[Senate Hearing 110-878]
[From the U.S. Government Publishing Office]
S. Hrg. 110-878
EXAMINING THE STATE OF THE DOMESTIC AUTOMOBILE INDUSTRY--PART II
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
ON
FURTHER EXAMINING THE STATE OF THE U.S. DOMESTIC AUTOMOTIVE INDUSTRY
AND ITS OVERALL IMPACT ON THE NATION'S ECONOMY, THE AUTOMOTIVE WORKERS,
AND THE COMPANIES INVOLVED IN THE SUPPLY CHAIN AND THEIR EMPLOYEES
__________
DECEMBER 4, 2008
__________
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
CHRISTOPHER J. DODD, Connecticut, Chairman
TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York WAYNE ALLARD, Colorado
EVAN BAYH, Indiana MICHAEL B. ENZI, Wyoming
THOMAS R. CARPER, Delaware CHUCK HAGEL, Nebraska
ROBERT MENENDEZ, New Jersey JIM BUNNING, Kentucky
DANIEL K. AKAKA, Hawaii MIKE CRAPO, Idaho
SHERROD BROWN, Ohio ELIZABETH DOLE, North Carolina
ROBERT P. CASEY, Pennsylvania MEL MARTINEZ, Florida
JON TESTER, Montana BOB CORKER, Tennessee
Shawn Maher, Staff Director
William D. Duhnke, Republican Staff Director and Counsel
Amy Friend, Chief Counsel
Mark Oesterle, Republican Chief Counsel
Dawn Ratliff, Chief Clerk
Devin Hartley, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
C O N T E N T S
----------
THURSDAY, DECEMBER 4, 2008
Page
Opening statement of Chairman Dodd............................... 1
Opening statements, comments, or prepared statements of:
Senator Shelby............................................... 5
Senator Akaka
Prepared statement....................................... 107
WITNESSES
Gene L. Dodaro, Acting Comptroller General of the United States,
Government Accountability Office............................... 7
Prepared statement........................................... 108
Response to written questions of:
Senators Brown and Tester................................ 206
G. Richard Wagoner, Jr., Chairman and Chief Executive Officer,
General Motors................................................. 37
Prepared statement........................................... 121
Ron Gettelfinger, President, International Union, United
Automobile, Aerospace, and Agricultural Implement Workers of
America........................................................ 39
Prepared statement........................................... 162
Alan R. Mulally, President and Chief Executive Officer, Ford
Motor Company.................................................. 40
Prepared statement........................................... 167
Robert Nardelli, Chairman and Chief Executive Officer, Chrysler
LLC............................................................ 42
Prepared statement........................................... 169
James T. Fleming, President, Connecticut Automotive Retailers
Association.................................................... 43
Prepared statement........................................... 189
Keith Wandell, President, Johnson Controls, Inc.................. 45
Prepared statement........................................... 191
Mark Zandi, Chief Economist and Co-Founder, Moody's Economy.com.. 47
Prepared statement........................................... 194
Allan I. Mendelowitz, Member of the Board of Directors, Federal
Housing Finance Board
Prepared statement........................................... 203
(iii)
EXAMINING THE STATE OF THE DOMESTIC AUTOMOBILE INDUSTRY--PART II
----------
THURSDAY, DECEMBER 4, 2008
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:11 a.m., in room SD-106, Dirksen
Senate Office Building, Senator Christopher J. Dodd (Chairman
of the Committee) presiding.
OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD
Chairman Dodd. The Committee will come to order. Good
morning. I would ask the Committee to come to order, and our
friends that cannot find a seat in the hearing room--as you all
noticed, we moved the hearing this morning. The last hearing
obviously drew a sizable audience of interested people, and so
we moved the hearing to this room this morning. I want to thank
my colleagues. I know many had planned, obviously, to be
probably elsewhere this week, but I am very grateful to all of
you for being here for this second hearing on the subject
matter. And I am going to take a minute or so this morning and
just explain some housekeeping provisions and then some opening
comments on the subject matter.
We are here, obviously, ``Examining the State of the
Domestic Automobile Industry: Part II,'' if you will, of these
hearings. This could quite possibly be, I would point out to my
colleagues--and I say that with some hesitation--the last
hearing of this Committee in the 110th Congress. And I want to
just take a moment, if we could, all of us here, to recognize
the service and valuable contributions of some of our
colleagues who will be leaving.
Senator Hagel, Chuck Hagel of Nebraska. He is a dear, dear
friend and a great--we served on two committees together over
the years, the Foreign Relations Committee and this Committee,
and you have been a valued friend and a wonderful member of the
U.S. Senate. We thank you immensely, Chuck, for your service.
Elizabeth Dole, our good friend from North Carolina, we
thank you for your service on this Committee as well and your
and Bob's wonderful contribution. You are very much part of the
Senate family and have been for a long time. So we thank you
immensely.
And, of course, Wayne Allard, my good friend from Colorado,
we thank him. Where is he? He is not here yet, but he is
coming, and we thank him very, very much as well for his
service, and their staff members on this Committee. Tewana
Wilkerson, Joe Cwiklinski, and Robbie have done a great job,
and I thank them for their service.
Let me make, as I said, a couple of housekeeping points, if
I can.
First, given this is the second hearing on the auto
industry and given the large number of witnesses we have before
us this morning, I would like to propose that Senator Shelby
and I make our opening statements and then move immediately to
our witnesses as a way of moving along here rapidly, given the
number of people who will be testifying before us.
And, second, the automobile companies represented here this
morning have provided this Committee and the Senate with
extensive information about their status and their plans. In
the case of one company, in the case of Chrysler, some of that
information is proprietary in nature. It is a private company,
not a public company. We have left it up to that company to
provide that information to each interested Senator in a manner
that both parties deem consistent with protecting the privacy
of proprietary data. Should any questions be raised today that
might trigger a request for proprietary information, I would
ask that these questions be answered by the auto companies to
the member's satisfaction in a manner that preserves the
confidentiality of the information sought.
Today the Committee meets, as I pointed out, for the second
time in as many weeks to consider the state of the domestic
automobile industry. As we consider the challenges facing this
industry, I want to be clear that Congress has already given
the Bush administration the authority to stabilize this
industry. I would like to take note that I invited the Treasury
Department and the Federal Reserve Board to testify here this
morning, and they have declined to do so. Yesterday I sent a
letter to Chairman Bernanke requesting his comments on the
industry's plans and whether there is anything that prevents
the Federal Reserve from lending any of these domestic--
providing any lending to any of these domestic auto
manufacturing companies.
When we last met, I said that the fate of the industry is
an important subject matter, obviously, for our Committee's
consideration. That statement even is truer today than it was a
few days ago. In fact, the very purpose of this hearing is
fundamentally to answer three very straightforward questions.
First, are the automobile companies in dire straits? Are
they in danger of failure?
Second, if they were to fail, what would be the
consequences for our overall economy?
And, third, if the economic consequences would be severe,
does the American Government have a responsibility to do
anything to help?
In just 2 weeks' time, the clouds on the economic horizon
have grown even darker and greater in number. Just this week,
we learned what many of us have believed for a long time. Our
economy is mired in a deep and sustained recession--a recession
that began some 12 months ago, a recession that has contributed
to the greatest loss of manufacturing jobs, including in the
automobile industry, in over a quarter of a century, and a
recession that was in many respects precipitated by massively
irresponsible actions by those in the financial sector,
including lenders who are now the recipients of hundreds of
billions of dollars in Federal taxpayer bailout assistance.
Amidst this backdrop of intensified economic turbulence and
uncertainty, the leaders of the domestic automobile industry
are here once again to explain why they are seeking assistance
from the Committee and from the Congress of the United States.
None of us relishes this task that we are asked to consider,
yet who among us believes we should risk the consequences of
the collapse of one or more domestic automobile manufacturers?
Make no mistake about it. Those consequences would be
severe and sweeping. Tens if not hundreds of thousands of jobs
would be lost in the auto industry itself. More would be lost
among suppliers, dealers, and all of the other businesses, from
restaurants to garages and others across our Nation in ways
large and small that depend on a domestic auto industry for
their livelihoods.
Moreover, at a time when taxpayers are already bearing an
extraordinary burden in funding economic recovery efforts, that
burden would only increase in the event of a failure of one or
more of these companies. Pension obligations alone could run
into the tens and maybe hundreds of billions of dollars.
A partial or complete failure of the domestic automobile
industry would have ramifications far beyond manufacturing and
pensions. It would affect virtually every sector of our
economy. That includes the financial sector, which is a
particular focus of this Committee. A collapse within the auto
sector would unquestionably worsen the credit crisis. By some
estimates, the domestic auto companies already comprise more
than 10 percent of the high-yield bond market and one of the
largest sectors in the leveraged finance for banks.
The Big Three have hundreds of billions in outstanding debt
liabilities, including tens of billions in short- and long-term
debt obligations. In addition to their outstanding debt, these
companies hold billions in credit default swaps. A failure in
the auto industry could trigger obligations by manufacturers
and counterparties that could have financial firms reeling.
Ultimately, the ability of those firms to inject credit and
liquidity into the overall economy could be impaired, stifling
job creation and further income growth. None of us--none of
us--wants to see that outcome.
So let us be clear this morning. In my view, we need to act
not for the purpose of protecting a handful of companies. If
that were the extent of the issue, I would let them fail. I
acknowledge those who advocate such a course on the assumption
that pressure from the outside will produce the desired
results. My concern with such an approach is that it plays
Russian roulette with the entire economy of the United States.
Inaction is no solution. Inaction would only add more
uncertainty and instability to our economy. These are the
ingredients that currently we have an overabundance,
ingredients that are contributing to the crisis of confidence
that has gripped the markets and precipitated the worst
economic crisis since the Great Depression.
It seems to me that the request being made by the
automobile industry, while large by any measure, is modest in
comparison to what this Committee has lately witnessed in the
financial sector. If the Federal Reserve and the Treasury
Department under President Bush can find $30 billion for Bear
Stearns, if they can concoct a $150 billion rescue for AIG, if
they can commit $200 billion to Fannie Mae and Freddie Mac, and
if they can back Citigroup to the tune of more than $300
billion, then there ought to be a way to come up with a far
smaller dollar figure to protect this economy from the
unintended consequences that would be unleashed by a collapse
of the automobile industry.
With regard to the automobile industry, certainly we should
not throw good money after bad, nor should we subsidize
ineffective performance and inefficient production. We must
demand that the auto companies demonstrate their commitment to
reform. We must insist that if they are going to be backed by
the American taxpayer, they owe it to those same taxpayers to
make vehicles in a far more environmentally and economically
sound manner.
The latest plans submitted by these companies over the last
several days, which I have read completely, all three of them,
are not perfect by any means. But, on average, I think they
represent a commitment to that kind of necessary reform that
Detroit must adopt if our economy and our country is to have an
automobile industry in the 21st century.
Some of the companies are to be commended for going back to
the drawing board, making tough decisions, and stepping forward
today. You have come a long way in 2 weeks, I would say. Some
may ask whether these proposed changes go far enough. In
addition, I think these plans still leave many questions
unanswered. In particular, will taxpayer assistance truly
ensure long-term viability for these companies? Or will they be
back here within weeks seeking more taxpayer assistance?
But let us be clear. There is no doubt that the automobile
companies have done far more--far more, I would suggest--than
the financial companies to show that they deserve taxpayer
support. The Treasury Department has given the Nation's largest
lenders hundreds of billions of dollars, as pointed out, as
this graph here behind me demonstrates. Even now, weeks after
the fact, Americans are still waiting for most of them to show
that they deserve the dollars they have received, still waiting
for them to appropriately increase lending to consumers and
businesses, still waiting--still waiting--for them to more
aggressively act to mitigate foreclosures in our country, and
still waiting for these lenders to rein in bonuses and other
forms of excessive compensation while the American taxpayer is
sacrificing on a daily basis.
The Nation's largest financial institutions are among the
largest culprits in causing the credit crisis, and yet
Secretary Paulson and the Treasury, despite being given
complete authority to condition aid to financial institutions,
have in no meaningful way insisted that these banks and
insurance companies adopt tough reforms to ensure that the kind
of shabby lending practices they engaged in will not happen
again. On the contrary, the Treasury Department's largesse with
taxpayer funds has been remarkably free of conditions placed on
the recipients of those funds. Indeed, in the spirit of the
season, Secretary Paulson has given the Nation's largest
financial institutions the biggest holiday present in the
history of American capitalism.
In my view, if we are going to insist on reforms by the
auto industry as a condition of receiving Federal funding, we
ought to do the same for the financial companies. For that
reason, I will do all I can to insist that any auto company
bill also place tough conditions on any loans to financial
firms, including provisions that require tax dollars to be used
for responsible practices, like lending that requires lenders
to get much more aggressive about attacking the foreclosure
crisis that is still at the root cause of the larger financial
crisis and that prohibits executives from paying themselves
obscene sums while they are essentially receiving a welfare
check for the American taxpayer.
At a time when average Americans are sacrificing mightily
for the sake of our Nation's economic recovery, we must, I
believe, insist that companies benefiting from those sacrifices
act as if they deserved them. At the same time, I believe we
need to take action to help our domestic auto industry in order
to protect our Nation's economy and America's workers.
Finally, I want to respond to recent stories indicating
that the administration is considering asking for access to the
final $350 billion we provided in the Emergency Economic
Stabilization Act. We passed a bill that gave this
administration broad authority to use funding to address the
economic crisis we find ourselves in. Regrettably, they have
misused the authority in two ways, in my view:
First, they are not doing what we clearly expected them to
do. Most importantly, they are not using the money to help
homeowners in distress. The FDIC has put forth a program that
would help 2 million homeowners keep their homes, and the
Treasury Department is refusing to fund that idea.
Second, they have spent the money--they have spent the
money, they have done so in an ad hoc and arbitrary manner, in
my view. They seem to be careening from pillar to post. Both
the Treasury and the Federal Reserve have spent trillions of
taxpayer dollars without adequate controls and without adequate
transparency.
I do not believe this administration should seek the use of
this additional funding unless they can present to the Congress
and the American public a comprehensive, coherent plan for
addressing those concerns.
Let me thank all of our witnesses again this morning for
appearing here. We look forward to hearing from each of you,
and with that, I want to turn to my colleague from Alabama, the
former Chairman of the Committee, Senator Shelby.
STATEMENT OF SENATOR RICHARD C. SHELBY
Senator Shelby. Thank you. Thank you, Chairman Dodd.
Only 2 months ago, Congress passed a bill that gave the
Secretary of the Treasury unprecedented authority to spend $700
billion to address the credit crisis. At the time, I expressed
grave concerns with this approach and questioned then whether
it would be an appropriate use of taxpayer dollars. The erratic
implementation of the TARP, its questionable efficacy, and now
the GAO report highlighting a number of deficiencies in the
program's administration and oversight have only confirmed my
original concerns.
My primary focus in these deliberations was and continues
to be the interest of the American taxpayer. We that in mind, I
opposed the creation of the TARP. Applying the same standard, I
intend to oppose bailing out the Big Three auto manufacturers.
Industry analysts contend that the firms continue to trail
their major competitors in almost every category necessary to
compete and to make a profit.
When we last met, the CEOs of the car companies were unable
to convince this Committee that they had done enough to reverse
this trend. They were asked to go back to the drawing board and
devise a plan to transform their respective business models and
return them to profitability.
Now that they have each submitted a plan that proposes to
do so, I am once again interested to hear how they plan to deal
with current management, labor, cost and quality control, and
product development shortfalls. How do they plan to address
changes in the marketplace such as long-term reductions in
annual sales? On what do they base their forecasts, and what
happens if they are wrong? Why do they believe their proposed
actions will reverse the continued loss of market share to
other car companies?
How are their plans structured to adapt to an international
market that demands greater efficiency and flexibility? Do the
additional changes that they propose go far enough to ensure
that taxpayers' dollars are being used to transform an industry
and not just prop up a failed business model for a few months?
Finally, how is the money going to be used, and how do we
account for it? And I guess, last, how are you going to pay it
back to the taxpayers?
At our last hearing, I asked whether this was the end or
was it just the beginning. We now have an answer, I believe. In
just 2 short weeks, the price tag has jumped from $24 billion
to $34 billion--$25 billion to $34 billion in 2 weeks. I am
interested to hear what changed and why we should believe that
things will get better as our economy continues to contract.
A recent report by Standard & Poor's states that all the
automakers ``face a similar array of threats in the near
term,'' and that any government assistance would be viewed ``as
buying more time for the automakers rather than solving the
fundamental business risks, especially deteriorating demand
globally.''
Each of the automakers have based their plans on what I
believe are optimistic sales forecasts. Today's witnesses need
to assure this Committee, and I believe the American people,
that their plans can account for the unexpected, which seems to
be the norm rather than the exception in today's economy. It
has been argued that a great deal is at stake in this debate. I
could not agree more. The strength of the American economic
system is that it allows us to take risks to create, to
innovate, to grow, to succeed, and sometimes to fail. Every
time Government endeavors to alter any of these dynamics, it
undermines and distorts the forces at work in all of them. I
believe that this can impose a cost that is too high to pay as
well.
I also believe that adversity can present opportunities.
The question is whether one is prepared to seize them. I look
forward to hearing if what the automakers are proposing
demonstrates that they are truly prepared to do so. I have my
doubts.
Thank you, Mr. Chairman.
Chairman Dodd. Thank you very much, Senator Shelby. And as
I mentioned earlier, we are going to go right to our witness,
and I want to welcome Mr. Gene Dodaro, the Acting Comptroller
of the U.S. Government Accountability Office. Mr. Dodaro has
worked for over 30 years in a number of key positions at the
GAO, including Chief Operating Officer of that entity, and has
certainly strong experience in this area. We welcome you to the
Committee, and we look forward to your testimony.
Let me also say to you and for the record that any
documentation or supporting materials that you wish to have
submitted to the record, consider them accepted, both from this
witness and the other witnesses as well, to compile our
necessary record. That will be also true of my colleagues as
well as witnesses.
Mr. Dodaro, the floor is yours.
STATEMENT OF GENE L. DODARO, ACTING COMPTROLLER GENERAL OF THE
UNITED STATES, GOVERNMENT
ACCOUNTABILITY OFFICE
Mr. Dodaro. Thank you very much, Mr. Chairman. Good morning
to you, Ranking Member Shelby, and all the Members of the
Committee. I am very pleased to be here today to assist your
deliberations on the automakers' request for Federal
assistance. GAO has been involved in a number of Federal rescue
efforts and bailouts dating back to the 1970s during the
Chrysler-Lockheed Martin assistance, and over the years we have
developed three fundamental principles that we think can help
guide decisions on the Congress in this matter.
First is clearly identifying what the problem is we're
trying to solve. In this case, we have got short-term liquidity
problems with the confluence of fundamental restructuring of
the industry, and it is all occurring against a backdrop of an
uncertain economic climate.
The second fundamental principles is making a clear
determination that it is in the national interest to provide
Federal assistance and, if that policy determination is made,
that there are clear, concise Federal objectives for the
assistance and a clear exit strategy to return the companies to
their normal status.
Last, the third fundamental principle is protecting the
Government's interest, and here there are several principles.
First is concessions, concessions by all parties--in this case,
management, labor, suppliers, dealers, and creditors of the
affected industry seeking assistance; that there also be clear
collateral and that the Federal Government be put in a first
lien holder position and senior creditor status for whatever
assistance is provided; that there be compensation for risk on
the part of the Federal Government and, if the entities
benefit, that the taxpayers share in that benefit through
warrants or other means going forward; and that there be
controls over management, and in this case that there be limits
on compensation, but there be clear and consistent Federal
control over the disbursement of the money, the monitoring of
what the money goes for, and also, you know, the ultimate
effect of whether or not the money is achieving the objectives
of the program.
Now, there are two points I would really like to highlight
this morning before I take questions. One is if the Congress
determines that Federal intervention is needed here and Federal
assistance is provided, there needs to be a rigorous board put
in place to oversee this process and to have clear
decisionmaking authority about when and how the money is to be
disbursed to the companies. The board has to have access to all
the information it needs from the entities in order to provide
that type of oversight on behalf of the Congress. The board
needs to monitor the situations, particularly important in this
case because you have a lot of changes undergoing with the
economy and the changing circumstances of the entities. The
board has to have the ability to protect the taxpayers'
interest, has to have the right leadership, the right
expertise, and the right resources to succeed.
