans will have on every day working Americans and the
communities in which they live. This is true especially in
light of the fact that we are still in the midst of a
foreclosure crisis and America's struggling homeowners are in
need of assistance. This brings me to the Nation's small car
dealers. In their plans, each auto maker states that they have
too many dealers and need to downsize. Ford says that it plans
to work collaboratively with its dealers to reduce its dealer
network. GM says that it plans to slash its dealer network by
35 percent. Chrysler simply says that it plans to rationalize
its dealer network without providing any specifics. What none
of them say is what the impact this rationalization,
consolidation, or reduction in the number of dealers will have
on those dealers and the local communities and local economies
they support. On November 30th, The New York Times published an
article entitled, ``Auto Dealerships Teeter as Big 3 Decline.''
I am interested, Mr. Chairman, in trying to understand how this
bailout will help the small dealers. I yield back.
The Chairman. The gentleman from New York, Mr. King, is
recognized for 2 minutes.
Mr. King. Thank you, Mr. Chairman. I want to thank you and
the ranking member for conducting this hearing. I want to thank
the gentlemen for appearing today. And I associate myself very
much with the remarks of Mr. Castle. There is no doubt that
this has a severe impact on the economy. The concern I have is
not whether we should do something, but do we know what we are
doing, do we know exactly what it is going to achieve? There is
no doubt that with the $700 billion, we thought we were doing
one thing, and it ends up the Treasury Secretary is doing
something else. And so my concern is, even though we are
talking about taxpayers' dollars, if I thought that the money--
if I was reasonably convinced that the money was going to work,
then I would support it. And I am not saying I won't.
But really that is what I am looking for, is that we will
have some reasonable expectation that whatever we do has a
reasonable chance of working, because no one wants to lose 3
million jobs with the impact it would have throughout the
economy. As the chairman pointed out, I believe it is another
half a million this month are unemployed, and hundreds of
thousands more over the course of the next year, if not more.
So what I am going to be listening to carefully today is, what
are the chances of this working, can we do it in the amount of
time we have available? Mr. Kanjorski is right, we should do
something transitional. But the fact is that the time for
posturing is gone, the time for partisanship is gone. We have
to address this very, very seriously. I think this hearing is a
very sound step in that direction, and I yield back the balance
of my time.
The Chairman. The gentleman from North Carolina is
recognized for 1\1/2\ minutes.
Mr. Watt. Thank you, Mr. Chairman, and thank you for
convening the hearing. I have been conducting my own market
research for the last 2 weeks, actually, in dealerships,
talking to people like Ernel Simpson and George Duran and
Reggie Hubbard and Anthony Wilder, who are salespeople and
owners of local dealerships. And there is a serious problem
exemplified most prominently by Ernel's statement to me that he
didn't sell a single car in October of this year. We know there
is a crisis. People are not buying. And if people are not
buying, there is not going to be any working capital or
turnover of money.
I also went this morning and looked at the next generation
of cars that are out in front of the Botanical Gardens. And I
want to encourage my colleagues, if they have an opportunity
today, to do that. All of them are in the development stage.
But if these manufacturers go into bankruptcy, they will never
get out of the development stage and into the implementation
stage, which is what is necessary to maintain the manufacturing
base here in the United States.
So this is important. I am trying to keep an open mind,
learning as much as I can about the crisis and what we can
reasonably do to bridge this gap. I think we need to do
something, and I am hopeful that we will come up with a
solution. I appreciate the witnesses being here, and I yield
back the balance of my time.
The Chairman. The gentleman from Illinois, Mr. Manzullo, is
recognized for 1\1/2\ minutes.
Mr. Manzullo. Mr. Chairman, thank you for holding this
hearing to give us an opportunity to discuss the restructuring
plans. The main flaw I see in these plans is the assumption
that the demand for cars will naturally rise during tough
economic times. If Congress just gives the Big 3 a bridge loan
to pay their normal operating expenses but does nothing to
increase the demand for the vehicles, we have not solved any of
the long-term problems, and not helped the tens of thousands of
people in my congressional district who are impacted by this
crisis, including the great workers at the Chrysler plant in
Belvedere, which makes the world's finest compact autos, the
Caliber, Patriot, and Compass.
We need to encourage Americans to start buying cars again,
and that is not in any of the plans. We should give Americans
tax incentives, tax credits, to encourage them to buy cars.
None of your plans has any statement, aside from one sentence
on page 26 of GM's, about how we get sales moving again. On top
of this, GM wants to become a commercial bank with the ability
to handle consumer checking accounts and compete with local
banks, credit unions, and local facilities of national banks
that the Big 3 shoved out of the auto credit market years ago,
and which, in fact, have plenty of money to lend to consumers
who want to buy your cars, but which you say there is no money
for American consumers to buy your automobiles.
I look forward to your testimony. I want to make sure that
the people I represent are helped out. But the plans that you
have given and the new plans are woefully insufficient because
they do not address demand.
The Chairman. The gentleman from New York, Mr. Ackerman, is
recognized for 2 minutes
Mr. Ackerman. We don't always have a second chance to make
a first impression. Welcome back. The situation in which we all
find ourselves, certainly with this economy, is not one of your
making. But the condition of the auto industry is one of your
making. We are faced with a reality that we have given away
almost $1 trillion in taxpayer money with what we thought was
some strings attached to a bunch of financial industry people.
You faced the fury around here with the American public of
having really no accountability for any of that money. We are
faced with dealing with that anger and that frustration, and
you are the people who are in front of us right now.
We want to be sure that if we are going to lend you this
money, that you are going to be able to do the right thing and
be able to run your companies. It seems to me that the last
time you were here, maybe you didn't get it. And I think that
coming up with a plan I think maybe you now do, indicated by
the fact that by the seat of your pants, you thought you needed
$25 billion, but when you really figured it out you need about
$34 billion. I don't want to send you home again because it is
just going to get more expensive in another 2 weeks, I am sure.
So you arrive here with this problem in the midst of a
perfect storm that occurred while the creek was already rising
and caught you doing the same rain dance that you were always
doing. And I think we seem to have gotten your attention last
week. Your testimony is going to be very important to us
because we are going to have to make an evaluation--
The Chairman. The gentleman's time has expired. The
gentlewoman from Illinois is recognized for a 1\1/2\ minutes.
Mrs. Biggert. Thank you, Mr. Chairman. Like my colleagues
here today, I am deeply concerned about the state of the U.S.
economy. Rather than looking forward to a cheerful holiday
season, most Americans are facing uncertainty about the
economic times due to unemployment or losses in their savings
and investments. Other Americans are cutting back because of
fear about their future. They have a job and they have savings
but they are worried about how bad the economy might get. They
are not buying, they are holding back to see what happens. What
we all want to know is this. Are the Big 3 auto companies not
selling cars because Americans don't want their cars, they want
better fuel efficiency from their cars, or they can't afford
their cars.
Is it because they can't get financing to purchase a new
car, believe that bankruptcy will make the warranties on their
cars worthless, or think we in Congress will enact some
legislation down the road that makes it more attractive to buy
their cars? Perhaps most importantly, is it just plain fear of
making any large purchase at a time of uncertainty in an
economy like this? We don't know. We don't know whether
granting your request today will mean you won't be back here in
2 or 3 or 4 months asking for more.
I think to start with, I would like the witnesses to
address how they will help dealers move inventory and encourage
American consumers to buy more American cars. Second, I would
like to hear thoughts on how Federal approval of GMAC's holding
company application, and Ford and Chrysler's ILC applications
may help to facilitate auto financing. And third, I would like
to hear how manufacturers plan to ensure that their operations
will become self-sustainable in the long term and guarantee
that taxpayers will not simply be asked to foot the bill. With
those questions in mind, I look forward to hearing from today's
witnesses. Thank you, Mr. Chairman. I yield back.
The Chairman. The gentleman from California is recognized
for 3 minutes.
Mr. Sherman. Thank you, Mr. Chairman. There are those who
are concerned that this proposal is a departure from pristine
capitalism. We don't live in a world of pristine capitalism.
When we look at the heavy subsidies provided by Japan, Germany,
Korea, France, and China to their auto industries, we realize
how insane it would be for us to go forward without a U.S.-
based auto industry. The worst type of job for America to lose
is a manufacturing job, and the worst time to lose a job is
right now. But when we craft the bill, we need to put tough
standards in the bill for three reasons: First, it will
maximize the likelihood that the bill will pass on the Floor;
second, it will minimize the number of executives from other
industries who drive their cars to Washington making that plea,
well, if you did it for the banks and the auto companies, you
need to do it for us; and finally, it is important that we put
tough provisions in these bills, because a careful reading of
the written pronouncements of the automobile companies
indicates that they themselves are not going to adhere to the
kind of tough conditions that the American people expect and
that the auto industry needs.
At the last hearing, I asked a number of questions. For the
record, I have gotten responses. My first was whether the
companies would seek to keep open American plants and close
down plants in other countries. They simply said, no, they
could not provide that assurance. The bill needs to provide
that you can't close a plant without the approval of the
Administration, and hopefully they will use reasonable efforts
to preserve American jobs. I asked whether there would be a
warranty fund so that people buying cars today can be sure that
their warranty will be serviced even if, God forbid, one of
these companies goes bankrupt.
There is no assurance in the plans of that. If we want to
protect consumers and to protect their warranty rights, we are
going to have to put that in the bill. I asked about executive
compensation and whether there would be a $1 million, I didn't
go for this $1 a year thing gentlemen, just $1 million a year
limit on the salary, bonuses, stock options, and pension plan
contributions, the whole executive compensation plan for any
executive. The response was that, no, that assurance could not
be given. If we want that limit to apply to the automobile
industry, we are going to have to put it in the bill.
Finally, and I know it has become symbolic and it can be
regarded as a red herring, but I do think it is something the
American people are now insisting on, and that is the use of
private planes. I know that the executives drove here today,
and that creates this image to the American people that the
days of private luxury aircraft are over. Yet, I am told by the
companies that is misreading the symbol, and so if we want the
limit we have to put it in the bill.
The Chairman. The gentleman from Texas, I believe, is next
for 1\1/2\ minutes.
Mr. Hensarling. Thank you, Mr. Chairman. We were last here
a couple of weeks ago. What has changed is clearly some of the
panelists found an alternative means of transportation to the
Nation's Capitol. The request has gone from $25 billion to $34
billion, so I will be interested to figure out what has changed
there. Here is what hasn't changed. Nobody in this room wants
to see the Big 3 fail. Now, it is a catastrophic consequence
for our Nation. But what hasn't changed also is that every
industry, every industry in America is hurting today. Show me
one that isn't. Show me one that couldn't be assisted and made
more viable and more profitable with an additional $34 billion.
So why the folks before us and not other folks back home.
Something else that hasn't changed is that this year, over half
a million small businesses, the job engine of America, half a
million small businesses will go under, a number of them in my
district, the Fifth District of Texas. They could be saved by
$34 billion. New small businesses could be launched with $34
billion. Here is something else that hasn't changed. Unless
consumers demand more of these vehicles, and unless the labor
cost of the Big 3 become more competitive, $34 billion, $44
billion, $54 billion, name your number, will not solve the
problem. There is a concept of throwing good money after bad. I
am anxious to hear about the plans.
Last but not least, what hasn't changed is the taxpayer is
already $25 billion light on sending money to the Big 3. Now,
you gentlemen haven't received it because it is tied to fuel
efficiency metrics. But there is bipartisan legislation that I
would be happy to support to release those funds to you now,
but seemingly the Speaker of the House doesn't want to move in
that direction for fear of a political battle between the UAW
and the environmental movement. But if it is truly an
emergency, that money should be reprogrammed. I yield back.
The Chairman. The gentleman from Georgia is recognized for
2 minutes.
Mr. Scott. Thank you very much, Mr. Chairman. Welcome back,
gentleman. When you were last here, we talked specifically
about helping the small businesses, the small auto dealers. In
my district in Metro Atlanta, I represent about 31 towns and
cities, and dealers are an integral part of that economy. And I
asked each of you, and each of you agreed, that we would have
this end, this plan. One, that we would make direct capital
accessible for these dealers through the Treasury Department.
That we would also have what we call disaster emergency loans
that are right there available in SBA. Nothing off of your
plate. All it would have to be would be the President or SBA
Director be able to target these. This would help African-
American dealers whom I represent quite a bit in the
Metropolitan Atlanta area. And secondly, to set that $1 billion
aside to be able to give low-interest loans. The problem with
the dealers is they can't get access to capital. And I think a
major part of this would be for you to make sure that is in
there. You agreed to do it at the last meeting. We want to make
sure that is in there if this moves forward. The other part is
the energy efficiency of automobiles. That is why the public is
not buying the automobiles. They are not going to buy these gas
guzzler SUVs. They want smaller cars, energy efficient cars. A
part of the plan should be to make sure you got a marketing
program in there to market these products over the next 90
days, to hurry up and then appeal to the patriotism of America.
America will rise to that and buy American cars if they are
fuel efficient. The other thing I think we really carefully
need to take a look at, and I talk to you Mr. Wagoner, and you
Mr. Nardelli, about this, to really look at merging your two
operations.
The Chairman. The gentleman's time has expired. The
gentleman from New Jersey is recognized for 1\1/2\ minutes.
Mr. Garrett. Thank you. Mr. Chairman, obviously the panel
sitting before you has a lot of experts on how to run an auto
industry. I thank the chairman for holding this hearing. I
understand also why the panel came before us several weeks ago
asking for in essence a blank check with no strings attached. I
think that was because Congress just previous to that gave away
$700 billion to the banks likewise with no strings attached or
no direction to the banks on operation or detailed information
on how the banks will actually use the money. So I think that
explains why you came before. I am pleased that the three
companies have now submitted a more detailed proposal. I do
still have some concerns how these new plans will be the saving
grace for our domestic auto manufacturers.
The purpose of the plans is to provide what is called a
bridge loan to the Big 3 domestic auto manufacturers. My
concern quite candidly is to make sure that this is not a
bridge to nowhere. As I understand it, GM is essentially out of
time right now. So the question is, as we close dealerships in
2012, or restructure the union obligations in 2011, none of
that is going to help us right now. Things have to be done
sooner. I do have concerns with regard to the preemption of
States' rights and how that impacts upon the dealerships, and I
would like to hear some information on that with regard to what
their actual cost savings are in there and how the implications
of implicating the States' rights issues will play out. I also
have concerns that the actual future sales numbers will be
considerably lower than the projected ones in these reports.
So in conclusion, if the Federal Government provides these
temporary loans without the proper restructuring, I think all
we are really doing is kicking the can down the road and
delaying the day of reckoning at the expense of the taxpayer.
And so for the reasons I said before, in addition to the ones
on the demand side that have been raised by several others, I
look forward to your testimony.
The Chairman. The gentlewoman from Florida for 1\1/2\
minutes.
Ms. Brown-Waite. Thank you, Mr. Chairman. Several weeks ago
when you were here, we were thinking of Christmas and the three
wise men. Your method of transportation proved that you were
the three wise guys. I am glad to see that you have turned into
the three wise men in choosing your own products as a method of
transportation here. You are here to tell us that after a
decade of declining sales volume, if it weren't for the
financial crisis, consumers would be buying the cars from
Detroit over the competition. However, the current crisis
facing Detroit is not one created from short-term problems
beyond your control, rather the crisis facing you all comes
from long-term problems of overcapacity, poor corporate
governance, and a lack of foresight.
To be fair, Ford did have the foresight to make
preparations for the future. General Motors and Chrysler,
though, ignored their liquidity problems, probably planning to
come to Congress rather than taking an objective look at
reality. You all continue to act with negligent disregard
toward your duty to plan for future emergencies. As a result,
today we have over 3 million jobs at risk. Fortunately, the $34
billion that you are asking for today is obviously more than
what you asked for the last time and probably less than what
everyone feels you will be coming back for within a reasonable
period of time. That is pretty sad.
As we learned with AIG, these situations can spiral out of
control, and despite the recent lessons, some of my colleagues
want to do for Detroit what already has been done for AIG. Mr.
Chairman, thank you for holding this hearing. I look forward to
hearing from the witnesses.
The Chairman. You are welcome. The gentleman from Texas for
1 minute.
Mr. Green. Thank you, Mr. Chairman. Mr. Chairman, thank you
for not only convening the meeting, but also for your
leadership. It has been dynamic. Mr. Chairman, this is about
the Big 3, but it is also more importantly about the American
economy. At a time when jobs are being lost at an unusual rate,
533,000 recently, unemployment is just up to 6.7 percent, at a
time when we have a shrinking job market, can we afford to put
more than 2 million people out of work? What will happen to
them if this crisis continues to exacerbate to the extent that
we lose the Big 3? They will have to have some sort of
unemployment compensation, they will have to have some sort of
medical benefits, they will have to have some sort of pension
program that is already in place to be cultivated and to be
continued. This is about the American economy. If we don't
focus on the American economy, we will lose our way. Thank you,
Mr. Chairman.
The Chairman. We have three more statements. Let me just
explain. We do this by time. On the Democratic side, we tend to
use more time, and on the Republican side, less time and more
Members. I do want to address, apparently some of my Democratic
colleagues thought I had been discriminating against them in
favor of the Republicans. I will remind people that when we had
our last hearing, it unfortunately coincided unavoidably with a
Republican conference, so some of the Republican members who
were entitled to make opening statements were at the
conference. When they returned, we combined the opening
statement time that they were entitled to with their 5-minute
question time. That is why some of them were given 7 minutes.
Mr. Bachus. Mr. Chairman.
The Chairman. The gentleman from Alabama.
Mr. Bachus. We were told that if we came here on a horse or
in a battery-operated car, we could get an extra minute.
The Chairman. Well, I would say anybody who is here on a
whole horse would get some consideration, but I am not sure
everybody qualifies. The gentleman from South Carolina for 1\1/
2\ minutes.
Mr. Barrett. Thank you, Mr. Chairman. Gentlemen, I am a
little unclear what we are doing here today trying to evaluate
the competitiveness of business plans and determine whether
taxpayer money should be used to save your business. And I
don't mean any disrespect, but 2 weeks ago you came here on
private jets telling us how your businesses were failing and
asking American taxpayers to bail you out. I understand your
situation. I appreciate it and am concerned about the jobs that
would be lost as a result of you closing your doors. None of us
here want to see that happen. But as we sit here, thousands of
people across this country who are watching this hearing are
losing their jobs. I know these are tough times, but the
discussions we are having here doesn't make sense to me.
We are sitting here trying to evaluate the business plans
of corporations. But trust me, Congress has no authority to
tell people how to spend money efficiently and effectively, and
we certainly can't prevent the direction of the marketplace. I
am concerned that businesses are rightly going to start
thinking they can just come to Uncle Sam and we will bail them
out. And we are broke, flat broke. The Federal Government
should be creating an environment where all businesses can
succeed, not micromanaging the affairs of private businesses
and industries and determining which businesses can fail and
which can succeed. I would ask for my whole statement to be
submitted for the record, Mr. Chairman.
The Chairman. The gentleman from Georgia is recognized for
1\1/2\ minutes.
Mr. Price. Thank you, Mr. Chairman. Over the past year, we
have seen an unprecedented level of government intervention
into the market, and there seems to have been enough time and
enough pain to pose this question, how is it working? One does
not have to be an expert to judge the efficacy of recent
government bailouts. Congress is appropriately in the position
of asking some very difficult questions. One that must be
addressed is whether or not the congressionally-backed taxpayer
safety net that has been cast far and wide has only served to
prolong and deepen our current financial downturn while at the
same time burdening an unconceivable and enormous debt on our
children, our grandchildren, and now, yes, even our great
grandchildren.
We are in real danger of politicizing our entire economy.
And there is historic risk in that, for it has always been the
absence of politics in the greater economy that has allowed
more success for more people than any nation in the history of
mankind. In a political economy, Washington is the judge.
Washington picks the winners and losers. Washington decides
what products and services we need. We all want the American
auto industry to survive and to thrive. My sense is that the
concessions necessary by all of the involved stakeholders to
ensure a robust American automobile industry will require a
legally expedited restructuring process. And I would ask our
guests what is it specifically that prevents you from
supporting this more tried and true, and dare I say American
solution?
The Chairman. The final statement, the gentleman from
Michigan, Mr. McCotter.
Mr. McCotter. Thank you, Mr. Chairman. A preliminary point,
I am not going to inquire about your travel arrangements
because I am a Congressman, not a Conde Nast travel agent. And
right now, it is a very anxious holiday for working families in
Michigan in our entire American manufacturing sector. For that
reason, later today, I will be putting out what I hope will be
four points for a principled bridge loan that can be approved
by this Congress, the most salient of which for the current
proceedings is that half of the bridge loan come from the TARP
funds for the prevention of foreclosures and that half of the
funds come from the Department of Energy loans for the
preservation of the research and development of green
technologies in which the auto industry already engages. And of
course, the ultimate maximum taxpayer protections, the best
protection of which is a viable restructuring plan, which I
believe you have put forward. As to why this is necessary
economically, we have heard much about a ripple effect, how one
manufacturing job's loss can cause the loss of 7 to 10 more
jobs.
My friends, that is not a ripple effect, that is a tsunami
effect, especially in these critical times. And as we debate
this issue, let us look past the people in the room at the
people who are employed in the manufacturing industry and
remember the human cost of the decision that we will render. In
the final analysis, I believe, I agree in some part with what
the President said on this issue, ``No matter how important the
autos are to our economy, we don't want to put good money after
bad.'' Yes, I recognize the rich irony in that Administration's
statement. But what I also recognize as we debate this issue is
a simple proposition.
In America, the only thing too important to fail is a
working family. And as we address the bridge loan for the auto
industry let us not fail these working families who have
entrusted us with these positions in Congress. Thank you.
The Chairman. We will now begin the statements. I, at this
point, would ask unanimous consent to enter into the record
submissions from General Motors and Ford on the extent to which
failures on their part would have reverberation throughout the
economy. The Ford statement is headed Systemic Risk, the
General Motors statement is headed Collateral Damage. And there
are other Members who are submitting things for the record; we
will get unanimous consent to do so. I also ask unanimous
consent that colleagues who are not on the committee be allowed
to join us on the dais.
I see the gentleman from Ohio who has a long interest in
this. And any other Members, particularly from those States
obviously where there is a significant manufacturing presence,
if there is no objection, will be invited to join us on the
dais, but not of course be able to ask questions because of the
time constraints. Is there any objection? I hear no objection,
so that request is granted. And
We will now start with our statements. I am going to begin
with the head of the United Auto Workers, Mr. Gettelfinger,
because at least for many of us in this committee, the Union is
not an afterthought. Mr. Gettelfinger.
STATEMENT OF RON GETTELFINGER, PRESIDENT, UNITED AUTO WORKERS
(UAW)
Mr. Gettelfinger. Mr. Chairman, distinguished members of
the committee, good morning. And thank you, Mr. Chairman, for
giving the women and men of UAW a voice in this hearing. The
UAW believes it is imperative that the Federal Government act
this month to provide an emergency bridge loan to General
Motors, Ford, and Chrysler. Without such assistance, General
Motors and Chrysler could run out of funds in the near future
and be forced to liquidate. The collapse of these companies
would inevitably drag down numerous auto part suppliers which
in turn could lead to a collapse of Ford. The UAW supports
conditioning any emergency bridge loan funds both on strict
accountability measures and on the companies pursuing
restructuring plans that will ensure the viability of their
operations in the coming years.
For such restructuring plans to succeed, we recognize that
all stakeholders, equity and bond holders, suppliers, dealers,
workers, and management must come to the table and share in the
sacrifices that will be needed. The UAW and the workers we
represent are prepared to do our part. We are continuing to
negotiate over ways to make the operations of General Motors,
Ford, and Chrysler more efficient and competitive. Workers and
retirees have already stepped forward and made enormous
sacrifices. Thanks to the changes in the 2005 and the 2007
contracts, the labor gap with the foreign transplant operations
will be largely or completely eliminated.
The UAW recognizes that the current crisis may require
workers to make further sacrifices. For example, we recognize
that the contributions owed by the companies to the retirees
health care VEBA fund may need to be spread out, and that there
may need to be adjustments in other areas of the contract. But
the UAW opposes any attempt to make workers and retirees the
scapegoats and to make them shoulder the entire burden of any
restructuring. Wages and benefits only make up 10 percent of
the cost of the domestic auto companies. The UAW also submits
that it is not feasible for Congress to hammer out the details
of a complete restructuring plan during the coming weeks. There
is simply not enough time to work through the many difficult
and complex issues associated with all of the key stakeholders,
as well as changes in the business operations of the companies.
What Congress can and should do is put in place a process that
will require all of the stakeholders to participate in a
restructuring of the companies outside of bankruptcy.
This process should ensure that there is fairness in the
sacrifices and that the companies will be able to continue as
viable business operations. This process can begin immediately
under the supervision of the next Administration. By doing
this, Congress can make sure that the emergency assistance is
indeed a bridge to a brighter future. Contrary to the
assertions by some commentators, in the present environment, a
so-called prepackaged Chapter 11 bankruptcy is simply not a
viable option for restructuring the Detroit based auto
companies. Research has indicated that the public will not buy
vehicles from a company in bankruptcy.
In addition, attached to my testimony is a detailed
analysis prepared with the assistance of experienced bankruptcy
practitioners. The analysis explains that a prepackaged
bankruptcy is not a feasible option for the domestic auto
companies because of the size and complexity of the issues that
would necessarily be involved in any restructuring, including
relationships with thousands of dealers and suppliers and major
changes in business operations. The UAW believes that the
recent actions by the Federal Government to provide an enormous
bailout to Citigroup reinforces the case for providing an
emergency bridge loan to the Detroit-based auto companies.
If the Federal Government can provide this type of blank
check to Wall Street, it should also be able to provide an
emergency bridge loan to General Motors, Ford, and Chrysler,
especially since these companies would be subject to strict
accountability and viability requirements.
In conclusion, the UAW believes it is imperative that the
Federal Government act this month to approve an emergency
bridge loan to GM, Ford, and Chrysler to enable them to
continue operations and to avoid the disastrous consequences
that their liquidation would involve for millions of workers,
retirees, and families across our entire Nation. Thank you, Mr.
Chairman.
[The prepared statement of Mr. Gettelfinger can be found on
page 154 of the appendix.]
The Chairman. Thank you, Mr. Gettelfinger.
Mr. Mulally.
STATEMENT OF ALAN R. MULALLY, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, FORD MOTOR COMPANY
Mr. Mulally. Good morning, Chairman Frank, Congressman
Bachus, and members of the committee. Since the last hearing, I
have thought a great deal about the concerns that you have
expressed. I want you to know I heard your message loud and
clear. On Tuesday, you received Ford's detailed and
comprehensive business plan, and I appreciate the opportunity
to return here today and share Ford's vision and progress in
becoming a profitable growing company. You were clear that our
business model needs to change. I absolutely agree. That is why
I came to Ford 2 years ago to join Bill Ford in implementing
his vision to transform our company and build a greener future
using advanced technology. Let me share with you what we have
done to change from how we used to do business to how we do
business now.
It used to be that we had too many brands. Now, we have a
laser focus on our most important brand, the Ford Blue Oval. In
the last 2 years, we sold Aston Martin, we sold Jaguar, and we
have sold Land Rover, and reduced our investment in Mazda. And
this week, we announced we are considering the sale of Volvo.
It used to be that our approach to the customers was, ``If
you build it, they will come.'' We produced more vehicles than
our customers wanted, and then slashed prices, hurting the
residual values of those vehicles and hurting our customers.
Now, we are aggressively matching production to meet the true
customer demand.
It used to be that we focused heavily on trucks and SUVs.
Now we are shifting to a balanced product portfolio, with even
more focus on small cars and the advanced technologies that
will drive higher fuel economy in all of our vehicles, no
matter what their size.