My clear message here today is the fact that this board has
to be established in order to succeed in this particular
endeavor if the decision is made to move forward. And it is
also very important to deal with the timing issues here. Many
of the needs of the companies put forth in their plans are
going to occur while we are having a change in and a transition
to a new administration. And so whatever administrative
apparatus is put in place, there has to be some continuity
during the period of time when there is a change in leadership.
And I have some ideas on how that could be addressed. I would
be happy to talk about it further in the questions.
Last, I would say the other fundamental point that we would
be making here is, because of the urgency of some of the
requests, that if there is a decision to move forward and to
provide assistance to the automakers, that Congress may want to
consider a short-term and a longer-term type of an approach and
that the money be phased in and doled out in increments over
time rather than large, up-front commitments. And this is where
the board would play a particular role in making sure that
there is enough justification and due diligence done on the
part of the Government with the companies' records to make sure
that the loans or whatever other assistance is provided is
warranted.
So, with that, Mr. Chairman, that concludes my opening
statement. I would be happy to address questions, and I also
want to underscore GAO's commitment to the Congress to work
with the Congress and providing all the help that we can in
making this difficult and very important decision.
Chairman Dodd. Thank you very much for your testimony this
morning. I have a couple of quick questions for you, and then I
will turn to my colleagues as well. We thank you for your
involvement.
There are a number of ways in which we can address this
issue, and obviously the one which has received a lot of
attention is whether or not Congress will act. Obviously, there
are various proposals, both in the House and some various ideas
that have been surfaced here, and, obviously, given the time
constraints and others, if Congress is going to act, it is
going to require some significant effort over the coming days.
The Majority Leader has suggested that we try to do something
next week, if we can, to come together.
But there are alternatives to that, and the two other
alternatives are: one, under the Emergency Economic
Stabilization Act, which this Congress supported back around
October 1st, granted broad authority to the Treasury to respond
to situations involving the economic difficulties in our
Nation. And while a lot of focus was paid to financial
institutions, the underlying point was to get economic
recovery.
Would you please share with us your analysis as to whether
or not, one, the Treasury has the authority under that
legislation to respond to this by utilizing the so-called TARP
funds in this case and has the authority to condition those
resources in a manner that they might see fit, given the
authority under that legislation.
And, second, under 13(3) of existing law dealing with the
Federal Reserve, as you saw them respond to the AIG situation,
do they not have the authority under that provision of law that
would allow them to respond to this situation? In effect, which
I have written to the Chairman of the Federal Reserve, Mr.
Bernanke, asking that question, but I would like to hear it
from the GAO this morning. Does that authority exist in your
mind in both cases?
Mr. Dodaro. First, as it relates to the authorities under
the Economic Stabilization Act for the Secretary of Treasury,
we believe that that legislation is worded broadly enough that
it would permit the Secretary of Treasury to provide the
assistance using TARP funds. And the Secretary has broad
discretion to set whatever conditions on the assistance that he
would determine necessary.
I would comment, though, that in my opinion, if TARP money
is used, there needs to be still additional changes in the
board oversight structure. Senator Shelby mentioned our recent
report on the TARP program where we pointed out the fact that
there are many critical management issues that are not yet
addressed as part of that oversight over that program.
Chairman Dodd. I want to get to that in a minute here about
the oversight.
Mr. Dodaro. And I will answer on the Federal Reserve
question, we also believe that the Federal Reserve has the
authority under the statutes that you cite to do this, provided
that there is a super majority vote of the Board of Governors,
the fact that there is certification that credit not available
through any other means to these companies, and that there is a
clear ability on the companies to repay the assistance. So
there are some determinations that would need to be made by the
Federal Reserve in order to exercise that statutory authority.
But both of those vehicles are potentially available.
Chairman Dodd. Now, just on the second question related--I
thank you for your answer to that question. That has been the
view of this Senator for a long time over the last number of
weeks that this matter has been discussed. There has been a
debate, obviously, as to whether or not that exists, but I
appreciate the clarity from the GAO on that question. The
authority clearly exists, and the right to condition that
assistance as well, which gets to the point of a trustee or a
board, an oversight board. And I agree with you totally on
that, I think having this disbursal of resources occur not on a
lump-sum basis but, rather, conditioned on the performance of
how things are moving forward with the various ideas that we
are hearing from the industry itself.
Tell me, though, in terms of the GAO's assessment in
reference to the oversight board, how do you--one, did they
require greater public scrutiny? I believe we did, obviously,
there. And what has been the GAO's assessment of that scrutiny?
Mr. Dodaro. In terms of oversight boards generally, Mr.
Chairman, you know, we would point to a couple models that have
been used before. All the Members here will recall the Airline
Stabilization Board that was put in place to provide loans to
the airline industry follow September 11, 2001. That Board was
made up of the Chairman of the Federal Reserve, the Secretary
of Treasury, and the Department of Transportation was an ex
officio member; GAO was a non-voting member of that Board as
well. That Board hired expertise. It brought in resources and,
in our view, worked fairly well. A similar type of oversight
board was put in place for the Chrysler loan guarantee program
during that period of time.
So our view in this case, you would want to have a board
that would have not only financial expertise--and our
experience has shown over time when an oversight board is set
up, you want to have the Federal Reserve and the Board of
Governors and Treasury as members of the board in any case. But
you also want to have industry expertise. In this case, it
could be the Commerce Department. Energy is already developing
the loan program under separate legislative authority given by
the Congress, and they have hired some expertise, we
understand, and would be available to help in this regard as
well.
So our view would be you would have to have a board
composition, and I would be happy to give you specifics on that
with conditions. But those would be our views on the best way
to address this particular situation.
Chairman Dodd. Well, we would ask you to do that right
away, if you would, as well. Just last on that point, is it the
GAO's opinion that there has been adequate oversight of the
Treasury's investments?
Mr. Dodaro. We think there are critical management
shortcomings, and we made a series of recommendations that we
believe Treasury needs to implement quickly in order to address
those issues to make sure that there is proper transparency and
accountability over the use of the money that has been provided
already, that the conditions that have been put on for
executive compensation and payment of dividends, et cetera, are
adhered to. We also made a series of recommendations about the
capacity of the Treasury Department to staff up to adequately
monitor and oversee and implement the program going forward,
and those are listed in our report. I would be happy to submit
our report for the record to document that, Mr. Chairman.
The other point I would make, you know, a lot of our
recommendations go to ensuring an effective transition given
the upcoming change in administration. One of the suggestions
that we might have in this case is if Congress would create a
board, if they make the determination that Federal assistance
is needed, that the one entity that is not going to have a
change in leadership is the Board of Governors of the Federal
Reserve. And it could be set up where they are members of the
board and serve in an interim status as chair until a new
Secretary, if it would be the Secretary of Commerce or one
other person is the chair of the board, until the new
leadership team is confirmed during the next session.
This is really important because, as you point out, you
have read the plans, as have I, and a lot of the assistance is
being requested during the next several months when this is
going to occur. And so you are going to need some continuity
during this period of time with the proper expertise and
resources if the Government's interests are going to be
adequately protected.
Chairman Dodd. You raised a second set of issues, and that
is, the transparency of the Federal Reserve and the assets they
are holding. And this Chairman intends to take a good look at
how the Fed has handled its investments. They have a lot more
than Treasury has handled, and, frankly, I have a lot of
concerns about the opaqueness, to put it mildly, of the Federal
Reserve's handling of those assets. That is for another hearing
at another time, but let me turn to Senator Shelby.
Senator Shelby. Thank you. Thank you, Chairman Dodd.
I appreciate that you were brought into this, the GAO was
brought into this without much lead time, and it is my
understanding that the GAO may not have very deep auto industry
expertise. In fact, it is my understanding that the GAO does
not presently employ auto industry analysts on its staff. But
even if you do not have auto-specific expertise, can you
extrapolate from your experiences conducting other analytical
projects and provide your assessment regarding the effort
required to adequately assess the financial condition of the
automakers? In other words, is 1 day enough time to prepare?
Mr. Dodaro. Well, we have been making the most of that 1
day, Senator, but you could use more time, obviously, and you
could need more detailed information from the companies. First
of all----
Senator Shelby. To make a good decision.
Mr. Dodaro. Yes, yes. And that is why we think a board
apparatus is a really important issue. I mean, in this case,
you know, one of the companies is not a public company, and
Chrysler, you know, is owned by a private equity firm. So you
do not have the normal disclosures that you do for the other
two companies. And so, you know, we have tried to get as much
information as quickly as we could in this case, but this is
the type of things that we believe the board could do. The
board could assure the Congress that credit is not available
elsewhere, that the cash-flow needs of the particular companies
are justified from a timing standpoint, et cetera.
Senator Shelby. But we are not at that point yet, are we?
Mr. Dodaro. Well, as the Chairman mentioned in his remarks,
there are questions about the plan.
Senator Shelby. Absolutely.
Mr. Dodaro. There is a need for additional information. It
provides a high-level view, and as it looks into the future,
there are some assumptions that are being made both from an
industry standpoint, an overall economic standpoint, but also
in concessions that would need to be negotiated with other
parties, for example, in a couple of cases, you know, swapping
equity for some of the debt that is held by the companies. And
while that is a laudable objective, exactly how that is going
to work out and play out as well as other negotiations in the
upcoming period of time, let alone changes in general economic
conditions, would remain to be seen. And that is the type of
thing that a board would monitor closely to protect the
Government's interest.
Senator Shelby. The bottom line is that the more
information one has, a board has, you have, we have, the better
informed decision we can make. Is that correct?
Mr. Dodaro. That is absolutely correct.
Senator Shelby. And you are not telling us this morning
that you have all the information you would like to make a
decision today, are you?
Mr. Dodaro. Well, we are auditors, Senator. We always like
more information.
Senator Shelby. Absolutely.
Mr. Dodaro. And I believe it is always in the Government's
interest to have everything it needs.
Senator Shelby. Yes, sir. You noted that the assistance
program--that these assistance programs from the Government
pose significant financial risk to the taxpayer. The magnitude
of that risk and the companies' need for the money can only be
assessed if we have detailed information about what the
financial state of each company is and what their plans are for
fixing their problems.
Could you tell the American people today that the auto
companies have provided the General Accounting Office in the
short time with sufficient information to make those
assessments of such magnitude today?
Mr. Dodaro. Well, there is definitely information in their
plans, if you take it as a self-reported basis, that shows that
they have some financial difficulties.
Senator Shelby. Sure.
Mr. Dodaro. That seemed to be clearly pointed out by them
in that data. We have not had time to do any independent----
Senator Shelby. To assess all that.
Mr. Dodaro. To assess it. But if you take the information
on a self-reported basis, obviously there are issues that need
to be addressed. That is why we were suggesting a short-term
approach and a longer-term approach to deal with the critical
issues. I mean, the Congress is in a difficult position right
now because of the urgency that is being expressed over the
need for this particular assistance, and we think if there is a
determination made to provide that assistance, there could be
some short-term issues. But you need to get the board in place
as soon as possible.
Senator Shelby. What would some of the possible benefits of
Chapter 11 reorganization be for these companies?
Mr. Dodaro. Senator, that is another area where, you know,
we do not have a lot of experience at the GAO in that area. But
there are obviously clearly defined legal procedures there that
are in place.
Senator Shelby. Under Chapter 11.
Mr. Dodaro. Yes, yes.
Senator Shelby. Chapter 11 basically is for restructuring
companies, is it not?
Mr. Dodaro. That is correct.
Senator Shelby. If they are worth of restructuring.
Mr. Dodaro. Right. That is correct. And, you know, there
are a lot of pros and cons of those issues. There are a lot of
risks associated with that as well, given the general economic
environment, the size of these companies, the
interrelationships with the suppliers that they have.
Senator Shelby. OK. I want to touch on something and see if
I understand what Senator Dodd was asking you and your answer
in dealing with the Fed. Were you saying a few minutes ago that
you believe that the Federal Reserve Board, led by Chairman
Bernanke, the Board of Governors, has the power now, if they so
wanted, thought it was necessary, to put money in these auto
companies just like they did with AIG and others? Do you
believe they have the power, the legal authority to do that if
they deemed it necessary?
Mr. Dodaro. Yes. Yes, we believe they do, but they would
have to make the determination that----
Senator Shelby. So they could do that without Congress
doing anything, could they not?
Mr. Dodaro. Historically, that authority has been used for
financial institutions, but, you know, our view is it is pretty
broad authority, and it could fit this circumstance. But they
would have to make the determinations that the credit is
available. It requires a super majority vote of the Board of
Governors to make it have a high threshold, and it has to
involve a determination by the Federal Reserve that the
companies would have the ability to repay. But those things are
present, and we believe it is broad enough authority that it
potentially----
Senator Shelby. They could do it if they wanted to do it.
Mr. Dodaro. Yes.
Chairman Dodd. Let me just say, I do not have the language
of 13(3) right in front of me, but believe me when I tell you
that it is not specific to financial institutions. It can be
any entity.
Mr. Dodaro. Right. I just was pointing out historically----
Chairman Dodd. But I want to make sure that we are not
confusing that question. It can be any entity at all under
13(3).
Senator Shelby. Senator Dodd, one last question. You have
been generous with my time.
If the Fed were to do something like that, looking at their
history, they have historically been a good task master for the
money, how it was spent, how companies were run--in other
words, the board you referred to. And that would be positive as
opposed to us loaning money to auto companies that I personally
doubt that will ever be paid back.
Mr. Dodaro. The Federal Reserve does have the expertise
necessary to be able to do some of the things that were
associated with the board, or any board or any entity could
contract for additional expertise that they may not have
resident in their entity.
Senator Shelby. Thank you.
Chairman Dodd. Senator Johnson.
Senator Johnson. Mr. Dodaro, let us cut to the chase. What
would be the effect on the Nation's economy if Congress or the
Fed did not authorize emergency loans for the Big Three
domestic automakers?
Mr. Dodaro. Well, Senator, we have not studied that issue
in depth, as mentioned, but obviously, there would be
repercussions. And how significant those repercussions would be
would depend upon, you know, what next steps would occur if
there was no Federal assistance put in place. But there is no
question that given the size of these companies, the number of
people that they employ, that if there are disruptions in their
operations, it is going to have an effect. And right now we are
in a weakened state from our economy's standpoint, and because
of that we are sort of in unprecedented circumstances right
now. And I think that is a heightened risk if the companies do
not provide--or are able to get some type of assistance.
Senator Johnson. What do legislators need to consider
exactly when writing legislation to ensure better integrity,
accountability, and transparency if funds are extended to the
automakers?
Mr. Dodaro. The number one recommendation, again, is a
board that has strong authority, that has access to all the
information that it needs, that has the expertise and it is
resourced properly to be able to review the information from
the companies and provide the type of oversight necessary.
Other safeguards should be the fact that there is collateral
established for the loan, that the Government is in a first
lien holder position, has senior status over the loan. If there
is collateral, we should get collateral during this period of
time. And there ought to be concessions made by all parties in
order to provide that assistance.
But the number one safeguard, Senator, in my opinion, is
this strong, decisionmaking board with the proper authority and
resources.
Senator Johnson. I yield back.
Chairman Dodd. Thank you very much, Senator.
Senator Bennett.
Senator Bennett. Thank you, Mr. Chairman.
Let us go back to the question of Fed authority. The
restructuring might very well consist of having current
creditors take equity. As I understand it, a very large portion
of the current creditors are, in fact, some of the institutions
that are on Chairman Dodd's chart, that is, the larger banks,
the larger financial institutions. Given their status, I am
sure they would not be happy with the idea of having their
balance sheets significantly changed by shifting from credit to
equity.
On the other hand, would it be possible for the Fed or the
Secretary of the Treasury, or both, under TARP to say if you
take equity in replacement for your debt, we then will give you
an infusion of cash from TARP? Then the balance sheet of the
auto company changes quite dramatically. The cash-flow
challenge changes because they are no longer paying interest on
their credit obligations, but they have an equity situation.
Discuss that. React to that possibility.
Mr. Dodaro. That is a very intriguing set of proposals,
Senator, and, you know, we have not examined the
interrelationships that you are talking about in terms of how
they exist. But I would say, though, that one of the tasks of
the board, or whatever entity is put in charge of this
particular situation, is to bring all parties to the table to
have a negotiated type of an arrangement. And certainly, you
know, at this point we should not rule out any possibilities of
how those types of negotiated settlements could take place to
provide the type of circumstances that you are talking about.
So, you know, I do not know enough to give you a particular
answer, but the concept of bringing people together that are
stakeholders in this process and trying to work out an
arrangement is one duty that the board should have.
Senator Bennett. Well, in your view, does the Treasury have
the authority now to do that kind of thing if, indeed, a
restructuring of that sort made sense?
Mr. Dodaro. Let me just turn to my General Counsel for a
minute.
Mr. Kepplinger. Senator, certainly the Secretary of
Treasury under the TARP program has a fair number of tools to
purchase assets. The other thing, too, is that they have the
authority, I would think, with the fact that they have this pot
of money available to them to engage the parties in
negotiations, and particularly to the extent that they are
mutually advantageous to work out those types of arrangements.
Is there something specific in TARP that addresses this
type of situation? Presently, not that I can recall off the top
of my head.
Senator Bennett. So if there is nothing currently in it,
the presumption is that, yes, they do have the authority?
Mr. Kepplinger. Well, they certainly have a wide range of
authority in terms of purchasing assets from the financial
institutions and providing loan insurance and loan guarantees.
How they could work the deal would depend upon the particulars.
Senator Bennett. Well, yes. I will not pursue it. My time
is running out. But it occurs to me that it might go down a
little better if the financial assistance were given to the
financial institutions rather than to the auto companies, but
the auto companies could receive significant relief. And by
putting the equity on the balance sheets of the financial
institutions, you create a new set of incentives on the part of
those equity holders who now become very significant
shareholders to protect their own investment by creating a
marketplace pressure for changes in the way the auto companies
operate. Seats on the board would come with that equity. In
effect, you take a portion of the oversight responsibility away
from the Government and put it in the hands of financial
institutions, at the same time easing the cash requirements on
the part of the auto companies.
So I throw that out as one thing for us to consider as we
go along.
Mr. Dodaro. Well, Senator, I would be happy to think about
that idea and provide, you know, some additional information to
the Committee on that proposal.
Senator Bennett. Thank you very much, Mr. Chairman.
Chairman Dodd. Thank you very much, Senator.
Senator Reed.
Senator Reed. Thank you, Mr. Chairman, and thank you, Mr.
Dodaro.
Are we talking about one board or three boards, giving
three separate entities, one of which is privately held?
Mr. Dodaro. I would suggest one board, Senator, to ensure
consistency. You know, from reading the plans, you obviously
have three very different situations that are being presented
here, but there needs to be consistency and equity in
treatment. One board, Senator.
Senator Reed. And with respect to the formulation that you
are talking about and one that seems to have been used both
with the airlines and with Chrysler back in the 1970s is that
the funding, the actual funding was contingent upon the board
determining that these conditions had all been met. Is that
correct?
Mr. Dodaro. That is correct.
Senator Reed. So, procedurally, the board, would it be
established, the actual disbursement of funds to the companies
would be made by the board, they would not have an account they
could draw down at their discretion?
Mr. Dodaro. That is correct.
Senator Reed. One of the points you made--and it is
reflective in several of the questions about assuring a first
priority for taxpayers in terms of their investment, implicit
in--at least implicit in what I have heard the companies have
said--is that this is very difficult for them to do because of
the ability to coordinate among debt holders, suppliers, et
cetera. Do you have any comments on that?
Mr. Dodaro. I think that, you know, each company is in a
different situation as it relates to that particular question,
Senator. This is an area that would have to be negotiated, but
I think the clear preference, if you will, is for the
Government to be placed in that status and that there be a
negotiated arrangement with the various creditors or other
stakeholders in order to make sure that that happens, or that
there is some other type of collateral or warrants that are
given for future purchase of stock. There are a lot of
different arrangements that could be made and negotiated, but
that would be another task for this board entity.
Senator Reed. Have you looked at the interlocking
relationships between the production companies and the finance
companies?
Mr. Dodaro. No, we have not.
Senator Reed. But that has to be something, I presume, that
should be considered.
Mr. Dodaro. Definitely.
Senator Reed. And, in fact, I am under the impression that
GMAC, at least, is seeking to become a bank holding company or
a financial holding company?
Mr. Dodaro. Yes, that is our understanding. That was in one
of the disclosures.
Senator Reed. So the Federal Reserve will be the regulator
of GMAC, effectively.
Mr. Dodaro. If they would approve----
Senator Reed. If they would be accepted.
Mr. Dodaro. If they approved that status.
Senator Reed. I guess a final point I want to make or a
question or clarification with respect to what you said is that
the procedure you seem to be suggesting, the one that we have
followed in every other situation, is that the critical act
that we do is establish the board and the parameters, one of
which would be first lien position, one of which would be a
definite voice in the management of the company--in fact, even
perhaps naming directors--and then concessions from everyone,
not just the UAW but suppliers, dealers, et cetera.
Mr. Dodaro. That is exactly right, Senator. Congress would
establish the membership of the board, the authorities of the
board, and Congress can establish whatever conditions it
believes necessary to protect the taxpayers' interest to guide
the board's decisions from a policy standpoint, including
executive compensation, payment of dividends, et cetera.
Senator Reed. And the other issue here is one of time
because what we have heard the companies say is that they are
in a very precarious cash-flow position, and that this board,
one, to be established; two, to make a careful review probably
with independent assistance is not something that can be done
in a matter of days.
Mr. Dodaro. Well, that is one of the reasons we would
suggest, if Congress decides assistance is warranted and
provided that there be a short-term mechanism to get the money,
most of the plans--or the two plans that require immediate
assistance, the General Motors plan and the Chrysler plan, call
for help during the--immediately, but also the January,
February, March timeframe, first quarter. You know, we believe
that there is sufficient expertise now available in the Federal
Government to get a board together to at least look at, while
there may be an initial outlay--and that initial outlay ought
to be conditioned on certifications by the automakers that no
other credit is available to them and other conditions, but
then they could immediately focus on the cash-flow positions of
those entities and then take a look at the longer-term issues
associated with restructuring. That would buy enough time to do
that.
Senator Reed. Thank you. Thank you, Mr. Chairman.
Chairman Dodd. Thank you very much, Senator Reed.
Senator Crapo.
Senator Crapo. Thank you very much, Mr. Chairman.
Mr. Dodaro, at the outset of your testimony, you indicated
that we had a short-term liquidity problem. Could you define
short-term for me? I mean, what are you talking about there?
Mr. Dodaro. Yes. Basically, that is reflecting what the
automakers put in their plans, Senator, which is the cash-flow
problems that they are having, meeting the needs of their
companies immediately in this particular month, but especially
in the first quarter for next year.
Senator Crapo. And these cash-flow projections are based on
various scenarios, correct?
Mr. Dodaro. That is correct.
Senator Crapo. And I know one of the big questions that we
are dealing with here in Congress is whether bankruptcy is not
a tenable option, and maybe the word ``bankruptcy'' shouldn't
be used. Maybe we should be talking about a Chapter 11
reorganization under the Bankruptcy Code. But aren't the
assumptions that the automakers are making dependent on the
public returning to full confidence in the companies?
Mr. Dodaro. Basically, most of the plans call for resuming
more of a normal sales status around the 2011-2012 type
timeframe, which is when they would propose that they would
start paying back the Federal loans. But there are also a
number of assumptions in there associated with negotiations
with their creditors and other stakeholders in the process. In
fact, the General Motors plan talks about an oversight board
along the lines of which I have talked about, and they
basically would be the substitute, if you will, for the
reorganization structure under the Chapter 11. The board would
take on that task of working with all the stakeholders.
Senator Crapo. And that gets to the real question I am
asking, because as I said, one of the big issues here is
whether a Chapter 11 reorganization is not tenable in the auto
industry in terms of the confidence that buyers will need to
purchase automobiles and so forth. And the question I have is,
do you believe that the essentially same type of
reorganization, if that is what we are talking about here, only
done through an oversight board rather than through a Chapter
11 proceeding, is going to create a difference in terms of
consumer confidence?
Mr. Dodaro. That is hard to predict, Senator, but my point
would be here, though, if the government takes on that task, it
needs to have the appropriate people and the resources and with
eyes wide open to go into that process to take it to a
successful conclusion. But the idea, particularly in the
current economic climate, trying to deal with predicting
consumer confidence or overall standpoint, I am just not
comfortable that I am in a position to do that.
Senator Crapo. With regard to the oversight board, what
authorities do you contemplate that it would have? And what I
am getting at here is I look back, and I am not an expert on
what happened in 1979 in terms of the Chrysler bailout that
occurred then, but my understanding is that at that time,
Congress was very specific and the terms and conditions that
Congress laid out were statutory, and I assume that you are
contemplating, as you suggest an oversight board here, that we
have again very specific Congressional standards set----
Mr. Dodaro. Yes.
Senator Crapo. ----and that this oversight board would have
some authorities to implement those standards, correct?
Mr. Dodaro. That is exactly right, Senator.
Senator Crapo. Do you recall what kind of standards
Congress put in in 1979?
Mr. Dodaro. If you would indulge me, Gary Kepplinger, our
current General Counsel, was the legal counsel for the
Comptroller General and we were on the Chrysler board, and if I
could ask him to take this----
Senator Crapo. That would be very helpful. And the question
I am getting at here is what kind of specifics did Congress at
that time require?
Mr. Kepplinger. As you asked before and as you pointed out,
the conditions in the Chrysler loan guaranty statute were very
specific. Congress, I think, developed these conditions through
over about a three or 4-month period, and I suspect, without
really knowing, that there was general acceptance by the major
players before the legislation was passed.
Now, there was a series of findings that the Chrysler loan
guaranty board had to make as a condition for issuing a
commitment--viability, ability to repay, assurances that the
concessions were in place, a financing and operating plan that
was satisfactory to the board, because actually, as Gene has
pointed out before, it is one of the best protections for the
government is to assure that the government has confidence in
the financing and operating plans going forward.
Then in addition to that, at the time of the loan guaranty,
there were other assurances and requirements that had to be in
place--guaranty fees, warrants, other protections, financial
upside advantage for the government should it happen, positions
in the event of bankruptcy, a senior position, et cetera, et
cetera, et cetera. I can supply, if you would like, a fairly
detailed and perhaps more orderly recitation of what they were.
Senator Crapo. That would be very helpful. I note I am way
over my time. I apologize to the Chairman for that. I would
just like to ask one quick follow-up. In terms of these kinds
of conditions that Congress imposed, and I would like those
specifics, would the oversight board that we are contemplating
that you are talking about today, would it have authorities to
engage in management decisions on behalf of the companies?
Mr. Dodaro. In Chrysler, the government was not involved
directly in managing the entities. The government's involvement
was more indirect through the control over a billion-and-a-half
in loan guarantees. And if you will also recall, there were
contributions, I think in the range of another billion-and-a-
half in terms of concessions from the stakeholders and
additional funding. So----
Chairman Dodd. In fact, that was a condition. Wasn't that a
condition?
Mr. Dodaro. The billion-and-a-half from all were
conditions. But my point is is that the board wasn't engaged in
the managing of the companies. The board was engaged in
financing, and to a, you could say to a good extent,
restructuring the companies.
Senator Crapo. And we wouldn't be suggesting anything any
different than that sort of arrangement now.
Thank you very much.
Chairman Dodd. That is a great question, and it again goes
back to the point that, well, 535 Members of the Congress in
the next matter of days trying to craft something here is
difficult and other options exist for managing this situation
where getting these kinds of decisions could be made almost by
fiat as opposed to trying to convince two bodies of Congress
along with others to draft something here that could work. So I
appreciate the observation.
Senator Schumer.
Senator Schumer. Well, thank you, Mr. Chairman. I want to
thank you. This is excellent testimony and I think it is along
the right lines we should pursue.
I have a couple of points I want to make and then I am
going to ask you to comment on them. First and obviously, at
least to me, we can't let the industry fail. Millions of
workers lose their job. We have to have a domestic
manufacturing base. And to let the auto industry fail during a
recession would make a sick economy sicker, so we have got to
do something.
Second, bankruptcy is not a viable option because it will
seal the death of the auto companies. No one is going to buy a
car from a bankrupt company. No one is going to make a loan to
someone buying a car from a bankrupt company. And everyone
talks about this prepack. A prepack brings the big players
together, but it doesn't bring all the players together and so
once you go to bankruptcy, they can delay it for months, even
years, and the company fails. So we have to do something, not
bankruptcy.
And I think I speak for many of us here. We care less where
the money comes from--that has been the big debate, should it
come from the TARP, should it come from the 136--but much more
how it is spent. And speaking for myself and I think a good
number of people, I don't trust the car companies' leadership.
I worry that if they are left on their own, they will be back a
short time later asking for more and we won't be better off. To
hand money over with vague, unenforceable promises without an
enforcement plan for viability isn't good enough.
So that leads us to where you are sort of, which is
Chrysler. That is the one model. It is interesting to note, Mr.
Chairman, that Chrysler wanted direct money or a tax refund and
the Congress said, no, we are setting up a board. But it wasn't
just an oversight board. And I think when you call it an
oversight board, you run into trouble, because this is a board,
I think, that has to do a lot more.
If you have a board, and I wouldn't even have a board right
now, given the time problem. I would have an individual. I
would let the President designate the Treasury Secretary, who I
believe was chairing the other board, or someone else, to bring
all the big parties together and work out concessions quickly
so that then the money can flow. If you give the money and then
say, let the auto companies negotiate, you know who is going to
lose? It will be the workers. UAW made concessions yesterday,
significant ones, but where are the bond holders? Where are the
dealers? Where are the other lenders?
The only way you can do that is the government has the
carrot, in my view, in the view not of a board. It will be too
cumbersome, and as Senator Reed alluded to, we don't have the
time. You let this President or the next one--it may have to be
this one--pick somebody. He calls all the major players into
the room, probably the Treasury Secretary, and says, you all
have to make concessions. And then the carrots, which are not
just some lending but warranties so that people will buy the
cars and some back-up for lending, because no one is buying the
cars without lending, that is the kind of plan.
I think that can be done within the next three to 4 weeks.
Look what they did on these financial things. That is not a
great example in many instances, but I think they can.
So the worry I have with yours is not the basic concept but
the timing, the strength of the board to impose conditions, but
also to do the negotiating, and perhaps it shouldn't be a board
but one individual or maybe the Treasury Secretary and two
others, and do it quickly. Now, why isn't that a better plan?
It is along the models you say, but that takes the Chrysler
model and adapts it to the problems we have now.
Mr. Dodaro. First of all, Senator, I want to clarify. I
have been trying to make sure I exorcise the word ``oversight''
out of this board proposal----
Senator Schumer. Good.
Mr. Dodaro. ----because I don't want it to be viewed as an
after-the-fact oversight board proposal. That is not what we
intend. It should be a decisionmaking apparatus and monitoring,
as well.
Senator Schumer. But monitoring is not--when you say
decisionmaking, do you mean it would help negotiate? It would
call the bond holders in?
Mr. Dodaro. Yes.
Senator Schumer. It would call the dealers in and say, you
have to make concessions----
Mr. Dodaro. Yes.
Senator Schumer. ----before we are going to give some
money.
Mr. Dodaro. Yes. Yes. Yes.
Senator Schumer. Good.
Mr. Dodaro. And also, we have two concepts. One is the
board concept. The other is short-term/long-term. Now, short-
term can be done in a wide variety of ways for the immediate
next few months, but the restructuring plans that have been put
forth by the automakers take you out two, 3 years----
Senator Schumer. Right.
Mr. Dodaro. and there, you need a stronger structure, and
there, I would highly recommend the board approach as a means
of continuity over time. But short-term, there are----
Senator Schumer. What about having one person designated by
the President, or if it need be the next President--by the
President to put together this package rather quickly?
Mr. Dodaro. There are various approaches that could be used
in the short-term.
Chairman Dodd. Does the word ``trust,'' a trustee, maybe
that is the concept. That word ``trustee'' has exactly the kind
of things, Chuck, I think you are talking about.
Senator Schumer. Yes.
Mr. Dodaro. I mean, in the current climate in which we are
dealing with a lot of these issues that are fast-moving issues,
all options ought to be on the table, including that one.
Senator Schumer. Thank you.
Chairman Dodd. Do you have another question? I am sorry. I
didn't mean to interrupt you.
Senator Schumer. No, my time has expired.
Chairman Dodd. OK. I am sorry.
Senator Dole.
Senator Dole. Thank you very much for your testimony this
morning, which I appreciate very much. Could you talk more
about the ramifications if the Big Three auto companies, if
they go through a prepackaged bankruptcy? Just more details on
that, please.
Mr. Dodaro. Senator, I wish I could. I mean, we were sort
of called into this at the last minute to look at the plans
that they have, so we really haven't studied or are in a
position to really answer that question with any degree of
certainty. I think the other difficult issue there will be
trying to determine exactly what the scope of the so-called
prepackaged bankruptcy would be. So I really can't offer much
more insight there. I am sorry.
Senator Dole. The report that was released 2 days ago by
GAO, I would like to talk about that for just a few more
moments because this report acknowledged that the Treasury
Department has provided more than $150 billion to 52
institutions at this point and that Treasury has yet to impose
the necessary safeguards, like a system fully developed and
implemented. It is a heightened risk that the interests of the
government and taxpayers may not be adequately protected.
Wouldn't the board, whatever we call it, which is supposed
to be a part of the legislation that we are talking about now
or the plan that we are talking about, run the same risk? What
is the guarantee that this would occur any more readily than
what has happened under the TARP legislation?
Mr. Dodaro. That is a good question, Senator, and what I
would say the difference would be is a clear delineation in
statute from the Congress as to what its expectations are of
whatever executive branch or administrative entity is put in
place.
In this particular case, the oversight board that is
mentioned under TARP is really an after-the-fact body for
reporting and monitoring. It is not along the lines of what you
were talking about. So the difference would be Congress
specifying what needs to be done by this entity to safeguard
the government's interest, and along the lines of the Chrysler
loan guaranty program or the airline stabilization board. We
have models that have worked and we are suggesting a
replication of that approach, and that level of specificity
would make all the world of difference, in my opinion, for this
particular set of circumstances compared to the TARP program.
Senator Dole. Thank you. Thank you, Mr. Chairman.
Chairman Dodd. Thank you very much, Senator.
Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman. Mr. Dodaro,
thank you for your testimony.
Some of my questions have been pursued by some of my
colleagues, but there is one specifically. You know, I look at
the TARP, your report on the TARP program, and I wonder, the
two things that we were looking for in addition to obviously
rescuing the financial institutions and trying to help Main
Street was transparency and accountability, and they seemed to
have been victims in this process of not being fulfilled in the
TARP program. So I wonder, isn't that a lesson for those of us
who are arguing for some greater conditionalities in that
process? As we look at the automakers and the possibilities of
helping them out, isn't conditionality a very key element of
what we should be looking for moving forward?
Mr. Dodaro. Absolutely. Absolutely, Senator. I think that
makes all the difference. If you look at the title of our
report, our title says ``Additional Actions Needed to Better
Ensure Integrity, Accountability, and Transparency,'' and the
conditionality is the underpinnings of that.
Senator Menendez. Now, I have heard, of course, in your
original testimony and some of your answers that, of course,
being first in line. I think I have read some accounts, and we
will hear their testimony when they come forward, but that the
Federal Government needs to be paid back first and all other
outstanding debt would be paid after the taxpayers get their
money back. Some of the Big Three have expressed skepticism at
achieving this. That was accomplished in the 1979 rescue, was
it not?
Mr. Dodaro. Yes, it was, Senator.
Senator Menendez. If it was done then, have circumstances
changed in such a way that it cannot be done now?
Mr. Dodaro. Not to my knowledge.
Senator Menendez. Let me ask you, among the conditions that
we should be looking at, first in line and the oversight board
at the appropriate time, should the Congress not be considering
what, in fact, that oversight board should be demanding of the
Big Three? For example, all of these companies have presented
some restructuring plans, but ensuring that that restructuring
takes place, ensuring that there are benchmarks and that there
are timeframes for those benchmarks, should that not be a
critical part of what we are seeking?
Mr. Dodaro. Yes, definitely.
Senator Menendez. Would we be looking at, for example, of
course, having a review? You mentioned having the board be part
of the actual final restructuring plan of these companies, that
that is something that Chrysler's rescue plan did, is that
correct?
Mr. Dodaro. Let me ask Gary to respond.
Senator Menendez. Sure.
Mr. Kepplinger. Largely through the conditions, Senator,
that were imposed upon the commitment and the extension of the
loan guarantees, you were accomplishing that restructuring and
those concessions had to be reflected in the financing plan.
There was a dollar-for-dollar draw down in terms of the amount
of loan guarantees that the board could provide to Chrysler had
to be matched dollar for dollar with concessions from the
stakeholder community. So you certainly can build that in.
Mr. Dodaro. And the conditions that were set during the
Chrysler period in 1979, that was for a $1.5 billion loan
guaranty program at that point in time, and so my advice would
be those would be the starting point for the conditions. Here,
we are talking about multiple entities with a lot more money at
stake, so Congress would be, at its discretion, add additional
conditions if it so deemed appropriate.
Senator Menendez. Now, at least maybe one, I don't know,
maybe more, but one of these companies has suggested the
possibility of having a merger with a foreign manufacturer. In
that case, would it not be of interest to the United States to
ensure that there are some conditions precedent at least on its
financial interests in that respect to make sure that, in fact,
what we are doing--that may create greater viability for the
company at the end of the day, but what we want to ensure is
that we are helping a domestic auto industry, not a foreign
auto industry.
Mr. Dodaro. Well, I think that, Senator, that goes back to
my other suggestion about the Congress establishing clear goals
and objectives to protect the national interest. So whatever
the Congress would want to make sure that it provides clarity
in the legislation. That issue certainly could be one of the
ones that is considered for that purpose.
Gary?
Mr. Kepplinger. That was a specific condition that was
included in the extension of the loan guarantees. To read from
the statute, the board had to determine that there was no
substantial likelihood that Chrysler Corporation will be
absorbed by or merged with any foreign entity, and that is, of
course, a judgment that you all will have to make.
Senator Menendez. And one final question. Have you looked
at this point in your--I know you got brought in rather late,
but have you looked at the presumptions of the Big Three in
terms of what their projections are as it relates to viability?
Have you had that opportunity?
Mr. Dodaro. No, we have not.
Senator Menendez. OK. We will look forward to the next
panel in that respect.
Thank you, Mr. Chairman.
Chairman Dodd. Senator Corker.
Senator Corker. Mr. Chairman, if I could, I could burn up 5
to 7 minutes now with this witness and I have some questions
that would be pertinent. What I would like to ask your
indulgence to do is to let me lop that over into this next
session for our main course. I know three of those witnesses
have driven a long ways to be here and I would rather use my
time, if you will, with them. But if that is not acceptable, I
will go ahead and use the time.
Chairman Dodd. No, no, fine. We will do that. I know
already I have talked with Senator Corker and he has asked for
a little extended time to pursue a line of questioning and I
certainly want to accommodate my colleague with that request. I
will just underscore the point that at least three of our
witnesses, maybe more, have driven a long way to be here and we
thank you for that.
Senator Shelby. Mr. Chairman, I wonder if they are going to
drive back.
[Laughter.]
Chairman Dodd. I think that will depend on what we do here
in the next few days.
[Laughter.]
Chairman Dodd. Let me see who is next here. I apologize.
Senator Casey?
Senator Casey. Mr. Chairman, thank you very much, and Mr.
Dodaro, we appreciate your testimony today.
I have to put something on the record because I have a bias
here. You have got roots in Pennsylvania and I know you
attended Lycoming, is that correct?
Mr. Dodaro. That is correct.
Senator Casey. One of our great colleges. So now that that
is on the table, that will obviously be the predicate for my
questions.
[Laughter.]