It used to be that our labor costs made us uncompetitive.
Now we have a ground-breaking agreement with the UAW to reduce
labor costs, and we appreciate the UAW's continued willingness
to help close the competitive gap. It used to be that we had
too many suppliers and dealers. Now we are putting in place the
right structure to maximize the efficiency and the
profitability for all of our partners. It used to be that we
operated regionally, European cars for Europe, Asian cars for
Asia, and American cars for the United States. Now, we are
leveraging our global assets--innovation, technology, and our
scale--to deliver world-class products to every market.
It used to be that our goal was simply to compete. Now we
are absolutely committed to exceeding our customers'
expectations for quality, fuel efficiency, safety, and
affordability. This is the Ford story. We are more balanced; we
are more efficient; we are more global; and we are more
focused. In short, we are on the right path to becoming a
profitable growing company for all of us.
We have moved our business model in a completely new
direction, in line with the most successful companies and
competitors around the world. And as a result of our progress,
we made a profit in the first quarter of this year, 2008.
Unfortunately, we all are facing a severe economic downturn
that has slowed our momentum. Despite this downturn, Ford does
not anticipate a near-term liquidity crisis. In fact, we expect
our automobile business to be profitable in 2011. But we do
support a government bridge loan because it is critically
important for the United States auto industry.
Specifically, Ford requests access to $9 billion in bridge
financing, something we hope we will not need to use. Instead,
as we continue to drive change in our company, this line of
credit will serve as a critical safeguard if events require it.
And if we did need access to this loan, we would use the money
to continue our aggressive transformation and restructuring.
Ford is an American company, and it is an American icon. We
are woven into the fabric of every community that relies on our
cars and trucks and the jobs our company supports. The entire
Ford team, from employees to shareholders, suppliers to
dealers, is absolutely committed to implementing our new
business model and becoming a lean, profitable company that
builds the best cars and trucks on the road for our customers.
There is a lot more work to do, but we are passionate about
the future of Ford. In fact, we invite you to visit us in
Dearborn to kick the tires, look under the hood, and talk to
our employees. We hope you will join us and see for yourself
the progress we are making to develop the vehicles of the
future.
[The prepared statement of Mr. Mulally can be found on page
169 of the appendix.]
Ms. Waters. [presiding] Thank you very much.
Mr. Nardelli.
STATEMENT OF ROBERT NARDELLI, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, CHRYSLER LLC
Mr. Nardelli. Thank you, Madam Chairwoman.
I appreciate the opportunity to represent the one million
people who depend upon Chrysler for their livelihood. Before I
answer your questions regarding our loan request, let me state
clearly why we are here.
Chrysler requests a $7 billion loan to bridge the current
financial crisis. And in exchange, Chrysler is committed to
continue our restructuring, including negotiations and cost-
savings concessions from all constituents, invest in fuel-
efficient cars and trucks that people want to buy, and begin
repayment of our government loan in 2012. I also want to
reinforce the need for Chrysler Financial to receive immediate
assistance from TARP, as their continued vitality is as
critical an assumption as our request.
Chrysler requires this loan to get back on the
transformation that began 1 year ago. As a newly independent
company in 2007, Chrysler was on track for financial
profitability. We eliminated more than 1.2 million units, or 30
percent of our capacity. We reduced our fixed cost, $2.4
billion, and separated more than 32,000 workers, including
5,000 on the Wednesday before Thanksgiving, or 25 percent of
our salaried workforce. And at the same time, we have invested
more than a half a billion dollars in product improvement in
our first 60 days of independence. We improved our J.D. Power
quality scores and reduced our warranty claims by 29 percent
and, as a result, through the first half of 2008, Chrysler met
or exceeded its operating plan and ended the first half of the
year with $9.4 billion in unrestricted cash.
We are here because of the financial crisis that started in
2007 and accelerated at the end of the quarter of 2008. As
consumer confidence fell and the credit markets remain frozen,
the lowest U.S. auto sales in more than 20 years put tremendous
pressure on our cash position. U.S. industry sales fell from
$17 million in a year, in 2007, to a monthly annualized rate of
$10.5 million just last month, a 6.5 million unit decline.
So what does that mean for Chrysler? It is a 10 percent
market share. It translates to the loss of 650,000 vehicles, or
roughly $16 million in lost revenue opportunity this year
alone. With such a huge hit to our sales and revenue, Chrysler
requires the loan to continue the restructuring and fund our
product renaissance.
Chrysler has a sound plan for financial viability that
includes seeking shared sacrifice from all constituents. We
have identified approximately $4 billion of potential cost
savings in improvements that have been included in our
viability plan that we have submitted. We are committed to
negotiate with all constituents to achieve our targeted
savings.
Our plan also includes producing high-quality, fuel-
efficient cars and trucks that people want to buy, while
supporting our country's energy security and environmental
sustainability goals.
For the 2009 model year, 73 percent of our products will
offer improved fuel economy compared with 2008. ENVI is our
breakthrough family of all-electric and our range-extended
electric vehicles, similar to the one that we have parked
outside.
Chrysler's long-range product plan is robust, realistic,
and it is green. The plan features 24 major launches from 2009
to 2012. It includes a hybrid Ram truck, our first electric-
drive vehicle will be out in 2010, with three additional models
by 2013.
A key feature of Chrysler's future is our capability as an
electric vehicle company. Through our GEM or neighborhood
electric vehicle division, Chrysler is the largest producer of
electric-driven vehicles in the United States. Combined with
new products from our ENVI group, we expect to have 500,000
Chrysler electric-drive vehicles on the road by 2013.
Chrysler will continue to aggressively pursue new business
models that do include alliances, partnerships, and
consolidation. This model is currently successful in helping
Chrysler increase effective utilization of our manufacturing
capacity. For example, in North America, Chrysler manufactures
all Volkswagen minivans and, beginning in 2012, will produce
all of Nissan full-size trucks.
So let me say in conclusion that I recognize that this is a
significant amount of public money. However, we believe this is
the least costly alternative, considering the depth of the
economic crisis and the options we face.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Nardelli can be found on
page 210 of the appendix.]
The Chairman. Before I get to Mr. Wagoner, I want to make
an announcement for us. Managing this fairly is not always
easy, but many of the Members got to ask questions of the auto
industry and the Union last time, and then others asked of the
second panel. I am going to reverse that. I am going to begin
by recognizing any Member on the Democratic side who did not
get to ask questions of this panel. We will then go to others.
So I just tell you that in advance so you have a chance to
formulate your questions. We will then pick up the regular
rotation.
Mr. Wagoner, please go ahead.
STATEMENT OF G. RICHARD WAGONER, JR., CHAIRMAN AND CHIEF
EXECUTIVE OFFICER, GENERAL MOTORS CORPORATION
Mr. Wagoner. Thank you very much, Mr. Chairman, and
committee members.
Let me start out by expressing our sincere appreciation for
the chance to come back to talk to you again. We know this is a
time when you normally are with your constituents.
I also wanted to thank the Speaker and the Senate Majority
Leader for the very clear direction which they have provided as
to the expectations as to what should be included in the plan.
General Motors this year is celebrating its 100th
anniversary as a company. As we begin the preparation and
finalization of this plan, we thought back over those 100 years
and the many successes of the company, but we also thought
about the mistakes that the company had made and how we have
learned from those mistakes. We applied all of that knowledge,
both our successes and our mistakes, as we put together the
comprehensive plan which we have submitted to you.
We thought about things we do best, such as when we are
pursuing technological excellence in leadership. We thought
about the fact that we always have to pay attention to make
sure we are cost competitive, and that we do best when we have
close alignment between our company's goals and the goals of
the country.
The plan that we have submitted is one that I and the whole
General Motors team believes in and believes we can accomplish.
The plan shows why GM needs temporary government funding, how
that funding will be used, how we intend to repay taxpayers,
and why funding is beneficial to the U.S. economy as well.
In some ways, the plan accelerates and expands
restructuring that we have been undertaking for the last
several years. But in many ways, in fact, the plan is a
blueprint for a new General Motors for our second century. The
key elements of the plan are based on much more conservative,
realistic industry volumes than we have historically had, and
also it is comprehensive in that it addresses both operating
competitiveness and balance sheet restructuring. The key
elements of the plan are a commitment to new technology,
particularly in the advanced propulsion area and the creation
of green jobs, an increased production of fuel-efficient
vehicles, a reduction in focus in a number of our brands,
models and retail outlets, further manufacturing and structural
cost reductions, full labor cost competitiveness with foreign
manufacturers in the United States, a significant restructuring
of our balance sheet, and continued suspension of common stock
dividends, as well as changes to executive and board
compensation and closure of our corporate aircraft operations.
These and other tough, but necessary actions will position
the company for medium and long-term success. This success is
achievable if we can weather the global financial crisis and
lowest level of U.S. industry sales in the last 50 years on a
per capita basis. To that end, our plan requests, respectfully,
$12 billion in short-term loans and a $6 billion line of credit
to cover the downside scenarios. We are seeking an immediate
loan of $4 billion and a second draw of up to $4 billion in
January. Our intent is to begin repayment as soon as 2011, and
full repayment by 2012 under the baseline industry forecast in
our report, and warrants would allow taxpayers to benefit if GM
share prices increase.
We also propose as part of our plan the creation of a
Federal oversight board which would facilitate the
restructuring negotiations, review the plans on a regular
basis, and act to protect taxpayers.
GM has been an important part of American culture for 100
years, most as the world's leading automaker. We are here today
because we have made mistakes that we have learned from,
because forces beyond our control in the credit markets have
pushed us to the brink and, most importantly, because saving
General Motors and all the company represents is a job worth
doing.
Thank you very much. I look forward to your questions.
[The prepared statement of Mr. Wagoner can be found on page
225 of the appendix.]
The Chairman. Let me have on the Democratic side the first
Member in seniority who did not ask last time, the gentlewoman
from New York. Remember, 5 minutes.
Mrs. McCarthy of New York. Thank you, Mr. Chairman. I
appreciate the testimony that we have heard.
Last night, I had the opportunity to look at your business
plan models, but I think we still have the problem of the
American people trying to understand why we need to help all of
you. Many of us understand, we are going around it in many
different ways. I certainly have heard from all my dealerships
in my district.
But the final economy, the final economy and how is it
going to affect this whole country if we allow one or all of
you to fail. And what about the dealerships and the
reconstruction of what you are planning on doing? If you go
into bankruptcy versus if you have a bridge loan, how is that
going to help those dealerships across the country to try to
keep their businesses open?
Mr. Wagoner. As we have discussed somewhat in our report,
the analysis that we have seen suggested if an auto
manufacturer goes into bankruptcy, that company will lose a
significant amount of its sales. Under that scenario, it would
obviously have a huge ramification for those that sell our
products, our dealers, so we would expect to see similar dire
consequences.
Mrs. McCarthy of New York. What I am trying to get at, and
we had this, unfortunately, with Mr. Paulson when he was trying
to explain why we needed to do the bailout going back, the
American people don't understand the words you are using. Put
it down to dollars and cents on basically what it is going to
cost this economy if we let you go, and what is the domino
effect going to be across the whole country.
Mr. Nardelli. From a Chrysler perspective, I just want to
reinforce a couple of comments I made in my opening comments of
the importance of our financial support, our financing
companies. They are inseparably linked. As of Saturday,
Chrysler had over 240 dealers that have gone bankrupt because
the finance company has not gotten any funds from TARP to be
able to improve the liquidity to the consumer or to our dealer
with relative to capacity. We have another 250 dealers that are
on credit hold. That represents about 63,000 units on an
annualized basis that are gone from our business plan. Of our
3,300 dealers, there are about 140,000 employees that they
currently have on their payroll. These are men and women that
stretch across this entire country, metro, urban, you name it.
So this would be a tremendous impact if Chrysler went down just
on the dealer network alone, plus there are 30 million Chrysler
owners in the market today whose car value would depreciate
significantly on future trade-in, and they would not be able to
get parts and service to maintain them. I know there have been
several questions raised about the dealers. These are the men
and women, these are the entrepreneurs, these are the small
businesses that we have to keep alive.
Mrs. McCarthy of New York. I guess what I am trying to get
is a dollars and cents; that is what the American people
understand. And we went through this again with Secretary
Paulson. I can go home and talk to my constituents and tell
them what it is in dollars and cents and why we have to do what
we have to do. It is a shame that none of you can come up--and
I think, going through some of the paperwork, you actually had
a dollar and cents on what it is going to cost this economy.
All right. If the U.S. financial system, Detroit Three plus
suppliers, create a $1.1 trillion gross exposure to the U.S.
financial system, and at least a $650 billion net exposure,
those are the dollars and cents that the American people
understand when we are trying to say, if we give you this
bridge loan, how much is it actually going to save the economy
across this whole country? That is the point I am trying to get
across. You have to learn how to speak to the American people
when you are in testimony in front of this.
We understand what you are trying to do. The American
people have to understand what we are trying to do to help them
because this is a political situation here.
Mr. Wagoner. Can I just comment that you are correct, the
data of that is the impact on the financial system of our
financial obligations. And I think obviously you can add to
that multiples as far as the impact on the real economy, the
loss of jobs, the closure of dealerships, the impact on the
supply base. So that number would be a huge increment on the
number that you cited.
Mr. Nardelli. Just on the three of us up here, the
financial institutions would be exposed over $300 billion alone
in what they have in financing to the three manufacturers here
at the table.
Mrs. McCarthy of New York. Thank you.
The Chairman. The gentleman from Delaware.
Mr. Castle. Thank you, Mr. Chairman.
Mr. Gettelfinger, I would just like to thank you. We often
fought the Union and what they have done in this circumstance,
and maybe there is some proper attribution there, but I think
you have made some hard decisions, and you show willingness to
do more and we appreciate that. My questions are not for you,
but I did want to make that statement.
I do want to ask the other gentlemen about something I
mentioned in my opening statement, and that is the other
aspects of the whole automobile business. As I look at the
numbers of the Center for Automotive Research saying that some
3 million people can lose their jobs, I think about 240,000
directly relate to you, but a lot relate to the other aspects
of the business, and the most immediate ones are our suppliers,
parts and whatever it may be, and also the auto dealers. And my
question is, should we be considering doing anything for them?
Should they be at this table, or is it your judgment that if we
are to restore you to profitability, if we have more Americans
buying American cars, that would suffice in terms of continuing
what they are doing? I point out that some 80 percent of these
suppliers have overlaps, that is, they deal with more than one
of you, which means if any one of them fails because you fail,
it could affect everybody else. So there is a tremendous amount
of economic involvement and engagement as far as that is
concerned. It is fine that you come here and say what you need.
I have read your plans and I understand those needs are there.
And we clearly, I think, want to do something if we can work
out what it is exactly we are going to do. But are we missing a
step in terms of not helping any of them directly with respect
to all of this? Or, as I said, just restoring you to
profitability would resolve that problem? If you could give
brief answers to that.
Mr. Wagoner. Yesterday, at the hearing in the Senate, we
had a supplier, the president of Johnson Controls, speaking,
and he spoke I think eloquently in support of our proposals and
made the observation that it is critical, first and foremost,
that the OEMs survive and prosper. That is the key for the
suppliers' success. But we certainly have been dealing with a
record number of supplier restructuring over the last 5 years.
It has affected us all significantly. So our specific plans
cover the needs of General Motors, but I do think it is fair,
your comment about that some of the supply base remains at
risk. The best thing I think we can do is grow automotive
demand, as you stated, and have us continue to produce cars and
trucks. But some of them continue to be in very tight
circumstances as well, as you indicate.
Mr. Nardelli. The short answer for Chrysler is I have
talked with our National Dealer Council and I have talked with
our National Supplier Council, and we have gotten tremendous
support that the best thing that could be done is to have a
strong OE to be able to provide the continuity of new products
and have the confidence from the consumer standpoint that we
are viable, and therefore result in solid sales.
Mr. Mulally. I would just add the economy and credit.
Mr. Castle. Okay. Just on another subject, very quickly. If
this does not work, I mean, we have seen your plans and we have
heard your testimony here today in terms of what your needs
are, and Ford having a little bit of a delayed need or whatever
it may be. But if this does not work, have you thought about
what the next steps would be? I don't know how long ``work''
means, but maybe within 6 months to 18 months, or whatever,
your sales are not what you would have anticipated, you have
consumed the money that we have loaned you to, and then you are
in a circumstance where you come back here and ask for more
money, and you are asking in some cases for sage money as it
is, or do you consider bankruptcy at that point? Can the large
banks at that point come through with loans? I am sure you have
explored it with your lenders previously, consolidation, issues
such as that. I didn't sense that in your written statements or
in your oral testimony here today. But my concern is, what if
this doesn't work? What might be the steps at that point? It is
still very important that we try to salvage the American
automobile business if we can.
Mr. Wagoner. Congressman, I thought the instructions that
we had for the submissions of the report were very helpful in
that they specifically asked us to cover a downside scenario as
to U.S. industry volumes. And so we asked our people to look at
what they thought would be an extreme extended downturn. We
used industry volumes, which in the last 2 months have been
very difficult, and took that level of industry for all of 2009
and then grew it only very gradually, recovering to 12.8
million units by 2012. If you have 4 years in a row running
from 10.5 to 12.8 million units, this is the kind of automotive
performance we haven't seen for decades in the United States,
frankly. And under that scenario, we believe that we can rely
on the 12-plus $6 billion credit line and actually begin to pay
some of the money back in 2010.
The Chairman. Thank you. The next Democrat who did not get
to question this panel, Mr. Wilson.
Let me say that we did not keep the list, but we will check
afterwards, so--
Mr. Wilson. I knew you would. Thank you, Mr. Chairman.
In Ohio, we appreciate well the interlocking relationship
between the Big Three and certainly your suppliers. Do I
understand you that the failure of one of the Big Three or one
of the major suppliers could bring the auto industry down
altogether?
Mr. Wagoner?
Mr. Wagoner. Yes, that is our view.
Mr. Wilson. Is there securitization for the suppliers,
then, tied in with what is going on with the bridge loans that
are being discussed for the Big Three?
Mr. Wagoner. The specific requests that we have for GM
relate to GM's funding only. We are working closely with our
suppliers. And as Mr. Nardelli said, the strong message we get
from our supplier council on a regular basis is that what we
can do most to help them is to ensure the viability of GM and
continue to work closely with them. And I think you know, but
when an individual supplier has a specific circumstance of
tight liquidity, or whatever, we regularly work with them on a
one-on-one basis to do our best to help them get through tough
times, but we don't have a specific pot of funds here to
support broadly the supply base.
Mr. Wilson. I am just wondering, if I can, Mr. Chairman, if
that should be part of the language. Because if we get the Big
Three propped up, and we hope they will be and will be
successful, we also need to be concerned about the major
suppliers.
Thank you.
Mr. Wagoner. That could be helpful.
The Chairman. The gentleman from New York, Mr. King.
Mr. King. Thank you, Mr. Chairman.
Again, I want to thank the witnesses for their testimony.
And as I stated in my opening statement, the concern I have
is that, if we do provide the loans, the bridge loans, that we
don't know exactly how much is really needed. For instance,
last week it was $25 billion, now it is $34 billion. There was
testimony yesterday that over $100 billion could be what is
actually required. And to follow up on what Mr. Castle said, I
am looking for some reasonable assurances that as we go
forward, this will work.
Now, Mr. Gettelfinger is here today, and I am not trying to
pinpoint the UAW at all. But in the testimony, Mr. Nardelli,
for instance, you spoke of continuing to negotiate cost
savings. Now, that is in the future. If the money is given, for
instance, what assurances do we have that those negotiations
will continue between the UAW--and I know there are others
besides UAW as far as the parties that have to be negotiated
with--what assurances do we have that once the money is there,
the negotiations will continue, and we won't be back here 6 or
8 months from now saying, we got the money up front, and
therefore we sort of put this on hold, sort of the way the
American people were doing with gas prices, when they were $4 a
gallon, $4.50 a gallon, they were in a panic. Now that it is
back under $2, and they are forgetting the potential crisis, I
am wondering, can we be assured that you will not forget how
important and how vital this crisis is and that the temporary
money you get will not put off those negotiations?
Mr. Gettelfinger?
Mr. Gettelfinger. Thank you very much for the question. I
would like to first of all say that, compare this to a ballpark
right now. In 2005 we went on first base, 2007 we went on
second base. Just recently, this week, we are on third base.
Other participants have not even entered the ballpark yet. We
are prepared, as I have stated in my testimony, to go back to
the bargaining table. In fact, we took action this week, but we
think everybody should be at that bargaining table. We think
the board of directors, we think the management, suppliers,
dealers, equity holders, and especially creditors should be at
the table. And we believe that there should be equal sacrifice.
But we also believe that the men and women of the UAW who have
stepped up should be given recognition for the three
negotiations in which we have already made major concessions.
But yes, sir, we are willing to go back to the bargaining
table, providing everybody else comes to the table as well.
Mr. King. Now, if I could ask the auto executives. You
heard Mr. Gettelfinger say it sounds like almost ongoing
negotiations. Do you feel the other parties will be at the
table? Do you feel that you can make the type of progress that
has to be made, that Mr. Gettelfinger believes has been made
with his people, that you will make with the others?
Mr. Nardelli. Congressman, if I could very quickly, and
then allow the others to comment. In our plan we are asking for
$7 billion. We have also identified $4 billion of concessions
across all constituents, just as Mr. Gettelfinger had
identified. We are willing to put in a benchmark date that if
not by March 31st we don't have those concessions in line,
because that is when we start to realize the benefit of those,
then we should be back here and pull the loan.
Mr. King. Mr. Mulally.
Mr. Mulally. Yes.
Mr. Wagoner. Our plan comprehends the same approach, to use
the short-term advance of funding and the oversight board as
forcing mechanisms to ensure that we deliver all parts of the
plan.
Mr. King. Thank you, Mr. Chairman. I yield back.
The Chairman. The gentleman from Florida, Mr. Klein.
Mr. Klein. Thank you, gentlemen, for being here today.
Mr. Chairman, I also want to just voice my support for use
of the TARP funds for the auto financing issue. We have heard
from a number of our dealers and many others about the lack of
availability of financing for customers, and that certainly is
one of the factors right now that is dealing with the lack of
sales that is going on. So I think that is already out there,
but Congress doesn't have to do anything further. It is more of
the Treasury's move here to make that available, and certainly
I would support that.
Gentlemen, what is going on here in this discussion is a
balancing act of what is palatable, what is feasible, what is
politically supportable, and what makes economic sense. None of
us are experts here, we are all trying to combine together with
you and others to come up with a good solution.
I want to throw an idea out that was sort of brought to me
by some local people who are economists, people who are
business entrepreneurs. And maybe it is just too common sense,
but I want to put it out there and see what you think.
We all know about the idea of collaboration and research.
We know that you are on different tracks and different points
on hybrid and electric vehicles. We know that your competitors
overseas are at different stages as well. We all know that in
order for you to be not only short term, but long term, and
have a sustainable plan, you have to have the most advanced,
the most cutting-edge technology on these automobiles that will
be attractive for us, as consumers, to buy them here in the
United States and everywhere in the world. We want you to be on
top of that and at the forefront.
What about the idea of taking whatever level of technology
and research you have going on right now and creating some type
of joint enterprise, whether it is public, not for profit,
maybe some different way of doing it or maybe some private
collaboration, taking some of the money that you are asking for
here right off the top so the American taxpayer can understand
there is something tangible that they are going to see come out
of this in terms of long-term sustainability, if they are
listening to the discussion today and your explanations, some
of it may be supportable in the way they view it, and some may
just think we are pouring money back into a problem, but taking
part of this and say, let's take whatever technology you have
and collaborating together and making that effort to say we are
going to do something together, our Manhattan Project, if you
will, for the moment, to say in some timeframe we are going to
put together the most far-reaching, the most supportable, the
best concepts that we can put together, take all that and put
it together, and then make it available back to each of the
companies for future development and commercialization.
What do you think about that?
Mr. Nardelli. Congressman, let me say, first of all, I
couldn't agree with you more. Two is, we ought to use the $25
billion that has been approved for fuel efficiency and
environmental compliance. We should take a portion of that
money and we should create exactly the format you have
suggested. Therefore, rather than each of us trying to spend a
portion of the money in developing the same technology, we do
it collectively, it works back, and we gain our brand identity
and differentiation through the vehicles we put it in. I fully
would support that because I think without that we might be
trading and trying to gain oil--removing our dependency on oil
to dependency on foreign technology. So I would totally
subscribe to the concept.
Mr. Wagoner. For my side, in fact in our submission we
specifically raised the concept. I would have to put a footnote
on that though as far as if the funding is taken out of the
request that we have put forward. We would have to tell you how
much we actually have in for our own R&D spending just to make
sure we balance it out right. But other countries do a lot of
their research this way. It is not a coincidence that the
leadership in battery technology in the world today is in Korea
and Japan. They do things just like you are saying. So I think
if we want to move this country to leadership in the next
generation technology, this kind of collaboration, plus a heavy
amount of government support and basic R&D, is going to be an
essential aspect and we would welcome it.
Mr. Mulally. Sir, I agree. And in a big way we are doing
that through our suppliers because, as you well know, about 75
percent of the dollar value of all our automobiles are with the
suppliers and they supply to all of us. So we work very closely
to make sure that we are targeting the most effective enabling
technology so we would bring that on. But that is a great idea
also, to take it a step further.
Mr. Klein. And I would like not just to talk about through
the supplier chain; I understand some of that technology is
advanced through manufacturers and research that way. I am
literally talking about physically taking this research and
these very bright people, I am convinced the brightest people
in the world, the scientists and the entrepreneurs, are right
here in the United States. And if we took this idea and took
each of you in your present form and bring this together under
one roof, physically under one roof, and put this out and say
this is going to be it, this is how we are going to focus all
of our attention on this, obviously you have to stay alive, but
I think that is something to consider, Mr. Chairman.
The Chairman. The gentleman from Alabama.
Mr. Bachus. As you all know, back in 1980, the government
got warrants from Chrysler, and then 3 years after that
Chrysler became profitable and Chrysler tried to get out of
that obligation. President Reagan went ahead and enforced it
and insisted that the warrants not be called back. If warrants
were given to you or there were some other agreement as to
interest rate at a later date, would you attempt to come back
to Congress or to Pennsylvania Avenue and try to get out of
those agreements?
Mr. Wagoner. No, sir.
Mr. Nardelli. No, sir.
Mr. Mulally. No.
Mr. Bachus. The one reason I mention that is of course AIG
did just that, they borrowed $85 billion, had an agreement at a
certain interest rate, and then 6 months later--or 6 weeks
later, actually, they complained that was much too high and it
was an onerous agreement. And actually over one weekend they
came in, didn't have to come to Congress, didn't have to
testify, and they got a lower interest rate and $65 billion
more, which sort of brings me to my second question. And either
Union representative, Mr. Gettelfinger, or you, Chrysler has
filed for a TARP application. You haven't had any word on that,
right?
Mr. Nardelli. No, sir.
Mr. Bachus. You know, Citibank and AIG got relief over a
weekend without ever coming to Congress; Congress found out
about it after the fact. I am sure you all feel a little
singled out, and I think Mr. Ackerman mentioned that. And it is
a good point, it is just amazing that there seems to be a
glaring double standard.
Chrysler Financial has had an ILC application for 3\1/2\
years. And during the last year there has been no moratorium.
You still haven't heard about that, have you?
Mr. Nardelli. No, sir.
Mr. Bachus. That would help, wouldn't it?
Mr. Nardelli. It would help tremendously because it would
give us access.
Mr. Bachus. Toyota, and some of you are calling it
Volkswagon, they have had that advantage over you. Ford has had
a request since last February. Have you heard?
Mr. Mulally. I have not. It is very important. It could
really free up the credit for the consumer.