Senator Casey. No, I am grateful for the work. I wanted to
ask you about basically two--probe two areas. One is I was
happy in the report that you provided, the testimony today,
that you highlighted goals for us on a number of fronts, not
just how to analyze the problem and the legislation and the
solution, in particular on the board, the aspects of putting
together a strong oversight board. But especially I appreciated
the taxpayer provisions, where you outline on pages four and
five about concessions that everybody has got to help here.
And I won't go through the detail of what you set forth:
The controls over management; where you talk about approving
aid recipients' financial and operating plans and any new major
contracts; Number three, that the government should require
adequate collateral; and four, the government should receive
compensation through fees and equity participation from these
entities. I think it is important that we have principles that
guide all aspects of this, but especially those that pertain to
taxpayer protections.
I guess the main area I wanted to question you about,
though, is your process. I was the Auditor General in
Pennsylvania. We issued audits and investigations, and I know
they take some time to do it the right way, but I know that you
are able to move, I think, a lot faster than some auditing
entities even of comparable size. I guess I was going to ask
you if it is possible to do a review that would help us even in
the near term when you have begun to take a look carefully at
each of the proposals that the automakers are presenting to us
today and have presented the last couple of days.
I was thinking about a report that could outline the
adequacy of the plans, maybe a review of how realistic
assumptions are that are built into the underpinning of these
reports, what additional information is needed for this
government, this Congress, to make determinations about
legislation even for next week, and how to modify the plans to
meet the criteria that you have established in this report.
I guess the question is, A, could such a report be done,
and B, is it possible even to construct something that would be
substantial and thorough enough literally in the next 6 days or
so, or 5 days, before we vote?
Mr. Dodaro. Senator, I first of all appreciate your
recognition that we are nimble and a fast-moving agency. In
this case, I don't know what we could do within that period of
time that would add a great deal of credibility. First of all,
we don't have the authority here in any of these companies to
go in and dig through their records that would be needed during
that period of time. We are also under our mandate to provide
reports on the TARP program every 60 days, so we have every
able-bodied person following that money, as well. I would like
to say that we could, but I just don't see how it would be
credible and meet all of our standards.
Senator Casey. Is there a way that you could peel off or we
could peel off an aspect of this for you to study in that time
period? In other words, if you couldn't provide an assessment,
an overall assessment of all three plans, are there specific
areas that we could ask you to probe?
Mr. Dodaro. I certainly would be willing to entertain that
to provide whatever help we could to the Congress. The other
thing we could do is to quickly provide a set of questions that
you could ask the automakers based on our reading of the plans
to provide some additional information for--that they could
then provide that information. We certainly could provide that
insight, which I think would be helpful and largely go toward
accomplishing the purpose of what you are talking about.
Senator Casey. And I think especially with regard to the
oversight board, because one of the things that I have called
for, and others have, as well, is that one of the ways that we
achieve some measure of accountability, because the atmosphere
in America today is, frankly, pretty negative about any kind of
assistance for a variety of reasons which we don't need to go
into. But maybe what we can do is peel off, and I know my time
is up, but we will peel off some possible areas of inquiry and
get those to you and see if it is possible to provide some
feedback even within this limited window.
Mr. Dodaro. Yes. And it would require, whatever aspect that
we focus in on would require the voluntary cooperation of the
entities to quickly provide us the information because we don't
have statutory right of access to that information. We would
want to make sure that we have all the facts for whatever we
would look at.
Senator Casey. Well, they seem to be in a cooperative mood.
Thank you.
Chairman Dodd. That is a very good suggestion, Senator
Casey, and I appreciate the response from the GAO. I might ask
in the very next panel that our witnesses from the industry
might respond to Senator Casey's suggestion and the GAO's
concern as to whether or not that might work. I think that
could be a valuable contribution as we are trying in a very
brief amount of time to do something here that could be
helpful, so I thank you very much.
Senator Tester.
Senator Tester. Yes, thank you, Chairman Dodd, Ranking
Member Shelby.
Just a quick point. I know you had mentioned in your
opening remarks, Chairman Dodd, that you had invited Chairman
Bernanke and Secretary Paulson here. It is unfortunate they did
not show up. I can tell you that the frustration with the $700
billion bailout, because of lack of transparency and lack of
accountability, actually is part of the bleed-over here that we
are dealing with with the auto industry, and then the fact that
the special Inspector General at the Treasury that we had a
hearing here 2 weeks ago was being held by a member of this
body is somewhat disturbing. In fact, it is more than just
somewhat.
Mr. Dodaro, I want to thank you for being here today. I
have got a few quick questions. We can run through them very
quickly.
In your testimony, you stated that potential borrowers have
a reasonable assurance of repayment of the loan. They need to
have that. What should that repayment schedule be?
Mr. Dodaro. That is a very good question, Senator, and I
think that would be one area we would look to the board to
establish based on looking at the financial condition and
operating plan of the boards. I don't think that the schedule
should be set by the borrower, which in this case you have your
opening bid here as to when they would repay it. I think the
schedule ought to be set by the lender, and that is one of the
things the board should do.
Senator Tester. That being said, you saw the repayment
schedule that the auto manufacturers have put forth. At first
blush, do you consider those repayment schedules realistic
considering the economy we are in?
Mr. Dodaro. A lot depends on the assumptions that they have
in the plans, and----
Senator Tester. How about from your perspective?
Mr. Dodaro. Well, from my perspective, I would insist on
collateral associated with the loans and make sure that the
interest rate is set commensurate with the risk. And in this
case, a lot of that depends on the performance of the economy
and the companies over a period of time. So I would set it at a
pretty high level.
Senator Tester. OK. Could you give me an indication of what
the impact to the PBGC, that is the pension program, would be
if the Big Three went into bankruptcy?
Mr. Dodaro. Right now, it looks like the pension issue is
in hand----
Senator Tester. OK.
Mr. Dodaro. ----and that there are not any immediate
issues. However, depending upon the concessions and the changes
and other things that could happen, as well as the return on
the investments that they have made in the pension plans, this
could be an issue down the road. So it is something we will
keep an eye on, but right now, it seems not to be an issue.
Senator Tester. So a bankruptcy would not impact those
pension programs?
Mr. Dodaro. I can get you a detailed answer for the record
there.
Senator Tester. I would love that.
Mr. Dodaro. We will do that.
Senator Tester. Unfortunately, I mean, we could potentially
be voting on this next week.
Mr. Dodaro. We will have an answer tomorrow.
Senator Tester. Oh, super. That would be great.
On the next panel, a gentleman from Moody's will be here. I
look forward to his testimony and asking him a few questions.
But one of the points that he makes is that $34 billion in
loans is not sufficient. Ultimately, it would be around $75 to
$125 billion--those are his words, and he will reiterate them,
I am sure, later--to keep these companies out of bankruptcy.
You have reviewed the plans. Could you comment on that and tell
me what GAO's perspective would be as far as the total dollar
amount? Is the $34 billion adequate or would you be more
inclined to go with Mr. Zandi's perspective?
Mr. Dodaro. Senator, we have not looked enough in depth at
that issue to really offer an informed opinion on that right
now.
Senator Tester. OK. You also mentioned in your testimony
that creditors should not be asked to make concessions that
will cost more than what they would expect to lose in a
bankruptcy. Could you give me an example of what you are
talking about?
Mr. Dodaro. Well, this would be taking an equity share for
credit or paying a portion back of the company, you know,
taking so many cents on the dollar that are owed. What we are
saying there is that the government shouldn't expect that the
creditors are going to quickly agree to something that they
think would be a worse deal than what they would get through
bankruptcy. That is all we are saying. It is just the basic
principle and expectation that the government should have when
it would carry out its oversight activities.
Senator Tester. I don't mean to put you on the spot again,
but I have got 35 seconds so I am going to do it. One of my big
concerns is that if we do this bailout today, even after the
plans, there is a potential we could be back here in a year,
maybe less. Could you give me any assurances that if we
allocate $34 billion today that it will take care of the
problem, assuming that the economic situation that we are in
right now is where it is going to be for the next year or maybe
even a little longer, and let us hope it doesn't go a year, but
I think we need to take the worst-case scenario as we approach
this kind of money.
Mr. Dodaro. We have not done the in-depth work that would
put me in a position to provide you that assurance, so I can't
provide it.
Senator Tester. OK. Well, I appreciate your honesty and I
appreciate your being with the Committee today. Thank you.
Mr. Dodaro. Thank you very much, Senator.
Chairman Dodd. Thank you very much, Senator.
Just to inform my colleagues, Senator Carper, Senator Bayh,
and Senator Brown are the remaining colleagues with questions,
and so I would ask my colleagues to go in that order.
Senator Carper. Thank you, Mr. Chairman.
Mr. Dodaro, we have heard any number of times in the past
from your predecessor, David Walker, our Comptroller General,
who has testified and is quite a good witness, as you know.
This is the first time I have heard you testify. You are ably
helped here by your counsel, but I think you have done just a
superb job with relatively short notice and I want to thank you
really from all of us.
Mr. Dodaro. Thank you, Senator.
Senator Carper. I am going to go back to a point raised
earlier by Senator Bennett. I think he raised a good idea. In
fact, a number of my colleagues have. But I am just going to
run through our options of what we could do here, and one is to
do nothing--not a good option, one that I don't endorse. Option
two, go to Chapter 11, in my view, not a good option. Some kind
of Chapter 11 that is prepackaged, maybe.
The idea of using the TARP and calling on the Secretary of
the Treasury and others to make those funds available, not a
bad idea, but we are not getting a lot of movement in that
direction from the administration. Asking the Federal Reserve
to use their vast resources, their printing machine, even, to
come here and provide the liquidity, the working capital that
is needed, I am uneasy about that option, but that is certainly
an option.
The other option was one that I think that Senator Bennett
was talking to and I just want to explore it again and ask you
to react to it again. We have provided, as you know--when we
initially did the TARP, passed the TARP legislation, my
expectation was that Treasury would use the money and go out
and buy mortgage-backed securities from financial institutions.
They have, for the most part, not done that. They did use their
authority to go in and inject capital into financial
institutions and some of those financial institutions have used
that money to pay dividends. Some of them used that money to
acquire other financial institutions. Some of them used it to
pay compensation, I presume.
What about the idea of saying to those banks that have
actually received the capital injection through the TARP, large
banks, and nine of them that got $125 billion or so, and then
the other thousands who received some similar kinds of
payments, but in the aggregate up to $125 billion, and simply
say to them, you received this capital injection. You have
received this money. Rather than using it for some of the other
purposes for which you are using it, we would like for you to
use it to lend money to the Detroit Three--Ford, Chrysler, GM--
and the Federal Government would guarantee the loan, would
guarantee the loans that are made.
To the extent that the loans were made and the banks--their
cost of capital investment, I think is about 5 percent.
Preferred stock, they have to pay 5 percent of the shares of
preferred stock, and after 5 years it goes up to 9 percent, but
their cost of capital right now is about 5 percent. If they
were even to charge like an extra 100 basis points beyond that,
with what is pretty much a low-risk/no-risk situation, they
could actually make some money on the deal. Let me just ask
you, in sort of thinking outside the box, does that work?
Mr. Dodaro. Well, right now, there have been agreements
signed between the banks and the Secretary of Treasury,
particularly the large banks where the money has already been
dispersed as well as some of the other banks, that it would
have to go back and renegotiate those agreements and terms.
There also is money that has not yet been allocated out of the
portion that has been set aside for the capital purchase
program where agreements have not been reached yet. There is
certainly more flexibility there up front. Unfortunately, those
will be some of the smaller institutions that may not
collectively have the type of resources that the automakers are
seeking at this particular point in time. But I think it is an
idea that should be explored. There would just have to be these
renegotiations for the larger banks if that would be the case.
Part of our recommendation in our report was to have
Treasury find out what they have used the money for so far, and
right now, there is not any reporting mechanism back there. So
from a practical standpoint, and I don't know to what extent
that even exists at this particular point in time, whether the
money is still available for that purpose. But there is more
money in the future.
Senator Carper. All right. Thank you. In the briefing
materials that were provided to us by the Committee, one of the
items that was noted is when they were going through the
different options that were available to us, one of the things
that they talked about was a government-sponsored
reorganization, which I think may be another way of saying a
strong oversight board involved at the front end, almost doing
a prepack Chapter 11. Is there some other entity than a
government-sponsored reorganization that is different from what
we have been talking about here? I would yield to your counsel,
as well, if you want to jump in.
Mr. Dodaro. Yes.
Senator Carper. Is there any difference between a
government-sponsored reorganization and what we have been
talking about with an activist oversight board?
Mr. Dodaro. Not that I see, and looking at the GM plan in
particular, to me, that just suggested that we are heading
essentially in the way of Chrysler. And remember that had the
Chrysler loan guaranty board not been successful in working
with Chrysler to bring it out of its financial difficulties at
the time, bankruptcy was still an option.
Senator Carper. All right. Thank you very much.
Chairman Dodd. Thank you, Senator, very much.
Senator Bayh.
Senator Bayh. Thank you, gentlemen. One of the things that
has become apparent to me and probably all of my colleagues
this morning--and by the way, thank you for the substantial
amount of work you have done in a very short period of time in
a very intricate area--is how complex this all is. Is it fair
to say, Mr. Dodaro, that even doing the best we can, and you
have answered a lot of questions about what are the
alternatives, how would this work, what would the results be,
isn't it true that there is just an irreducible amount of
uncertainty at the end of the day that we are going to have to
come to grips with? You mentioned in the context of bankruptcy.
I think the phrase you used, that there are significant
uncertainties in all of this. There is no dead certain
guarantee about how it is going to function at the end of the
day. That is not possible, isn't that correct?
Mr. Dodaro. Given the uncertain economic situations that we
are in as a backdrop to all this, I think you are exactly
right. The real question for the Congress is how you best
manage the uncertainty----
Senator Bayh. Well, therein lies my----
Mr. Dodaro. ----to minimize the risk.
Senator Bayh. Forgive my treading on your remarks, but I
have only got 5 minutes here. I think you mentioned a key
thing, and I will give you where I am coming from on this. You
mentioned the economic backdrop, and I think in your testimony
you used the phrase ``significant ripple effect'' if the
companies are allowed to go down, and you mentioned it would be
a drag on an already weakened economy. So a lot of this for me
comes back to what is our appetite for risk taking at this
moment in time? Is this a time for adding additional risk to
the economy, or is this a time for a more cautious approach?
And given the great deal of uncertainty already present in the
economy, it suggests to me that this is a time for a more
cautious approach, trying to minimize the amount of
fragileness, uncertainty, instability in an economy that
already has plenty of all of those things.
So my question to you is, and you alluded to this in both
your oral remarks and in your written testimony, isn't it true
that if we were to allow these companies to go under, to go
into bankruptcy, that there would be a lot of unanticipated
consequences, some of them perhaps profound, and almost all of
them certainly negative? Isn't that true?
Mr. Dodaro. It is hard to determine what the outcome would
be at this point. I think it could be potentially significant.
I agree with that. And I think the real policy question, I also
point out in my written statement, for the Congress to make in
this case is what are the circumstances that it is willing to
enter into from a Federal standpoint. And so that is really
part of the policy.
Senator Bayh. Well, you used the phrase, ``significant
ripple effect,'' and I assume by that you meant not only the
direct job loss to the manufacturers, but the losses among
their suppliers, among their dealers, and, in fact, the
multiplier effect in the broader community. And one of the
points that I would like to make, and there are a lot of people
even in a State like my own where we have a lot of automotive
industry, why should we do this? And I think the point is that
it goes way beyond just the automotive manufacturers
themselves. It is the broader community that is going to suffer
and the broader economy that might suffer because of this, and
I assume that that is what you meant by the phrase
``significant ripple effect.''
Mr. Dodaro. Yes.
Senator Bayh. Possibly thousands, tens of thousands, I
mean, who knows, but a significant economic impact on a whole
lot of middle-class folks who aren't seated anywhere at this
table here today.
Mr. Dodaro. There would definitely be repercussions.
Senator Bayh. And according to you, significant. You used
the phrase ``significant ripple effect.'' In an effort to try
and address the residual uncertainties, you used the phrase,
one of the potential downsides to all this is the precedent
that could be set. Well, there are some other precedents on the
other side and there has been a lot of discussion of the
Chrysler situation, which I think most people would conclude
had a happy outcome. The taxpayers were repaid ahead of
schedule, actually made money. The jobs were saved. The economy
was saved the adverse consequences. So isn't that a, if done
correctly, isn't that a positive precedent that exists?
Mr. Dodaro. That is exactly right, and that is why we are
suggesting that the board model that was used under the
Chrysler approach is the right model because we believe that
was instrumental in the success that you mentioned.
Senator Bayh. And we have some more recent perhaps not so
positive precedents. The example of Lehman Brothers springs to
mind, where some folks decided that there was not enough
systemic risk involved to save Lehman Brothers. They decided to
save Bear Stearns, but they said, well, Lehman, we can let go.
It is not going to be so bad. And I think most people looking
back on that would say, well, wait a minute. It turned out to
be a lot worse than had been anticipated, and looking back, the
cost of saving Lehman was probably a lot less than the
consequences that we have paid to date. Isn't that another
precedent that is out there in recent memory that might argue
for action? Again, erring on the side of caution and stability
as opposed to greater risk taking and instability.
Mr. Dodaro. Well, it is certainly an example others have
pointed to, as you suggest. We have not looked at it carefully,
but it is an example people point to.
Senator Bayh. And I see the example here on the board of
AIG, and my colleague, John Tester, asked--and he raised this
issue and I am sorry he left, but he said, can you guarantee me
that people aren't going to be back? Well, AIG was back within
a matter of weeks and I don't think we would have extended
capital to any of these entities if the prerequisite had been,
look, a lock-certain guarantee we will never hear from you
again, because there is no such thing, isn't that also correct?
Mr. Dodaro. There is always a possibility that
circumstances are going to change.
Senator Bayh. My last point, and again, I admire your work
and a lot of this comes back to, again, there is just an
irreducible level of the unknown. And so the question is, where
does the balance lie, in the area of greater risk taking or
greater stability? But Senator Schumer asked, and I have
extended my time, so my last question will be, in this Chrysler
precedent, which we all have agreed was a positive precedent
that if we could replicate would be the way to go, and we have
got to bring all the different stakeholders to the table and
they have got to all participate, and I think labor very
courageously said that they were willing to go back to the
table to talk about this.
It seems to me that the toughest player out there are going
to be the creditors. How do you get them to come to the table?
How do you get them to take the steps that are going to be
necessary?
So my question to you, both of you, is in the Chrysler
precedent, if some of them are just balking, is there any--
outside of bankruptcy--any ability to have what is termed a
cram-down, basically to say if some of the creditors are
balking, holding up the whole thing, what do you do about that?
Is there any mechanism for dealing with that outside of
bankruptcy, to basically require them to participate so that
you don't have everybody getting flushed down the tubes because
there are just a few intransigent folks?
Mr. Kepplinger. Fortunately, I can recall only one episode
where that happened, and it was a relatively small bank in
Rockford, Illinois, that was part of a credit facility. And the
cram-down, as you say, Senator Bayh, was simply the money was
found to buy them out. Now, that is not a particularly useful
incentive----
Senator Bayh. At 100 percent? At a dollar-for-dollar basis?
Mr. Kepplinger. They were relatively small, and the problem
was taken care of with what often speaks very effectively, was
money. And that was agreeable to the other participants in this
facility because they had made the business judgment that it
was better for them to make concessions and retain their debt
than it was to go into a bankruptcy.
So I can't remember who on the panel referred to carrot,
but there needs to be that carrot. There need to be those
business judgments. And as Gene suggested before, the board has
to have enough specific requirements and conditions that they
have leverage to negotiate with, but that they also have enough
flexibility to deal with the vagaries, and as Gene also pointed
out, the differences between the current financial situations
of the players.
Senator Bayh. My time has expired, but I think the carrot,
absolutely. I was also interested, is there a stick here
possibly that could be balanced against the carrot to lead to a
decent outcome? I mean, it is sort of----
Mr. Kepplinger. It is bankruptcy.
Senator Bayh. ----the financial equivalent of eminent
domain.
Mr. Kepplinger. In one sense, it is bankruptcy.
Senator Bayh. Mm-hmm.
Mr. Dodaro. One of the other points I would like to
elaborate on your question about the uncertainty, one of the
features that the board would have is the fact that if there
are changing circumstances, they will know about it early
enough to consider other options. So the idea that there would
be more of an early warning system built in so that Congress
wouldn't be put in a position of having to make quick decisions
without all the information.
Chairman Dodd. Senator Bayh, thank you. Very good. Very
good exchange, too. Very helpful.
Senator Brown.
Senator Brown. Thank you, Mr. Chairman. Thank you, Mr.
Dodaro. Thank you, Mr. Chairman, for calling this hearing. I
apologize for my late arrival. I was on the early morning
flight and the flight was canceled for mechanical reasons. I
guess if I had thought ahead, I would have hitched a ride with
one of the witnesses driving from Cleveland, so I appreciate
that.
[Laughter.]
Senator Brown. As the Chairman said in his opening
statement, we are asking extraordinary things of our witnesses
today, something that we didn't ask of bankers when they came
in front of this Committee, or more precisely did not come in
front of this Committee. We didn't ask that the CEOs of the
banks drive to town in a Wells Fargo armored truck. We didn't
ask the CEOs of the banks, each of which was asking for, or
each of which was given $25 billion, we didn't ask for them to
appear before us. We didn't ask them to come up with a plan on
how they were going to spend the money. Neither Congress nor
the Bush administration did that. We are asking lots of these
witnesses, as we should, to protect taxpayers' investment. I
think it is important to keep that in mind and I appreciate the
Chairman in his statement pointing out that we are asking
extraordinary help with asking extraordinarily little
accountability from the banks.
All of us know the damage of these companies' failures,
these companies going into bankruptcy, the damage it would be
to all parts of the country, especially my part of the country,
but everywhere. I think if we look at this as we have in some
sense with talking about Chrysler and what happened 30 years
ago, if we fail to act, some future Professor Bernanke is going
to--people are going to marvel at the opportunity we missed. We
are adding another three million people to the unemployment
lines on top of the 1.5 million people who have lost their jobs
just in this calendar year alone. And I think our
responsibility is great and I am confident that this Committee
and the Senate and the House and the White House will step up
and do the right thing and take the responsibility that we
should as we move forward in the next few days.
I want to go back to a couple of points. Most of the
questions have certainly been asked by now that I think are
relevant. A couple of points that were brought up by Senator
Tester, when he asked you about the effects of if the
government doesn't provide this assistance, if we fail to move
forward on these proposals, you mentioned that PBGC would be
able to withstand it, that there wouldn't be great change. I
want to explore that.
I talked yesterday with the Governor of Ohio, who is facing
huge budget problems as the Governors of almost all States,
especially States like mine. He talked about the borrowing from
the unemployment fund. And this is a recession that we have
been in now a year, I guess, officially, but because the
recovery was so mild and weak almost a decade ago, the State
unemployment funds and the other safety nets, if you will, that
States provide never were built up because of the mild growth
or the relatively weak growth we had coming out of the last
recession. So we are in a position today in all kinds of States
in this country, from everywhere in the country, we are in a
position where we simply do not have much ability to withstand
these more difficult times.
So talk through, if you would, what this means? With PBGC,
there is not just--maybe Ford, Chrysler, and GM are fully
funded with their pension plans. A whole lot of the suppliers
aren't, I have got to be sure. What is this going to mean to
PBGC? What is this going to mean if we do nothing or go Chapter
11? What is it going to mean for food stamps and unemployment
funds and Medicaid to the Federal and State governments? What
is this more precisely going to mean then?
Mr. Dodaro. Well, there is no question, to the extent to
which unemployment rises, it puts additional strain on all the
social safety net programs that you mentioned, Senator, not the
least of which is the health care costs and the Medicaid
programs that the States are running, which is already growing
at a rapid figure aside from these other figures.
Now, the specifics on the PBGC is that, you know,
basically, the PBGC Corporation has basically said that things
are OK right now for the Big Three. But, you know, if there are
some issues that emerge down the road, this could become much
more problematic. And as I mentioned to Senator Tester, I would
like to go back. This is a highly technical area, and I want to
make sure I give this Committee the right answer, and by
tomorrow I will provide a more detailed answer on the pension
area in terms of what the current status is. But I would note
that these companies are so large that, if something would
happen down the road, they would almost double the number of
people who would be receiving guarantees under PBGC, if that
would ever get to that point down the road. So there is a
significant issue potentially in the future, but I will get you
a definitive answer tomorrow.
Senator Brown. A steel maker not far from where I live in
norther Ohio just announced the layoff of several hundred. It
is very directly related to the auto industry. I spoke this
week earlier with an auto dealer in southwest Ohio who has 800
employees. He is not about to go out of business, but he going
to get squeezed. I do not know anything about his pension plan,
but I do know that PBGC has been just buffeted time after time
after time after time with job loss in the last 5 years, and it
is only going to get worse.
Let me just in my last--I know I am about out of time. I
want to make a comment about the Chrysler situation just for a
moment. I know there are many similarities to 30 years ago with
Chrysler. There is the oil spike. There is the difficult credit
market. There is a recession. Your suggestion that the
differences are--of the similarities and differences I want to
just expand on and respond just for a second.
For example, some of the differences from 1979, the UAW had
not made the concessions anywhere near in 1979 what they have
made today. So even though it is only a billion and a half then
compared to now, the UAW concessions have been much greater.
The 2007 contract, there was nothing comparable to that in
1979. There was not the job loss leading up to 1979 for
Chrysler that there has been, the cutting of costs, the
downsizing, whatever, that there has been for all of the Big
Three leading up to this situation. So we just need to be
cautious about making that comparison. There are good reasons
to make it, and there are some not so good reasons, and we need
to be cautious because of the different situation that way.
I think the good reasons are that the Government figured
out how to do it, the taxpayers got their money back, and as
several people up here have said, it did work, and we need to
remember that.
Mr. Dodaro. I agree with you, Senator, and I think the
circumstances, certainly economically, with the status of the
auto industry at that time were very different. And we do not
want to imply or infer that we are comparing those situations.
But the one thing that is the same is there is the same
need to protect the taxpayers' interest, and that is what we
are saying can be replicated.
Senator Brown. Of course. Thank you.
Thank you, Mr. Chairman.
Chairman Dodd. Senator Brown, thank you very much.
You have been a tremendous witness this morning. Frankly,
we could have probably used less of your time, but, obviously,
you have offered some very valuable testimony and historical
perspective about the 1979 decision and some good ideas on how
to move forward. So we are very grateful to the GAO. All of us
up here who over the years have dealt with the GAO have a high
regard for the work being done.
As you point out, and I should have made reference to it in
introducing you, as part of the emergency economic
stabilization bill, of course, we insisted legislatively that
the GAO be deeply involved, not after the fact but during the
development of this program. And so your observations about the
lack of the kind of oversight that should have been conducted
is obviously important to all of us here. So we thank you
immensely.
Let me just say I appreciate Senator Carper's point talking
about Senator Bennett's point. I thought there was some
viability with that option as well, but you point out it may be
impossible or very difficult to go back and rewrite some of
these agreements that have been struck. But it is certainly
worth exploring in my view as an alternative idea of what we
need to do. We may have some additional questions for you, and
particularly Senator Casey raised, I thought, some very good
questions, and your agreement to get back to us. And,
obviously, the industry itself will have to be helpful in that
regard. As you point out, you do not have the authority to get
some information, but it certainly would be helpful to this
Committee to respond to Senator Casey, and I am asking in
advance in their testimony that the members of the automobile
industry comply where they can for that kind of information.
So we will leave the record open for some additional
questions we may have, but we thank you immensely for your
testimony. And we thank your staff. The GAO staff is very
helpful.
Mr. Dodaro. Yes, they have been terrific. Thank you, Mr.
Chairman.
Chairman Dodd. Thank you very much.
Let me invite now our second--and I am going to combine the
panels. I know there was some hesitancy, but just given the
pressures of my colleagues as well as other obligations they
have and the witnesses themselves, the testimony tomorrow
before the House, I am combining the second and third panels
into one panel. We have already exhausted a couple of hours
with the first panel, and I want to move along. So let me
introduce our second panel, and I appreciate in several
instances their being back here.
Our first witness on this panel is Mr. G. Richard Wagoner,
Jr., President and CEO of General Motors Corporation, also
serves on GM's Board of Directors, previously served as
President and Chief Operations Officer and Chief Financial
Officer at GM. And, Mr. Wagoner, we welcome you back to the
Committee.
We will then hear from Ron Gettelfinger, United Auto
Workers President. Prior to becoming the President of the UAW,
Mr. Gettelfinger served as the UAW Vice President, and, again,
we are pleased, Ron, that you are here this afternoon. We thank
you for coming.
The next witness is Alan Mulally, President and CEO of the
Ford Motor Company and a member of the company's Board of
Directors. Prior to joining Ford in 2006, Mr. Mulally worked
for the Boeing Company with whom he became Executive Vice
President of the Boeing Company and President and Chief
Executive Officer of Boeing Commercial Airlines.
We are then going to hear from Mr. Robert Nardelli,
Chairman and CEO of Chrysler LLC and a member of the Board of
Managers. Prior to working for Chrysler, Mr. Nardelli served as
Chairman, President, and CEO of the Home Depot.
I understand that our CEOs all drove down here and had
comfortable rides, and I gather your automobiles are parked
outside, even some of the models yet to be introduced. The Volt
I think is here. Is that true, Mr. Wagoner?
Mr. Wagoner. Yes, sir, that is true.
Chairman Dodd. Well, for those who want to see what some of
these newer models may look like--and I hesitate to say this
because I do not want to show any bias or preference, but I
drive an Escape. I would tell you Mr. Mulally is giving me a
``thumbs up'' to me here along the way--although I am looking
at the Tahoe with two children, so I want you to know I need a
little more room here, the hybrid.
Anyway, I also want to welcome Mr. James Fleming here. Jim
is a good friend of mine, let me say up front. We are from
Connecticut together, and Jim is the President of the
Connecticut Automotive Retailers Association. He served in the
State of Connecticut for many years as a member of the
Connecticut House and Senate, including Senate Republican
Majority Leader of our State Legislature. Mr. Fleming has also
served in the executive branch of the Connecticut State
Government as the commissioner of several departments and has
long experience in our State, and I thank you very much, Jim,
for coming down and representing the dealer issues before this
Committee.
Next we will hear from Keith Wandell, who is President and
Chief Operating Officer of Johnson Controls, Inc., where he
held various positions ranging from plant manager to Vice
President of the Power Solutions Division.
And our final witness is Dr. Mark Zandi, Chief Economist
and Co-Founder of Moody's Economy.com, where he directs the
company's research consulting services. Dr. Zandi's research
focuses on macroeconomic, financial, and regional economics,
and he has recently been studying the determinants of mortgage
foreclosure and personal bankruptcy, and we see you quoted
quite frequently, Dr. Zandi, so we thank you again. In fact,
you have been before the Committee so we welcome you back to
it.
I will begin, I guess, in the order we have introduced you,
and I apologize for the number of you at one table here, but I
thought just for the sake of efficiencies, we would move
forward, and there are a lot of similarities, obviously. When
we start talking about these issues, obviously everyone
represented at this table is directly affected by it, so there
is no outlier here that has no relevancy to the testimony that
we are going to hear from you.
So, with that, Mr. Wagoner, we thank you.
STATEMENT OF G. RICHARD WAGONER, JR., CHAIRMAN AND CHIEF
EXECUTIVE OFFICER, GENERAL MOTORS
Mr. Wagoner. Thank you very much, Mr. Chairman and to
Members of the Committee. I wanted to start by extending my
sincere appreciation for the opportunity for us to come back.
It is obviously a very important matter for all of our
constituents. I know it is a time when you are frequently
working with your own constituents, and for you to give up the
time to come back I think is something that we want to extend
our thanks.
I also wanted to thank the Speaker and the Senate Majority
Leader for their very specific direction on what was being
requested in the plan. It helped us to think more broadly, and
we appreciate that direction.
As we put our plan together--it happens to be, somewhat
ironically, GM's centennial year this year--we thought about
our past and what that should mean for our future, and we
obviously have a lot of things that we are proud of. There have
been a lot of great accomplishments on the company's behalf.
And there are also mistakes during our history.
What we were trying to do as we put this plan together,
which we submitted earlier this week, was to learn from both of
those--learn from our contributions, our successes, and learn
from our mistakes--to make sure we did not repeat the mistakes
and that we built on the contributions. And so as we thought
about things like developing a comprehensive plan, we said we
have done best in our history when we focused on technology
leadership and technological excellence, when we have kept our
focus on being cost competitive every day, when we have kept
close alignment between the goals of the company and the goals
of the country. And so the plan that we are submitting to you
is one that I think does those and many other things, and it is
a plan that I and my General Motors team believe very strongly
in.
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.
Government.
In some ways, the plan accelerates the restructuring that
has been underway for the past several years, but in many ways,
it radically expands it, and I think it is fair to say it
creates a blueprint for a new General Motors.
The key elements: First of all, it is based on what we
think is a realistic although quite a bit more conservative
view of the market than we have traditionally used. And it is
also comprehensive. It considers the need to address operating
issues as well as to address our financial structure.
Key highlights include a renewed and expanded commitment to
new technologies, especially advanced propulsion, and green
jobs; increased production of fuel-efficient vehicles; a
reduction in the number of brands, models, and retail outlets
so we can focus our resources; further manufacturing and
structural cost reductions; working with our UAW counterparts
to ensure full labor competitiveness with foreign manufacturers
here in the U.S.; significant restructuring of our balance
sheet; and sacrifices by all parties involved, including
continued suspension of our common stock dividend and changes
in executive and board compensation, including reducing our
board's compensation and mine to $1 a year; and cessation of
our corporate aircraft operations.
These and other tough but necessary actions will position
our company for long-term success, and this success is
achievable if we can weather the global financial crisis and
the lowest level of U.S. auto sales on a per capita basis in
over 50 years.
Toward that end, our plan respectfully requests $12 billion
in short-term loans and a $6 billion line of credit. We are
seeking an immediate loan of $4 billion and potentially a
second draw of up to $4 billion in January, reflecting the
current very weak state of automotive production and demand.
The intent is to begin repayment as soon as 2011 and fully
repay by 2012 under our baseline insurance forecast scenario.
Warrants would allow taxpayers to benefit if GM's share price
increases.
We also proposes of a Federal Oversight Board that would
facilitate the restructuring negotiations and protect
taxpayers.
GM has been an important part of American culture for a
hundred years, and most of that time as the world's leading
automaker. We are here today because we made mistakes, which we
are learning from, because some forces beyond our control have
pushed us to the brink, and, most importantly, because saving
General Motors--and all this company represents--is a job worth
doing.
Thank you very much, and I look forward to your questions.
Chairman Dodd. Thank you very much, Mr. Wagoner.
Mr. Gettelfinger, welcome.
STATEMENT OF RON GETTELFINGER, PRESIDENT, INTERNATIONAL UNION,
UNITED AUTOMOBILE, AEROSPACE AND AGRICULTURAL IMPLEMENT WORKERS
OF AMERICA
Mr. Gettelfinger. Mr. Chairman, Members of the Committee,
on behalf of the men and women of the UAW, I appreciate this
opportunity to present our views on the state of the domestic
auto industry.
The UAW believes that 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 very
near future and be forced to liquidate. The collapse of these
companies would inevitably drag down numerous auto parts
suppliers, which in turn could lead to the collapse of Ford.
The UAW supports conditioning any emergency bridge loan
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 bondholders, 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 cost 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 retiree
health care VEBA fund may need to be spread out and that there
may need to be adjustments in other areas. But the UAW
vigorously 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 week. 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 to 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 so, 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 pre-packaged 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 our testimony is a detailed analysis
prepared with the assistance of experienced bankruptcy
practitioners explaining that a pre-packaged bankruptcy is not
a feasible option for the domestic auto companies because of
the size and complexity of the issues that would 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 strongly urges Congress to act this
month to approve an emergency bridge loan to General Motors,
Ford, and Chrysler to enable them to continue operations and to
avoid the disastrous consequences that their liquidation would
involve for millions of workers and retirees and for our entire
Nation.
Thank you very much.
Chairman Dodd. Thank you very much, President Gettelfinger.
Mr. Mulally, welcome back to the Committee.
STATEMENT OF ALAN R. MULALLY, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, FORD MOTOR COMPANY
Mr. Mulally. Thank you. Mr. Chairman, Senator Shelby, and
Members of the Committee, since the last hearing I have thought
a great deal about the concerns that you 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 to share Ford's vision and progress on becoming a
profitable, growing company.
You were clear that the business model needs to change. I
could not agree more, and that is exactly 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
it used to be doing 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 have sold Aston Martin, Jaguar,
and Land Rover, and we reduced our investment in Mazda. And
this week we announced we are considering a sale of Volvo.
It used to be that our approach to our 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.
It used to be that our labor costs made us uncompetitive.
Now we have a ground-breaking agreement with the UAW to reduce
our labor costs, and we appreciate the UAW's continuing
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 of all of our partners.
It used to be that we operated regionally--European cars
for Europe, Asian cars for Asia, American cars for the U.S.
market. Now we are leveraging our global assets, innovation,
technology, and scale to deliver world-class products for 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 really focused. In
short, we are on the right plan to becoming a profitable,
growing company.
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 to the United States automobile industry.
Specifically, Ford requests access to $9 billion in bridge
financing, something we hope we will not need to use. Instead,
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 to access this loan, we would use the money to
continue our aggressive transformation and restructuring. Ford
is an American company and 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 our 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.
Thank you very much.
Chairman Dodd. Thank you very much, Mr. Mulally.
Mr. Nardelli.
STATEMENT OF ROBERT NARDELLI, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, CHRYSLER LLC
Mr. Nardelli. Mr. Chairman, members of the panel, I
appreciate the opportunity to present to you again today, and I
am here representing the 1 million people who depend upon
Chrysler for their livelihoods.
Before I answer your questions regarding our loan request,
let me be very clear and state why we are here: Chrysler is
requesting a $7 billion loan to bridge the current financial
crisis. And in exchange, Chrysler is committed to: continue our
restructuring, including negotiating cost-saving concessions
from all constituents; invest in fuel-efficient cars and trucks
that people want to buy and begin repayment of the 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 a critical assumption in our plan.
Chrysler requires this loan to get back to the
transformation that began 1 year ago, gaining our independence.
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 costs by $2.4 billion. We separated more than 32,000
employees, including, unfortunately, just 5,000 last Wednesday
before Thanksgiving. And at the same time, we have invested
more than half a billion dollars in product improvements in our
first 60 days. We improved our J.D. Power quality scores, and
we reduced our warranty claims by 29 percent. 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 second quarter of 2008.
As consumer confidence fell and credit markets remained frozen,
the lowest U.S. auto sales in more than 20 years has put
tremendous pressure on our cash position. The U.S. industry
sales fell from 17 million a year in 2007, to a monthly
annualized rate of 10.5 million last month. That is 6.5 million
units of decline.
So what is the impact on Chrysler from that result. With a
10-percent market share, it would translate to Chrysler to a
loss of 650,000 vehicles, or roughly $16 billion in lost
revenue opportunity this year alone. With such a huge hit to
our sales and revenue base, Chrysler requires the loan to
continue the restructuring and fund our product renaissance.
Chrysler has a sound plan for financial viability that
includes the seeking of shared sacrifice from all constituents.
We have identified approximately $4 billion of potential cost
savings and improvements that have been included in our plan,
and we are committed to negotiate with all constituents to
achieve those 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 efficiency compared with our 2008 models.
We plan on launching additional small, fuel-efficient vehicles.
ENVI is our breakthrough family of all-electric vehicles and
range-extended electric vehicles, similar to the one I drove
here today.
Chrysler's long-range product plan is robust, it is
realistic, and it is green. The plan features 24 major launches
from 2009 through 2012. It includes a hybrid Ram truck, our
first electric-drive vehicle 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, which is our
neighborhood electric vehicle division, Chrysler is the largest
producer of electric-drive vehicles in the U.S. today. Combined
with the 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 include alliances, partnerships, and
consolidations. This model is currently successful in helping
Chrysler increase the effective utilization of our
manufacturing capacity. For example, in North America today,
Chrysler manufactures all of Volkswagen's minivans, and
beginning in 2012, we will produce all of Nissan's full-size
trucks.