Mr. Bachus. Yes, it is amazing to me. And let me conclude
by saying GMAC has had an application for a bank holding
company for some period of time. You have not heard anything,
have you?
Mr. Wagoner. Our application is under consideration.
Mr. Bachus. Under consideration. You know, Morgan Stanley
and Goldman Sachs, they got expedited status because there was
a financial problem or because of the financial issues. I can't
imagine why you are not being given expedited consideration.
But it does appear that our Federal regulators certainly have
two tracks, one for Citi, one for AIG, one for Morgan Stanley
and one for Goldman, and a much slower track, almost a dirt
road track, that you take. And we have urged them, and I know
the chairman--
The Chairman. If the gentleman would yield, you mentioned
the moratorium. But even during the period of that moratorium,
in our new charter for industrial loan corporations, we had
made it clear that the auto companies should not be covered by
that. So even during the period of the moratorium, we made that
clear with regard to GMAC's application, and others. So I am in
total agreement with the gentleman.
Mr. Bachus. This committee and the chairman and I moved
legislation with the support of people on both sides saying if
Toyota and Volkswagen had that tremendous advantage, then Ford
and Chrysler certainly ought to have it. And it is quite
discouraging to see $7.7 trillion worth of different credit
facilities, TARP funds and all of this, and yet when our motor
companies appear before these regulators all they do--they
certainly don't do anything.
Thank you.
The Chairman. The gentleman from New Hampshire.
Mr. Hodes. Thank you, Mr. Chairman.
I want to thank the witnesses for appearing today, and
thank you for the work you did in putting together your
business plans. I think they have gone some way to showing that
you are connecting the dots because a couple of weeks ago, at
least what I heard from my constituents, was that you folks
simply were in another universe and you weren't connecting the
dots and that you didn't have the answers that people expected
before exposing taxpayer money, again, given what we have just
done with the financial system bailout, to loss of taxpayer
money.
I am not opposed to helping your industries. I think that
they are crucial to our economy, the jobs that are connected
are upper most in my mind. I have met with representatives of
the UAW in New Hampshire, I have met with the auto dealers who,
despite the fact that a third of them are going to disappear
under the best of circumstances, are supporting helping the
auto industries. But I think that, even assuming your business
plans worked and we spent $34 billion, what I am hearing here
today from my colleagues, and what I have heard from others,
including the auto dealers, is that is only one-third of the
problem. You can hold yourselves open for business with the
money we give you, the $34 billion, and I think that is a
short-term fix, it will get you on the road, but not get you
down all the way to a long-term transformation. But the issue
with the credit availability is a serious, serious issue. That
is the second component to the true cost to the taxpayers.
And so you have heard from the ranking member and the
chairman that there is support for the idea, perhaps, of the
transformation of bank holding companies and ILC, and also from
other members about accessing the TARP funds. What amount of
money do you put on the need of the credit companies, whether
it is spent in an asset purchase program or direct injection,
or whatever Secretary Paulson comes up with as plan A, B, C or
D, what amount of money for the credit companies do you see as
necessary? And would they accept conditions that say the money
they get has to go for auto loans as opposed to what we did
with the bailouts where the banks are sitting on the money?
That is question number one.
And number two, don't you think we also are going to
realistically need incentives for consumers who are worried
about losing their jobs, losing their houses, and are frankly
concerned about spending $30,000 or $40,000 on a car purchase?
And if that is going to be required, what is the dollar amount,
what is the plan for that, how do you think it ought to happen,
and aren't we really talking about a really much bigger number
than $34 billion when those are factored in?
Mr. Nardelli. Well, let me, first of all, sir, answer the
first part of your question. Chrysler Financial, that is what
they do. It is the easiest and the cleanest allocation of funds
that you will see. They basically provide about 70 percent of
consumer loans and close to a similar amount of floor planning.
Our dealers have been tremendously disadvantaged relative to
the rates, as we went out and got a new conduit and what they
have to pay there. So termination of the lease program took 20
percent of our volume away, and the fact that dealers now
cannot floor plan beyond 1 year has imposed additional hardship
on them. So the support for our financial institution, the
financial arm of our company is important. The short-term
request for Chrysler was about $1.6 billion for wholesale, that
request is in, and another couple of billion to support retail,
so that when consumers come in, they can get competitive rates
and they have access to loans.
Today, at a 700 to 750 FICA score, at least our consumers,
the hardworking men and women of America who buy our products,
just aren't qualifying.
Mr. Hodes. So is Chrysler's answer $4 to $5 billion on the
credit side?
Mr. Nardelli. That is the current request that is in today.
Mr. Hodes. And do you think that is sufficient under the
current circumstances?
Mr. Nardelli. Along with getting ILC that will allow us
then to sell paper, to increase the capacity, and we will be
able to get that flow going back through Chrysler Financial,
supporting our dealers, supporting the consumers.
Mr. Hodes. GM, Ford.
Mr. Wagoner. Our situation is a little different. Our
finance company, which we only own 49 percent of, is applying
for a bank holding company status. And if they achieve that,
they would then be eligible over time to access funds that have
already been appropriated under the TARP. I can't give you that
exact amount now, I can check and try to get back to you. But
it is critical.
The Chairman. Mr. Mulally, if you can go very quickly.
Mr. Mulally. As you know, we are in a very different
situation because we have our own finance company. And the
relationship that you are talking about is very important. We
support 77 percent of all the wholesale financing. And so what
we have in for the short-term, asset-backed commercial paper
with the Federal Reserve is $16 billion, and we have accessed
$4 billion of that to support the customers.
The Chairman. The gentleman from California, Mr. Royce.
Mr. Royce. Thank you, Mr. Chairman. I would like to ask a
question of Mr. Wagoner and also Mr. Mulally. And it goes more
to the long-term question of Ford and GM because over the last
few years, Ford and GM internationally have performed very,
very well. And one of the questions I have is what is it about
the business environment or the tax structure or the operating
costs, as you go down the reasons for the success for Ford and
GM in past years and looking forward over the long haul, why
they are projected to do well overseas and international
competition and why it is a greater burden here. I would like a
discussion from each of you in terms of what some of those
determinants are.
Mr. Wagoner. I will be glad to start. When we go into new
or newer markets, frankly we don't take some of the burdens of
the past that we might have for being in business in the United
States for 100 years, so we get to use, you know, all of our
accumulated knowledge of the industry. But then as we go into
new markets, we go in on an unencumbered basis. Frankly, not so
different than some of the transplants who have come to the
United States later, they come using the latest knowledge, the
latest thinking about dealership structures and things of that
sort. So sometimes, ironically, coming a little bit later can
be an advantage.
So the reason that we have been successful in growth
markets is we really use our global capabilities and we build
up with the latest best practices, whether it is lean
manufacturing or when it is the right product technologies,
whether it is the right distribution strategy. So I think that
is a plus. And by the way, those overseas businesses, over the
last several years, almost uniformly have been quite
profitable. And they have, in almost every case, been able to
send dividends back to help us address funding issues in the
United States.
I think the other thing that we have struggled mightily
with here in the United States is the fact that we have had
huge pension and post-retiree health care obligations. Our
report indicates that we have spent about $103 billion over the
last 15 years to fund pensions and post-retiree health care
obligations. Those were responsibilities that we had from our
past, and so we felt it was appropriate to try to fund those.
But in all candor, that is a use of cash that in a newer market
we wouldn't have to allocate funding for. And obviously if we
had the $103 billion and could use it for other things, it
would enable us to be even farther ahead on technology or new
equipment in our plants, or whatever.
So I think that is maybe two of the points that I would
cite there. But I do want to highlight that a lot of that is
behind us now, thanks to the funding we have put in and the
work we have done with Mr. Gettelfinger and his Union. So we do
think we have a lot of those issues behind us now in the United
States, and so we are looking forward to our next 100 years
here with a cleaner slate, if you will.
Mr. Royce. Let me ask Mr. Mulally the same question.
Mr. Mulally. You bet. As you all know, Ford has grown up as
a global company, very regionally operated though, but because
of that we had just an absolute laser focus on the Ford brand.
And in the United States over time, especially with our cost
structure in the United States and fuel prices being relatively
low and low interest rates, we were focusing on the larger
vehicles, the SUVs and the trucks. Well, around the world, the
majority of our vehicles are much smaller. And we all know how
neat they are because the fuel prices are relatively higher.
So going forward, especially because of the work we have
done with the UAW where we can now make smaller vehicles in the
United States profitably, we are leveraging all of those
fabulous vehicles from around the world in the United States,
so we will have a balanced portfolio now of small, medium and
large cars, utilities, and trucks. I think we are going to be
able to profitably grow now in the United States using those
lessons learned from around the world.
Mr. Royce. Let me also ask you, the spread here that we
have seen on auto loans, and asset-backed securities in
general, getting back to the ranking member's question, just
how much of a benefit would it be since your competitors, for
example--well, Toyota operates under an ILC. If it were
possible to achieve the bank holding company position, or the
ILC status, how much of a difference would that make in that
very large spread right now? Would that diminish those costs in
financing significantly if you were on par with your
competition?
Mr. Wagoner. It would have a huge impact for us because
right now we either can't get credit, or the spreads have moved
up dramatically. And if we had a bank holding company status
and then you would have deposit taking capability, the cost of
funds would go down. I can't give you an exact basis point on
that, I could look it up and get back to you, but it would be a
tremendous advantage.
The Chairman. The gentlewoman from Wisconsin.
Ms. Moore of Wisconsin. Mr. Wagoner, you mentioned in your
last response, you talked about the legacy cost, which, as you
said, in the last 15 years they have cost you $103 billion and
it has constrained investment in more advanced manufacturing
product technologies. And you have a very elaborate plan.
Wouldn't this have been a great time for GM to say, we need a
national health care program in order to stay viable? You
correctly identify the problem that other markets--China, Latin
America and Russia--where GM doesn't have the burden of those
costs. Why did you stop short of saying that this kind of
initiative would help our industry?
Mr. Wagoner. Well, it undoubtedly would help to level the
playing field for the industry. I remember back to when
President Clinton first brought forth proposals on health care
back in the early to mid-1990's, our chairman and my
predecessor, Jack Smith, was a very proactive proponent of it,
and we have tried to be very active in the health care debate
since here in Washington, but our endorsement per se wouldn't
necessarily have resulted in the enactment of a policy. But our
competitors do, in most other countries, operate with a
significantly greater government role in health care.
Ms. Moore of Wisconsin. But it is very much not a part of
your plan here.
Let me move on to ask a question about the warrants and
about the first position of taxpayers. How can taxpayers manage
to retain a first position, GM and Chrysler, if, in fact, you
plan to honor all of the trade debtors in other countries? Can
you just walk through for the committee how you would be able
to do that?
Mr. Wagoner. We at GM have a fairly significant collateral
pool that has not been pledged yet of assets, for example, our
ownership position, overseas subsidiaries, and trademarks. And
so, as one thing, we could offer that as collateral against any
borrowing that we do, and that would be a first lien for the
government.
Mr. Nardelli. And in our position, our assets are all
securitized against the first lien, and therefore it would take
a congressional action to subordinate that to the government
loan.
Ms. Moore of Wisconsin. I think one of the things that
makes a lot of people nervous, there are conservatives and so-
called liberals, and I think that there are nervous people on
both sides, and, Mr. Gettelfinger, your Union has made a lot of
sacrifices in this. I appreciated your testimony setting the
record straight that the $73 an hour amount really was mostly
these legacy costs. And you have made agreements, apparently,
to cut your workforce severely.
I guess I would like to hear the narrative or, you know,
what do we say to folks if we approve this plan, and yet there
are 20,000, 25,000 workers who are going to be laid off, a
severe constraint in the supplier and dealer market, what do we
say as we vote for this plan?
Mr. Gettelfinger. Well, first of all, thank you for
pointing out the sound bite, the $73 sound bite, because that
is clearly what it was. But secondly, there has to be a
restructuring in the industry. And what this is about, this is
about survival at this point in time. And there are going to
be, unfortunately, losses. There are going to be facilities
closed down, we understand that. We are going to lose
dealerships, we know that. And we are going to lose suppliers.
But what is the end result if we do nothing? That is the
question. And as hard as it is to have to say that, that is
reality. We can't sugarcoat it, we can't stick our head in the
sand. It is what it is.
The thing is, if we can just get through this economic
downturn, then we can hope that there will be growth in the
industry and we can rebuild and move forward to a brighter
future.
Ms. Moore of Wisconsin. Thank you. I yield back.
The Chairman. The gentleman from Illinois, Mr. Manzullo.
Mr. Manzullo. Thank you, Mr. Chairman.
I am quite distressed over the continuous talk coming from
the Big Three that there is no money available for consumers to
buy your automobiles. Credit unions, local branches of national
banks, and community banks are loaded with money and are ready,
willing, and eager to give to people to buy your automobiles.
On the current business environment on the Ford, page 3,
quoting the Federal Reserve's senior loan officers, it says,
``Over 60 percent of banks have tightened standards for
consumer credit.'' That is not the case. I talked to a bank
yesterday. I said, ``Have you changed any standards in the past
year?'' He said, ``No.'' He said what happened is the Big Three
set up their own financing arm and they pushed the community
banks out of lending. And then you come back here, and you have
created much of the crisis among yourselves because you created
your own subprime market in automobile loans that is sitting
out there because it was too easy credit to people who couldn't
afford to buy the automobiles that you sold to them. That
originally is what TARP was set up for was to buy that back.
And now, Mr. Wagoner, you want to go into the commercial
banking business. You want to be able to take demand deposits
or set up checking accounts. I mean, you would be a bank on the
order of Wal-Mart, which we stopped, and Mr. Nardelli, of Home
Depot, which we also stopped. Why would an automobile
manufacturer go into the commercial banking business and wreak
havoc on the community banks, credit unions, and local branches
of national banks? You are there to make cars, not to run a
banking operation. That is part of the bailout, so that you can
become a commercial bank? I don't expect an answer because
there is no good answer to that. Your job is to make cars.
And the other thing is I noticed that both Ford and GM have
overseas subsidiaries that are doing quite well. My question to
each of you is, have you taken advantage of the IRS 60-day
window to bring back profits from overseas operations to infuse
them into your domestic operation without having to pay 35
percent tax? Mr. Wagoner, have you done that?
Mr. Wagoner. Yes. We have remitted all of the available
funds. This isn't an issue for us because we have an excess tax
credit position.
Mr. Manzullo. You have already brought it back?
Mr. Wagoner. Yes.
Mr. Manzullo. Mr. Nardelli.
Mr. Nardelli. The same for Ford.
Mr. Manzullo. The other question that I have is for Ford.
On page 17 of your plan, you state that you want to accomplish
the goal to increase more car profitability by improving cars
at competitive levels through reduced complexity of global
purchasing skills. Does that mean you are going to be buying
more fasteners and tool and die from China to infuse into
American cars?
Mr. Mulally. It means that we are going to try to
standardize more and more on all of the parts as well as
simplify the vehicles--
Mr. Manzullo. Would you answer my question, please?
Mr. Mulally. We operate all around the world--
Mr. Manzullo. I understand that. Does that mean that we are
going to lose more fastener and tool and die industry in the
United States because you are going to be buying those from the
Chinese--
Mr. Mulally. Absolutely not. Our goal and the plan that we
have presented grows our business in the United States.
Mr. Manzullo. I am talking about the suppliers.
Mr. Mulally. Our plan is to grow the business, including
our suppliers, in the United States.
Mr. Manzullo. So you are telling us that if you get the
money--and by the way, I think everybody in this room is in
favor of getting the needed $25 billion that is already there--
is that, based upon this statement on page 17, that you are not
going to be increasing purchases from Chinese and other
overseas suppliers of tools and dies and fasteners?
Mr. Mulally. Yes. What we meant by that, part of our
strategy is to make them the same standard, not necessarily
where we buy them. Our plan is to grow our business in the
United States.
Mr. Manzullo. You didn't answer the question. Are you going
to use U.S. taxpayer dollars to source more tool and die
equipment and fasteners from overseas facilities for American
manufacturing?
Mr. Mulally. No.
Mr. Manzullo. Thank you.
The Chairman. The gentlewoman from Illinois, Ms. Bean.
Ms. Bean. Thank you, Mr. Chairman.
I thank you all for your testimony today. I am sure you all
wish you were here under better circumstances. And I know most
of us here appreciate how integral the auto industry is to the
economic fabric of our Nation. I know that as I travel to visit
manufacturers in the Eighth District of Illinois, most of them
that I visited are part of your supply chain, and their own
economic viability is very much tied to yours.
We have also seen dealer closings in my district and heard
from the mayors of those municipalities who will suffer the tax
consequences of those closings.
In your proposals, you highlight the strides that you have
made in recent years relative to development of electric
hybrids and more fuel-efficient vehicles, and yet when you hear
from most Americans, they don't seem to know about those
accomplishments and improvements that you have made. Most
business plans that I have looked at from my business past, one
of the most critical parts is marketing. And my question to you
is, while you seem to, in your proposal, talk about narrowing
the gaps operationally and economically to compete, you seem to
fail to miss the part where you are truly failing is in
marketing to your potential customers. And so my question is,
what will you do to market the improvements you have already
made and any subsequent improvements you make, because having
the best mouse trap isn't going to necessarily get you there.
Mr. Wagoner. I think it is a great observation, and I think
one of the earlier questioners highlighted a frustration that
we have that some people have a view on a quality gap which
doesn't exist anymore. So it speaks well to your point.
From our perspective, I think the world of marketing has
changed a lot. The old days of network TV is not as effective
as some of the new ways. So we have put a lot more effort
ourselves into Internet-based marketing and I would say trying
to put more of our efforts into finding ways to use broader
communication approaches on new technologies. So things like
the Chevy Volt would be an example of a breakthrough, brand-new
idea, no one else is working on that. It is a great piece of
engineering, technological work. But we have obviously been
much more open than we have ever been in developing a product,
and taking it to market, and showing it around the country, and
showing here is where we are on the battery development. I
actually drove one of the early models up to the Senate
yesterday. And so I think using the knowledge--and the facts of
what you are really doing to tell your story in some ways is
more effective than the old fancy commercials.
Ms. Bean. If I might, I think with the road trips and
driving down here and making some stops along the way was a
good thing to do, but I would boldly suggest that you do more
of it. Were there further comments on that?
And I would also like to speak specifically even to the
cooperative marketing funds spent by your dealers. If you open
a Sunday paper and you look at the auto ads, your foreign
competitors are talking about miles per gallon on their
vehicles. The American ads do not include that, which leads
consumers to think that you must not have something that you
are proud of to be talking about. And will you impose some
restrictions on those cooperative marketing funds to your
dealers to make sure they are including that?
Mr. Mulally. An absolutely other great point. To your
point, when you look more at the local advertising
historically, it would be more about the deal and not capturing
the real value of the products. And a couple of things that
have really worked for us over the last year, because, as you
know, our market share has stabilized. And we are starting to
actually grow again, is to really stress the value of the
products. And the biggest ones on the consumer's mind has been
quality, sustainability, and fuel mileage, safety, and then
great value. And another thing we have used are third-party
assessments. So we provided a lot of data, a lot of information
on a lot of the vehicles.
And right now we are rated equal to or above the best in
the world on quality, on sustainability. Every one of our new
vehicles now is equal to or better than the competition. And on
safety we have the most five-star ratings of any manufacturer,
but we have to use every mechanism we can to get that message
out in addition to the good value.
Mr. Nardelli. Great suggestion. One of the things we did to
try and dispel the whole issue of reliability and durability,
and we really have tried to bugle it loudly, is our lifetime
warranty on our power trains. And the dealers have been
tremendously supportive of that advertising. I think as we gain
momentum in our product portfolio on more energy--as I said, 79
percent of our products will show fuel efficiency year over
year. Your point is spot on.
Ms. Bean. My last point is that also have your PR work the
media a little better, because the coverage you have been
getting certainly hasn't framed this very well, and you are not
getting the credit that you are due in certain areas.
Mr. Nardelli. Thank you.
The Chairman. The gentleman from Texas, Mr. Hensarling.
Mr. Hensarling. Thank you, Mr. Chairman.
Gentlemen, there is no reason you should remember
everyone's opening comments, but there are several aspects of
your request that trouble me. One is if you get the money, then
who doesn't get the money? Can you name me three industries in
this economy that aren't hurting, that couldn't use $34
billion? I can't think of them. I have had homebuilders in my
office. I have talked to representatives of the airlines, the
largest poultry producer--I believe it was the largest, perhaps
second largest--Pilgrims Pride, not located in my congressional
district but nearby, just filed for Chapter 11; 50,000 jobs in
east Texas are being threatened.
So I wonder what the standard is. Is it simply because you
are bigger or perhaps in more pain than other industries in the
economy? That troubles me. So if we say yes to who--to you, who
do we say no to?
I ask this somewhat rhetorically. I know two--I know the
answer. I assume nobody at the table has ever heard of Williams
Paint and Body Shop in Mesquite, Texas, hadn't heard of
Jacksonville Industries in Jacksonville, Texas, hadn't heard of
the Kinnis Framing Contractors in Chandler, Texas. My
assumption is you haven't heard of these businesses. They are
small businesses located in the Fifth Congressional District of
Texas. One has unfortunately failed. The other two are
struggling in this economy.
So the second question I have about your request, given
that small businesses create three out of four jobs in America,
if the purpose of Congress is to try to help our economy, save
jobs, create new jobs, why should you get the $34 billion and
not small business, or is it only the small businesses that
service the auto industry that should be recipients or
beneficiaries of this money? If anybody cares to address that,
I would like to hear it.
Mr. Nardelli. Let me try, please.
I don't think anybody has been immune from this financial
crisis that we are going through today in this economic trough.
I certainly understand your point of view, And as we look at it
from our perspective, the auto industry, I think at least one
of the companies you mentioned is, in fact, impacted by the
auto company or in support of the auto company. If you look
at--you know, again, I look at our business, our dealers, 3,300
of them are small-business men and women. These are very
comparable to the examples that you gave us. And the only point
I can offer is that a strong OE--in our case, there is about a
million people depending on Chrysler's success. So I am
certainly not justifying because we are bigger, I am merely
presenting the point that we may have a broader impact across
the country, sir.
Mr. Hensarling. Let me ask another question. There was a
report on CBS News last night that you gentlemen have spent
roughly somewhere north of $50 million on lobbying fees for the
first 9 months of this year. I don't know if anybody cares to
challenge the accuracy of that report. If not, I would simply
point out that the three businesses, small businesses, in my
district certainly don't have that advantage.
I don't begrudge you your constitutional right to petition
your government for redress. That is not my point. But my point
is clearly we have heard of your name. Clearly you have people
that you can afford to represent you in Washington, D.C., small
business can't. So something strikes me as patently unfair.
But I do have a specific question about the lobbying fees.
Can any of you tell me what portion of those fees were used to
lobby Congress to remove the restrictions on the money that is
already in the pipeline versus trying to get the additional $34
billion?
Mr. Nardelli. I have been given a number. Zero, sir.
Mr. Hensarling. Zero. Zero has been spent on either this
trying to reprogram the earlier money or to get this additional
money?
Mr. Nardelli. I am sorry?
Mr. Hensarling. I am sorry, Mr. Nardelli. Zero has been
expended where?
Mr. Nardelli. I think your question was how much has been
spent on reprogramming money.
Mr. Hensarling. I thought it was an either/or question as
far as how does the $50 million break down.
Mr. Nardelli. I don't know the answer to that.
Mr. Hensarling. Thank you.
Last question; I know my time is running out here.
The Chairman. It is about out; 3 seconds.
Mr. Hensarling. Thank you, Mr. Chairman. I will yield back.
The Chairman. The gentleman from Indiana, or is it the
gentleman from Illinois?
Mr. Donnelly. I went last time.
The Chairman. I thank the gentleman for his honesty.
The gentleman from Illinois.
Mr. Foster. Your viability plans assume a significant
recovery in the unit volume over time, And I would like to poke
a little bit at how realistic this might be. One of the things
that has been mentioned anecdotally is that cars are lasting
longer, And it is no secret that in flat economic times, that
will result in a drop in the number of new vehicles required
each year. Have you made efforts to quantify this?
If you look at the fleet of vehicles that have been
produced over the last 10 years and will be wearing out, what
does that mean in terms of the anticipated number of vehicles
that have to be replaced? And is there a number you can attach
to that, any of you?
Mr. Wagoner. I don't have it with me, but we can get it for
you.
Mr. Foster. Do you have a feeling whether this means that
there would be a 20 percent drop? It is my feeling that cars
last a lot more than 20 percent longer than they used to, and
that would naively lead to a 20 percent drop in flat economic
times. It seems to me that if you are really trying to make
projections that aren't just seat-of-the-pants things, that
would be an important factor to understand.
Mr. Wagoner. We have that data. I don't have it with me,
but we would be glad to review that, and we could get our
experts to show you the whole model we use.
Mr. Nardelli. I would only answer in that our forecast for
2009 is the exit rate of 2008. In other words, we are looking
at the 10.5 exit rate as an entrance rate and basically holding
that depressed level, that significantly depressed level, 35,
40 percent year over year, throughout 2009. And as we were
asked to also do a sensitivity analysis, we took that down
another million units in the industry to 10, 10.1. And
basically with the request that we have asked, even at the
lower level we still would be able to repay a billion dollars
back to the taxpayers by 2012.
Mr. Foster. My second question has to do with offshoring of
components and subassemblies, as you mentioned in various
testimony, 70 or 75 percent of the value added in a car, which
presumably means 70 or 75 percent of the jobs come from
subassemblies. And I was wondering if you anticipate being able
to become cost-competitive with the transplants, particularly
for small cars, without increasing the offshore component value
in your cars.
And secondly, just how does that compare now between the
three of you and between you and the transplants in terms of
the fraction of the value that is offshored in a car today?
Mr. Nardelli. I don't know exactly on the transplants; 78
percent of our purchase material is from U.S.-based suppliers.
Mr. Foster. By U.S.-based, do you mean U.S. manufacturing
plants?
Mr. Nardelli. No, no. U.S. manufacturers.
Mr. Foster. So that a battery manufacturer with a plant in
Mexico qualifies as U.S.-based by that definition.
Mr. Nardelli. It could, sir. I don't know that secondary
split out of that. But 78 percent of the materials from a U.S.-
based supplier.
Mr. Foster. Well, there is a certain amount of pain that
has happened by suppliers moving their bases offshore.
Mr. Nardelli. I don't know the--
Mr. Foster. So developing that number for us would be very
interesting both now and for your projections and for the
transplants, getting a comparison, seeing if we are going to
see a continuing hemorrhaging of jobs under the business plans
you are talking about.
And I guess the third quick question is how many of you are
personally confident that there will be a solution to the
battery problem, that this won't be this decade's fuel cell,
hydrogen fuel cell, that is just something everyone talks about
and then, in fact, never becomes economically reasonable? And
maybe I will just attach a number to it. What year do you think
there might be a battery that is cost-competitive and
performance-competitive with the gasoline engine?
Mr. Wagoner. I am personally confident. We are putting a
lot of money, for example, in this Chevy Volt that I mentioned
before which we are endeavoring to get into production in 2010.
It will not, obviously, at that point be fully cost-
competitive. I would say we should expect two generations of
vehicles to do that. So maybe a target would be 2016, 2017 we
would be completely cost-competitive. But that is going to
depend on volume. So if we can get volume up faster than that,
then the opportunity to be cost-competitive could be something.
Mr. Foster. As I understand it, you do not have a battery
car that is technologically competitive right now, not to
mention cost-competitive.
Mr. Wagoner. Well, actually, I drove one yesterday that
will leap ahead of what anybody has on the market in 2010, the
Chevy Volt extended-range electric vehicle.
Mr. Foster. But it is not performance-competitive with the
gas car, correct?
Mr. Wagoner. I tell you, I drove over today--you mentioned
fuel cells, but the way the fuel cell drive is a proxy for an
electric vehicle, because it is an electric vehicle, it drives
in some ways better than a gasoline-powered vehicle.
Mr. Foster. But in terms of range and battery lifetime and
all these issues that people have failed to succeed after 100
years.
Mr. Wagoner. That is why the concept that we are putting in
the Volt, which is an extended-range vehicle which always runs
on the electricity, has a battery which gets you 40 miles, and
then you can recharge the battery with a very small,
efficiently running internal combustion engine, is, I think, a
good solution.
The Chairman. The gentleman from New Jersey, Mr. Garrett.
Mr. Garrett. Thank you, Mr. Chairman.
Again, thanks, members of the panel, for being here.
Let me just follow up on a line of questioning. It seems
that there is a spectrum of ideas out here of potential actions
or inactions that Congress could take. On the one end, Congress
could say they are not going to do anything; on the other end
of the spectrum, Congress could come back and say, we are going
to pass a piece of legislation with all the bells and whistles
of oversight and so on and so forth for the full $34 billion.
And somewhere in between there is, of course, maybe
alternatives.
One of the alternatives that the gentleman from Texas was
referencing a moment ago--I think it is one of the
alternatives--is the idea--his phrase of reprogramming the $25
billion that is already approved and signed into law and what
have you.
So let me just throw that question specifically out to you.
If Congress in its wisdom decides not to take either end of the
spectrums of actions today or in the next few days on this, is
an alternative to take the reprogramming idea? And if we did
craft some sort of legislation with regard to reprogramming
that $25 billion, could we do it in a way that we would, say,
reprogram a portion of it? And the numbers that I am hearing
here off the back of the page was around $9 billion, $4 billion
and then $4 billion, and so on. So is there a cumulative aspect
of, say, we just reprogram a portion of that $25 billion and
free up those dollars in cash to your hands without the
restrictions that those bills have right now?
Mr. Nardelli. In the short term, at least from Chrysler's
perspective, we are certainly open to whatever makes the most
sense for Congress as far as making the bridge loan available
to help us get through this trough, point one.
Point two, in our plan, to be absolutely clear, we have a
request in for $7 billion in the bridge loan, but we also--our
original request in for the 136 money was about $8 billion. We
were told to assume somewhere between 70 and 80 percent. We
have $6 billion built in our plan, assuming we would get some
of that starting in 2010, 2011, and 2012 based on the process
as we understand it today.
Mr. Mulally. We have sufficient liquidity.
Mr. Wagoner. From our perspective, we said however the
short-term funding comes is up to the Congress. I would need to
point out, though, that we have already filed $8 billion worth
of--actually not projects, but the expected funding from those
that would come out over a several-year period under 136. So if
that was all drawn down now for short-term needs then, you
know, in the future we would hope that 136 could be replenished
as well.
Mr. Garrett. I only say this because I know the dilemma
that Congress finds itself in as far as the two ends of the
spectrum, and also the fact that we know from your testimony
here and the Senate testimony as well and other questioning
that we hear that the numbers may be larger down the road
besides the $34 billion. And I think one of you gentlemen, I
forget who, testified in the Senate that March 1st or March
31st might be a point in time that you would be coming back
after the negotiations and everything were all done. This might
be that proverbial middle ground.
Secondly, one of the questions I--or comments I made during
my opening statement was with regard to one of my major
concerns, and that is States' rights and the issues of the
dealers that are out there. Can any of you address the issues
of what really would be the savings, and why is there savings
with regard to the dealers out there and the shrinking of the
dealerships? Because I am told that as far as the dealer is
concerned, that he operates his own shop, he pays his own
bills. You may have some kickbacks as far as advertising and
that sort of thing and like that, but he buys those cars
sitting on his lot, right, or are financed, but those are his
cars. Can you explain to me why there would be such a
significant savings by violating a State's rights and the
contract agreements that are already out there?
Mr. Nardelli. So for us, Chrysler, I mentioned the 2 points
about the 500 dealers; 250 or so are already gone because they
have had to declare bankruptcy. The other 250 are on credit
hold. Our program--we call it Genesis--is more about helping
assure the profitability of the dealers that are out there,
particularly in the metro area where we may be overdealered. So
we work in a harmonious way with them to make sure that the
dealer consolidation as we try to go to one dealership with all
three brands so that we don't have and they don't have the
expense associated with trying to cover multiple brands and--
Mr. Garrett. That is really their problem, isn't it?
Mr. Nardelli. We want to help them. They are an integral
part of our success. Without the dealers and strong financial
dealers, we can't be successful, sir.
Mr. Wagoner. Are you talking about the issue of State
franchise legislation? A lot has been discussed about that. Our
plan can be accomplished without changing that. And obviously
if you have more regulatory regimes, sometimes it can slow you
down. But we are not assuming that there is a need to change
State franchise legislation to accomplish our plan.
Mr. Garrett. I see a yellow light. If I have the time--
there is the red light.
The Chairman. Your time has expired.
The gentlewoman from California.
Ms. Speier. Thank you, Mr. Chairman. And thank you again,
members of the panel, for joining us.
At our last hearing, I asked you each whether or not you
would meet the fuel economy standards that were scheduled for
2020, to meet them in 2015. I think each of you said no, you
couldn't do it. And I was stunned by that because in 1960,
President Kennedy said we will have a man on the moon by the
end of the decade. NASA didn't have a clue, and yet we got a
man on the moon by the end of that decade.
The European Union is scheduled to have a fleetwide fuel
economy standard of 50 miles per gallon by 2015. Are you still
of the opinion that you cannot meet those standards sooner?
Mr. Wagoner. From our side, we have a big business in
Europe, so we meet those standards. I would say one thing,
frankly, that has been done in Europe differently than the
United States is tighter coordination of energy policy issues.
So as you probably know, for example, in Europe, one of the
things we have had for many years is much higher prices of
gasoline due to higher taxation. So consumers, then, react very
rationally. So our product mix in Europe is very much smaller.
The Chairman. Excuse me. Apparently, there was a
miscommunication. The gentlewoman did get to ask questions of
this panel the last time, I believe, and this was reserved for
people who had not asked the last time. That is what we had
announced earlier. So we will conclude the questioning there. I
believe the gentlewoman did previously--
Ms. Speier. That is absolutely true.
The Chairman. The gentlewoman from Florida.
Ms. Brown-Waite. Thank you, Mr. Chairman.
I have a large number of retirees who live in the Fifth
Congressional District in Florida, both former union members,
retired union members, and I have some auto execs. So I take
this whole issue very, very seriously. It really is about their
future and also the future of their children and grandchildren
who may want or currently have a job in the industry.
But one of the things that I think we need to be very
careful of is that we are not unduly causing concern, because
if bankruptcy is necessary, reorganization, people need to be
assured that the Pension Benefit Guaranty Corporation, albeit
in the red--which we will have to address that issue--will be
there for those pensioners. And I wanted to make that statement
because I have heard from so many who are afraid that their
pensions are at risk.
Mr. Nardelli, I have a question specifically for you. If
the private equity company that currently has the major holding
in Chrysler has $24 billion currently in assets, and they will
not put forth any more money to stave off bankruptcy, how can
we in good conscience expect the taxpayers to take on this
substantial cost? And I would appreciate hearing from you.
Mr. Nardelli. Sure. It is a question that has been asked
yesterday. And just to try to bring some clarity, the private
equity firm is a composite of many investors. They are made up
of pension funds, they are made up of teachers' funds, State
funds. So they have the same regulatory responsibility,
fiduciary responsibility, as a publicly traded company would be
relative to those fiduciary responsibilities. So it is not an
issue, one, of them being able to commit on the behalf of those
investors to put more in, number one. Number two--
Ms. Brown-Waite. Did you ask?
Mr. Nardelli. Yes. Exactly. We have asked them. We have
asked every major financial institution; all 100 of those that
got TARP funding we have asked for funding. We have gone
offshore asking for funding.
Ms. Brown-Waite. And the private equity company said no,
correct?
Mr. Nardelli. First of all, let me be clear. They already
put the equity in to create the company. We did another $2
billion drawdown on equity on the car side. They have continued
to put more equity into our finance company to make sure that
the car company could continue to provide consumer loans and
wholesale support. So I want to be clear, it is not as if they
haven't continually tried to provide financial support for us
over this period. And just finally, they have publicly said
that on any carry-forward interest, they won't profit--and they
have also on their second lien been willing to convert 100
percent of that to equity.
Ms. Brown-Waite. Thank you.
And my question for the three auto manufacturers is,
obviously overcapacity has been part of the problem. You have a
combined market share of about 50 percent, 52 percent in 2007,
but there are--nearly 70 percent is accounted for your various
brands' dealerships, of dealerships throughout America. How
many of those do you expect will be closing over the next 4
years even with a bailout? That is question number one.
And question number two is, what are you doing to help
those dealers out there, whom every Member of Congress has
heard from, to help the dealers with the excess inventories
that we have now? I would appreciate hearing from the three of
you.
Mr. Wagoner. Our plan calls for a reduction in the number
of dealers of about 800 over the next 4 years. Individual
dealers make the call that they don't want to stay in the
business because the economics don't work for them anymore, or
we have cases where we might have five dealers in a city, and
we only--really only four can be profitable, so we work to try
to consolidate them. What we are trying to do--their
profitability is critical for us, obviously because if they are
not profitable, they are not there to support our new product
launches.
So what we are trying to do is be very diligent in--for
example, not overproducing the number of vehicles that we ask
them to carry in inventory right now is the biggest thing we
can do, along with helping with financing support.
The Chairman. The gentlewoman's time has expired.
Ms. Brown-Waite. Mr. Chairman, could I ask them, though, to
submit their answers in writing?
The Chairman. Yes. I appreciate that. Any questions that
you do not get a chance to answer or you want to elaborate on,
please submit in writing. And indeed any Member who has
questions in addition to those asked, submit them through the
committee. We will get responses in writing. We ask obviously
that they be done fairly quickly.
I now recognize myself for 5 minutes to talk about health
care.
Mr. Wagoner, how much are you obligated to put into this
new health facility that came out as a result of the collective
bargaining?
Mr. Wagoner. Beyond what we already have put in it over the
past several years, it is about $20 billion more.
The Chairman. Over what period of time?
Mr. Wagoner. Over a period of time, as I recall, it was
about 8 to 20 years.
The Chairman. $20 billion in addition.
How about Ford and Chrysler, what are your ongoing, looking
forward obligations for health care? You don't have--do you
have the--
Mr. Mulally. Yes. And we have put in $3 billion, and we
have $7 billion more to go.
The Chairman. You have $7 billion more to go?
Mr. Nardelli?
Mr. Nardelli. We have $11.3 billion more to go.
The Chairman. So that is $38 billion, if I add correctly,
more than you are asking for in health care. That is very
relevant. One of the questions we have is if we were to provide
some bridge financing now, this Congress has already been
burned by financing a bridge to nowhere, and I think we don't
want to repeat that. So we would like some assurance that it is
a bridge that has another terminus. The relevance of that is I
hope that in the next Congress, working with the new President,
we will be doing something about health care. Is it then the
case that to the extent we could have a national health care
plan--because I don't think anyone thinks it makes any sense to
do anything that is specific to one group of employees. But if
we were able to establish some form of health care at the
national level which shifted the burden away from this
employment nexus to the extent that we could reduce this, we
would be enhancing the likelihood of success; is that accurate?
Mr. Wagoner. Yes, sir. And beyond the numbers we just gave
you, we have ongoing every year health care costs for active
employees. It would help us additionally.
The Chairman. Mr. Nardelli?
Mr. Nardelli. Yes, sir.
Mr. Mulally. Yes, sir.
The Chairman. Mr. Gettelfinger, I think the Union has
gotten far too little credit, first for the creativity of the
agreement to allow this shift for the retirees, but also, as I
understand it, the agreement--well, just tell me what the
recent announcement was about what you would be willing to do
with regard to health care.
Mr. Gettelfinger. Well, sir, in 2005, we made the initial--
what we refer to as the 2005 VEBA, which is Voluntary Employee
Beneficiary Association. As in the case of General Motors, that
took $18 billion of their old pay obligation off of their--
The Chairman. But you just made a decision to even ease
that. Tell me what that was.
Mr. Gettelfinger. But then in 2007, we put it all in there
based on these commitments. Like on January 1, 2010, General
Motors owes $7 billion, Ford owes $4.4 billion, and Chrysler
owes $3.5 billion.
The Chairman. What did you just decide to do?
Mr. Gettelfinger. What we have decided to do, sir, is to
draw out that obligation, to remove that immediate liability
off of their books to put them in a position--
The Chairman. I appreciate that. So you have made a
significant offer here that puts off the need for that. The
relevance of it is--and I do want to think about how we can be
constructive--that gives us more time to fashion a consensus on
a national health care plan, so that if, in fact, we were able
to do that, to the extent that we have a broader plan, that
deferral could then become forgiveness altogether. And I think
that is very important. It shows the linkage.
First of all, one of the burdens you have been under is the
requirement to do health care. I always find the best
comparison to be between the costs in Michigan and the costs in
Ontario, because people can't blame unions. Your sister union
in Canada is a pretty strong one. You can't blame environmental
rules. The cost difference between Canada and the United States
has to be entirely on health care.
Mr. Gettelfinger, you wanted to say something else?
Mr. Gettelfinger. Yes, sir. As far as our commitment to
each other, the company to the Union, the Union to the company,
we put together what we referred to as a National Health Care
Reform Institute to study the entire issue.
The Chairman. I appreciate that. And I think--you know, I
have to say I wish--among the mistakes the auto companies made
was in 1993 when there was an effort by President Clinton to do
something about health care, you didn't help him, And now you
are reaping some of that. But it does show the importance of a
rational national health care plan going forward. Reducing the
nexus between employment and health care is good social policy,
it is good economic policy, and it would have particular
relevance here.
I just want to add one last point. I know one of my
colleagues will do this. One of the problems you face in
getting votes, certainly on the Democratic side, is the fact
that you are now suing a lot of States that are represented
here over greenhouse emissions. And I have to tell you that
that is a serious obstacle. We are being asked by some
attorneys general--I will put that letter into the record--not
to go forward while you are suing the States again, some of
which are represented here, over the question of greenhouse gas
emissions. And that is something that you are going to have to
confront, and I know it is going to be raised later on.
The gentleman from South Carolina, Mr. Barrett.
Mr. Barrett. Thank you, Mr. Chairman.
Gentlemen, thank you for coming today. And I certainly
don't want to get into a health care debate today because there
are plenty of other issues, but I think we are being extremely
short-sighted to realize that taking health care costs off your
role, somebody has to pay for that, somebody has to pay
additional taxes. And if you don't think you are going to pay
additional taxes--and me--I think it is a fallacy.
The one question I want to ask first, driving around my
district, talking to my folks, the one question they say is why
now; why are we deciding today that we are going to
restructure, that we are going to cut our labor costs, that we
are going to shrink down the size of our lines? I mean, you
guys are the ``bestest'' and the brightest, so to speak. You
have men and women who are experts in every field. Why today
are you realizing that your competitors are getting an
advantage on you, and all of a sudden we have to restructure?
You should have seen this coming for years. And I know you
have. And all of a sudden you are coming to the United States
Congress, which is not our job, to tell you how to restructure.
But you are doing it. I mean, why now? Why not 10 years ago?
Why not 20 years ago? Please, somebody.
Mr. Wagoner. Yes. We aren't just starting this now. We have
reduced--for example, over the last 3 years, we reduced our
cost base against a base of $40 billion of fixed costs, we
reduced it to $30 billion working a lot actually with the UAW.
So we have been working on this.
I think now what is different today are two things:
Automotive demand, the trend had been running kind of 17
million units a year for an average of about the last decade,
And now they have fallen to, in recent months, under 10 million
or 11 million units. So there is a radical fall-off in demand
at a time, frankly, when, at least for General Motors, our
balance sheet is weak in part because of the massive
expenditures we made in the past on health care and pensions.
And so then you say why are we doing the additional
restructuring now? Because we have to face the reality that
because of the state of the credit markets and the U.S.
economy, we have to structure the business not to be highly
profitable at 17- or 18 million units, but now to be highly
profitable at 13 million units. And to do that, frankly, we are
having to take additional and painful steps.
Mr. Barrett. I understand. But please, you are not the
Federal Government. You don't think in 2-year terms. You can
move faster. And if you are going to be competitive, if this
thing is going to work, if it happens, you have to be more
competitive.
Another question, Mr. Wagoner. I hate to pick on you. You
were talking about legacy costs, and when you move into a new
market, you get rid of a lot of the legacy costs. What makes
you think that you can't cut some of the legacy costs faster
under a bankruptcy type of format rather than government
restructuring, which you are basically asking for right now?
Mr. Wagoner. First of all, the pension legacy costs we have
paid for, that is done. Our pension plans are essentially fully
funded. So there is no advantage or disadvantage from a
bankruptcy there.
Second of all, as Mr. Gettelfinger pointed out in his
comments to the chairman's question, the post-retiree health
care benefits, we have reached an agreement where those will be
the responsibility of this trust in 2010. So we will also no
longer have those in front of us. We do have some payments due
to that trust which Mr. Gettlefinger has agreed we can stretch
out over a period of time. We need to sit down and discuss
those. But we don't really think from that perspective a
bankruptcy helps a lot on those issues. And meanwhile, it is
going to cream our revenues. And if our revenues go down like
this, we will never be able to cut costs enough to get ahead of
that.
Mr. Barrett. Mr. Nardelli, I know that you guys have
brought a plan forward, and you are asking Congress for certain
things. Are you asking for things in this plan that you
wouldn't ask for, having brought it to Congress, if that make
sense? Are you bringing this plan and asking for things to
appease Congress that you wouldn't normally ask for in a
regular plan if you were going to a financier?
Mr. Nardelli. No. I think if you look at the plan that we
have submitted, and it is a 120-page document, what we are
asking for is a $7 billion bridge loan. If I could just build
off Mr. Wagoner. We started in August when we became
independent from Daimler, we started on this massive
restructuring. And I think the reality is two things really hit
us. One is 17 million to 10.5--
Mr. Barrett. Let me cut you off because my time--does it
give you enough flexibility? Does this plan with the government
mandates on CAFE standards and things like this, does it give
you the flexibility that you need to turn your companies
around, to make them profitable, to compete with your
competitors?
Mr. Nardelli. I believe it does.
The Chairman. Time has expired. Any further answers will
have to come in writing.
The gentleman from Pennsylvania is now recognized for 5
minutes.
Mr. Kanjorski. Thank you, Mr. Chairman.
Gentlemen, let me ask you a few questions. One, you were
examined by Ms. Brown-Waite of Florida just recently. And a
masterful obfuscation. I think she was asking a very simple
question, and I have the same question. Why don't your equity
owners provide the equity necessary for your company to go on?
I do not want to hear whether there are pension funds or they
have obligations. Isn't the truth of the matter that they do
not feel that the presently structured auto industry of the
United States is survivable in its present form?
Mr. Nardelli. Sir, they never conveyed that to me.
Mr. Kanjorski. Then why won't they give you any money?
Mr. Nardelli. I assume they have no access to additional
funds.
Mr. Kanjorski. I think she indicated they had $20 billion
on hand, $24 billion. That is a considerable amount of money.
Mr. Nardelli. I don't know if that is in the form of cash
or in the form of assets, sir.
Mr. Kanjorski. But the taxpayers of the United States have
that money on hand, and we should provide it as their
representatives much sooner than your equity owners?
Mr. Nardelli. I am only suggesting that I have tried
mightily to get funds to keep Chrysler alive.
Mr. Kanjorski. I listened intently to the Senate
examination yesterday, and I thought Senator Corker was
excellent. And he basically told all of these gentlemen that
from his business perspective as a businessman--he personally
is a very successful businessman. He looked at your balance
sheets, and he said they just don't work; you can't retire your
present debt on your plans over the next several years unless
there is a restructuring, unless there is haircuts taken by
your creditors, etc., etc.
Now, I am not familiar with all of the facts of those
things, but I am reasonably willing to assume that he has
looked at it. And I think most of you agree that something has
to be done. This balance sheet doesn't make sense to a
continuing, successful, viable business. If that is the case,
it seems to me this is the time.
Look, labor stepped forward. They have indicated they are
ready to step forward again. Why can't the creditors step
forward? Why can't the suppliers step forward? Why can't the
dealers step forward? Why can't management step forward?
Instead of a dollar a year, I think you ought to take no
greater salary than any of the successful Japanese companies
for as long as you are indebted to the United States. When you
are out, I don't care what you do, but until that time, you
shouldn't be getting 20 times the salary of a successful
Japanese automotive executive. It is ridiculous.
Now, those things are minor and can be solved. It just
seems to me--and my frustration is, hey, we are running out of
time. I don't know if you sense it as I do, but you all are
telling us you are within 25 days of bankruptcy potentially.
This is not a time for us to horse around. What do we have to
do? A very complicated agreement. Not that complicated that it
can't be done in a reasonable period of a month or 2 months,
but too complicated to put together and get done before the end
of this month. So we are looking at the precipice. You are
going to go over if we don't do something.
It seems to me yesterday there was agreement in the Senate
if General Motors were able to get an advance, a bridge-bridge
loan of $4 billion, if Chrysler were able to get a bridge-
bridge loan of $4 billion, and Ford can manage itself until
March 31st, we can get a hiatus here until March 31st for the
new Congress and the new President to act; is that correct?
Mr. Nardelli. It is correct for Chrysler.
Mr. Wagoner. For General Motors, the number we have
indicated that we need up to $4 billion at the end of this
month. Also at the end of January. And so the total amount that
we would need as we see it today through the end of March would
be up to $10 billion.
Mr. Kanjorski. Up to $10 billion?
Mr. Wagoner. Yes, sir. But we do have collateral that we
could offer against that.
Mr. Kanjorski. And Ford?
Mr. Mulally. We believe we have sufficient liquidity. We do
not need any money.
Mr. Kanjorski. So you need an adjustment somewhere between
$14 billion and downward, perhaps as low as $10 billion, to
give us the 90 days we need as a Congress, both House and
Senate and the new Administration, to put something together;
is that agreed?
Mr. Nardelli. Yes.
Mr. Wagoner. Can I make one more comment, sir? It is
important. We were hoping to use the 90-day period to do
exactly what you suggested, which is to work with debt holders,
to work with UAW, to use that time period--
Mr. Kanjorski. Why aren't we doing that? Why are we all
sitting around talking about a business plan here and a
business plan there and time is running out? And it almost
looks to me like you hope that with that target coming down on
us, you are going to get us to do something and just throw the
money out there and say, go ahead, do with it as you will.
I tell you this: I do not sense the Congress' appetite
right now to do that. I think you are skating on extremely thin
ice. And I happen to be a friend of your industry and your
intent to get this thing straightened out. I think what you
have to do is come up with a plan for success. That means the
haircuts have to be taken, the negotiations have to be--we have
to know where we are going. I would urge you to do that.
The Chairman. The gentleman from Georgia, Mr. Price.
Mr. Price. Thank you, Mr. Chairman.
I want to just make a comment about your bringing up the
issue of health care and the fact that it would reduce costs
significantly. I am reminded of the comment by P.J. O'Rourke,
who said that if you think health care is expensive now, just
wait until it is free, as the gentleman from South Carolina
mentioned. Somebody will be paying for it. And whether or not
it is in the program that you all have identified or elsewhere,
it will certainly be paid for.
Mr. Gettelfinger, you have been saluted for concessions
that the unions have made, and I want to join the individuals
who are commending you for those concessions. I want to address
the issue of the jobs bank. It seems to me that the suspension
of the jobs bank, which, as I understand, is a program that
pays individuals who have been laid off for an extended period
of time a significant amount of their income--the suspension of
that program is an admission that affects the financial
viability of the company. To me it seems that way. If that is
the case, wouldn't it be appropriate to suspend that program
definitely, end it definitely, as opposed to just suspend it
for a finite period of time?
Mr. Gettelfinger. Yes, sir. What we are doing is, we are
looking at that. But I would just like to point out to you that
some of the competitors, the foreign brand competitors, pay 100
percent when their workers are off. But we have set that aside.
We recognize that it really--
Mr. Price. So you are open to ending the program?
Mr. Gettelfinger. What we are doing right now, sir, we have
taken action on Wednesday of this week to suspend the jobs bank
program, to immediately enter into discussions with the
companies and work out the mechanics of the program. But also
know that we have a very few number of people in there. We have
a number of people who would be coming in there. So we want to
enter into discussions with the company in a way as humanly
possible in that program without a lot--
Mr. Price. I am looking forward to positive results from
that. It is somewhat humiliating, I would suggest, to have you
all sitting here and taking advice about how to run your
business from Members of Congress, many of whom have great
expertise in certain areas, but I would suggest isn't
necessarily running a large global company.
My good friend from Illinois talked about appropriate
recommendations regarding marketing, and you ought to take some
of those into advice, I am sure. If you get this money,
however, there are all sorts of folks who are working in other
companies, building automobiles in the United States. Those
individuals pay taxes. If you get this money, some of their tax
money will go to compete against the company for which they
work. Why is that fair?
Mr. Wagoner. If I could just comment. In many cases, those
companies are seeking support from their own governments right
now in their home countries for funding. First of all, as you
know, this is being done almost globally due to the crisis in
the industry. Second of all, many of those companies benefited
from very extensive incentives to locate plants in States, and
so their costs were reduced from the beginning. And it is
certainly true, I suspect, if we were building all new plants,
we could seek similar support. But we have such a huge existing
manufacturing base, that frequently the kind of support you get
to retool an existing plant would understandably be less than
paying for a whole new plant.
Mr. Price. You understand the questions that we get at
home, though? Why should my tax money go for this activity?
Have any of the three of you looked at how many billions of
dollars your companies might be able to save with specific
decreases in the three biggest cost drivers, taxation and
regulation, liability costs that you have, and made proposals
that might result in significant decrease in the cost of doing
business?
Mr. Nardelli. Sir, from our standpoint, unfortunately, we
have not been profitable, so there is no Federal tax suggestion
that--
Mr. Price. Your liability and regulatory costs aren't
anything?
Mr. Nardelli. No, they are.
Mr. Price. Have you looked at what those costs are and how
we might be able to assist in that area?
Mr. Nardelli. We have not explored significant
opportunities on how to get those down.
Mr. Mulally. Nothing there, except that I think that what
we did last year during the 2007 Energy Independence and
Security Act to come together, what we really were going to do
about fuel economy was a very important step. We have one
standard.
Mr. Price. GM, taxation, liability, regulatory costs?
Mr. Wagoner. Same position on taxation. We don't currently
pay taxes because we have a tax loss carry-forward position
that is huge. Regulatory costs--and obviously we have, you
know, less than we used to, but significant costs related to--
Mr. Price. My time is about to run out. I would encourage
you to--
Mr. Wagoner. We can get you a number.
The Chairman. Go ahead and finish.
Mr. Price. I would just encourage you to put a sharp pencil
to those issues.
The Chairman. The gentlewoman from California.
Ms. Waters. Thank you very much. Again, I would like to
thank you, Mr. Chairman, for this opportunity to try and figure
out what the situation is with our automobile manufacturers and
see what our responsibility may or may not be.
As you know, I have focused on dealerships, and small ones,
because I believe that many of these small, independently owned
dealerships are anchored in many communities that provide
support, but not profit. They create jobs and stability and
development. I have not seen the kind of discussion about
assistance for these dealerships that would make me want to be
very anxious about supporting a rescue plan.
Of course, let me say to UAW, we are very concerned about
the workers, and we believe that if we are able to move to the
point of a rescue plan, that we would be able to save many
families who depend on these companies that they have worked
with for many years, and that those families are key to the
stability of our community. So we are concerned about that.