With Government collaboration, our industry can accelerate
how America drives cutting-edge technology. An Automotive
Energy Security Alliance would: coordinate public and private
spending which is already devoted to advanced technologies;
produce basic technology available to all manufacturing; drive
private investments to meet our national energy and
environmental goals. Such an alliance would help ensure that as
a country, we do not trade our current dependence on foreign
oil for dependence on foreign technology.
In closing, 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 that we face.
Thank you very much.
Chairman Dodd. Thank you very much, Mr. Nardelli.
James, welcome. Welcome to the Committee. Is that
microphone on?
STATEMENT OF JAMES T. FLEMING, PRESIDENT, CONNECTICUT
AUTOMOTIVE RETAILERS ASSOCIATION
Mr. Fleming. Thank you, Mr. Chairman, Senator Shelby,
Members of the Committee. As President of the Connecticut
Automotive Retailers Association, I represent 300 dealers in
Connecticut and their 14,000 employees, all of whom have good
jobs with great wages and benefits. Our dealers are small
businesspeople and entrepreneurs, and some of them are sitting
behind me here today to let you know how important this
legislation is to them and to our dealers.
We appreciate the fact that the dealers' perspective is
being asked for because we have something to say, and I want to
talk a little bit about the ripple effect that we have heard a
little bit about this morning here. To our people to these
small businesspeople, it is a tsunami. It is not a ripple. And
I want to just relate what a dealer told me before I came down
here to Washington to testify.
He indicated to me that last month he had 30 people that
came into his dealership. Those 30 people would normally have
qualified to get financing to purchase a car, but because of
how squeamish the banks are just with talk of bankruptcy, he
could not get these people financed. That is how serious it is.
Now, what does that mean to the State of Connecticut? I got
an e-mail just before I came up here to talk about the impact
that is having on the State's budget. Every one of the Senators
here, if you go back and talk to your State budget officers
that are trying to deal with deficit situations, will find out
what a big part automobile sales represent in that budget. In
Connecticut, it represents a loss of $65 million in our budget
just in new-car sales tax. That is what has been going on in
our State budget.
Members, this is not a bailout bill for Detroit or for Wall
Street. This is about investing in the future of our small
towns and businesses. The economies and the budgets of State
governments, as I said, ultimately are going to be affected by
what you do here. If you go back to your constituents, as I
have done as a State Senator in my past life, and they ask you
what did you vote for, what you are voting for here, what you
are supporting here is keeping people employed in those small
businesses in your district. That is what this is about.
If you say no, or if you do nothing, which is essentially
no, and allow bankruptcy to occur, the impact on the dealers
and the people that they employ in your home States will be
dramatic. People will not buy cars from a bankrupt entity. They
are afraid to buy cars as it is right now. This is the second
largest purchase that they will ever make in their life. This
is not the same as a structured bankruptcy for an airline. This
is a big expenditure on the part of people back in your
districts.
If you say yes to this financing package, it gives us some
time to try to adjust to what is going on in the economy.
We have lost 25 dealerships in Connecticut in the last
year. We have lost 700 jobs in Connecticut in the last year.
Those people are not going to be able to contribute to the
economy.
Another issue I would like to raise, and I hope, gentlemen
and Senator Dole, that you will ask me in detail about this.
When a dealer goes out of business, there is no golden
parachute for that dealer. I know a dealer who last month lost
his Chevy dealership. He had mortgaged his home. He had lost
all of his personal wealth that he put into that business to
try to keep it alive. He does not want a piece of this money.
He wants the manufacturers to survive so he can continue to
compete at that local level, and to compete with these
gentlemen that are here, because dealers are different than the
manufacturers in Detroit. If you want to hold them accountable,
do it. Hold them accountable. It is the public's money. But if
you do not pass this bill, the effect on your constituents and
on people that I represent will be dramatic. So I urge you to
take that action and do it fast, because just as we have been
sitting here today, I know dealers who have had to lay people
off.
So with that said, Mr. Chairman, I know I have a few
seconds left here. I would just ask you to consider the human
side of what is going on, and when you have an opportunity, go
back to your district. Go into those dealerships and see what
these guys are doing. It is tough work. They are writing the
paychecks out. They do not have massive staffs. They have about
maybe 30 people in a dealership. In Connecticut, somebody is
making about $55,000 a year on average in a dealership. That is
good pay. That will go away if we wait too long and you act
negatively on what is before you.
Thank you, Mr. Chairman.
Chairman Dodd. Well, thank you, Mr. Fleming. And I would
point out, and my colleagues have done this as well, but about
a week or so ago, I had a long meeting and a good meeting with
the dealers in my own State, and good conversations with them
about the implications of this as well. So it is a worthwhile
visit to make to hear their perspective on this, and I know my
colleagues probably have done the same. But I want to thank Mr.
Fleming for organizing that in my State and giving me a chance
to hear from my dealers as well.
Mr. Wandell.
STATEMENT OF KEITH WANDELL, PRESIDENT, JOHNSON CONTROLS, INC.
Mr. Wandell. Chairman Dodd, Senator Shelby, and Members of
the Committee, thank you for the opportunity to provide
testimony on the state of the domestic automotive industry. My
name is Keith Wandell, and I am President and Chief Operating
Officer of Johnson Controls, Incorporated. We are a global
multi-industry company with sales of $38 billion in 2008, and
approximately 37 percent of our sales involve the supply of
systems and services to improve the energy efficiency of
nonresidential and residential buildings worldwide. We are also
the largest supplier of automotive batteries to the automotive
aftermarket, as well as the original equipment manufacturers in
the world.
In addition, our company is the seventh largest automotive
supplier in the world. We are the third largest supplier in
North America behind Magna International, which is a Canadian
company, and Delphi, a U.S. company which we all know has been
in bankruptcy since 2005. Our global sales of seats and other
interior products to the automotive industry totaled--and I
apologize, there was a typo in our document. It is $18 billion;
$6.7 billion of that were to the North American market
specifically. We supply every automaker with a presence in the
U.S., with just under half of our sales to the Detroit Three
and the balance to the transplants. Johnson Controls has 43,000
employees in the U.S.; 22,000 of those are in the States
represented by the Members of this Committee.
While Johnson Controls is a key supplier to the global
automotive industry, we are somewhat atypical of most
automotive suppliers because we are much larger than most, we
are more diversified by our products, our geography, and our
markets. Being a supplier of interior systems, we are probably
less capital intensive than many other automotive suppliers. We
are profitable, and we have a strong balance sheet. We do,
however, share the same issues and concerns about the domestic
automotive industry as those suppliers which are solely
dedicated to the automotive industry.
A Detroit Three failure would have dire economic
ramifications for the vast interconnected supply chain of
companies that provide parts and components which enable the
U.S. automakers to assemble vehicles. Our main concern is that
once cascading supply chain interruptions begin, many suppliers
will fail due to the interdependence of that supply chain. And
many of the companies which would be impacted are small, women-
and minority-owned businesses.
During 2008, Johnson Controls purchased $1.7 billion of
goods and services from minority- and female-owned businesses.
The Detroit Three had a combined purchase of approximately $12
billion from these same businesses. Should any one of the U.S.
automakers suddenly fail, the vast majority of these women- and
minority-owned businesses will fail and will fail quickly.
Let me share an example with you. Recently, earlier this
year, a minority supplier to Johnson Controls, the supplier
that really supplied a vast part of the auto industry, Plastech
Engineered Products, failed and went into bankruptcy. Plastech
had $800 million of revenue. They shipped 6,200 different part
numbers to 52 vehicle assembly plants in North America,
supplying 121 vehicle lines and 12 customers: General Motors,
Ford, Chrysler, Volkswagen, Mercedes, Honda, Toyota, Nissan,
Hyundai-Kia, AM General, Mazda, and Mitsubishi. Had Johnson
Controls and the first-tier lending group not acquired
Plastech's assets out of bankruptcy, had we not assembled an
operating team to manage the process, and had we not provided
the bridge financing necessary to avoid liquidation, all 52 of
those assembly plants would have been affected to one degree or
another for varying durations. That is one small microcosm of
how interconnected the supply chain is.
A year ago approximately 20 percent of our--Johnson
Controls--automotive suppliers, part suppliers that provide
parts to us that allow us to provide complete seat assemblies
and cockpits, et cetera, to the Detroit Three--were financially
distressed according to third-party independent third sources.
Since the rapid deterioration of industry volumes, that number
has grown to beyond 35 percent, so over 35 percent of our
suppliers are financially distressed and on the verge of
bankruptcy. And this number continues to grow. This supply base
has over 100,000 employees.
Should one of the Detroit Three fail, a significant number
of supplier failures would occur and would become unmanageable.
And I know that Mr. Nardelli and Mr. Wagoner and Mr. Mulally in
their organizations today, there is an inordinate amount of
time being spent by their supply chain people in trying to
manage the number of bankruptcies and financially distressed
suppliers that there are in this industry, just like we are.
And I can assure you that even though Toyota, Nissan,
Honda, Mercedes, and every other foreign car maker who
assembles plants in America are not here today, they too are
deeply concerned about the viability of the U.S. supply base.
I think that all of us here agree that major changes are
needed in the North American automotive industry. There are
major changes that are needed in the supply chain as well. But
we hope everyone here understands how important it is that
these changes occur in an orderly fashion, which is unlikely if
we allow even one of these companies to fail. There will be an
implosion of the supply base that will affect all the car
companies.
It is extremely important that we have a sound, healthy,
and sustainable U.S.-owned automotive industry that is
competitive globally. And I do not believe that Americans--in
spite of the CNN poll that came out this morning that said 60
percent of the Americans are not in favor of some sort of
financial aid, I do not believe that Americans want to yield an
industry that impacts millions of jobs and invests billions of
dollars in technology and will help secure our energy
independence through new, innovative, and environmentally
friendly transportation. The supply base provides 70 percent of
the value-added components that go into a vehicle and spend
over 40 percent of the total R&D dollars in the automotive
industry.
The plans that have been submitted address many of the
issues that have been burdensome to the health of the industry,
and I think given the opportunity, the Detroit Three in their
own way and each one are on their own way to resolving a lot of
these issues. And I think given, you know, an opportunity to
address these challenges, I think we will be on our way to
bringing to the market consumer-desired, fuel-efficient,
environmentally friendly vehicles that the consumers are
desiring.
I was also asked to comment on the potential impact of a
Detroit Three failure on our company. Earlier I said that we
are diversified, profitable, and we have a strong balance
sheet. Unlike many suppliers, we would weather the storm
largely due to our strong non-automotive businesses. A Detroit
Three failure would have a short- to mid-term impact probably
on our cash-flow or access to capital maybe and possibly our
cost of borrowing. One of the bigger impacts would be the
curtailment of our investments in new technologies in all of
our businesses, including the hybrid vehicle technology that we
are working with all the Big Three on.
So, in conclusion, we believe that the industry has a long
and proud heritage; it has played a significant role in the
development of this country's strong economic position in the
world. And speaking for our company, and I am sure all of the
auto suppliers, we would respectfully urge the Members of this
Committee, and the Congress as a whole, to provide the
financial support that the automakers need at this critical
time.
Thank you very much for your attention.
Chairman Dodd. Thank you very much.
Dr. Zandi, thank you.
STATEMENT OF MARK ZANDI, CHIEF ECONOMIST AND
CO-FOUNDER, MOODY'S ECONOMY.COM
Mr. Zandi. Thank you, Mr. Chairman, Senator Shelby, and the
rest of the Committee, for the opportunity to speak here today.
My remarks represent my personal views, not those of the
Moody's Corporation, which is my employer. I will make four
points in my remarks.
Point one, the Federal Government should provide financial
help to the domestic automakers. Without help, the automakers
will quickly be in bankruptcy, resulting in liquidations and
hundreds of thousands of layoffs at a time when the broader
economy is suffering its worst recession since the Great
Depression. If the automakers file for background anytime in
the next few weeks, or even months, then this would be very
damaging to the sliding economy. The Big Three employ fewer
than 250,000 people in the United States, but given their broad
links into the rest of the economy, as we have seen, closer to
2.5 million jobs would be immediately at risk. Hundreds of
thousands would lose their jobs when the economy is already set
to lose several million. The hit to already record-low
consumer, business, and investor confidence would be
devastating.
Point two, under the most likely outlook for the economy
and auto industry, the $34 billion in loans requested by the
Big Three will not be sufficient for them to avoid bankruptcy
at some point in the next 2 years. They would ultimately need,
in my view, somewhere between $75 billion to $125 billion to
avoid this fate. This cost estimate is based in part on the
expectation that light vehicle sales will average close to 11
million units in 2009 and 13.5 million units in 2010. For
context, vehicle sales averaged almost 17 million units
annually between 1999 and 2006. This extraordinarily weak
vehicle sales outlook is due to three factors: first, the
current sharp decline in employment--we will lose 2 million
jobs this year, at least that many in 2009--the severe credit
crunch that is undermining the availability of vehicle loans
and leases, and the significant amount of what I call pent-up
vehicle demand created earlier in the decade as the automakers
used increasingly aggressive financial incentives to
artificially support demand. Seventeen million units is not
supportable by underlying demand. The cost of keeping the Big
Three out of bankruptcy also significantly depends on their
ability to arrest the decline in their market share. Their
share has been steadily falling, reflecting many factors, but
most critically, higher gasoline prices. The very recent
decline in gas prices notwithstanding, vehicle buyers will not
quickly return to buying the Big Three's less fuel-efficient
vehicles. Whether their market share remains close to its
current 50 percent or declines nearer to 40 percent in the next
2 years will determine whether the cost of avoiding bankruptcy
will be $75 billion or $125 billion.
Point three, the Big Three's restructuring plans, if fully
executed, could result in a viable long-term domestic auto
industry. However, given the very difficult changes this will
require of the Big Three and their stakeholders, there is a
considerable risk the plans will not be executed effectively.
Each automaker has outlined laudable steps to return to long-
term viability. They envisage deep cost-cutting producing more
fuel-efficient cars, rationalizing their brands and retail
outlets, and refocusing their marketing efforts. And they have
already made significant strides in restructuring their
operations and reducing costs. The industry's labor costs have
actually declined during this decade. Moreover, given the
considerable UAW wage and benefit concessions in 2007, further
substantial cost savings would soon occur. But despite this
clear progress, it would be extraordinarily challenging for the
Big Three to convince all of their stakeholders, including
management and the UAW, their creditors, suppliers, and
dealers, to quickly make the very substantial concessions
necessary to make their plans work.
Point four, I recommend that Congress provide the $34
billion in aid that the Big Three requested in exchange for
warrants and restrictions on executive comp and dividend
payments. This is necessary given the potential for the
automakers' imminent disorderly bankruptcy at an extraordinary
fragile time for the economy. The aid should be disbursed in
two tranches. The first payout should be sufficient to allow
the automakers to comfortably avoid bankruptcy when the economy
is most vulnerable over the next 3 to 6 months. The second
payout should only occur if the automakers are hitting
benchmarks in the restructuring plans, which could be
determined by the oversight board. Policymakers should be
convinced that they are not throwing good money after bad.
Congress should at the same time make it clear that if the
restructuring plans are unsuccessful, no more Government loans
will be forthcoming. Instead, Congress will ensure there is an
orderly bankruptcy process by providing financing in bankruptcy
and guaranteeing warranties on new vehicles sold.
There is a reasonable concern that if the Big Three file
for a pre-arranged bankruptcy--even a Government-supported
bankruptcy--people would stop buying their cars. But getting a
loan from the Government, even one as large as $34 billion,
will not convince anyone that they will be around for very long
either. There is also a worry that bankruptcy would further
damage the fragile financial system, but debt holders have had
a long time to adjust to this possibility.
A concerted, comprehensive, and consistent Government
response to the economic crises is vitally needed. The economy
needs a sizable economic recovery package and a substantive
foreclosure mitigation plan, but the Government's resources are
not unlimited and must be used wisely. The Federal budget
deficit will easily top $1 trillion this fiscal year and again
in fiscal year 2010.
The automakers have come forth with a reasonable plan to
restructure their businesses, but $34 billion in a plan may
very well not be enough for them to become viable companies
again. Policymakers must prepare for this eventuality.
Thank you.
Chairman Dodd. Well, thank you very much, Dr. Zandi. Let me
thank all of you for your testimony, and we have got a large
participation of members here, and I am going to try and move
right along with my questions and get as quick answers as we
can from you on these matters, and I will ask my colleagues to
do as well. There is an awful lot to talk about here.
Let me begin. You all were sitting, I noticed all of you
sitting here when the General Accounting Office was testifying
and describing, in effect, the 1979 Chrysler situation, which I
am sure Mr. Nardelli and the other CEOs and Ron Gettelfinger
are very familiar with. The others may be as well. Just
quickly, if you would--and I will the CEOs, if you would--were
we to craft something like that, whether it is a trustee or an
oversight board that was described by the General Accounting
Office, would you be willing to accept such a structure? We
will begin with Mr. Wagoner.
Mr. Wagoner. Yes, sir.
Mr. Mulally. Yes.
Chairman Dodd. Mr. Nardelli.
Mr. Nardelli. Yes, sir, and we included that in our
statement.
Chairman Dodd. Anything you would add to what has been said
by him that you would suggest in terms of the time constraints
we are dealing with? If we were to take virtually the same
model in 1979 on an oversight board--which I think worked
fairly well. I think it sort of covered what our colleagues
raised earlier. It was decisionmaking rather than just
oversight. Would you add anything to that at all?
Mr. Wagoner. I would just reinforce the point about moving
fast on this would enable all of us to understand the
direction. There are nuances in this area, so for us, faster
would be better.
Chairman Dodd. Now, I read all of the reports you submitted
on Tuesday. Did all of you read each other's reports?
Mr. Nardelli. Yes, sir.
Chairman Dodd. You are familiar with each other's? Ford is
familiar with Chrysler and GM and so forth? You have had a
chance to look those over as well?
Mr. Wagoner. Yes, sir.
Chairman Dodd. Well, let me ask you again, Mr. Zandi. I
appreciate your points for all of the reasons you have laid
out, but you also have, of course, a pretty--a concern, I am
sure, of all of my colleagues. They also read about your
prediction that this number was going to increase, that we are
talking $75 billion to $125 billion. What else could be done in
your view to mitigate that problem?
One of my concerns--and someone raised this, and it may
have been Mr. Fleming at our meeting in Connecticut with the
dealers where we spent 3 hours last week--is that ultimate none
of this works until consumers buy cars. We do a lot of these
actions at the top and so forth, but the final test will be
whether or not people show up in showrooms and buy cars.
Is there anything we could be doing from the bottom-up
approach on this thing? We are doing a lot of top-down. We have
certainly seen it with the financial institutions, the
injection of capital and the like. But many of us up here are
concerned that we have done very little bottom-up to shore up
consumer confidence; mitigation of foreclosure, you mentioned
that as well. But, obviously, support for consumers out there
who would, frankly, like, as Mr. Fleming pointed out, the 30
people who showed up who, under normal circumstances, would
have qualified with FICO scores to purchase a car but were
turned away because of the 780 or whatever the number is now
that you must reach in order to qualify for a loan.
Are there things that we could be doing up here, aside from
what we are talking about, to mitigate that number?
Mr. Zandi. Well, one obvious thing is I do think the
captive finance companies are a problem. They are a drain on
the finances, particularly of GM. And, moreover, because of
their financial problems, it is making it difficult for
borrowers to get loans and leases. Leasing has completely dried
up.
So I think one clear thing that could be done is to
facilitate their move to bank holding companies so that they
could become eligible for the TARP money and hopefully re-
establish some viability in the credit markets.
Chairman Dodd. And that would help, in your view?
Mr. Zandi. I think that would be very significant help. I
think one of the reasons why people cannot buy cars at this
moment in time is because they cannot get financing,
particularly leasing. I mean, there is no leasing.
Chairman Dodd. I heard that over and over again from my
dealers back in--and the CEOs agree with this as well?
Mr. Nardelli. Yes, sir. I mean, one of the major points I
made in my opening comments was the fact that Chrysler
Financial really does need access to liquidity and capacity.
Chairman Dodd. You asked for the TARP money, and I was
going to raise this in a question with you. That sentence
jumped out at me in your testimony.