But I don't see any discussion about how you plan to--I
understand when you say you are going to do consolidation. You
don't explain it thoroughly, but to me it looks as if
consolidation means that the big dealerships with access to
capital and multiple locations will be able to buy up the small
independent dealers and just put them out of business, and that
bothers me. I don't see the small dealers having access to
capital from our banks and financial institutions or your
financial arms.
Chrysler, for example, when you were purchased by Cerberus,
it looks as if they purchased, according to an article, for a
very low price of $7.4 billion. Only $2.2 billion of that
purchase price was for Chrysler's carmaking operations. The
other $5.2 billion or so bought Chrysler Financial Services,
which is doing very well. But there is no commitment that I see
from that financial services operation to give support to those
small dealers who have been profitable, operated their
businesses good in the past, and only got into trouble with
this economic turndown. Chrysler, you have money to help these
dealers. What do you plan on doing for these small, independent
dealers who are the anchors in these communities?
Mr. Nardelli. The current financial structure of Chrysler
Financial is the arm that is providing the capital support for
the dealers. That is the current funds flow. It does not come
out of the car company. It does come out of the financial arm.
I don't know the exact amount.
Ms. Waters. But they are not making any money available to
these small dealers now. As a matter of fact, they are calling
in some of the commitments that were made in asking people to
pay off these loans. What do you plan on doing--you are here to
get help. What are you going to do to help them?
Mr. Nardelli. You are exactly right. Due to the capacity
limitations on Chrysler Financial because they have not been
able to access the window, in fact they cannot make additional
funds available, they have certain tripwires that if they cross
over, that they will be in violation of some of their governing
documents. So that is to our earlier conservation today, it is
critically important that Chrysler Financial gets access to the
TARP funds both to improve liquidity and capacity for our
dealers and our customers.
Ms. Waters. But it seems to me that Cerberus is doing
pretty well. They basically own Chrysler. They have done things
like--well, literally private equity fund that purchased
Mervyn's and stripped it of all of its real estate and made a
lot of money on it. The financial arm is doing very, very well.
Why can't that be used for support for these small dealers
rather than saying just sell out or get out?
Mr. Nardelli. I don't--to be honest with you, I don't know
the extent of the financial funds available at the Cerberus or
parent level. I know that, again, they have investment funds
that have certain criteria relative to how those funds might be
used and where they are invested. So I really can't give you a
more complete answer, but I would be happy to try to get that
for you.
Ms. Waters. Is there a commitment by any of you to give
support to these small, independent dealerships that include a
lot of minority dealerships that are going to close down?
Mr. Mulally. Absolutely. In Ford's case, as you well know,
we have the Ford Motor Credit Corporation. We have provided the
financing support for all of the dealerships, 77 percent of
them. And we are absolutely committed to our small dealerships
as well as the larger ones. The most important thing we can do
right now is get them the credit. That is why we are
encouraging the Fed to approve this--and this medium-term
asset-backed commercial paper.
The Chairman. The others will have to answer in writing.
The gentlewoman from Illinois.
Mrs. Biggert. Thank you, Mr. Chairman.
In my opening statement, I asked the question about what
are the reasons that people are not buying the cars. And I just
wondered since most of us sitting up here have been doing
surveys--or a poll, as we would call them, during the past
year, I wondered if any of your companies do surveys annually
or whatever to determine what the customer thinks.
Mr. Wagoner. Continually we do surveys.
Mrs. Biggert. So you know the answers why people are not
buying your cars?
Mr. Wagoner. Well, I don't know. But, yes, basically what
is going on now is I think the macro issues are customer
sentiment is very--consumers are concerned about housing and
their jobs and stuff, so they are not disposed to buy things
they don't have to. Second of all, we talked so much about
credit availability I think is a huge issue. And then I think
just concerns about the economy are the big issues that I would
say.
Mrs. Biggert. If I might return then to the other issue of
the ILCs, which I had mentioned also and was brought up several
times. And then Mr. Manzullo touched on the fact that the
community banks, the credit unions, and the local branches of
national banks are really standing in the wings waiting to help
to--and provide finances. How exactly are you working with the
existing financial institutions to ramp up financing for
consumers?
Mr. Nardelli. I would like the opportunity to answer
because I didn't get a chance. We got approval from Chrysler
Financial to go out and test that market. We gave half of our
country the opportunity to with some private--with some
publicly traded companies. And in November, we consider half of
the volume, 80,000 plus units that we sold in November, 573
were supported by financing outside of Chrysler Finance.
Mrs. Biggert. According to the Wall Street Journal in an
article published Wednesday--I believe Wednesday afternoon--
they said that, ``The auto firms don't appear to have
collateral that would meet the Fed's lending criteria.'' Is
this true?
Mr. Wagoner. We have, as I have mentioned earlier,
significant collateral that is undesignated right now. I am not
familiar with the specifics of the criteria of the Fed. I can
get back to you on that.
Mrs. Biggert. All right. Thank you.
Would anybody else like to add anything to that? Okay. Then
if Ford and Chrysler were approved to be ILCs tomorrow, which
would technically make them eligible to apply for TARP funding,
do you think you would get the TARP funding. And, GMAC, if
you--if you are a bank holding--would the Fed give you a loan?
Mr. Nardelli. We certainly would hope so; that if we
received approval and got access to the window, as I mentioned
earlier, we are looking for $1.6 billion immediately and
another $2 billion for wholesale and retail, which we would be
able then to provide to our dealerships to try to get some more
volume into our business.
Mrs. Biggert. In your plan submitted to Congress, you
mentioned the introduction of 20-plus new models by 2012. And
each of you also highlights the significant investments the
overall industry has made in R&D. With this in mind, have you
identified specific ways you will shorten the car concept-to-
dealer timeline in order to meet long-term CAFE increases and
customer credit? And I am worried about this because it seems
like the transplants have really been able to bring to market
some of their ideas a lot faster than you all have.
Mr. Wagoner. I would observe--I think that is a comment
that for some of them--not all of them, by the way, but some of
them--might have been true 5 or 10 years ago. Generally today,
I think all of us use the same kind of computer-based
engineering design systems so we can move through much more
quickly than we used to. And I think the competitive band is
very tight right now.
Mrs. Biggert. Would that be like 2\1/2\ to 4 years?
Mr. Wagoner. Right. And it depends on--you know, if it is
an all new vehicle from the ground up, it is going to take
longer. If it is a modification of an existing platform, it
could be at the shorter end of the timeframe.
Mrs. Biggert. Thank you.
I yield back.
The Chairman. The gentlewoman from New York.
Mrs. Maloney. Thank you, Mr. Chairman. Mr. Chairman, you
raised a very relevant point earlier when you mentioned the
efforts by our guests to block laws that we have adopted in our
States. In fact, 16 States have adopted or planned to adopt
laws to lower greenhouse gas emission standards. And my basic
question to you is, why in the world should my constituents or
taxpayers in New York State or any State provide $38 billion in
loans for your companies if you will continue to attempt to
undo laws that we have adopted in our States? Wouldn't that be
equivalent to giving you money to sue us?
So I would like to ask each CEO, will you pledge today to
cease all legal and lobbying efforts to block the California
greenhouse gas standards for cars that have been adopted in New
York and many other States, and tell us, are you going to use
this money to sue us, or do you pledge today that you will
block your efforts to lobby and sue States that have adopted a
stricter antipollution standards?
Mr. Nardelli. Let me try to go first. It is not our intent
to use the $7 billion, if we are fortunate enough to get a
favorable decision, to sue those States. I would also say that
it adds a level of complexity and cost at a time when we are
trying to get simplification. To be able to produce cars unique
to a State or unique to a city in some cases would add
tremendous complexity in manufacturing and in our technology.
Mrs. Maloney. Thank you.
Mr. Wagoner?
Mr. Wagoner. Yes. I would just add that we have been of a
view and continue to have a view that a single national
standard as aggressive as it would be is a far more efficient
way to reduce greenhouse gas emissions and reduce imported oil,
so that remains our strong preference.
Mrs. Maloney. And the California standard being adopted by
16 States is moving toward a national standard.
Mr. Mulally. We agree with one national standard.
Mrs. Maloney. Secondly, my constituents are asking about
your efficiency, your fuel efficiency. Many countries have far
more fuel-efficient cars, and they want to know why you can't
meet the standards of other countries. We can't export if we
are not more fuel-efficient. I noticed in your plans you have
talked about your standard and your goals of becoming more
fuel-efficient, and I would like to hear the year and
specifically how many miles per gallon you propose to do by
2015.
And secondly, I would like to hear your comments on
electric cars. I know that GM has talked about having one on
the road in 2010. And Ford, in your plan you talked about
moving towards electric cars.
But before you answer, I would like to request if the
chairman would allow me to place in the record--
The Chairman. Without objection.
Mrs. Maloney. --a report that was issued earlier at a Joint
Economic Committee meeting which I chaired on the unemployment
numbers for this month. They were the worst in 124 years. We
lost over 533,000 jobs, and the Commissioners of the Bureau of
Labor of Statistics made a very compelling point for a bridge
loan to the auto industry, indicating that 2\1/2\ to 3 million
American jobs are directly or indirectly tied to this industry.
Through November, almost 20 percent of all job losses in 2008
were directly associated with the auto industry; 13,000 auto
jobs lost this month, 135,000 this year; 115,000 more jobs lost
this year with auto dealers, and 240,000 workers, companies are
directly employed now to the auto industry.
I would like to place in the record the full report, but I
would like to hear your goals and your benchmarks. What do you
propose to achieve in fuel efficiency and also your comments on
electric cars and your plans to move there and what would that
mean to our economy, our fuel efficiency, our jobs in America.
Mr. Wagoner. Just in the interest of time, our report lays
out our fuel economy plans, but they involve significant
increases over the next 4 years and I would be glad to share
with you the 2014 numbers. I don't have them right with me. It
shows a dramatic improvement, and I think I can just say we
share your passion for developing electric vehicles. We think
that is going to be the breakthrough for the future.
The Chairman. The other responses have to be in writing
because the time has expired. I said we would end at 12:30. I
am going to ask for your indulgence. We have one member on this
committee from Michigan, and if we go another three members, we
can reach him. If members are very good about keeping to the
time, if that is okay, I am going to go ahead so that we can
reach our colleague from Michigan. Now, it is the gentlewoman
from West Virginia.
Mrs. Capito. Thank you, Mr. Chairman. I want to thank the
panelists, too, for coming before us. I have a question for Mr.
Wagoner. In your proposal brought forward, you have asked for
$4 billion to take you to the end of the month, $4 billion to
take you to the end of January. Just briefly, can you give me a
snapshot of what is $4 billion between now and December 31st
going to be used for? You recommend an oversight board as well
when you and I both know that the creation and sustainability
of an oversight board in 26 days is pretty much impossible. I
just want to know what is $4 billion getting you, and then what
is it going to get you in January? Is it like paying your
mortgage every month or something?
Mr. Wagoner. No. Basically the funding request up to the
end of the month of up to $4 billion is what we think we need
to be able to make all of the significant annual monthly
payments that we normally make at the beginning of the
following month.
Mrs. Capito. So payroll and production costs?
Mr. Wagoner. Right. And suppliers, etc. The reason the
number is so high is that production has been slashed over the
last weeks because of dealers' inability to finance wholesale
units or to get wholesale financing.
Mrs. Capito. Is it the same?
Mr. Nardelli. Yes. For us, we have $11.6 billion in
expenses. $8 billion is for suppliers, $1.2 billion for
vendors, $900 million on wages, healthcare is $500 million, and
capital expenditures are $500 million, so we have $11.6 billion
of distribution during the quarter. And so the $4 billion of
inflow, plus a revenue inflow, would allow us to have a minimum
level at the end of the first quarter.
Mrs. Capito. So you are anticipating that by March 1st, the
sales will back up and the ship will get righted at least to a
certain extent. Is that why it goes down in March?
Mr. Nardelli. By March 31st, but we are assuming a very,
very depressed January in our analysis. The first quarter is
typically seasonably low. And we believe January will be even
more extreme relative to our overall manufacturing output as we
try to get dealer inventory back down to an acceptable level.
When I took over here, there were 600,000 units in the field.
We got it down to 400,000. We would like to get it lower to
reduce the floor planning cost for our dealers.
Mrs. Capito. And another question I had was obviously the
dealers have made a push to all of us, and I congratulate them
for putting really the human face of a small business and the
amount of workers and the community involvement that they all
have in our States and in our districts, and I think that
really helps. I was actually, just to add a little levity to
this, I was thinking about, you know, we think about our cars
and our automobiles, and I started thinking about all the cars
that I had, and I remembered all the names that we had. You
know, we had Leroy and Big Blue and Crasher and Goldie, and
then the one my dad drove which was an old Chrysler wagon and
called that the ``chick magnet.'' So I mean, everybody has a
name or an attachment, sorry, Mr. Chairman, for their
automobile.
The Chairman. It is just not something I would ever want to
drive.
Mrs. Capito. Anyway, getting back to the dealers, they are
very fearful of the bankruptcy option. They feel that the
confidence that is lacking in the consumer right now is going
to become exasperated by any kind of bankruptcy, whether it is
preplanned or whatever. And I think what is really killing us
right now is just this uncertainty. We don't know what
direction it is going to go. It is almost like tell me what the
pain is going to be and let me move forward. And so I
understand that in a context of putting it within a time limit
is where you all must be feeling this.
Is that sort of the general feeling that you have, we just
have to find an end here so we can rebuild? I would also like
just, and I know I have taken probably all of my time, but the
bankruptcy option, if you could just go back through that one
other time. I know Mr. Gettelfinger did a nice job on that.
Mr. Nardelli. The quick answer to one is this morning's
survey that was reported; 57 percent of the consumers surveyed
would not buy a vehicle from a company that they anticipate is
going into bankruptcy.
Mrs. Capito. Well, I mean, I have already had two people
tell me in the last week they had options that went the other
direction because of the fear of bankruptcy. Thank you, Mr.
Chairman.
The Chairman. The gentleman from North Carolina.
Mr. Watt. Thank you, Mr. Chairman. I thought I was about to
get cut off, so I appreciate you extending the time. I, in my
opening statement, encouraged the members to go out and look at
your new generation cars, which I did earlier today. But one of
the concerns I have is that none of those cars are yet on the
market. Is there anything that can be done to speed up the
process of getting those cars on the market? And is there
anything that can be done, I asked this question out there to
the people who were out with the cars this morning, to create a
bridge for people who are buying these first new generation
cars, so that when the second and third and fourth generation
more efficient, more cost effective comes on the market, those
people don't get stuck? Because I think that is really stopping
a lot of people from buying cars now, because they think next
year there is going to be a more efficient car on the market.
Is there anything that can be done to speed up and create that
bridge for people who are willing to take the front end risk?
Mr. Wagoner. I would like to comment that we do have a lot
of hybrids and flex fuel vehicles on the road today. But we do
hope that the next generations will get better and at lower
costs. I know the President-Elect has expressed a lot of
interest in energy policy. What would really help to move to
the next generations faster are closer alignment between
government policy on energy and the expectations and the
technologies that we work on in the auto sector, because the
issue is getting scale to battery manufacture, fuel cell
infrastructure. Pick your technology. The issue is kind of
breaking through the traditional oil-based infrastructure that
we have into one of these new infrastructures. By the way, that
is one of the reasons electricity makes sense, because most
everybody--
Mr. Watt. Well, we have a Volt that is sitting out there
now, that won't be on the market until 2012. Is there anything
to do--or 2010, I guess. Is there anything that can be done to
advance that Volt to the point where it can be sold next year?
Mr. Wagoner. We have, I checked the other day, 1,200
engineers and designers and research people working on trying
to get that car to market as soon as possible. As this whole
concept of developing this battery technology and making it
robust for automotive use, we are hustling like crazy to get it
to market in 2010. But I do think your point is relevant. What
can we do to ramp up the production faster and get to the next
generation faster. And this is where I think, for example--
Mr. Watt. And what can you do to protect those who are
willing to take the first generation as you evolve to the next
generation?
Mr. Wagoner. We are going to have to give them things like
extended warranties that are transferrable so they don't have a
burden of trying out the new technology. And I think beyond
that we have a very long waiting list for the Volt right now,
so we have a lot of people who want to buy it.
Mr. Watt. That is good news.
Mr. Nardelli. I think one specific answer is we went to
Denso, which is one of the cooperative companies owned by
Toyota who does have advance battery technology, but as you
might guess, no capacity. And so back to the discussion we had
earlier this morning, the faster we can get a cooperative
effort between national development, government and the
manufacturers, from our point of view, the battery is probably
the single biggest limiting factor in us being able to get
those vehicles on the road.
Mr. Watt. Let me try to get another question in to Mr.
Gettelfinger in particular. I do talk radio shows sporadically
and Al and Stacey are always after me at WBT. They are
concerned that you are cutting down employees as part of this
transition rather than employ more people. And I say, well,
what about the people you are saving the jobs for; go through
that equation again for Al and Stacey at WBT in Charlotte.
Mr. Gettelfinger. Well, unfortunately, there has been a lot
of restructuring taking place in the industry. If you go back
in the past, while people didn't think restructuring was going
on, it really was. In 1979, I believe it was General Motors had
460,000 UAW members. Today they have had 63,000 on the rolls.
Since September of 2005 through September of 2008, General
Motors has reduced 47,000 members, UAW workers. At Ford, that
number is through 2005 up to this point it is 37,000, I
believe.
Mr. Watt. Give me that in writing. My time has run out and
I have to yield back.
Mr. Gettelfinger. The point is there has been major
restructuring going on in the industry. And it has been
extremely painful for our membership, for the company's
employees, for their families, and for the communities and
States where they live.
The Chairman. Mr. Gettelfinger, I think if I heard the
question correctly, what would also be requested would be why
this is in the interest of the workers.
Mr. Watt. That is the part of it that people don't
understand.
The Chairman. Why those arguments don't figure up. So that
is what I think the gentleman would like in writing.
Mr. Watt. Give me something in writing so I can send it to
Al and Stacey.
Mr. Gettelfinger. Okay. Thank you.
The Chairman. The last question comes from the gentleman
from Michigan.
Mr. McCotter. Thank you, Mr. Chairman. I appreciate your
indulgence. I have a question. But I would like to go back to
what I laid out as a potential proposition for a compromised
bill that could be passed by both Chambers and signed into law
by the President. Because it appears we are really having two
conversations within Congress. The first conversation is
whether or not there should be a bridge loan to the auto
industry. And that is predominantly what you are encountering
in front of both the Senate and in front of the House, are
Members grappling with the question of whether a bridge loan to
the American auto industry is a good idea.
The second step, which is one that we are going to have to
take, I hope relatively quickly, to facilitate that process is
what should such a bridge loan look like, starting with where
does the money come from. I have to point out at this juncture
that one of the misconceptions in the public's mind is that we
are talking about a new appropriation of new money. That is not
what the discussion that I have heard has been about. We are
talking about redirecting already appropriated money.
So for those, especially on my side of the aisle who say we
are going to save taxpayers $25 billion or $34 billion by
voting against or denying this bridge loan they are mistaken,
because the money is already targeted and appropriated to be
spent elsewhere. The money that we are talking about for a
bridge loan is going to come from one or both of the following
places: It is going to come from TARP funds, which were going
to go to Wall Street firms if they are not used for the bridge
loan; or they are going to come from DOE energy innovation
loans which are going to be expended as well if not applied to
the bridge loan. Which is why I continue to go back to a
request for people to seriously consider the Solomonic approach
of taking half of the bridge loan from the TARP funds and half
of the bridge loan from the DOE funds.
The logic behind this is quite simple. The TARP funds are
there to help unfreeze the credit market. Mr. Paulson in front
of this committee the day before you first testified said that
the underlying problem in the credit market is the foreclosure
crisis and that we must do everything we can to end the
foreclosure crisis. That will unfreeze the credit markets. So
my first question, and I will do them one at a time, preferably
in a series and let you answer. The first question is if the
bridge loan is not approved, you will face a bankruptcy
proceeding and will not thousands of your employees potentially
face foreclosures on the homes they are currently in and that
would undermine the very logic behind Mr. Paulson's TARP plan.
The second question is, the DOE funds are there to spur
energy innovations and green technologies. As we all know, the
auto industries and the American industries have been leaders
in these innovations, especially for your research and
development funding. That strikes me as a reasonable use of the
DOE energy funds, is to preserve what you are already doing by
incorporating it into a bridge loan. Money is fungible. What
would happen if the bridge loan is not approved and you have to
face bankruptcy, what happens to the research and development
you are currently engaged in and how far will that be set back.
The final question is regarding taxpayer protections, and
it is for Mr. Gettelfinger. I believe that what you said about
the incoming Administration and being the stakeholders to the
table to have discussions and have a process in place to bring
back to Congress not a bankruptcy proceeding, but something
that could be called an accelerated restructuring map where all
the stakeholders come up with an idea, show the viability and
come to Congress not merely for money, if at all, but what we
can legislatively do to help facilitate the industry's
restructuring. I think that is something that this committee,
Mr. Chairman, if legislation is pursued, should try to
facilitate within that legislation to show our commitment to
it. Because that, in the long run, is what is going to help the
restructuring process after the bridge loan is necessitated and
hopefully approved. And I would like you to just talk briefly
more about your ideas in that regard because I think it is a
very timely idea, and it goes to the heart of taxpayer
protections in the bridge loan. Those are my thoughts.
The Chairman. We will extend the time a little bit for that
question and that will wrap it up. So if each of you could take
about 30 to 45 seconds on this we can go.
Mr. Wagoner. I will just start. There were two questions
for us, one asked if bankruptcy would impact employees'
abilities to pay mortgages. I feel like that is an absolute
certainty. And it would go far beyond our employees; it would
also be dealer employees and supplier employees. So I think
your thesis is right. You ask what the impact of bankruptcy
would be on our green technology, and it would be a horrible
waste because we have committed a huge amount of money to
develop electric cars, fuel cells, flex fuel. And it would be
the United States throwing away a massive investment, and in
some cases a leadership position globally which would seem to
be a terrible loss.
Mr. Nardelli. Sir, for us, if we were denied the funds, it
certainly would push us in that direction and possibly even
worse, to liquidation. There are 1 million people in our
calculation counting on Chrysler, point one, who certainly
would be unemployed and therefore run the risk of not being
able to pay their mortgages. Second, in this plan, there is
about $12.8 billion, including some of the energy funds that
you reference. But again, it would be funds not expended. And
therefore payments not made either to engineers, to scientists
or to people who make tools and dies and capital for the future
of our energy independence.
Mr. Mulally. Even though we are not requesting a bridge
loan, it is so important, this industry so important, that is
why we have joined our colleagues. Because if one of us goes
in, it has the potential, as we have talked about, to take all
of us in. And what that would mean to the economy would be
tremendous. Then, instead of being part of the solution to get
through the worst economic crisis all of us have been in across
this great country, we would be part of the problem.
Mr. Gettelfinger. Then on the question of the stakeholders
coming to the table outside of bankruptcy with some kind of
oversight, whether it be a trustee or other named governance,
that all the stakeholders come to make sure that we share in
the sacrifice that has to be made to make these companies
viable.
The Chairman. The panel is dismissed with our thanks, and
we will ask them to leave quickly. People who want to talk to
them can talk to them outside. We will get the new panel in.
Please leave right now. Go.
We will now proceed with the second panel. We will begin
with the Acting Comptroller General, Mr. Dodaro. I appreciate
the fact that you are not in the best of physical health right
now, and I thank you for accommodating us. The Comptroller
General from the Government Accountability Office.
STATEMENT OF THE HONORABLE GENE DODARO, ACTING COMPTROLLER
GENERAL, U.S. GOVERNMENT ACCOUNTABILITY OFFICE
Mr. Dodaro. Thank you very much, Mr. Chairman. I am pleased
to be here today to assist your deliberations and all the
members of the committee's deliberations on the automakers'
request for Federal assistance. GAO has been involved in
Federal rescue efforts and bailouts dating back to the 1970's.
And over this period of time, we have developed three basic
principles that we think can help guide congressional
deliberations in this particular matter. First, is clearly
identifying the problem at hand. Clearly, here we have a
confluence of short-term liquidity issues as well as
fundamental restructuring of the industry against the backdrop
of a very uncertain economic climate.
The second fundamental principle is determining the
national interest and whether or not it is in the national
interest to intervene with Federal assistance. Once that policy
decision is made, there needs to be a clear articulation of the
government's goals and objectives and an exit strategy so that
the businesses can be returned to their normal status as soon
as possible. The third fundamental principle is protecting the
government's and the taxpayers' interest. Here concessions are
important. Concessions in this instance from management, labor,
creditors, suppliers, dealers. There needs to be collateral.
The Federal Government should be the first lien stakeholder in
terms of recouping the money in the event of a particular
problem. There also needs to be compensation for the risk
through warrants or other things so that if there is an upside
to the company's recovery, the Federal Government can then
recoup not only its initial investment, but benefit from the
risk that it has been taking.
There needs to be controls over management. In this case,
making sure that the Federal interests are protected. Now,
there are two main points I would like to make here, and then I
would be happy at the appropriate time to answer questions.
First, it is critically important from my standpoint that the
Congress consider having a strong independent board overseeing
and protecting the Federal Government's interest in this
matter. The board needs to have the right leadership, the
experience, and the resources to be able to look at the
operating plans of the companies, determine when reimbursements
should be made, overseeing the use of the money and
anticipating future events that might be occurring both in the
general economic situation, as well as with these companies
themselves, so that the Federal Government is not put, and the
Congress in this case, in a position of making future immediate
decisions that are made over time.
The control board function and independent board has worked
well in the past both with the Chrysler loan guarantee effort,
and in our opinion also worked well most recently with the
airline stabilization board which was set up to make loans to
the airlines following September 11th.
Lastly, there is a real opportunity here, we believe, to
look at this both from an immediate issue, as well as a long-
term issue given the fact that the companies are presenting the
more immediate needs to the Congress so that in our opinion,
there could be an approach made here that is a two-pronged
approach dealing with the immediate situation that they have
and then dealing and protecting the government's interest not
only there, but setting up a longer term approach to this,
particularly as the restructuring efforts would proceed if the
Federal Government determines to intervene in this matter.
So that concludes my opening summary. I also want to
underscore the fact that GAO stands ready to help the Congress
in making this important and very difficult decision. Thank
you.
[The prepared statement of Mr. Dodaro can be found on page
136 of the appendix.]
Ms. Waters. [presiding] Thank you very much.
Mr. Altman.
STATEMENT OF EDWARD ALTMAN, MAX L. HEINE PROFESSOR OF FINANCE,
LEONARD N. STERN SCHOOL OF BUSINESS, NEW YORK UNIVERSITY
Mr. Altman. Thank you very much, Madam Chairwoman. My name
is Edward Altman, and I am a professor of finance at New York
University's Stern School of Business and director of its
research program in financial markets and credit risk. I have
been a professor at Stern School for 41 years, and my areas of
teaching and research expertise are in the area of corporate
finance, bankruptcy, and reorganization and credit risk. My
comments today will center on an alternative plan to that
presented by the automakers and also on the financial health
and solvency prospects of one of our largest, or the largest
automaker, General Motors Corporation.
I have been analyzing the health of GM and Ford for many
years. And we predicted that both GM and Ford would be
downgraded to noninvestment grade status several years before
it took place in the spring of 2005. I was one of the first
analysts to advocate that General Motors should file for
bankruptcy protection under Chapter 11 of the Bankruptcy Code,
but that the U.S. Government should not turn their back on
these very important automakers. And it is very important to
underlie that I am advocating that they get a $40 billion to
$50 billion loan, call it debtor and possession loan, in
bankruptcy, and I will elaborate that in a moment. On the other
hand, General Motors Corporation is asking for a $12 billion
loan and a $6 billion line of credit. Unfortunately, this
traditional loan, even for $18 billion, is inadequate and is
destined to fail in the current environment and will likely be
followed by additional requests for more rescue funds or a
bankruptcy petition. GM's cash burn of more than $2 billion a
month will reduce its assets even further and the loan would be
exhausted in 6 to 9 months. The global automobile industry, not
just GM, is facing the likely prospect of an extended and
severe economic recession likely to last for another 2 years.
In my opinion, GM should file for protection, yes,
protection, under the U.S. Bankruptcy Code as soon as feasible.
The benefits afforded to firms whose assets are protected and
whose fixed payments on most liabilities are suspended while
reorganizing under Chapter 11 is quite clear. And another
sometimes overlooked enormous benefit of a firm in bankruptcy
is that they are entitled to what is called debtor in
possession loans which gives the lender, in this case the U.S.
Government, as I am advocating, a super priority status over
all other creditors, unsecured creditors at first. Also, as you
heard in the testimony, at least General Motors has a number of
unencumbered assets that could be put up as collateral in this
debtor in possession lending. Therefore, first priority, even
if it doesn't work, the U.S. taxpayer is more than likely to be
paid back in full.
There have been thousands of cases of debtor in possession
financing in the past, and only 1, 2, 3 have actually resulted
in anybody who has made the loans losing money. Critics of this
idea will quickly point out that the current market for their
financing is closed. Because of that, and the enormous amount
that we are advocating, it is necessary that the U.S.
Government be the lender of last resort with respect to the DIP
financing. I advocate that the government work with one or more
banking organizations who are experienced in structuring and
monitoring DIP loans. Don't try to do it yourself. There are
experienced people out there. And I also suggest that the
Treasury Department encourage several of the banks who have
received the TARP loans to participate in the DIP financing.
This is actually an excellent investment for these banks to
be made at this point in time or any time in the past.
Bankruptcy status enhances the ability for management, the
existing ones or new management that could be brought into play
if the firm goes bankrupt. To renegotiate existing and legacy
pension and health care claims which is much more difficult
outside the protective confines of the court system. Some feel
that a GM bankruptcy announcement will cause immeasurable harm
to the U.S. economy. But pointing out the high likelihood of
bankruptcy will reduce the surprise impact.
In addition, a clearly articulated communication of
guaranteed government support will blunt consumers' fears of
liquidation, lost warranties, spare parts, availability, or
other bankruptcy costs. A bankrupt company under Chapter 11 is
not a liquidation. They stay in business.
[The prepared statement of Professor Altman can be found on
page 111 of the appendix.]
Ms. Waters. Thank you very much, Mr. Altman.
Now, Mr. Rohatyn.
STATEMENT OF THE HONORABLE FELIX G. ROHATYN, FGR ASSOCIATES,
LLC
Mr. Rohatyn. Thank you, Madam Chairwoman. I appreciate
being invited here. I had a certain level of experience in
areas sort of parallel to these over the last years, mostly in
connection with New York City's flirtation with bankruptcy,
which we avoided with great effort. I thought I could sort of
give you some of my thoughts and some of our experience since
we managed actually to survive. We found very quickly in May
1975 when the banks cut off the credit of the City of New York
that we had no other place to go except the Federal Government,
and the Federal Government quickly turned down our request for
an emergency loan.
So at that point we found ourselves pretty much alone and
felt that we--but we decided, certainly Governor Carey and his
people decided, that we should not file for bankruptcy, that
bankruptcy was the last thing we wanted to do in terms of the
economic life of the City, in terms of its social life, and in
terms of its future.
So having said, that we turned towards the only potential
sources of capital that we could identify; namely, the New York
City banks; and secondly, the New York City pension funds. We
negotiated with them the creation of the Municipal Assistance
Corporation which would finance the City, and the creation of
the financial control board which was the equivalent of what I
think you are talking about now in terms of oversight. And we
managed for 8, 9, 10 months a year to survive on this with this
combination. We did finally run out of steam. And a week before
we were about to file for bankruptcy, which was Thanksgiving of
1975, we were finished, we were about to file, we got some
unexpected assistance from abroad. Because the first western
economic summit was taking place near Paris and President Ford,
who was then President of the United States, attended that
meeting together with Arthur Burns, who was Chairman of the
Fed. And he brought us a message from the president of France
and from the chancellor of Germany which said, don't even think
about going bankrupt, everybody will think the United States is
bankrupt, and the dollar will have a crisis and you will have a
crisis.
This was 4 days before we were going to go into bankruptcy,
and luckily President Ford turned out to be more reasonable
than I thought he might be. He stepped back from the brink,
came back to the United States, and signed legislation that
gave us a seasonable loan of, I forget how many billion
dollars, but which was going to see us through until a time
when hopefully we could have a budget that is back in balance.
And that was about a 5-year pull. For the City of New York,
this was an absolute must that we just couldn't imagine the
City going bankrupt or filing for bankruptcy. And sure enough,
we also had the good fortune to elect a very good mayor, Ed
Koch. We had a spectacular governor. And within 4 years after
that, we had a balanced budget. For the next 30 years, we
balanced the budget except for 9/11. I doubt that we could do
that again now as a matter of fact. Now, I look at what is
happening today and the efforts that we are trying to make here
to save an industry which is powerful and important. And the
first comment that I would make is to hurry up because I think
the economy is falling out from under our feet, and there is
very little time left in which you will be able to act without
having whatever actions you take preempted by other players,
whether they are courts, whether they are the legislature, or
whether they are the State.
And so the first suggestion I would make to you is take
your ground and go to sign because you are going to run out of
time. Chapter 11 is not a very quick process, but if that is
what you want to do, do it. Or in my judgment, what is much
better is an agreement among the stakeholders with respect to
salaries, with respect to investment, with respect to balance
of power, if you will, which is what we did in New York City.
We created essentially in a city, which was heavily a union
city, we created a partnership between the business leadership
and the labor leadership and the State both in terms of how the
City was going to be managed, and how the pension funds and the
banks would work together to provide us financing until we
could hopefully do it on our own. I think at this point, I will
stand down.
[The prepared statement of Mr. Rohatyn can be found on page
220 of the appendix.]
Ms. Waters. Well, thank you very much, and we will be back
to you at the point that we begin to ask the questions.
I would like to now call on Mr. David Friedman.
STATEMENT OF DAVID FRIEDMAN, RESEARCH DIRECTOR, CLEAN VEHICLES
PROGRAM, UNION OF CONCERNED SCIENTISTS
Mr. Friedman. Thank you, Madam Chairwoman, and thank you,
members of the committee. I truly appreciate the opportunity to
testify before you today. I am a research director and senior
engineer with the Union of Concerned Scientists. And as an
engineer, I hope to bring a different perspective to this
hearing. But first, I would like to point to the perspective of
the American taxpayers whose money would be on the line. As I
am sure you are all well aware, Americans have, by and large,
lost confidence in the Detroit automakers. Recent polling
indicates over 60 percent of Americans oppose government
financial assistance to them. This is despite the fact that
about half the cars and trucks sold last year are from the
Detroit 3. Now, there are a lot of reasons for this lack of
confidence. But if this committee, the House, the Senate, and
the American people are going to support giving money to the
automakers we need to find a way to ensure that this is not a
bailout.
Instead, the package should be structured as an investment
where taxpayers are given a very clear return through money
saved at the pump. To help rebuild confidence in the auto
industry, and to build confidence in a package, I suggest four
steps:
First, we need to acknowledge what we already know. The
survival of the Detroit auto industry depends on their ability
to deliver the products consumers need in a world of volatile
oil prices and a changing climate. No matter how they
restructure themselves, if automakers fail to produce millions,
millions of highly fuel efficient cars and trucks every year
they will not be able to compete and they will not become
profitable.
Second, we need to require a return on taxpayer investment.
This will help ensure that this package is in our Nation's
interest. Automakers should be required to comply with fuel
economy standards 3 years early as GM has effectively said it
is going to do in the plans they just submitted. If Detroit
automakers were required to follow this path, consumers would
see net savings of more than $30 billion through 2025. And that
is with gas at just $2 a gallon.
Third, require that automakers not bite the hand that feeds
them. In return for taxpayer monies, automakers should be
obligated to drop lawsuits seeking to block States that are
requiring cleaner cars. These States represent over 35 percent
of taxpayers and they are demanding cleaner cars through a
single global warming pollution standard. Frankly, it would be
a slap in the face to ask their residents to put up money to
help an auto industry that is undermining their efforts.
Further, based on submissions from GM and Ford it looks like
they could be in a position to comply with the State standards.
If the auto industry wants one single standard, a great way to
deal with this is to simply adopt the State standards
nationwide.
Fourth, we should preserve the 2007 energy bill's 136
advanced technology loan package and do not even temporarily
bypass its modest requirement of a 25 percent increase in fuel
economy for qualifying investments. In their plans, the
automakers said they are already depending on this and they
said that they can deliver on that 25 percent. There is no
reason to sidestep that.
If there are other barriers to getting that money to car
companies as soon as possible those are the things that should
be addressed. Now, Madam Chairwoman, the reason why I am so
focused on building confidence in car companies by ensuring a
return on investment is because I had very mixed emotions in
studying their plans. There are a lot of reasons for hope in
some of the plans the automakers submitted. From a promise to
essentially meet 2015 fuel economy requirements 3 years early,
to the planned introduction of a hybrid family car that beats
the competition by at least 6 miles per gallon, the automakers
appear to be laying out a more positive direction than they
have followed in the past.
But these promises also sound a little too familiar. They
sound too much like the unfulfilled promise to deliver an 80
mile per gallon family car or a commercially available hydrogen
car in return for billions in R&D money under the partnership
for new generation of vehicles or the freedom car program. I
honestly think that automakers that made these promises can
carry them out. That has never been the question. Detroit's
automakers already have the technology to do this and they are
working hard at the more advanced technologies. And they have
an extremely talented work force.
So I am genuinely excited about the products they can
produce. The question is not whether they can deliver; it is
whether they will. And it is up to this committee and the
Congress to make sure they deliver on these in return for
financial help. Now, I have been a critic of the auto industry
so it probably doesn't surprise you to see me pointing out the
risk and accepting them at their word. But I also strongly
believe that we need a viable domestic auto industry to tackle
America's oil addiction while avoiding the worst impacts of
climate change. If we avoid something that looks like an auto
industry bailout and instead invest in them and require cleaner
cars and trucks we can save money, save gas, reduce global
warming pollution, and create new jobs along the way. Thank
you.
[The prepared statement of Mr. Friedman can be found on
page 150 of the appendix.]
Ms. Waters. Thank you very much.
Mr. Damon Lester.
STATEMENT OF DAMON LESTER, PRESIDENT, NATIONAL ASSOCIATION OF
MINORITY AUTOMOBILE DEALERS (NAMAD)
Mr. Lester. Thank you, Madam Chairwoman, and members of the
committee. I want to thank you for inviting me here to speak to
you on behalf of all the small new automobile dealers in the
United States. My name is Damon Lester, and I am the president
of the National Association of Minority Automobile Dealers
(NAMAD). NAMAD represents over 2,000 ethnic minority automobile
dealers, who represent less than 5 percent of the overall
automobile dealer network in the United States.
However, I am here today not simply to talk about ethnic
minority automobile dealers, but the owners of all small
dealerships in the country as this automobile industry and this
economy is facing a complete global economic meltdown. Today,
small dealerships throughout the United States are suffering at
an alarming rate and are running out of cash and will close
their doors if access to capital is not provided to them
immediately. While NAMAD supports the bridge loan requests made
by the Big Three, we also believe that fair consideration
should also be given to those small dealerships who sell the
products that the manufacturer produces.
There is a direct correlation between the success of a
healthy manufacturer and a healthy and profitable dealership.
We support the requests made by Congress for the Detroit 3 to
come up with a plan depicting how they are going to spend the
requested funds. We support the need for more fuel efficient
vehicles and we also support the concessions made by the UAW as
well. As all of these efforts provide a blueprint on how the
manufacturer will and has revamped its operations.
However, we are concerned about the small dealer. Without
the dealership operating effectively, without the manufacturer
having a strong consumer confidence in the brands and in the
corporation, consumers will not purchase a vehicle and we need
to change that. As I have reviewed the plans submitted by the
Big Three, which focus on both short- and long-term viability
of their respective companies, I am extremely concerned with
some of the language that was alluded to in their proposals of
having an excess number of dealerships. We believe that this
deserves some review.
As all small dealerships in rural and suburban America on
average employ 53 employees and generate over $33 million in
gross annual sales, a small dealership is Main Street. These
dealerships provide so much to the communities they serve that
if a dealership closes today, the local churches will suffer,
the local school and summer athletic teams will suffer, the
local 4-H Clubs and Lion's Clubs will suffer, the local Boy
Scouts and Girl Scouts Club will suffer, and the local print
and television stations will suffer as well.
This is what Main Street is all about; grass roots, roll up
your sleeves and becoming active in the communities in which
they serve. As this Congress is considering the requests for
immediate capital and liquidity by the Detroit 3, fair
consideration and attention must also be given to the small
dealerships. One very simple way to provide access to capital
for these small dealerships is by the Small Business
Administration Loan Guarantee Program. It has come to our
attention that in the past 10 years, the SBA Loan Guarantee
Program has been shortchanged and attempts to fund it have been
shortchanged as well.
In fact, just modifying the definition of who is eligible
for the Loan Guarantee Program would help small dealerships.
Currently the size standard, which is the definition used by
the SBA to determine whether or not a business is deemed small,
is stated as either employee based or in gross annual receipts
based. As it relates to automobile dealers, the size standard
currently is $29 million in average gross receipts, which is
well below what the average gross annual sales are today. We
believe if the size standard was modified to reflect an 100-
employee based model, it will provide greater assistance for
these small dealerships to survive.
It is our hope that the loan guarantee will provide more
assurance for financial institutions to begin lending to
automobile dealers as it has come to almost a complete halt
right now. We understand with any financial assistance program
not all will be saved, but we truly believe that those dealers
who have been historically profitable but are now going out of
business for the lack of access to capital, can survive. I
believe if there were an increase in the SBA Loan Guarantee
Program of $1 billion from the TARP, which should be dedicated
to provide assistance to small dealerships will potentially
cover over 80 percent of those dealerships running out of cash
now and being forced to close their doors.
This loan guarantee will provide assistance to those rural
and suburban dealers as well. In addition, I will recommend
that $1 billion of TARP dollars from the manufacturer requested
funds be directed to support small dealerships with the
stipulation that these funds be used to purchase real estate,
equipment and provide job training. And on behalf of the
National Association of Minority Automobile Dealers, I want to
thank the Detroit 3 for opening the doors for the diversity we
now see among the small auto dealer network through its dealer
development programs. Thank you.
[The prepared statement of Mr. Lester can be found on page
165 of the appendix.]
Ms. Waters. Thank you very much.
Mrs. Biggert. Madam Chairwoman, I have a Parliamentary
inquiry. I notice that this witness is not on the memo to us,
nor do we have his testimony. And I don't know whether the
chairman and the ranking member discussed this, but I would
hope that this would not set a precedent, and I am not sure
that the testimony should be entered into the record.
Ms. Waters. Certainly the chairman is not here, but it is
my understanding that a decision was made. I don't know what
conversation took place between the chairman and the ranking
member, but I would certainly hope that there would be no
opposition to this testimony being a part of the official
record. And I would suggest that there may be follow-up
conversation with the chairman about it.
Mrs. Biggert. I certainly don't want to dismiss the
testimony, and it is very relevant to this. But with the caveat
that I would not want to see this set a precedent that this
happens when none of our staff is aware of this.
Ms. Waters. I can appreciate that. And I do not think that
there are many situations where the chairman would add someone
at the last moment without that kind of conversation. I
certainly think we should note that. I shall talk with him
based on this conversation that we are having and hope that
would not happen again.
Mrs. Biggert. Thank you.
Ms. Waters. You are certainly welcome.
The Chairman. I made the decision to add Mr. Lester, as I
made the decision to extend the time to accommodate Mr.
McCotter. Sometimes we don't always have things as we
anticipated. It struck me that the dealers should be
represented. We did have a dealer representative on the last
panel. And frankly, also the aspect of the impact on the
minority community seemed important. So it did not seem to me
that anybody would object to any witnesses. As I said, from
time to time, I think it is important to make decisions that
will I think accommodate important interests reasonably in ways
that don't cause any problem. Does the gentlewoman have any
further questions about it?
Mrs. Biggert. If the gentleman would yield. No, I just
wanted, since you were not here, and the question was that
there is no testimony that we have or anything. I just wanted
to know, just to make sure this isn't a precedent that will be
when this is not discussed--
The Chairman. No.
Mrs. Biggert. And I can understand.
The Chairman. It is a response at the last minute to
someone calling to my attention a mistake, and I realized that
there wasn't testimony. So it will not be the regular order,
but I couldn't rule out doing it again. And I will say, from
time to time, I have accommodated requests that have come from
Members on either side to change things. We were up to
Professor Sachs, I believe.
STATEMENT OF JEFFREY D. SACHS, DIRECTOR, THE EARTH INSTITUTE,
AND QUETELET PROFESSOR OF SUSTAINABLE DEVELOPMENT AND PROFESSOR
OF HEALTH POLICY AND MANAGEMENT, COLUMBIA UNIVERSITY
Mr. Sachs. Mr. Chairman, thank you very much. Let me start
by commending this committee for keeping at this, because this
is of extraordinary importance for the American economy. Nobody
likes this crisis, nobody likes these bailouts. History will
record that this committee made a great service to the country
in passing the TARP legislation. We have a crisis that is
unprecedented in its speed and ferocity. It is hard to get
everything right. You are doing the right thing. I would plead
with you to stay in session to get this one done as well,
otherwise we will have a meltdown in this economy that is of
absolutely extraordinary proportions. This industry has
enormous value worth preserving. These are some of the largest
companies in the entire world. This is absolutely the worst
financial crisis since the Great Depression. We all agree,
aside from specific tactics on the need for a large government
loan and a government involvement, so we are down to the
details.
In my view, Chapter 11 is not the best option right now. It
is extraordinarily unpredictable. The last time we did a
Chapter 11 was Lehman Brothers. That turned out to be the
single biggest financial shock in modern history. And I think
that we want to avoid going to that route as a first resort. In
my view, it is the last resort. There are tremendous
unpredictabilities on the consumer side, the finance side and
the supplier side, possibilities of cascading disasters that I
think we would do best to avoid right now. Now, we all agree
that we need a significant restructuring. What GM put forward
in detail, for example, is a very significant balance sheet
restructuring. I believe that it can be done outside of Chapter
11, and I think that is what should be attempted right now. And
I think it is enormously impressive what they put forward and
enormously important for us to support that process. They call
for an oversight board that can help that process. I agree with
that. And I think that this is the basic structure in which
this should proceed. Who should pay for this? This is the hot
potato that everybody is worrying about, understandably. There
are three sources of funds it seems to me, not just two. One is
a direct loan by the Fed.
I think Chairman Bernanke is the missing personality at
these negotiations, quite frankly. I do not understand the
reticence of the Fed right now. The Fed lent against Bear
Stearns assets. The Fed lent against Citibank assets. The Fed
can lend against GM collateral. This is a big mistake that is
being made right now. This is a systemic financial risk in this
country and a substantial one. And we need the Fed here as
well. So in my opinion, this is the first place where we should
be looking for financing. Second is TARP. It fits perfectly
with the intentions of the TARP that this be used for this
purpose. And I am so happy with the testimony of Mr. Dodaro
yesterday and again today. This is absolutely appropriate that
the TARP should be used for this purpose. The third is section
136. I also support that.
Let's be pragmatic. Get this job done so that we don't have
a meltdown. Have a new Administration come in. It is going to
have to take a longer term look at this in early 2009 to help
this process go forward. This is not the end of the story; this
is the beginning. That does not mean endless amounts of new
money. That is not what I am implying. What I am implying is
government support for a basic restructuring of this industry
to achieve financial restructuring, balance sheet change, and
model change along the lines of the environmental goals that we
all share. So we need to get there because otherwise we will
have a meltdown. I think at this point the double standard with
Wall Street is so painful and so palpable it is hard actually
to understand, how one throws a $306 billion guarantee over
Citigroup without a single hearing or a single plan or a single
datum, but we can't get even a loan effectively senior and
collateralized for millions of workers is a shock to me.
I don't even understand what they are thinking right now.
Because this is absolutely as systemic as Citigroup or
absolutely as systemic as the other financial matters. This is
our largest industry. Are we going to watch it melt down by
Christmas? That is what we are talking about, with all of the
disintegration of value that would go along with this. So I
think we have to frankly, in my opinion, have Chairman Bernanke
and Treasury Secretary Paulson here at the table. We have three
sources of funds. It needs to be worked out. This is not an
endless open-ended process. There are plans on the table which
your committee has successfully elicited, a great contribution
of these hearings I might add. And it is going to be a process
now to get to the next Administration for a longer term
considered strategy.
Let me finally add that all around the world, governments
are supporting their automobile industries. Just yesterday,
President Sarkozy made announcements about France. This is
going to be a worldwide phenomenon given that we are in the
sharpest downturn in modern history. And so please do not leave
this weekend. I don't want to open up to see what the markets
look like on Monday morning because Congress has gone home and
hasn't been able to figure out how to do $25 billion when we
have trillions of dollars at stake. Thank you very much.
The Chairman. You are pretty free with our weekends, Mr.
Sachs.
Mr. Sachs. With all due respect.
The Chairman. You may have to give notes to our responsive
spouses, significant others, and children.
First of all, I appreciate--let me ask this. Do you have an
opinion on the response that was made by the Treasury and the
Fed in various combination to Citigroup and AIG?
Take them one at a time. What did you think about the
response to AIG?
Mr. Altman. I think the AIG bailout was necessary. I think
the deal that the U.S. Government got was very poor. AIG is a
global organization with an incredible amount of--
The Chairman. They didn't declare bankruptcy, did they?
Mr. Altman. No.
The Chairman. Do you think they should have? I mean, why
the requirement for bankruptcy here and not for AIG? I am
picking up--or similarly with Citigroup. Both of those got
large amounts of money without bankruptcy. Why is bankruptcy a
necessity for the autoworkers or--
Mr. Altman. In this case, what I am advocating is that the
government does not turn its back on General Motors when they
go bankrupt. In fact--
The Chairman. I understand that.
Mr. Altman. --I am advocating a much greater amount of
assistance than what General Motors and the rest are asking
for.
The Chairman. I understand that, but I still--it does seem
to me there is a difference in the treatment legally in terms
of bankruptcy that was provided with regard to AIG and
Citigroup on the one hand and what you are advocating here.
Mr. Altman. There is a difference.
The Chairman. What is the justification for being harsher
on the auto companies than on the financial companies?
Mr. Altman. Well, first of all, I don't think we are being
harsher on the auto companies. The auto companies--
The Chairman. You don't think if AIG was told if they had
to do some form of bankruptcy, they wouldn't have thought that
was being harsher?
Mr. Altman. I am sorry. I didn't hear the question.
The Chairman. Well, if AIG had been told that they had to
declare some form of bankruptcy, etc., you don't think they
would have considered that to be harsher than what in fact
happened?
Mr. Altman. Sure. Absolutely.
The Chairman. Then why isn't it harsher for the auto
companies than it was for AIG?
Mr. Altman. No, no. What I am saying is that I think the
only hope for General Motors and the rest is to go bankrupt, to
restructure, to perhaps even change the management of their
companies.
The Chairman. We changed the management of AIG without
bankruptcy, and we restructured. I just don't understand why
you have to take the extra step of bankruptcy here and didn't
do it there. And there is this concern of a disparity that--and
the ranking member made the point with regard to even the
treatment of requests for approval of various forms of banking.
I appreciate it. I think that is both a perception problem
and a real problem; and I have to say I think there is to some
extent in the culture and at the decision-making level what I
have said before, a blue collar/white collar bias. I have heard
a lot of requests from Mr. Gettelfinger to have the blue collar
workers that he aptly represents reduce their compensation
because it is greater than some other autoworkers. But my guess
is the average autoworker gets significantly less in annual
compensation than the average worker at Citigroup or AIG. And
no one asked that they reduce their wages. We did talk about
cutting out their bonuses, but I am sure the autoworkers would
be perfectly willing to give up their bonuses, which they don't
have. So that is what is troubling to me.
Let me ask the panelists, Mr. Sachs, and Mr. Rohatyn, who
have some experience here, what is the likelihood in your
judgment of our taking some action and it leading ultimately to
success, to the survival of the companies? Mr. Rohatyn.
Mr. Rohatyn. I would think, Mr. Chairman--and depending on
how quickly it is done, because every day that goes by creates
another problem--I would think you have a 50/50 chance of being
successful. The case is difficult to make from a popular point
of view, but I think it is vital from a substantive point of
view.
The Chairman. You do substantive and we will do popular or
unpopular.
Mr. Sachs?
Mr. Sachs. I think the chances of GM and Ford remaining
self-standing, successful companies is over 90 percent. Very,
very high probability. Chrysler, obviously, the chance that it
gets merged with some other company is more likely. But these
are major global enterprises. Unless in the middle of this
crisis they are driven to disaster, they will survive and they
will recover.
The Chairman. Thank you.
Mr. Friedman, one last question because--and I began and
Mrs. Maloney ably carried out on the issue you raised about the
lawsuit. One of the arguments we got was, though, that the
three American companies are only some of the plaintiffs. If
they withdrew as plaintiffs, would that end the lawsuit? Would
it be more than a symbolic victory to get them out if other
plaintiffs were able to go forward on the same legal issues?
Mr. Friedman. There are definitely other plaintiffs. But
let us be honest, the leaders of these lawsuits have been the
Big Three.
The Chairman. I understand that. But, as a practical
matter, what would the effect be if they got out? Would their
lawsuit still go forward?
Mr. Friedman. You would have to ask the members of the
other foreign companies and some of the dealers what they would
do. But I would think it would be incredibly difficult for them
to maintain those lawsuits if the Big Three stepped away.
The Chairman. The gentlewoman from Illinois.
Mrs. Biggert. Thank you, Mr. Chairman.
Mr. Friedman, I serve on the Science Committee as well as
this committee, so I am really extremely interested in the
alternative vehicles and all that goes into that. And I worry
about the fact that we have to continue this, particularly with
the price of gasoline going down as in the 1970's when
everybody suddenly thought, well, let us bring back the big
cars. But I do see a difference here with people really looking
forward to having the fuel-efficient cars. Do you think that
that is one of the factors that--why people are not buying a
car right now, that they know this is coming soon and there are
already the hybrids and they don't want to buy a car that is
going to lose value, that doesn't last as long as some cars
have in the past?
Mr. Friedman. I am not sure people are avoiding cars
because they are just holding back and waiting for the next
silver bullet.
I think the challenge, actually, has been for the last 7
years before the credit crisis people weren't buying as many
cars; and the reason for that was because gas prices went up
and they were less affordable. But, even more importantly, what
happened during those 7 years was overall sales went down by 1
million, but domestic sales went down by 2 million. And what
that means is the Big Three were losing market share and the
imports were gaining market share in part because they had a
better reputation and in part because they had better fuel-
efficient vehicles.
Gas prices are low now, but basically we have low prices by
recession. That is not a sound basis for a financial and energy
or an environmental policy. We need to be prepared for when gas
prices spike again.
Mrs. Biggert. What we also had, though, was the rebates
that people got with the 60,000 cars in each of the different
companies if they bought a hybrid car. That was added in 2005,
and most of those have expired now. Do you think that is one
way to spur people to buy cars?