Mr. Nardelli. Sir, we have had a request in----
Chairman Dodd. But you know they have said no.
Mr. Nardelli. Yes, sir.
Chairman Dodd. So what happens? Even if we do what we are
doing up here, are you telling me Chrysler fails anyway?
Mr. Nardelli. Sir, if we do not--to your question exactly -
that is why I made the point in this oral testimony in the last
time we were here, that it is a tandem request, that our
captive financials--and if I read correctly, both in General
Motors and Ford--it is an integral part of the overall auto
industry success. We literally lost 20 percent of our volume
overnight due to capacity constraints in the lease business.
You know, our private equity group worked very hard to get a
new conduit, but there were many new constraints put on that
$24 billion of conduit.
For example, if we did go into bankruptcy, they would be
restricted from providing any wholesale support to our dealers,
which immediately, as was said, would put unbelievable
hardship--in other words, the dealers would have to go out and
try to get wholesale financing.
Chairman Dodd. I know. But I was making the point to you
earlier. Obviously, there are a lot of things we may try and do
up here. So this is in addition to the $34 billion.
Mr. Nardelli. Those requests are being handled outside this
request.
Chairman Dodd. But it is in addition to the $34 billion.
Mr. Nardelli. Yes, and those requests have been made to
TARP. They have been made to--our ILC request
Chairman Dodd. You have gotten the same answer we have
gotten?
Mr. Nardelli. Well, sir, the request for the ILC has been
in for 3 years.
Chairman Dodd. Well, to the TARP.
Mr. Nardelli. And to the TARP, we have gotten no response.
Chairman Dodd. They have not said yes or no to you?
Mr. Nardelli. Yes, sir. No, sir, they have not confirmed
either way.
Chairman Dodd. Let me just jump to a couple of quick
questions, if I can, and then there is so much to raise with
you. Let me say this, Mr. Nardelli, because, you know, as I
understand it, Cerberus paid $7 billion to buy Chrysler. You
will excuse me if the numbers do not sort of jump out at me
that it is exactly the number you are looking for. And the
question I raised to myself, are we merely just providing money
because of a ``business decision'' that was made, where today
that $7 billion, I presume the value was a lot less than that.
I mean, I am more intrigued in a sense if there is a For Sale
sign out here with Chrysler, looking for a merger or an
acquisition, that that occur, and then talking about
restructuring, then pumping $7 billion in to pick up the cost
of the acquisition, if you understand my question.
Mr. Nardelli. I understand exactly, and let me just say for
the record that Cerberus--I could not ask for a better partner/
owner. They are absolutely committed and have been committed to
returning Chrysler to viability and profitability.
Chairman Dodd. But you did not ask them anything beyond
that. You said a one-time infusion, $7 billion, nothing more.
Now, GM and Ford, Ford talks about a line of credit for 10
years, I think. GM talks about tranches of 4 or 6 and 6 down
the road, depending upon the economy. Chrysler said, ``Just
give me the 7, that is all.''
Mr. Nardelli. That is it. If I can go back to your first
question, in addition to the original capitalization, we also
drew down about $2 billion middle of this year, so there was
another cash infusion from our privately held owners. But
because they are a private equity does not mean that there are
not the same investors that many of these banks have. We have
some of the largest pension funds are contributors to this, and
they are going to through the same economic evaluation that the
banks are going through, the other lenders, in making these
decisions. So that is point number one.
Point number two, if you look at my submission that we
made, we are, in fact, taking a much more conservative approach
in our plan than was--so our exit rate for this year will be
about 13.5 million units. In 2009, we assume the industry to be
at about 11.1 million. So we have intentionally taken a very
conservative approach, and that volume does not grow over the
period to about 13.5 until 2012.
So we have tried to take a conservative approach, Mr.
Chairman, to avoid having to come back and ask you again for
support.
Chairman Dodd. All right. Let me jump quickly to Ford. GM
and Chrysler both place the taxpayers in a primary position.
You are asking for a line of credit of around--what is it, $10
to $13 billion over 10 years?
Mr. Mulally. Nine.
Chairman Dodd. And yet there is no indication in your plan
here that the taxpayer would come in first as a result of
extending that line of credit. Why?
Mr. Mulally. No, I understand, and also to understand the
importance of protecting the taxpayer. And what we put in our
submission to you was that in our current covenants with the
banks today, we would be in violation of those covenants, which
they could put us in default. So what we said in our
transmission is that we would like to work with you on that
because there has just to be a way to work with the banks and
you to address that issue. We understand the importance.
Chairman Dodd. Let me jump quickly to one other point I
want to make, if I can, and that is the issue of the closing of
some of the SUV plants that we were talking about. The Big
Three obviously acknowledged some strategic errors in their
business models, failing to realize the demand for smaller
fuel-efficient cars and the like. I appreciate your
acknowledgment of that.
This Committee will have this coming year in the 111th
Congress the responsibility of a Highway Trust Fund issue, the
highway bill, and this Committee's jurisdiction is over mass
transit issues. Many of us here, including those who come from
rural States, are deeply interested in what can happen in terms
of mass transit.
It just struck me when I looked--and, again, I do not claim
deep, deep knowledge about this, but looking at the wheel base
and so forth of an SUV, what could also be constructed in
minibuses and the like, we have got tremendous demands from
some of our local communities, and we have American-made
requirements here. It seems to me we might be thinking about
accessing a market that is emerging for minibuses, mass transit
systems, railway cars and the like. I know in my own State we
have had to go out of country to buy some of these things. We
no longer produce them. Many have talked about what your
industries did in the early 1940s in transitioning to the
production of tanks and airplanes to meet the national security
needs of our country.
Are any of you giving any thought at all to this emerging
demand of mass transit vehicles, minibuses, commuters? Today we
have got a 30-percent increase in demand for minibuses to deal
with this car-sharing approach to get people into urban areas
outside. What is being done at all about thinking about that
aspect of your industry?
Mr. Nardelli. Sir, if you look at, again, my oral testimony
and one of the charts we presented, if you look at the bottom
half of the page, we do have a light-duty commercial van that
is being investigated and contemplated as part of our
aggressive product renaissance in 2009-10 and beyond. It is on
the lower half of the page.
So we are looking at that, and we are trying to be
responsive. I am proud to say that I drove a hybrid here from
Detroit, and the technology performed extremely well.
Chairman Dodd. I presume it was a Chrysler.
Mr. Nardelli. Yes, sir.
[Laughter.]
Chairman Dodd. Just wanted to check for the record.
Mr. Nardelli. Yes, sir.
Chairman Dodd. Well, you all made buses. You used to make
your supply chain. You used to also do the rail cars. Right?
You all made buses at one point, didn't you?
Mr. Wagoner. Yes, we made buses. We were in the rail
business as well.
Chairman Dodd. Any thoughts about getting back into that
kind of work?
Mr. Wagoner. We continue to build a fairly large van, of
which the applications are largely commercial. I am making note
of your comment about increasing demand likely out of the trust
fund, because we have plenty of capacity and that van is a very
competitive one and can be adapted to those kinds of uses. And
we also have some ventures that we work in Europe where the
product there is a similar kind of van that gets better fuel
economy. We have looked from time to time at whether there will
be a market for that in the U.S. for tooling up to build it in
the U.S. So as that develops, we would be very interested.
Chairman Dodd. Mr. Wagoner, let me, by the way, in reading
the plans--and I am not giving an editorial comment here, but I
was impressed with the detail of the GM plan and how you laid
things out. But let me read something that was reported today
and ask you to respond to it.
It said, ``If GM does reduce its dealerships to 4,700 by
2012, as promised yesterday, it will still have almost 4 times
as many as Toyota. It suggested going from eight brands to five
by unloading Hummer, Saab, and Saturn, but it still plans to
accept 40 of today's 48 models. Disappointingly, but not
surprisingly, the GM plan contains no hint at a change in
management. In contrast to Ford and Chrysler, which are headed
by newcomers, GM's top cadre has presided over hears of
decline. GM's board might find that acceptable, but if
taxpayers are going to invest in GM, they are entitled to ask
whether this is the right team to revitalize the company.''
I would like to give you a chance to respond to that.
Mr. Wagoner. On the last point, I am doing this job because
I am committed to the future of General Motors, to the people
of General Motors. I do not have a golden parachute. I do not
have any protections. I serve at the pleasure of the board. And
I think the most important thing for us to do is to put forth a
plan that we think puts us on the right footing for the future,
and I think the leadership team we have today is the right one.
But as I said, I serve at the pleasure of the board and will
always----
Chairman Dodd. How about these other points here, what did
I say, 40 or 48 models, dealerships--I mean, Mr. Fleming told
me that in Connecticut we have lost--I forget how many you told
me last week. We are losing dealerships anyway, and I wonder if
these numbers reflect just the attrition that is occurring as a
result of the economic crisis.
Mr. Wagoner. Well, this year we have lost about 300
dealers. It was an extraordinarily difficult year due to the
radical reduction within the year of the production. So,
obviously, the plan we have now basically would do about
1,800--1,750, 1,800 over the next 4 years. So that is a
significantly faster pace.
I would point out one difference. Because of our history,
we have a huge number of dealers in rural communities, in small
towns. Those dealers do a great job. We have much higher market
share in those communities. They do not, frankly, require a lot
of support from the company, and so we let those dealers decide
individually do they want to stay in business or not. Some are
over time, due to the economics of the business, ramping down,
but many choose to stay in. So we actually think that part is a
competitive advantage. And a lot of the consolidation that we
talk about in our plan is in the metro areas where the over-
dealering is an economic disadvantage for the dealers that
remain. So we will move more aggressive in those parts of the
country.
Chairman Dodd. I appreciate that. I have a lot more
questions, but let me turn to Senator Shelby.
Senator Shelby. Thank you, Chairman Dodd.
A lot of people believe sincerely that the restructuring
plans that each of your companies has provided are not a
serious set of plans, that they contain few concrete details on
how your companies will return to profitability, that they
contain surely a lot of scattered facts, but lack a systematic
presentation on how your companies would use the money to
return to profitability and pay back the taxpayers.
If you made this presentation to get a bank loan, I suspect
that any sensible banker would summarily dismiss your request.
And for the Committee here with our responsibility, and to
improve our understanding of how each of your companies plan to
return to profitability--in other words, how are you going to
compete and return to profitability--would each of you agree to
provide this Committee with full pro forma financial statements
prepared in a manner that shows how your restructuring plans
will impact your businesses over the next--not 3 months--3
years? Would you all be willing to do that, Mr. Nardelli?
Mr. Nardelli. Yes, sir. In the 100-page document, as
Chairman Dodd suggested that we submit it, there is a complete
tab that gives a complete pro forma P&L, income in cash, by
quarter for 2009 and by year for 2010, 2011, and 2012.
So in response to your question, the answer is yes. In
response to the question that we got from the General
Accounting Office as far as whether we would be willing to make
data available, the answer is yes. And we have embedded in that
pro forma--in those financials, the targeted $4 billion, when
that would have to take effect. We are looking at, for example,
in----
Senator Shelby. What you would do with it.
Mr. Nardelli. Yes, sir. We have spelled out exactly what
our obligations are relative to supplier payments, payroll, et
cetera. And we have also put in 2012 in the cash pro forma the
first $1 billion repayment back to the taxpayers.
Senator Shelby. Ford, will they do the same thing.
Mr. Mulally. Of course.
Senator Shelby. GM?
Mr. Wagoner. Senator Shelby, we have that data. We would be
glad to share it. Some of it is confidential, so we would share
it directly with your staffs or yourself. Be glad to do it.
Senator Shelby. We have been talking from time to time
about the 1979 Chrysler bailout. You were not there then.
Mr. Nardelli. No, sir.
Senator Shelby. But the last time Congress bailed out an
automaker--as I said, it was in 1979--that legislation
conditioned Government assistance to Chrysler providing a
restructuring plan that met very specific requirements,
including minimum concessions from its creditors, suppliers,
workers, and dealers. A lot of us do not believe your plan
comes up close to providing the same level of detail.
How does your restructuring plan that you provided to the
Committee compare with the financial reports you provide to
prospective investors? Is it the same or is it different? And
if it is different, why is it different?
Mr. Nardelli. No, sir, it is not different in our case.
When----
Senator Shelby. OK. You are speaking about Chrysler.
Mr. Nardelli. Yes, sir. It is not different in Chrysler's
case. We had to present, again, exactly the same pro formas
when we became organized back in August of 2007 to all of our
institutional lenders, certainly the largest ones. And, in
fact, every month our CFO has a full disclosure, a full report
to all our investors. Even though we are private, they are just
as demanding as shareholders and have the same expectations.
Senator Shelby. Do you basically -and I will address this
to all three. Do you usually provide prospective investors with
detailed pro forma financial reports showing how any financing
would be used in the business and how the money would be paid
back? Mr. Wagoner.
Mr. Wagoner. Yes, we would, if we were doing, for example,
a public financing and equity raise, we would lay out that sort
of thing. We would be glad to do it here as well.
Senator Shelby. Wouldn't this be as public as you could
get, the taxpayers?
Mr. Wagoner. We would be glad to provide anything you would
like, sir.
Senator Shelby. What about Ford?
Mr. Mulally. The way you have described it is exactly the
way we have approached our business plan in the past, and
everything that we have presented to you is what we have also
presented to the banks when we went for additional credit to
finance the transformation of Ford.
Senator Shelby. Dr. Zandi, you stated in your testimony,
your written testimony, that the Big Three automakers would
need between $75 and $150 billion to avoid bankruptcy. At $150
billion, the bailout would be more than 1 percent of the GDP of
this country. Would you discuss why your estimate is so much
higher than the $34 billion estimated by the Big Three? I think
you are on the right track, though.
Mr. Zandi. The estimate is $75 billion to $125 billion, but
$25 billion among friends----
Senator Shelby. OK.
Mr. Zandi. It is a function of many variables. There are
three key variables. The first is expectations for total
vehicle sales. I expect in 2009 11 million vehicle sales. I
think Chrysler is very close to that. The other two are higher
than that in their baseline expectations.
The second variable is market share, what share of the
total market they should expect to capture, and that is----
Chairman Dodd. Doctor, before you continue along on that,
the numbers we are looking at, Ford's and Chrysler's actually
are the same as GM's in those predictions, about 11, right?
Mr. Nardelli. For 2009 we have 11.1 as our projected----
Chairman Dodd. Right. And the other one is 11--is that the
same, or is it 12?
Mr. Zandi. I thought it was higher.
Mr. Mulally. GM is at 12, I think.
Mr. Wagoner. Our base case is 12. Our downside case is at
10.5.
Chairman Dodd. GM is at 12, Chrysler is at 11.1, and Ford
is at 11.
Mr. Zandi. OK. Fair enough. And then the third variable is
price, you know, how much can you get for a car. And that will
affect your market share. So just three of the variables, and
by my calculation, using my expectations for the economy and
what it means for sales, market share, for pricing, I am
skeptical, doubtful that it is going to end at $34 billion.
Mr. Nardelli. Mr. Chairman, if I might.
Senator Shelby. Yes, go ahead.
Mr. Nardelli. Our share projection in our recovery plan to
you is that our share is flat through the planning period. And
quite honestly, while not as robust as my colleagues, our share
has been about 10 percent of the industry for the last decade.
We have had pretty much relatively flat share, again, for the
past decade, and we are not assuming any share of growth in our
plan or any positive pricing.
Senator Shelby. Mr. Fleming, you testified--and one of your
phrases was kind of troubling to me, and I believe I have got
it right. You said, ``A bailout here would give us''--the
automobile industry here--``some time to try to adjust.'' That
would probably be true, some time to try to adjust. In other
words, give you breathing room. But I think we have to have
more than that here to try to balance the taxpayers' interest
here with everything.
Mr. Gettelfinger also said--and I thought you were
tentative in this: ``Of course, if any plan works, there have
got to be management concessions''--I am not a management
expert, but I can tell you, if you are not making money, there
is a problem. Is it in management? Is it in labor? You know, is
it a combination of both? Is it lack of innovation in your
products? I do not know this, but I know there is a deep
structural problem here. But you said we may need--may need--to
do so-and-so. I think that is ambiguous and kind of tentative.
And I believe any plan to work, any plan, you are going to have
to have restructuring of management, and you are going to have
to get rid of a lot of people to save a lot of jobs. You are
going to have to do the same thing at the UAW, and the question
is--I hope that, you know, you realize you are in this
together, and if you are not, if you are not going to give the
concessions and the management is not going to give the
concessions and suppliers are not going to give concessions, we
are wasting our time and taxpayers' money big time. That is my
thought of it.
I want to ask you--this is just an aside, because there has
been a lot of big talk about it. You flew up here before. I
understand that. And you drove up here. Did you drive or did
you have a driver? Did you drive a little and ride a little?
And, second, I guess, are you going to drive back? And if so,
if some of us wanted to ride to Detroit, could we ride with
you?
Chairman Dodd. Where did you stay? Where did you eat?
[Laughter.]
Senator Shelby. The Chairman wants to make light of this,
but I can tell you this: Are you planning to drive back?
According to press releases, you drove up here.
Mr. Nardelli. Yes, sir, and I did have a colleague, and we
rotated. We left Tuesday night and drove until midnight and
then got up at 5:30 the next morning, and then drove the rest
of the way in. And we did rotate, and I do plan to drive back.
Senator Shelby. What about you?
Mr. Mulally. We carpooled. I drove and I am driving back.
Senator Shelby. You did not carpool with him, did you?
Mr. Mulally. No. Carpooled with our Ford people.
Senator Shelby. OK. What about you?
Mr. Wagoner. I drove with a colleague. We split it up about
50/50. We drove down yesterday, and I am going to drive back
myself Friday or Saturday.
Senator Shelby. Mr. Zandi, one last question. In part of
your testimony, you said that ``there is no better way to
ensure that the Big Three are around than if they are
significantly restructured in Chapter 11 bankruptcy.'' Would
you please explain here--we know it would be painful; we
understand all this--why restructuring under Chapter 11 in your
view is preferable to restructuring outside of bankruptcy, if
it is?
Mr. Zandi. Let me clarify. I think that the best option----
Senator Shelby. I was just quoting your testimony.
Mr. Zandi. I will clarify my testimony.
Senator Shelby. Yes, sir. Go ahead.
Mr. Zandi. I think the best option is to have a
restructuring outside of bankruptcy. I think if you can get all
those stakeholders together and they can all agree, that is
preferable to bankruptcy, everyone's coming together----
Senator Shelby. Do you believe that is going to happen?
Mr. Zandi. I am very doubtful that it will happen. So what
I am suggesting is that you give them the opportunity, because
if you do not, I think failure at this point, bankruptcy at
this point in time would be cataclysmic for the economy. I
really believe that. So I think you need to help them now. Give
them an opportunity--and, also, they have done some good
things. They have restructured. Their labor costs have fallen.
They have made concessions. I think they deserve the
opportunity to execute.
But I would make it very clear that if they do not, the
next step is indeed a bankruptcy, so that you can prepare, as
Congress you can be ready, because you will have to do
something in bankruptcy, too. You will have to do two key
things. First, you are going to have to provide financing in
bankruptcy because if they go into bankruptcy without your
help----
Senator Shelby. There are provisions for financing----
Mr. Zandi. They won't get it. They won't get it in this
environment. They will go into liquidation. And, second, you
will probably have to guarantee any warranties on the cars that
they sell. Otherwise, they are right, no one will buy their
cars.
Senator Shelby. So you are putting the taxpayers on the
hook a long time, aren't you, basically?
Mr. Zandi. No matter what?
Senator Shelby. No matter what.
Mr. Zandi. No matter what.
Senator Shelby. And how long do you believe it would be
before--if they got the $34 billion, how long would it be
before they are back here, in your judgment?
Mr. Zandi. I think it will be----
Senator Shelby. Six months?
Mr. Zandi. No. It will be fall, late----
Senator Shelby. But they will certainly be back, won't
they?
Mr. Zandi. I think that is a high probability, yes.
Senator Shelby. And $34 billion is probably just the
beginning. Is that correct?
Mr. Zandi. I think that is a high probability.
Senator Shelby. Thank you, Senator Dodd.
Chairman Dodd. All right. Senator Menendez, you are
actually next.
Senator Menendez. Thank you, Mr. Chairman.