Mr. Friedman. I think there are two steps that we need. One
in general for buying cars, I do think we need to find a way to
get consumers more resources to buy new cars and that those
resources should be directly tied to the performance of those
vehicles, not just hybrid vehicles but even just a simple
conventional vehicle like some of the technology Ford is
talking about that can boost fuel economy by 25, 30, or 40
percent.
The tricky thing is going to be, how do you pay for that?
Now, one option is in the broader stimulus to invest money, to
encourage consumers to buy more cars. Another option is to
create a system of fees and rebates to help move the market
while you are also increasing standards.
Mrs. Biggert. There is, you know, the EISA, section 136.
You talked a little bit about that, and I wasn't quite clear
what you meant. But this really is to encourage the companies
to invest in the type of cars that we want to see.
But one of the plans that was brought up was to take some
of that money and to infuse the three car companies to provide
the money from that. But isn't that going to reduce the amount
of research and development into finding the ways to improve
CAFE standards and all of the things we need to do?
Mr. Friedman. I do worry there are risks of robbing Peter
to pay Paul. If that money is shifted over without the same
conditions that are currently under it, which is that those
investments must provide at least a 25 percent increase in fuel
economy, if the car companies and Congress do not accept the
fact that the auto industry's future has to be founded on
increasing fuel economy and innovation, these plans will all be
doomed to fail.
We need to invest in them in a smart way and make sure
consumers get something back. I think it is powerful if we can
tell consumers we will save you $30 billion by 2025 by
requiring automakers to do more than they already have to in
terms of fuel economy. I think that will build significant
confidence in a world that right now, because of the previous
bailout, are not very comfortable with where this money may or
may not go.
Mrs. Biggert. Just a short question for anyone who wants to
answer. We used to be able to deduct interest on auto loans. A
lot of that has gone into home equity loans. Does anybody think
that that should come back? Will that spur coming back? Mr.
Lester?
Mr. Lester. I think overall that is one mechanism that
would be able to stimulate consumers to begin to buy vehicles
as it was done in the past that consumers were able to write
off interest on the loans. I know it is being researched now
through Senator Mikulski. But I do think that it is one viable
option.
Mrs. Biggert. Thank you. I yield back.
The Chairman. The gentlewoman from California. I am sorry,
the gentleman from Pennsylvania.
Mr. Kanjorski. Thank you, Mr. Chairman.
Mr. Sachs, I listened to your testimony there at the end as
I returned from a break, and I have to say I am in full
sympathy with what you are saying. I cannot understand all of
this problem and we are arguing over what pot this comes out
of. It is like--I gave an example just recently when someone
asked me: It is like having a starving man come up to you, and
you go through a mental argument with yourself as to what
pocket you should take the money out of in order to buy him
food. In the meantime, he starves to death.
In this, it seems the inaction of the Congress and the
Administration in arguing over the energy pot, the TARP pot, or
whether we develop a new pot, who really cares? What I do care
about is how we structure this, because I think there are
several precedents in the future that we have to make. One I am
disturbed about is that we are rushing this in the 11th hour to
do something very quickly with very poor forethought; and just
having come off the Wall Street rescue program, I think we can
all see now that what we anticipated to be responsible
implementation by the Executive Branch of government has not
necessarily followed. Now, maybe they were great at Goldman
Sachs, but I do not think they would have written some of the
deals they wrote for Goldman U.S.A. and, as a result, we have
to tighten up what authorities we allow these people to do in
dealing with the taxpayers' money.
Now one of the things that I think we have to come up with
is several conclusions. I watched all of the testimony
yesterday before the Senate, and I was particularly moved by
the questioning of Senator Corker and then the testimony of Mr.
Zandi. I think they really in a clutch put our problem.
Mr. Corker is a Republican, and I am a Democrat, so
understand this is very bipartisan, this discussion. I thought
he was absolutely on the ball when he talked about the problem
with these companies is that they are not real companies. When
you look at their balance sheet, you reject the viability of
success of these companies. They are not going to make it. They
have to be restructured. They have to have haircuts, if you
will, through all of the elements of contribution, whether it
is management, labor, suppliers, creditors, dealers. They all
have to be brought in.
Now, that is a hard thing to put together. We know from our
experience with Chrysler bailout number one, it took 3 months
to do that, 90 days. So what can we do in a week? We cannot do
much. I do not think we can get to a final settlement to
prevent bankruptcy if bankruptcy is 25 days off.
So my remedy would be very simple. Right now, let us take
the big risk, with what we have pending, do an emergency plug-
in of $4 billion for General Motors, $4 billion for Chrysler--
that is what they say they basically need to make March 31st--
and then dedicate ourselves, together with the present and the
future Administrations, to put a settlement sheet together as
to what the Congress and the taxpayers need as assurances which
would mean restructuring these companies. And not being too
optimistic as to whether or not they are going to do this.
Impose a master, a super master on the board--or oversight
that can impose a settlement. Tell them what they have to do.
If the creditors aren't willing to take a haircut, enforce a
haircut. If we can did that, I think we can get to a very
optimistic program.
Now, with all that being said, there is one other area I
would like to hear from you, very quickly. I am disturbed with
the fact that they have woven into their network the inability
for any one of them to fail without causing systemic risk to
the whole system. We have allowed something to occur in this
system that one little, small company like Chrysler can force
the United States Government to come in with untold amounts of
money. Because if they fail, the suppliers fail, or the other
companies fail. It will be systemic risk. Something we did in
the law to allow them to get that complicated.
And part of that is having them become financial
institutions, too. Why can we not spin off their financial
elements from these ``manufacturers?'' Let them be
manufacturers and let banks do financing. What is the problem
with that?
As I hear through all of the testimony, particularly from
Chrysler, the biggest part of their business and the most
important asset they have is the financial part of the asset. I
think they would forego the car business. They want to be in
the financial business. Let us separate them.
What are your thoughts on this? Very quickly.
Mr. Sachs. Thank you very much, Congressman.
I think, in general, the logic that you are making a loan
against a credible scenario, but it is going to be taken up
again in the spring by the new Administration in a more
clarified structure is the right logic of what is happening
right now. You don't have the time to fine tune this thing, but
you can't let it go at the same time. I would urge you to go a
couple of months later, let this new government come in, have a
moment to find their seats, to actually think through this
thing so that maybe it is May 1st, maybe it is June 1st.
But you are right, that this is a two-step process. We
can't let the meltdown happen right now. The bigger
restructuring depends on the quality of Executive Branch
leadership and your oversight.
I feel your pain on TARP. I want to commend you for passing
TARP, though. It made a huge, positive contribution.
And on the subject--
The Chairman. The time has expired.
The gentleman from Delaware.
Mr. Castle. Thank you, Mr. Chairman.
I am actually going to follow up along the same lines,
Professor, that Mr. Kanjorski was just asking about.
You indicated in your opening statement here that virtually
any of these sources that have been discussed potentially could
help with the auto bailout, and you are critical that the
Federal Reserve has not been involved. You talked about the
TARP. You talked about, I think, the section 136 funds which
are out there. My question is, is there any reason why we
couldn't use multiple sources, maybe even some of the larger
banks that hopefully are being restored to credibility and more
liquidity could be involved as well?
Mr. Sachs. Essentially, the Fed option is a loan to one of
our big banks or a group of banks which would then extend a
non-recourse loan against Big Three collateral. GM testified
this morning that they have some collateral for that this
morning, also. That is why they could be a part of this
solution.
No doubt using all three would make sense. But it means
getting people in the room to negotiate something. That is why
I say the weekend, as painful as it is, is really important to
get this thing done. And I don't think that there is a magic to
not using section 136 or only TARP and so forth, but probably
all three can play a role.
Mr. Castle. And, just briefly, in answering Mr. Kanjorski,
you were agreeing that we could do something on a temporary
level--it could be a 6-month or a 4-month basis over the more
permanent funding solution at a later time?
Mr. Sachs. I would urge you not to make it so short term
that everybody says, my God, there is no solution here. But, on
the other hand, you don't have to solve a 5-year problem today;
and you shouldn't solve a 5-year problem today. Because you
need the Executive Branch, and that means a new government and
giving them a bit of time. So I would go 6 months out and get
that done with the positive intention that we are on a new path
in this country and that this is to make a new industry out of
this. And I think you will make a great contribution that way.
Mr. Castle. Good. Thank you.
Mr. Dodaro, have you looked--has your office looked at
these numbers and are you in agreement with the numbers? I
mean, we have seen the reports from Ford, Chrysler, and General
Motors; we have looked at them, and our staff has looked at
them. I am not saying we have the expertise to understand them.
They are making representations today which you probably heard
about the exact amount of money they need even on a month-by-
month basis at this point. We need, I think, verification of
that or the rebuttal side of it if that is what the case is.
Have you all looked at that carefully? Are you satisfied
that their representations are accurate? I am not suggesting
they are misrepresenting intentionally, but they are accurate
in terms of their numbers?
Mr. Dodaro. First of all, we were brought in at the time
when they were prepared to plan. So we have only had the
opportunity like everybody else to look at the plans since they
were submitted late on Tuesday.
Mr. Castle. That is right. We assume you are a lot brighter
in this area than we are.
Mr. Dodaro. There are a couple of issues, Congressman.
Number one, we have read the plans. We don't have normal
access to the records of private sector entities. We have tried
to look at some of the publicly available information.
Chrysler, being held by a private equity firm, doesn't
produce public financial statements, so the publicly available
information on them is really very limited.
And looking at the plans, there are assumptions in the
plans that I think need to be monitored very carefully. There
are assumptions that they can exchange equity for some of the
debt that they owe. There are assumptions that they can
negotiate with a number of their stakeholders in bringing down
some of their costs. There are assumptions about car sales
going forward. So that is why we have suggested, you know, the
immediate approach and even the cash draws that are in place.
There ought to be certifications by the companies that
credit is not available anywhere else. Someone on behalf of the
Federal Government should look at the cash flow information,
the details that support their plans and disburse the money,
even in the immediate period. The money is to be needed between
January and March, and circumstances can change. So somebody on
behalf of the Federal Government.
That is why we had suggested a board or some entity that
provides the immediate assistance could get those operating
plans and cash flow justifications and make sure that it is
warranted in that case, while the more longer term
restructuring issues could be settled along the lines that
Professor Sachs is talking about.
Mr. Castle. Well, I agree. I think clearly we need the
board; I think clearly we need your engagement and involvement
in it. But it is interesting, because you are sort of endorsing
the shorter-solution-first concept as well.
Mr. Dodaro. There are many issues. This is a very
complicated situation. And I think that if the government goes
into it, we ought to go in with eyes wide open, that this is--
as I mentioned in my opening statement, you have short-term
liquidity issues, but you have restructuring issues, and this
is all occurring against the backdrop of a very uncertain,
unchartered economic climate.
The Chairman. The gentlewoman from California.
Ms. Waters. Thank you very much, Mr. Chairman.
I have tried to concentrate my efforts on the small
dealerships. One of the reasons I do this is because
politicians and others are constantly saying we are bailing out
Wall Street, but what about Main Street? And it has become the
kind of rhetoric with no meaning to it. I really am concerned
about Main Street. And while the manufacturers came in here
today talking about they have some consolidation plans, they
failed to really tell us what those consolidation plans are.
I maintain that simply getting rid of all these small
dealerships and consolidating by allowing the big boys to buy
out all of the small dealerships--I want to ask Mr. Lester.
Many of those small dealerships are minorities. Many of them
are in trouble. I keep hearing that they can get no help from
the financial arms of these auto manufacturers, whether it is
GMAC or the others. They all have these financing arms that
have shut down on them.
One can make an argument, well, they are in financial
trouble. However, as I understand it, they are literally
blocking the ability for small, independent companies to be
able to stay afloat, just as they are asking us to help them do
or to be able to buy up some of the other smaller dealers that
would like to sell.
Can you help me understand? What do you know about this
consolidation plan? Why can't you get money from these
financing arms? And if you can't get money from them, surely
you can get money from these banks that we are bailing out.
What is going on?
Mr. Lester. Right now, there is an overall freeze for
access to capital via a captive institution or a larger
financial institution to provide credit or capital to any
dealership. As a result of this credit freeze that we are in
right now, most of the banks and the captives deem it too high
risk to lend to dealers now when, historically, they were
courting dealers, particularly minority dealerships, for their
business.
As relates to the captives, it is even to the point as well
as the financial institutions that when we are in an
environment of decreasing our interest rates, they are
increasing them and putting a stronger requirement onto the
dealerships. And when we are in an environment where there is
very few traffic in those stores, you cannot hold your
operating--working capital requirements on a monthly basis if
you have a squeeze from your local bank curtailing your loan,
you have a squeeze from your lender, increasing your floor plan
rates, and you have the inability and also the actual shutting
down of your access of credit from via your line of credit with
your financial institutions.
Ms. Waters. I understand that, if I may, that many of these
small independent banks have operated very well for many years.
They are good managers, and they just happen to be caught up in
this economic crisis. But if they can stay afloat as the
automobile manufacturers are asking us to keep them afloat that
they would be able to resume and make a profit and do well. Is
that true?
Mr. Lester. Yes. Many of the dealerships believe that if
they can get some help they can survive these turbulent times.
Dealers are one of the most resilient entrepreneurs out there.
But if there is no help or no availability to capital, they
will just go away, run out of cash and close their doors.
Ms. Waters. Are the big automobile manufacturers that were
here today, are they calling in their loans today at their
financing arms? Are they squeezing small independent dealers
now?
Mr. Lester. Yes. They are to the point of asking for--
curtailing their floor plan loans. They are shutting down lines
of credit. They are not providing any access to capital to the
standpoint where, when you had available credit made available,
they have actually closed those lending down.
Ms. Waters. Do you believe that if we are to rescue these
big automobile manufacturers we should insist or include in our
language support for the small independent dealers?
Mr. Lester. Yes. If support is going to be given to the
manufacturers, the dealers also have to get some fair support
as well as they have--they work hand in hand. If they can't
make it, there is not going to be anyone left to sell it.
Ms. Waters. Thank you very much, Mr. Chairman.
The Chairman. The gentleman from Alabama.
Mr. Bachus. Thank you.
Professor Sachs, I want to welcome you and express to you
that I have enjoyed our friendship and working together on
issues. It is good to see you.
I am going to address my question to Professor Altman,
because my question deals with restructuring. And I think we
all agree that there has to be a fundamental restructuring of
the industry. My first question is, the Comptroller General
mentioned that general restructuring--I may be paraphrasing
you. There are a lot of complex issues. I think you expressed
your concern that these couldn't be dealt with in a matter of
months or weeks for sure; is that correct?
Mr. Dodaro. I think they need to be carefully thought
through, and I think there has to be somebody at the table
representing the Federal Government and the taxpayers' interest
and safeguarding those, to be done successfully, to achieve the
right outcome.
Mr. Bachus. All right. And I think you are dealing--
restructuring, it usually takes years. I mean, does it not? I
am not against that. I am just saying it is not something you
go in on a Friday and you come out a month later. Is that--am I
accurate? Or would you say--
Mr. Altman. Yes, I would endorse that. In a Chapter 11
reorganization, the average time is 18 months to 2 years.
Mr. Bachus. So it is not a short and sweet process.
Mr. Altman. This is a very complex company with many
international as well as domestic aspects. It would not be a
short period, and that is why they need sustainable funding for
a long period of time.
Mr. Bachus. That is actually where I was going. It is a
process of several months, at least, if not 18 months to 2
years, particularly with the challenges that the domestic
automobile industry has and the extent of restructuring. So
even this idea of prepackaged--I mean, there is issues that
prepackaged is--certain things should be dealt with, but they
have to be dealt with during that process of restructuring.
Which brings me to this: They are going to need financing.
You don't have restructuring without significant financing.
Mr. Altman. Absolutely.
Mr. Bachus. And I think you have to have successful
restructuring to get the money back. So it ought to be--whether
you are a Democrat or Republican or conservative or liberal, we
ought to all want a fundamental and successful restructuring.
And that can't happen without financing.
Mr. Altman. Absolutely. And the idea that we put forward is
that they would get more than the $18 billion that General
Motors is asking for. We actually ran through our models to
look at what the $18 billion would bring to them, and they
still come out as a likely bankrupt company with the $18
billion. With $4 billion or $8 billion, you know, there is
almost no chance.
Now, in terms of the restructuring, that probably would
take a minimum of 12 months, probably closer to 2 years, which
is consistent with how long the recession is likely to last. So
the best time for them to be coming out would be when the
recession is over; and in this period of time, they need this
$40- to $50 billion or more.
The testimony yesterday in the Senate from Mr. Zandi was
the fact that they needed $75- to $125 billion, all three of
them. And the numbers are much larger than what they are asking
for. They are going to be come back asking for a lot more in a
very short period of time.
Mr. Bachus. But if you give them $20 million without
structural changes, then you lose that. If there is a
successful restructuring and they are profitable, you know,
there is not a loss to the taxpayer, at least the taxpayer is
protected. So that maybe sounds a little different.
Let me wrap it up by saying that--because my time will
expire--I am very disappointed--I expressed this to the first
panel--with the financial institutions that have received
hundreds of billions of dollars with the express intent of
loaning that to America's manufacturers. And is that not a
source of funds?
Mr. Altman. Yes. Well, let me mention, with respect to the
DIP financing, it is--these are experienced institutions
dealing with DIP financing. They could help out enormously, but
they also should help out in terms of providing part of the DIP
financing funds. It is a good investment for them. It is a good
investment for the United States taxpayer. And I believe this
is the way to go rather than simply having no participation on
the part of expertise in this area.
The Chairman. The gentleman from North Carolina.
Mr. Watt. Thank you, Mr. Chairman. I have three questions.
First, Mr. Lester, I take it if we do something either
short term or intermediate term, your position is we ought to
include the suggestions that you have outlined in some detail
on the bottom of page 3 and the top of page 4 of your
testimony?
Mr. Lester. Yes.
Mr. Watt. Mr. Sachs, what is your take on what kind of
pressure we should be putting on this private equity firm to
ante up this money for Chrysler's part of this? There seem to
be two or three different kinds of spins that are being put on
that. Can you give me your brief take on that?
Mr. Sachs. I don't put the Chrysler situation really
different--so different from the other two in that regard. I
think none of them--
Mr. Watt. Do you think the private equity firm would sit
there and allow Chrysler to go into bankruptcy as opposed to
anteing up the rest?
Mr. Sachs. Yes.
Mr. Watt. Why?
Mr. Sachs. Because if there is no chance of financing that
gives them the way out, that may be their best shot right now,
is to take zero.
Mr. Watt. Even if they have the money?
Mr. Sachs. Yes, because it may just go under. If there is
no financing for restructuring, it doesn't make sense.
Mr. Watt. Okay. And, Mr. Sachs, again, you talk about a 6-
month timeframe, but you heard Mr. McCotter's suggestion that
we do this on an even narrower timeframe. What was your
reaction to Mr. McCotter's suggestion about how we do this on a
smaller amount with a shorter timeframe?
Mr. Sachs. I think this is relevant also for this
restructuring issue. We can't send a signal that we are just
dripping an IV line into a moribund patient. That will not
work. The idea of doing this for 3 weeks is a zero in my mind.
It doesn't make any sense.
Six months only works, by the way, if it is done in a very
positive way with President-Elect Obama saying, we are going to
make this work for the longer term; we are going to be in
there.
And--sorry, if I might, Congressman, just to emphasize--we
don't need Chapter 11 to do a balance sheet restructuring. We
can do it in the shadow of this and preserve value.
Mr. Watt. You are arguing about something that I am on your
side on.
Mr. Sachs. Yes.
Mr. Watt. What is the 6-month cost? Is that the $19 billion
or what did that come to, the 6-month cost that you are talking
about?
Mr. Sachs. I would have to add up for each of them, which
we could do on that basis. But it is somewhere around the
number you are giving.
Mr. Watt. $16- to $18 billion?
Mr. Sachs. Something like that. Yes.
Mr. Watt. So you are suggesting that a viable approach to
this, instead of making a $34 billion commitment, would be to
do it in a 6-month increment?
Mr. Sachs. What I am suggesting in the reality of this is
that what we are doing right now is getting to a position where
a more fundamental decision can be taken in the spring. And it
is going to require more money in the spring. But against the
kind of longer-term scenarios that have been presented to this
committee. So I don't want to cut it so close that the
consumers say it is an abandonment. On the other hand, you
don't have to settle everything for the long term right now.
You really do have to carry it in a positive way to the next
government.
Mr. Watt. What is your reaction to that, Mr. Dodaro?
Mr. Dodaro. Basically, we had suggested if the Congress
makes the determination they want to provide assistance here,
structuring a short-term and a longer-term approach is an
appropriate way to go forward.
Mr. Watt. So what you are saying is consistent with what
Professor Sachs is saying?
Mr. Dodaro. Yes. The only additional point that I would
make, Congressman, is that even in the short term, I think
there has to be a guardian, a Federal guardian and an
independent person making sure that the disbursements are
warranted even during that short intermediate period of time.
Mr. Watt. To the extent part of that money would come out
of the TARP, there is already an existing framework for doing
that. Is there one in the section--whatever--106 money or
whatever it is?
Mr. Dodaro. Yes. What I am talking about, though, would be
more rigorous than what is in the TARP program right now.
Mr. Watt. Do you mean what we expected the TARP oversight
people to do, rather than what they are actually doing?
Mr. Dodaro. I think we need more information up front to
have confidence that the government's expenditures are there,
and in the short term I would have a higher risk premium.
The Chairman. The gentleman from Massachusetts.
Mr. Lynch. Thank you, Mr. Chairman.
I appreciate the ranking member's work as well. I want to
thank the witnesses for their thoughtful testimony, all of the
witnesses here today.
I remain unconvinced, just after listening to the CEOs of
the various companies, that any of these plans might ultimately
work the way they have laid them out. Just as a threshold
matter, the projections that they have for growth in auto sales
from year to year during this supposed bailout, totally
inconsistent with the employment numbers that we saw come out
today; and the projections of some related industries like the
steel industry, they are projecting a different trend
certainly.
And if I take Mr. Dodaro's suggestion, I would make an
assertion, sort of put a marker down, that we need to have a
domestic auto industry in the United States. It may not be the
Big Three. It might be the Big Two. That might be what has to
happen here.
But I am concerned--I hear the different views of
bankruptcy, especially with respect to Mr. Dodaro and Professor
Altman and Professor Sachs. I am concerned, Professor Altman,
with your scenario there where they have this, you know,
bankruptcy proceeding, we try to take care of this problem in
bankruptcy. I have had dealings as an attorney trying to
represent employees, trying to get their pension funds and
their health and welfare benefits from companies that have gone
into bankruptcy. Bankruptcy courts are not known for their
speed, God knows. And I think easily with companies of this
size, it could be a very long bankruptcy. It could be 3 to 4
years, and they would be in bankruptcy when the market comes
back. I think they would be at a severe disadvantage with
respect to some of these foreign automakers. I think they would
lose a lot of market share, and they wouldn't be able to
respond. As well, not only the effect on the firms themselves,
but also the cascading bankruptcies that might happen, that
probably will happen with these suppliers right down the line.
So what I would like to hear from you--here is the essence
of my question: Is there some way--and we are looking at this
as a pre-bankruptcy sort of assistance now. Is there a way--you
describe, Professor Altman, about a super seniority granted to
the taxpayer. That is job one for us in Congress. We have to
protect the taxpayer. Is there a way to grant super seniority
outside of bankruptcy before we go into bankruptcy to any
monies that might go?
And, again, I am not convinced that it needs to or that it
should. But we have to protect those interests.
Is there a way to create a receivership in some way to make
sure that whatever dollar goes to GM or Chrysler or Ford that
if eventually they do collapse into bankruptcy that the first
dollar that comes out of there, before a dollar goes to any of
those CEOs, that the taxpayers are repaid? Or is there some
other configuration--
I tried to look through history about different examples
that might be comparable to this one, and I looked at the steel
seizure cases during the Truman Administration where he went in
and just took control of the steel industry. He obviously was
overturned by the Supreme Court because he didn't have
congressional authorization to do that. But, in this case,
maybe it would be incumbent upon Congress to grant President
Obama when he is in office some emergency type of power.
Could you just elaborate on how you see that all working
out?
Mr. Altman. Under the law, you are not permitted to issue
new debt and take precedent over existing debts that have been
collateralized with assets behind it. So that is protected.
General Motors has put forward a plan that they say they have
unencumbered assets--
Mr. Lynch. Let me stop you there, though. If Congress
passed another law, would it be unconstitutional, would we be
derogating the rights of contract if we put the taxpayers' lien
ahead of everybody else in the special circumstances?
Mr. Altman. It would undermine, I think, the entire credit
system that we have in the United States, to be perfectly
honest with you. The flow of credit would come to a halt, even
in good times.
Mr. Lynch. It looks pretty undermined right now. I am just
saying we are trying to protect the taxpayers. I understand the
principles involved, but these are extraordinary--
Mr. Altman. The only way they could get some precedent for
the taxpayer would have new unencumbered assets be put up as
collateral, And then the question is what is the value of
those. A lot of those are intangibles and would have some
trouble convincing me that you are going to get your money back
in a short period of time.
Mr. Lynch. Mr. Chairman, can I have one of the other
witnesses--Mr. Sachs, you have a--
Mr. Kanjorski. [presiding] Very quickly.
Mr. Lynch. Professor Sachs, do you want to take a crack at
that?
Mr. Sachs. On the seniority question, well, I actually
wanted to respond to the other question, which is that we
should not plan for failure of sticking at 10 million units per
year, which is where the economy is right now. I don't find the
recovery scenario unrealistic in the same way. We have to plan
for a macroeconomic recovery, and this is part of it. And there
will be a macroeconomic recovery, and by doing this it will
help it considerably. This won't happen in 2009, but it will
happen in 2010, 2011, or 2012. We have gone from 17 million
units down to 10.1 million units. We are not going to stay at
10.1 million unless we do everything wrong right now.
Mr. Lynch. Okay. Thank you, Mr. Chairman. Thank you for
your forbearance.
Mr. Kanjorski. Mr. Green.
Mr. Green. Thank you, Mr. Chairman.
Mr. Dodaro? Am I pronouncing that correctly? Sir, I am
going to exclude you from my questions. And believe me, it is
not because I love you any less than I love the others. But I
do have questions for your colleagues who are with you today.
My first question is, given that we expended $85 billion
plus an additional $37.8 billion plus an additional $40
billion--depending on who is counting, between $112 and $152
billion thereabout--to bail out AIG, was it in our national
interest to do so? Let us have Mr. Altman address this first,
please. Was it in our interest to do so, our national interest?
Mr. Altman. I think it was in our interest to bail out--
Mr. Green. That will be sufficient. I only say this because
time is of the essence. I still love you. I want to hear more.
But it was in our national interest to do so.
If you concur with Mr. Altman, and you believe that it was
in our national interest to bail out AIG and to have $306
billion thereabout in guarantees for Citi, if you think that it
was in our national interest to do so, would you kindly extend
a hand into the air? If you think it was in our national
interest to do so, in the national interest of the United
States of America.
All right. I think we have all hands, except one.
Am I to conclude, Mr.--is it--I can't quite see the name as
well as I should. Do you differ, sir?
Mr. Rohatyn. I beg your pardon?
Mr. Green. Do you think that it was in our national
interest to bail out AIG?
Mr. Rohatyn. Yes, I do.
Mr. Green. So everybody agrees. All right. Thank you.
Now to the next question: Is it in our national interest to
bail out the auto industry? Is it in our national interest? In
you think so, kindly extend a hand into the air.
Everybody agrees that it is in our national interest to do
so. Thank you. You may lower your hands.
If it is in our national interest to do so, do you think
that indecision is going to be a decision that will impact our
national interest? If you do, raise your hand. Indecision will
be a decision that is going to impact us.
Thank you very much. All hands, for the record, were
raised.
And do you agree that indecision will ultimately become a
decision that is going to be to the detriment of the national
interest of the American economy, the national interest of the
country? I don't mean to be so elementary, but this is a good
way for us to get a message to the American people.
Okay. It appears that we seem to think that we must do
something to take care of the auto industry. After all, France
is going to do it, Japan will do it, China will do it.
Countries protect their auto industries.
The question is, will we allow ourselves to become victims
of what Dr. King called the paralysis of analysis? We can
literally analyze this to death. We did not analyze AIG to
death. Someone took bold, decisive action. That bold, decisive
action, whether we admit it or not, has provided some stability
in the financial markets. It really has. Sending a clear and
concise message makes a difference. At some point, someone in a
very high office has to send a clear and concise message we are
not going to sacrifice the American auto industry.
Now, they have come in and they have done everything except
roll over and play dead, and I suspect that if we had said,
would you be willing to roll over and play dead, somebody would
have literally rolled over and played dead. I think they are
willing to make whatever concessions we can concoct. And we
ought to have strings attached, we ought to do everything that
we can to make sure that the American taxpayer is protected,
but the truth of the matter is, we must act. This is in the
interest of the American people. More importantly, said another
way, it is in our national interest.
I think that at some point this talk about Chapter 11 and
Chapter 7 is going to put us in a position where we are going
to bankrupt the American dollar. Now, this is where I--my time
is up, so I will simply close with this: The full faith and
credit of the American economy is based upon the full faith and
credit of the American dollar. We are playing with fire. We are
playing with economic fire.
Thank you. I yield back.
Mr. Kanjorski. Thank you, Mr. Green.
The gentlelady from California, do you have something to
submit for the record?
Ms. Waters. Thank you very much. I would like to submit for
the record a letter from John Lewis relative to the small
dealerships, and also an article from the New York Times
entitled, ``Auto Dealerships Teeter as Big Three Decline.''
Mr. Kanjorski. Without objection, it is so ordered.
Mr. Cleaver.
Mr. Cleaver. Thank you, Mr. Chairman.
I would like to say amen to the sermon by Bishop Al Green.
I do think that he said it all and did it quite eloquently. I
just appreciate your participation here. Very good reflexes.
The issue that I am concerned about is waiting, and I do
think there is a difference in how we handle Wall Street and
how we are handling our automobile industry. I get that all
things come to those who wait. Sometimes, though, it is just
leftovers from the fellows who got there first, and this is
where I think we find the automobile industry.
One of the issues that I would hope that you could help me
understand and deal with--I have two automobile plants in my
district, in Missouri, Kansas City, Missouri. If we don't act
equally fast for GMAC and for Chrysler financing, it won't
matter if we can make cars if we still don't have the capacity
to buy them. So I would like for you to--if I am off base, if
you would help me. And if I am, support me.
Professor Sachs. And thank you for being here again.
Mr. Sachs. Thank you. It is always an honor to be in front
of this committee.
We absolutely need first to make sure that these companies
don't go into default in the next week, or in 2 or 3 weeks, and
second, that we spur demand again. There will be many parts of
that next year. Part of it will be automobile financing turned
back on, because it is off right now, as you know very well.
Part of it will be the overall stimulus program. Part of it
will be TARP and its successors working more effectively. So
the demand side and preventing this disaster which--where delay
is risky are the two goals that we need to put together.
Mr. Altman. I would endorse the need to move quickly. My
fear is that if we move and we do it with a Band-Aid or two, I
know $4 billion doesn't sound like a Band-Aid, but we are going
to come back very soon to ask for a lot more, and then more,
because this recession is not going away in 6 months. So we
have to be prepared for that. And I agree with Jeff that we
need to have a fiscal stimulus after the new Administration
comes in to get demand going again, and so that is part of the
package.
Mr. Cleaver. My final question: Someone unfortunately
brought up subprime loans in the automobile industry this
morning, which was just unfortunate that someone would do that.
The economy is not in trouble because we have had foreclosures
on Cadillacs or Chevys. But do any of you see anything wrong
with--in any agreement also making sure that to get an
automobile loan, your credit score doesn't have to be 700 or
750? I mean, we may need--yes, yes, Mr. Lester, I am sure you
can respond to this.
Mr. Lester. I think that is what the problem is now. The
requirements that the financial institutions as well as the
captives have put on the consumer, no one has the ability--very
few people have the ability to have a 700 FICO score to go out
and buy a Ford Focus, for example. We are in an economic
disaster, and we can't afford for these manufacturers and
dealerships to go away. This country can't take it. You already
mentioned that if we go away, the dollar will disseminate.
Mr. Cleaver. So do you think that something like this
should be included in any agreement?
Mr. Lester. I think TARP loosening up, making the
announcement a week before last about loosening and providing
access for capital to lenders for auto loans and student loans,
that is hopefully--once it gets up and running, it will--
Mr. Cleaver. What I am asking is, should we have a de-icer
amendment?
Mr. Lester. Yes.
Mr. Sachs. I would not suggest it. It would overburden this
specific action right now. This has to be a priority for the
next Treasury Secretary. That is for sure.
The Chairman. Thank you.
Let me just say--I am going to ask for unanimous consent
for about 90 seconds. I noticed Mr. Rohatyn had a comment he
wanted to make, and just given his experience, I want to ask
him if he had something he wanted to add.
Mr. Rohatyn. Yes, Mr. Chairman, I do. I think it is
terribly important that there not be any--
The Chairman. You are cutting in and out.
Mr. Rohatyn. I think it is terribly important, because
people are going to be listening to what comes out of this
meeting, and what comes out of the other meeting, whether there
is any hope for these companies or whether they are being
condemned to death, which would be a terrible thing for us, and
I think somehow, somewhere, somebody has to put out some kind
of a release or information with respect to the commitment to
the industry among the political leadership in this country.
The Chairman. I have been asked--and I think it is a fair
point. I have been trying not to say much, because when you are
trying to work things out--let us just say the better--in
advance, but I have been struck by a pretty broad consensus
here that something should be done. There are only a couple of
Members who took a fairly strong position saying free
enterprise being what it is, don't do this. Now, that doesn't
necessarily get us there, but I think if you are listening, we
have gotten to the question of how to do this. I think the
majority of this committee appears to me to have resolved the
question about whether the answer is ``yes.'' It is not a
guarantee of success, but it clearly is a step forward.
The gentleman from Colorado.
Mr. Perlmutter. Thank you, Mr. Chairman.
And, Mr. Rohatyn, that is exactly where I was going to go.
Three weeks ago when the automakers came to this committee,
they didn't present us with much that we could get our arms
around. It wasn't very helpful. Today the information, their
business plans, are much more substantial, and much more
professional. Obviously painted a bleak picture for today, but
a much brighter picture given restructuring for a year, 2
years, 3 years down the road. The technological leaps that they
are making with respect to batteries and the like really do
benefit us as consumers and us as a Nation going forward on an
energy basis.
And, you know, just back in Colorado, I have to deal with
people on the street. So I have to ask three questions. One, is
the domestic auto industry essential to this country, meaning,
if it were to fail, would the damage be too great for us to
sustain over a reasonable period of time? Two, is there a way
in the short run to maintain these companies so that they are
competitive and successful in the long run? And three, can we
substantially protect the American taxpayer in maintaining the
domestic auto industry?
And I think the answer is yes. And I think it is a
combination of things that Professor Sachs is saying, Professor
Altman and you, Mr. Rohatyn. It may not be that we do a Chapter
11, because I have a lot of experience in that field, and it
just takes too long, and there are different hurdles and judges
and things you have to deal with. But we need to have something
that provides powers to an oversight committee or to somebody
to do the restructuring necessary with all of the interest
holders in here, the bondholders, the shareholders, the
management, unions, retirees, the lenders, the suppliers. I
mean, everybody has to take a hit in this deal. So you can't do
it without some sort of law in place to do that.
And then--and I disagree with you, Mr.--Professor Altman,
the taxpayer can be assured of a senior interest in this
situation. And that is what I believe. If, in fact, we are
going to be the lender of last resort, as you suggested, then
we must act like a lender of last resort and make sure that our
investors, the taxpayers, are protected to the nth degree if we
can do that.
Mr. Altman. I disagree. You cannot be senior to existing
loans that have collateral. You can be senior to the unsecured,
yes.
Mr. Perlmutter. If we were to take a Chapter 11, we could
have a priming loan. I am not suggesting a Chapter 11. In a
Chapter 11, you can have a priming loan that is senior to any
other interest.
Mr. Altman. Absolutely.
Mr. Perlmutter. And I don't know why we couldn't do that
otherwise.
Mr. Altman. You would have to pass new legislation.
Mr. Perlmutter. Right.
Does anybody else want to respond?
Mr. Altman. Which would be a massive request, Congressman.
Mr. Perlmutter. And why?
Mr. Altman. Because you would be changing the whole
capitalistic system.
Yes, you would, Jeffrey. You would be putting existing
creditor capital at risk at any time that the government could
come in and take a senior position above existing capital. That
is what happens. In other countries, when that happens, you
lose the capital.
Mr. Perlmutter. But you can do that in Chapter 11 now?
Mr. Altman. That's correct, and that is the only place you
can do that.
Mr. Perlmutter. But we are asked to come in with $34
billion in an emergency to keep these companies afloat so they
can get to the brighter future. I have to protect the taxpayer
from something that might happen here.
Mr. Altman. Well, I do believe you can do a lot to get a
senior status in this loan. One way to do it is to get the
existing creditors to go away and take equity. And I think
General Motors is making that plan. I think that is a good
idea. And then you don't have to worry about them; they take
equity in place of the debt. Then you can go in and be senior,
and there is nothing wrong with that.
But just to force it down them, I think that would be a
mistake.
Mr. Perlmutter. Thank you, Mr. Chairman.
The Chairman. Well, take that--I remember when the press
office said you can only do that as a Chapter 11. That is true
if you are a lawyer arguing in court.
You are now before the body that wrote Chapter 11 and it
can rewrite Chapter 11. And there is a problem that lawyers
have, which is to assume in the normal course of a legal
argument you are restricted to choose between column A and
column B. We can write column C third. So the answer is, it
would not necessarily be that we mandated people to do things,
you can come up with constitutional issues with that.
But the old doctrine of unconstitutional conditions on
gifts seems to me have long since disappeared into the mists.
And if we are going to vote all that money, we can put on it
any conditions that we think appropriate, so we are not
restricted to either Chapter 11 or not. We can write what we
think is appropriate with these powers.
The gentleman from California.
Mr. Sherman. Thank you, Mr. Chairman.
I think these hearings show that we ought to pass a bill.
Our best chance to pass a bill is to write one that has tough
standards to protect consumer warranties, to make sure that the
U.S. Government is involved in deciding which plants get closed
and which stay open, and to deal with executive compensation
and perks and deal with a number of the other issues that have
come up.
Clearly, everybody has to give something. Now, the
shareholders are going to give. We are going to dilute them if
we get sufficient warrants. And if time permits, I want to ask
the witnesses about how many warrants that ought to be.
The executives--I think I join several of my colleagues in
torturing them, and that is just a taste of what we would like
to put in the bill. The unions have made substantial
concessions, and have indicated they are going to make more.
But we have been talking here about the creditors, and not just
making the loans senior, our debt senior to theirs, but to
actually write down the liability.
Right now, people are buying GM debt for 15 cents on the
dollar; and if everything goes swimmingly--should they get a
dollar on the dollar if things go swimmingly, only because the
taxpayers ride to the rescue--Professor Altman, do you see a
way not only to make the taxpayers' debt senior but to actually
provide for a reduction in the amount that GM, for example, has
to pay on its unsecured debt.
Mr. Altman. Yes. What you are referring to is something
known as a ``distressed exchange,'' and the creditors are
offered, let's say, 20 cents on the dollar in new securities,
equity, preferred stock. And they have to evaluate whether or
not it is to their interest to do so.
Mr. Sherman. So this would only be voluntarily. Is there
any way for us to write a statute that makes it mandatory?
Mr. Altman. Well, as Chairman Frank said, you can do
whatever you want.
Mr. Sherman. I am a little concerned about the takings
clause.
Mr. Altman. I wouldn't recommend that. It is much better.
And I think GM has a good plan in that respect to write down
the debt. $30 billion, I think, was in their plan to reduce it;
and I think that makes sense. But I ran it through my model,
and they still come up a bankrupt entity even after doing that.
Mr. Sherman. Mr. Sachs, a new line of questioning: Let's
say the doubters are right, and all we can do is give a
transfusion to a patient who is ultimately going to expire with
regard to GM and Chrysler. One of the things about a business
cycle is that companies fail at the very time that other
companies are failing. It would be nice if we could arrange it
so that companies only fail during good economic times.
How much higher will our GDP be if we do nothing but delay
the dissolution of GM and Chrysler by 12 months.
Mr. Sachs. Very, very slight. And that certainly can't be
the goal of this exercise.
Mr. Sherman. So if we were to spend--
Mr. Sachs. This would not be the right way to do capital
spending.
Mr. Sherman. If we put in the money, one of the reasons to
put in the money is maybe the companies will survive.
Mr. Sachs. I would say more than a good chance.
Mr. Sherman. Another way to put in the money is, maybe we
can delay by 12 months their failure to survive.
You are saying that second objective is of slight value to
the United States?
Mr. Sachs. I think that's right. It would be marginally
present, but that can't be the point of this exercise. But I
would not be so pessimistic to think that there isn't a
trajectory out of this. That is the whole point.
Mr. Sherman. I just started with a worst-case assumption. I
am not asking you to embrace it.
Mr. Sachs. Absolutely.
Mr. Sherman. Mr. Rohatyn--if I am pronouncing that
correctly--the chairman's draft calls for us to get warrants
with a value of 20 percent of the money we are putting in. And
the question is--I mean, these are companies you could buy the
whole company according to today's values for $2 billion, $3
billion, $4 billion, and we are talking about putting in $34
billion. When you use the standard approaches used to value
warrants, would we end up, if we exercised the warrants, owning
well over 90 percent of the outstanding shares if you looked at
what the value of the warrants would be?
Mr. Rohatyn. Well, I think that you certainly would try not
to wind up with 90 percent of the equity of the company.
Mr. Sherman. I would disagree with you. If we are taking 99
percent of the risk, I hope we do end up with 90 percent of the
company. And if the shareholders don't want to take that deal,
they can seek money elsewhere.
I yield back.
Mr. Green. [presiding] Thank you.
Mr. Manzullo is recognized for 5 minutes.
Mr. Manzullo. Thank you, Mr. Chairman.
I am sorry I missed your testimony. I was working with two
small manufacturers trying to keep them afloat during these
times of crisis.
My question goes to the $25 billion that has been set aside
already. It is actually $7 billion because, I think it was the
CBO said that they estimated at 20 percent of default. So,
therefore, $7 billion has been parked in order to guarantee $25
billion in loans to the Big Three for the process of retooling.
And my question would be, at least at this point, based
upon the testimony of an immediate need, why not use a portion
of that to keep these companies going, and then revisit the
bigger issue sometime in March or whatever period of time they
said the instant money would not be available? And all that
would take--and I think there are votes in both Houses--would
be to have a simple amendment saying that this money--I think
what is called ``136 money''--whatever it is, could be
reprogrammed for meeting general operating expenses.
I would like to know your thoughts on that, Mr. Friedman.
Mr. Friedman. Well, I think one of the flaws with that plan
is, if you looked in the companies' plans, they are already
depending--they are already expecting that money as part of
their recovery plans. So maybe there is an argument--in fact, I
think there is an argument--to find ways to accelerate getting
them that money under some of the same conditions they were
already going get the money, such as a 25 percent improvement
in fuel economy.
But they need additional money is what they are asking for.
They are already expecting that money.
Mr. Manzullo. They probably won't get it.
Mr. Friedman. Additional money or the base money?
Mr. Manzullo. Well, the additional money. This Congress is
very reluctant. If this is emergency money, let's put it this
way, if you hear at least Chrysler and GMC, they won't be
around in 30 days even to worry about that 136 money. So why
not use a portion of that to keep them afloat? You can always
come back and add to the pot if it is necessary, and some
people would vote for that, to replenish the original $25
billion for environmentally new cars.
Mr. Friedman. Well, I think no matter what you need to find
a way, even if you move the money forward, you need to find a
way to preserve the fact that the money is supposed to go
towards advanced technology.
Mr. Manzullo. How can you preserve it if the company is out
of business?
Mr. Friedman. I think the first step is making sure they
are going to be sustainable businesses. But you would be
mortgaging their future if you did not require them to invest
in--
Mr. Manzullo. They don't have a future based upon what they
said unless they get billions of dollars up front. So why not
use that money that is already there to fix the roof that
covers the area where the R&D is going on with the new cars?
Mr. Friedman. I would argue to accelerate that money under
the same conditions, and I would argue--I think the panel has
discussed that there are two other sources for that money. We
have to make sure that these companies, as Professor Sachs
said, are planning for an macroeconomic recovery. And in a
macroeconomic recovery, gas prices are going to shoot up as
China and India and the other countries start guzzling gas
more. And these companies are going to be in trouble again if
a--
Mr. Manzullo. I can't agree with what you are saying
because what you are saying is that it will not come to pass if
they have no money to keep on going.
Professor Sachs.
Mr. Sachs. Congressman, I think using the section 136 as
part of this is appropriate, in my opinion. But quantitatively,
I think it is likely that this will need to be part of a
package that includes some of the TARP.
I think the Fed can do some things on its own, by the way.
And this is one of the missing actors here. I would like
Chairman Bernanke to step up and help this process more than
has been the case so far, because they are making loans that
are a lot riskier than this one.
Mr. Manzullo. The problem is that the the plans are
woefully insufficient.
Mr. Sachs. No. They could be doing this on terms that are
better than what they are doing right now and are appropriate
for preserving our financial system. So TARP, section 136, and
the Fed offer three ways, and it is going to have to be a
package. If it is only a very narrow, constricted, begrudging
amount, then, Congressman, you will not succeed in your
objective, I am afraid.
Mr. Manzullo. Anybody else?
Mr. Rohatyn. I think Professor Sachs is absolutely right. I
completely share Professor Sachs's views. Either we do this on
a large scale or just there is no point to it.
Mr. Manzullo. I mean, the plan isn't there. You have GMC
that wants to go into the--GM wants to go into the commercial
banking business, which I think is absurd. So to pull out of
the doldrums and to correct our mistakes based on making
automobiles, we are going to go in the commercial banking
business.
No one has ever done an analysis of the impact that that
will have on community banks, credit unions, and on national
banks that have local branches across the country. But that is
part of their plan.
The union people sit here--Mr. Gettelfinger sat there, and
I thought he had a pretty reasonable approach. He says, ``Yes,
we are here. We are willing to sit down.'' There has been no
viable plan that has been presented to this Congress in the
details that are necessary to warrant that type of money.
The Chairman. The gentleman's time has expired.
Mr. Manzullo. Thank you, Mr. Chairman.
The Chairman. Do we have any other members?
Mr. Foster, are you next?
Mr. Foster. One number that I think is absolutely crucial,
and I would like to see developed by an entrusted third party,
is the total value of GM's unencumbered assets, and that could
be used as collateral either by DIP financing or some sort of
prebankruptcy financing, and to compare that to the capital
injection you are going to need for return to viability.
And that is the fundamental number that I think this whole
discussion depends on. And I would be interested in knowing who
it is that we can trust to develop this number.
Mr. Altman. I think you would have to get an outside party.
I don't think you could trust the companies in this case. And
any of us--looking at their financial statements would be very
difficult to understand. You would have to value every one of
those assets, both tangible and intangible. And I do believe
they have unincumbent assets. But can you get, for example Opel
in Germany, can you get the German government which has a stake
in this, too, in providing money to Opel under certain
conditions, can you be able to transfer that equity to a lender
here?
It is a very good question, an excellent question, and one
that I was wrestling with myself in trying to prepare the
testimony.
Mr. Sachs. Congressman, I don't think with all due respect
that it is really the question for this weekend or before you
recess or before the new government comes in. This has to be
viewed practically as a two-part process. You have a basic
framework that has been put in front of this committee, which I
find very valid and very credible and absolutely worth the
American people investing in.
Then we are going to have a new government that is
responsible for helping to answer a lot of these questions. We
don't have, with the outgoing Administration, the capacity to
do these things right now, but we are going to have a new
government. In 6 months' time you will get a lot of answers.
And it is important--even in a month-and-a-half's time, you
will get a lot of answers that you will not get right now.
I think, therefore, pragmatically, because these decisions
really are needed in hours--day two, you are leaving town--that
putting in the kinds of protections that are in your draft
legislation, I think, is appropriate. Assigning oversight
responsibility to the Cabinet, ministers of departments of the
incoming government are completely--and of the outgoing
government, for that matter--are completely appropriate.
But fine-tuning, in my opinion, is not commensurate with
our macroeconomic reality. Last week, $306 billion was thrown
over something without 1/100th of what you are asking for right
now in scrutiny because events are moving at trillions of
dollars very, very fast.
And I think it is important that we understand the
macroeconomic crisis that we are in, and that the American
people understand the macroeconomic crisis we are in. This is
not normal, what is happening. This isn't even normal about a
difficult situation for the auto industry. This is a global
macroeconomic crisis unprecedented since the Great Depression.
And so we have to act with the speed that is imperfect in
answering a lot of things, but it is realistic to the
circumstances that our country and the world face.
Mr. Foster. It seems to me that the long-term issue that we
are dancing around is that the problem here is declining market
share. And the reason for that is, it is fundamentally less
expensive to produce cars and components in developing nations.
You can get a good engineer for $10,000 a year in India and $2-
a-day factory labor in China, and they can be trained to do a
decent job of assembling quality cars. The only way to preserve
the car industry long term is to acknowledge that we have a
national security in preserving a self-sufficient automobile
industry, and that nothing short of some combination of
tariffs, nontariff barriers, subsidies or repeated capital
injections--which is sort of what we are doing here--nothing
short of that sort of thing is actually going to do the trick
to make a long-term, stable automobile industry here. And I
think that sometimes gets called a national auto policy. But it
is pretty much what it comes down to.
Mr. Sachs. If that is a question, Congressman, I would
disagree with that.
Mr. Foster. What is wrong with it?
Mr. Sachs. The auto industry in the long term is a growing
industry. There will be actually hundreds of millions of new
vehicles when the world's middle-income countries continue to
achieve economic growth. Our industry has a chance to be a
technological leader. We can make breakthroughs. They have been
long delayed because our pricing policies, our national
policies on this, have not been what they need to be.
It is not only the industry. It is the choices we made as a
country politically, personally, and the company that has led
us to a situation where we are. But we are on the verge of
developing leap-frog technologies. This is the absolute truth,
whether it is fuel cell technologies or plug-in hybrids, these
are major, world-class companies we are dealing with.
The Chairman. The gentlewoman from California.
Ms. Speier. Thank you, Mr. Chairman.
Thank you all for participating. I have two trains of
thought that I would like to pursue. One is around demand. All
of this to me makes no sense at all if we don't create a demand
for these vehicles. And the American people right now are damn
mad. They do not want us to bail out this industry. And if we
then pump tens of billions of dollars into this industry over
the course of the next 6 or 8 months, and the American people
continue to be angry about that, they are not going to buy the
cars. So where are we?
Mr. Sachs. Congresswoman, they are mad that unemployment
jumped to 6.7 percent today and 560,000 jobs were lost. They
are going to be very mad when unemployment reaches 9 percent.
They will be really mad if unemployment reaches 12 percent. If
we allow the most important industry in this country to
disintegrate, believe me, the fury will be nothing like what
will happen when they hear about a $25 billion bailout.
We have to take the macroeconomics seriously right now. We
are in the steepest descent we have been in in modern times. It
is crucial to stop this. So the American people need to
understand this isn't a favor for the industry, this is a favor
for the American people. That is the most important thing they
need to understand. This is to break a collapse of our economy
that is under way right now. And this can be understood.
Ms. Speier. All right. Let me ask you a further question.
Does it make sense--and this is a question for any of you
who would like to answer it--for us to create a tax credit so
that American motorists go out and buy cars that American
manufacturers build that get more than 30 miles per gallon?
Mr. Friedman. Congresswoman, we have actually been working
in California for a plan very much like that, based on vehicle
emissions, where if you purchase a vehicle that gets improved
emissions, you get a tax break from the government. That will
encourage people to buy better vehicles, it will encourage more
competition in the industry. And right now when we are in the
world of a fiscal stimulus we can probably afford to just do
that part of it.
Now, in the long run, you want to add a financing portion
of that, and that is some sort of fee for vehicles that pollute
too much and use too much gas. So I think this is an
opportunity again to take some of the policies that are being
formulated in California and move them nationally.
I also think we have other opportunities to stimulate
demand and to deal with the fact that, as gas prices go up,
people are also going to be looking for alternatives to cars.
We have a lot of truck plants that build vehicles that have
body-on-frame construction. You can start moving some of these
plants over to rail, over to buses. We can revolutionize our
transportation industry while stimulating our economy.
So this is a down payment. We need a whole other
conversation about a broader macroeconomic stimulus to get
consumers buying, but also get consumers options other than
cars.
Ms. Speier. Thank you.
Now, the other train of thought: Cerberus really troubles
me. They paid $7 billion for Chrysler, and now they want $7
billion as part of their rescue. And they have just stripped
Mervyn's of all its real estate, and now 30,000 employees of
that company are on the street because they are liquidating.
They are a private equity firm. We don't know anything
really about their holdings and what they have done to Chrysler
or how much money they have already taken out of Chrysler. I
don't understand why we should be bailing them out.
Comments?
Mr. Dodaro. I think that in that particular case, there
needs to be a really high threshold and representations that
credit is not available in other sources before the government
moves in. This is why I think that there needs to be a Federal
guardian. There needs to be somebody asking for additional
information before the Federal Government makes that decision.
Not that we go around with a particular point of view, but you
need more information. And I think you need a greater degree of
representation for the reasons that you mention.
Ms. Speier. Thank you. I yield back.
The Chairman. I thank the panel.
And responding again to Mr. Levin, let me leave people with
a two-part question: Should we do something, and if so, what
should we do? There is a lot more agreement that we should do
something, unless the President apparently today called on us
once again to make the $25 billion from the energy efficiency
part available in ways that many of us disagree with because it
would too greatly loosen those.
And I think it is fair to say that the job report today,
this disastrous job report, has heightened the interest in
doing something.
The one thing I will say is that it is obviously going to
be incumbent upon us, given the wide recognition that it is
important to do something, we are going to have to have some
give here; and if we are lucky, we will come out with a bill
next week that nobody likes. Because any bill that any
individual liked couldn't pass.
But--there is a sufficient consensus that we have to do
something, but I hope we will get something acceptable to
enough Members of both Houses so we will avert disaster.
I will just repeat--and Mr. Rohatyn said it might not be
popular--one of the things we have learned is, if we didn't
know it before, averting disaster is no basis for a political
campaign. If you do something good, people are happy. If you
avoid something bad, people are not happy.
One thing--and I have to say to my friends, the economists
here, on whose judgment we rely a great deal; and they
understand this--there is one very important metric in
economics which is a disaster in politics, that is, reducing
the rate at which something bad is happening. That can be a
sign of real success in a public policy term. Any politician
who goes and takes credit for saying, yes, things are really
bad, but boy, would they have been worse if it wasn't for me,
perhaps should study to become an economist because he or she
will need an alternative profession.
But I believe--and I am encouraged from talking to my
colleagues informally as well as formally--there is an
understanding that we have to work together. There are a lot of
ways to do this. No one can be certain, but I have some more
optimism than I had before that we will get ourselves to a
point in a reasonable way until next year, and we will have
several months in which we can work on this.
The hearing is adjourned.
[Whereupon, at 3:00 p.m., the hearing was adjourned.]
A P P E N D I X
December 5, 2008
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