You know, Dr. Zandi, when our witnesses from the Big Three
were here last time, I went through with them a series of
questions about the $25 billion and was not satisfied with how
we came to the $25 billion, and I appreciated putting the
pencil to the paper and now seeing that it is somewhere around
$34 billion.
Then I listened to your testimony, and, you know, you have
a series of statements in your written testimony that says,
among other things, that this is anywhere between $75 and $125
billion in actuality. And you say that based upon views that
vehicles sales will eventually return to their underlying
annual pace of 16 million units, but only when the job market
stabilizes, credit flows more freely, the pent-up demand is
worked off, and it could well be two decades or more before
sales return to the 17-million-unit sales pace that prevailed
during the first half of the decade.
Then you went on to say that the cost of keeping the Big
Three out of bankruptcy also significantly depends on the
ability to slow the decline in their share of total vehicle
sales, a share that has been steadily falling since the mid-
1990s, from nearly three-quarters of the market to less than
half. And then, finally, you talked about even more intense
pressure from foreign car makers in the context of this
marketplace and the stepped-up effort.
That is the essence of your testimony as it relates to
coming to that $75 to $125 billion. Is that fair?
Mr. Zandi. Yes, that is fair.
Senator Menendez. Well, let me turn then to the CEOs of the
three companies. Do you dispute Dr. Zandi's figures? Because we
have got to get a sense, put our arms around the magnitude of
this, in order to try to be helpful. I understand the present
magnitude in terms of the immediacy. But the question is: Are
his figures off? And if his figures are off, why are they off?
Mr. Wagoner. I can tell you what we did, Senator. We
developed--as was requested in the letter we received--
different scenarios of volumes, and our 18 billion need was
based on a scenario which has industry levels of 10.5 million
units next year, then it goes 11.5, 12, and 12.8 million units.
We consider that to be a pretty conservative scenario. So that
raises the question what could--and we also have market share
going down gradually as recognition of reducing some of our
brands, but not a lot.
So where could our needs be higher? I think there are
probably three areas that I would focus on. If the industry was
significantly smaller, that would affect us, but it does not
sound like that is a difference.
We talked about the finance company, the importance of
those being--in our case, GMAC being granted bank holding
company status. If that does not happen and we do not get any
finance flow, then that could negatively impact us. We have
assumed as part of this plan--and that filing, by the way, is
in the Federal Reserve now--that that will eventually be
granted, hopefully in due course.
The third thing is something that concerns me that we have
seen in the last 45 days, which is we have made the assumption
that people are willing to look at our cars, as they have, as a
fair opportunity versus competitors. It is clear that the
overhang of discussion around bankruptcy is affecting certain
fires, and if that persists and persists a longer time, it
could negatively affect our volume.
Senator Menendez. So you do not dismiss the fact that the
figure can be significantly higher than $34 billion.
Mr. Wagoner. I have not done any calculations, but I would
be glad to do it with alternative scenarios.
Senator Menendez. Mr. Mulally.
Mr. Mulally. Yes, I am happy to comment on it. We started
by looking at history through all the economic cycles,
especially around 1980, and looking at the peak to trough on
the contraction of the economy and then the recovery coming
out. And the scenarios that you asked us for really we believe
bracketed what we think that economic scenario would look like.
And it is pretty much in agreement with what the Federal
Reserve just announced a few days ago about the contraction
next year being in the 1 to 1.5 percent.
So we have the economy contracting all the way through 2009
and not starting to recover until 2010. And I really, our
economists, everybody we are talking to really believes that
with the actions that we are taking today on the fiscal and the
monetary policy and the stimulus that you are thinking about,
that that is a very, very conservative recovery.
The other scenario you asked for, which was a kind of worst
case, would be an economy contraction that we have never seen
before since the Depression.
So I think that middle scenario that you asked for is a
very conservative, realistic scenario, and that is what we
based on request for a potential need of the $9 billion. So we
think that is a good number.
Senator Menendez. Well, let me just say there is--I
understand that answer. There is a gulf between $34 billion,
which grew from $25 billion, which is what we were told was
necessary for viability, to $75 to $125 billion. And my concern
is getting our arms around this in a way that we know the
totality of the situation and can meet with--I mean, none of
you could operate--well, if you operate a company like this,
you are not going to succeed. If we operated as fiduciaries to
the taxpayers like, we cannot succeed. It is what has happened
at the TARP program where we are throwing money out there
without having a sense of the strategy of understanding what is
necessary in this case to assure viability.
Let me ask two final questions. Are you all committed
truly--and you will have to be committed because, as far as I
am concerned, there are going to have to be conditions placed--
to the type of fundamental transformational change that is
necessary for you to survive? Are you truly committed--you
know, Mr. Wagoner, Saturn was your previous commitment to that,
and then you largely walked away. You know, so that is a past
example. You know, are you truly committed to that? And, last,
can you tell us, of those groups that are out there that
already see taxpayer bailout funds, how many of them are
holding a good part of your commercial debt?
The final comment I will make, I just want to say,
President Gettelfinger, you know, leadership is really tested
in difficult times, and I appreciate what you have been willing
to do to come forward. And it is never easy for a union leader
to come forth and make very serious concessions and even talk
about getting to the table more. But it cannot be done simply
by the union. There have to be all the elements here to achieve
the goal--the suppliers, the creditors, and others. Otherwise,
the union cannot solve this problem on their own, and I know
some would like to break the back of the union here as part of
their goal. But this is not going to be achieved just simply
through that.
Could you just answer those questions?
Mr. Nardelli. Senator, if I could start, please. Again, in
our base plan that we submitted, where we are asking for $7
billion, which is the same amount we asked for last time, we
are opening 2009 at 11.1 million SAAR, and that grows to 13.7
in 2012. Our downside scenario--and we end that period at $12.5
billion in cash, which includes $1 billion starting the
repayment to the taxpayers for this bridge loan.
In our most conservative approach, we start at 10.1 next
year, and it grows to 12.7. And we do have a deterioration in
cash of about $2 billion given the volume reduction.
As I indicated, our assumptions on share is flat. We have
had a relatively flat share over the last decade. We have built
negative price into our plan.
The one thing that has not been mentioned here that I would
like to make sure we are clear on and transparent is we have
baked in here some of the 136 funds that we have requested,
assuming that they will be approved concurrent with our
expenditure, submission of the invoices, and then to repay. But
we have not started to show that infusion of funds for advanced
technology until 2010.
So, again, while it has been submitted, 12/31 this year is
my understanding is the first toll gate for submissions that
could be approved for redistribution. We have elected to take a
very conservative approach in that plan.
And, Senator Shelby, I would say in your comments to Ron
Gettelfinger, there is certainly nothing, I think the term
``wishy-washy'' about 32,000 people have already lost their
jobs, and 5,000 walked out Wednesday before Thanksgiving, which
represented a 25-percent reduction in our salary workforce. So
we take this very seriously. We understand our fiduciary
responsibility. I can tell you I understand the weight of this
meeting and tomorrow.
Mr. Wagoner. Senator, I can assure you that our plan is
far-reaching, extensive. It is a different way of thinking, and
the GM team is behind and committed to achieving it.
You asked about do those institutions, would they be
affected by a bankruptcy, and the answer is, yes, some are
creditors to us. But it is my understanding that there are a
significant amount of credit default swaps written against our
securities, which would also be triggered in the event of a
bankruptcy.
Mr. Mulally. Yes, I would just like to add that we know it
can be done because we have been doing it, and clearly,
focusing on a brand and a brand promise for the customers,
having small, medium, and larger vehicles, being best in class
and quality and fuel efficiency and safety, and consolidating
the production to really meet the true demand and getting those
costs out. As a result of all those actions, we got back to
profitability in the first quarter of this year before this
tremendous downturn.
So we know it can be done, and what we are talking about
now is getting through this terrible recession. But I
absolutely believe that we are going to continue to take these
actions and create a viable, growing Ford for us all.
Chairman Dodd. Thank you very much, Senator.
Senator Crapo.
Senator Crapo. Thank you very much, Mr. Chairman.
I want to focus my questions on primarily the CEOs of our
Big Three, and I want to return to the question of a Chapter 11
reorganization. One of the reasons that this issue just keeps
coming back up is there are many experts, as I am sure you are
aware, who are saying that we need to have the authorities and
the ability to basically require the kinds of changes in
relationships and the kinds of restructuring changes that are
necessary that a Chapter 11 proceeding would--a reorganization
proceeding would provide.
I have read all your testimony and your materials, and I
understand the arguments that have been made there and here
today about the fact that a bankruptcy proceeding would have
very serious negative problems with it.
The question I have is: Do we have the ability to achieve
those needed, forced if necessary, changes in relationships
with people as broad-reaching as employees, suppliers, dealers,
retirees, creditors, the various legacy cost issues, do we have
the ability in what you have presented to us today, if Congress
were to agree with it, to be sure that we could achieve those
types of major restructurings?
Mr. Nardelli. Senator, let me just offer a thought. Again,
bankruptcy was something I was hoping never to become an expert
in, in my 38 years, and certainly not today. But your point is
correct, that as I try to understand it, we cannot just make
unilateral rejections, for example, with the union, certainly
with the banks that have secured lending. I think certainly
this Committee would understand that more than anybody. If that
was breached, who would go out and lend money unsecured and not
have recovery?
I would say that one of the things that was discussed with
the Government Accounting Office, I would suggest that we put a
date--March 31st as a benchmark data that says give us the
funding, allow us to survive, and then by March 31st, have the
toll gate to see where we are against those negotiations. At
least I am speaking for Chrysler.
Senator Crapo. Mr. Wagoner.
Mr. Wagoner. Our proposal comprehends the idea of this
Federal oversight board. I realized there was some concern with
the naming of that, but obviously highly empowered board. We
would submit the plan with a timeframe. The board would play an
active role as the funding would be doled out only gradually,
and then if by a date certain--and March 31st I think would be
a good one to work with--we cannot get the parties together,
then additional funding would not be advanced, and we could
provide collateral against the loans----
Senator Crapo. Would your idea with regard to this board
include the board having the authority to impose restructuring
conditions on various parties?
Mr. Wagoner. I am not sure that is legally possible, but
that would obviously facilitate it.
Senator Crapo. Well, we could make it legally possible
with----
Mr. Wagoner. I think that would help a lot. That would
really help.
Senator Crapo. All right. Mr. Mulally.
Mr. Mulally. Yes, we believe we have sufficient liquidity
at the current time, but we absolutely support the oversight
board concept.
Senator Crapo. And when you talk about the oversight board,
are you also talking about a board with the authority to
literally impose restructuring conditions as a Chapter 11 court
could?
Mr. Mulally. I do not know all of--I would probably need to
think about that a little bit. It sounds right, but I just do
not know all of the implications of that.
Senator Crapo. Mr. Nardelli, could you respond to that
question about the oversight board?
Mr. Nardelli. Sir, as you said, Congress has the authority
to do a lot of things, so if that is what Congress determines,
then obviously all of the constituents would be held under
that. I am not burdened of being a lawyer, and so I do not know
the technical answer to it. But certainly if that is a
prerequisite and if that is the understanding, Chrysler would
certainly obviously try to comply.
Senator Crapo. In that context, an argument that each of
you have made--and many others--is that people will not buy
cars if any one or all of the Big Three are in a bankruptcy
proceeding. They will not buy a car from a company in
bankruptcy. But if we were, in essence, to create an oversight
board that was basically a Federal restructuring trustee, would
that impact the confidence level in your ability to meet your
assumptions about people being willing to come back and
purchase cars?
Mr. Wagoner. I think it is a fair question. My sense,
Senator, is that right now the concern is very high, and so I
think in the case that we put forth, we will be in need of
funding soon. And so I think if people saw that funding coming,
even with these conditions in front of it, and we would have to
present a plan that we could convince people that we could
execute it. But I think it would help vis-a-vis where we are
today. Obviously, it would be best once it is all cleared.
Senator Crapo. My time is running out. Let me ask just one
more question. Frankly, I am just seeking a restatement, but my
understanding is that I did not hear any objection from any of
the three of you to the establishment of an oversight board, or
whatever we call it, a Federal oversight entity that has the
literal authority to impose restructuring conditions and to
enforce those as a matter of law as these dollars are utilized.
Am I correct?
Mr. Mulally. Correct.
Senator Crapo. Thank you.
Chairman Dodd. Thank you very much, Senator Crapo.
Senator Reed.
Senator Reed. I just want to follow up quickly Senator
Crapo's question. Everyone seems conceptually to accept an
oversight board. The question in my mind would be: Is there a
possibility of emergency funding getting you to, whatever it
takes, 30 days, the point at which you can go before the board
with the concessions in hand so that the funding of the
majority of these funds you are requesting would be made not on
your assertions, which I think are very sincere, but on actual
concessions, actual restructurings in place? Is that feasible,
Mr. Wagoner? Then your colleagues.
Mr. Wagoner. I think we would do our best. Thirty days for
these kinds of things might be a little tight. That is why we
had said--we initially talked February 28 or March 31st,
depending on the complexity of them. But I can assure you we
would move as fast as we can. And, you know, I think it is to
the advantage of the industry to have a short timeframe because
it will force everyone, let's sit down, let's see where we can
go, and get a yes or no on it.
Senator Reed. But in that context, the initial draw of
funds would be much less than you are requesting. Is that
correct?
Mr. Wagoner. Well, our initial draw of funds is based on
what we estimate we would need up to. That is $4 billion. So
under that case, we believe we need that amount to meet our
obligations through the end of January.
Senator Reed. So that gets you through to what date?
Mr. Wagoner. That gets us through the end of January.
Senator Reed. End of January.
Mr. Wagoner. Yes, sir.
Senator Reed. Mr. Mulally.
Mr. Mulally. Yes, sir, we believe we have a viable plan
today, and our intention is to not draw on the loan.
Senator Reed. So you could go with all the restructuring at
some point in the future to this board and then be qualified at
any time to draw the money. Is that----
Mr. Mulally. Our basic position is that we want to support
the industry for the reasons we have talked about, and with the
actions we have taken, we are hoping not to access this money.
But, clearly, we are part of the bigger plan.
Senator Reed. Mr. Nardelli, your response.
Mr. Nardelli. Yes, sir. Senator, what we would need is $4
billion in our plan, of the $7 billion we have requested, to
get us through March 31st to allow time to go through these
mutually agreed upon concessionary discussions with all the
constituents, certainly myself, employees, dealers, suppliers.
I think Ron, as was stated, has already come forward, and
certainly the institutional lenders.
Senator Reed. Thank you, and thank you to the UAW that has
already made significant concessions. I think that shows more
than just--a profound commitment to make this deal work, so
thank you.
Mr. Zandi, you have set a price on the overall efforts to
assist the companies of about $75 to $125 billion. You have
also suggested that if they are forced into bankruptcy, it
would be--whatever word you described.
Mr. Zandi. I used ``cataclysmic.''
Senator Reed. Catastrophic. Have you put a price tag on
that in terms of unemployment compensation, pension benefits.
Mr. Zandi. Measurably more than that.
Senator Reed. Measurably more than that.
Mr. Zandi. Yes.
Senator Reed. So we are not talking it is a close call.
Mr. Zandi. Not a close call.
Senator Reed. Not a close call. Several hundreds of
billions of dollars.
Mr. Zandi. Yes. It is not even in the same universe.
Senator Reed. Thank you very much. There is another aspect
that I think that is important which has been alluded to: the
interconnection between the financing companies and the
manufacturing companies. There is a possibility that we could
create a board that governs the manufacturers, but then the
Federal Reserve would govern the finance companies or the new
financial holding companies, which would introduce an
additional level of complexity.
There is also the possibility that requirements that would
be imposed on the financing companies by Federal regulators
could be directly in opposition to the best interests of the
manufacturers.
Is there an argument that whatever we do should be done on
a unified basis rather than having the Federal Reserve operate
on one end and an oversight board or oversight management
person on the other?
Mr. Zandi. That is a reasonable concern. I hadn't thought
of that, but that might be something to worry about, that the
Federal Reserve could be, as a regulator of the bank holding
company, working at cross purposes with the board that you have
established to resolve the issues with respect to the auto
companies.
Senator Reed. And I think there is another issue which goes
right to your arrangement, which your private equity holds 100
percent of Chrysler Financial, 51 percent of GMAC, and 51
percent or your company. And just the ability to move money
around might be very frustrating to an oversight board that is
trying to return, because of investment in the manufacturer,
the best possible return for taxpayers. Do you foresee that as
a problem? And, in fact, how would you sort of preemptively
avoid that problem?
Mr. Nardelli. Well, first of all, sir, let me just
reconfirm, they are inextricably linked, the finance company,
our success is embedded in theirs and vice versa. If I ship
product and I do not get paid from the finance company as a
result of shipping to a dealer, I have a tremendous cash
strain, maybe $300 to $400 million a day. Point one.
Point two, the way it is structured today, these are both
wholly owned, so there are independent boards, and there is
governance. So there is not an arbitrary manner by which funds
are transferred back and forth. Each have their own separate
boards. Each have a set of governance. Certainly if it becomes
approved by an ILC access to 13(3), get TARP funding, you just
will not be able to move money back and forth.
Senator Reed. Just a final point. You price the cars.
Mr. Nardelli. Yes sir.
Senator Reed. They price the credit.
Mr. Nardelli. Yes, sir.
Senator Reed. And I think there is the opportunity, at
least in those two different pricing modes, for one company to
make a significant profit and the other company to break even.
That is at least possible.
Mr. Nardelli. I think the pricing of the credit is really
driven by the markets today, just like our pricing is driven--
we can set a price. The consumer dictates the price. And the
same is true in the credit market, sir. When you go back to the
industry, when it was 17-plus million, you quickly see where
the credit was and the ability to make credit accessible to a
much lower FICO score that allow consumers to really step into
these vehicles along with the lease program. Twenty percent of
our volume I think across the board was lease programs.
Senator Reed. Thank you.
Chairman Dodd. Great questions. Thank you, Senator Reed.
Senator Dole.
Senator Dole. Mr. Chairman, recently our colleague George
Voinovich sent a letter to Democratic leadership, and I want to
quote from that letter. He said, ``While I applaud your
insistence that the potential borrowers prove their case,
however, I am concerned about the method that you have
constructed in doing so. Specifically, I question your decision
that congressional leadership and committees of jurisdiction
are best positioned to make determinations about a
multinational corporation's future financial prospects. Who
exactly will be making these decisions? Do you intend to rely
on the expertise of executive branch officials or outside
experts? Or do you feel that Congress is qualified to draw such
conclusions?''
That being said, I would like to ask each of the chief
executive officers, have any outside non-political business
groups, groups with business acumen, been able to render an
opinion as to the viability and quality of your respective
restructuring plans? I would also be interested in how you
view--if you have any specific comments on the Levin-Stabenow-
Bond-Voinovich proposal.
Mr. Wagoner. Before we submitted our plan, we asked one
financial analyst to sign a confidentiality agreement and
review it. But I am sure now that it is out, we will be getting
more comments from analysts. So we will be getting input on the
plan from those sorts of people. In fact, we are probably
getting it even as we speak.
As far as your second question about the source of the
funding in the prior bill that was under contemplation, our
view and comment all along has been we really do leave it to
the Congress to decide what is the best way to provide the
funding. And in that sense, you know, we are really open to
whatever ideas the Congress and the administration determine
are best.
Mr. Mulally. Senator, absolutely. When we went to the banks
about a year and a half ago to put together our transformation
plan that we have been talking about, they absolutely thought
that plan was going to create a viable, profitably growing Ford
for us. And then as we made that progress this last year, we
got back to profitability in the first quarter, they were very
pleased with the progress and very supportive of our plan going
forward.
So I think that is really the final test right there, and
they loaned us the money.
Mr. Nardelli. Senator, I would just add, exactly, we did
get outside independent verification primarily on the cash-flow
analysis and the cash-flow charts. We also presented it to our
board and asked for review and approval before we submitted it
on Tuesday.
Senator Dole. Thank you.
Thank you, Mr. Chairman.
Chairman Dodd. Thank you very much. Senator Schumer.
Senator Schumer. Thank you, Mr. Chairman, and thank you to
the witnesses.
Just to sort of sum up, I think, where we are at, we
realize just letting you fail would be cataclysmic, as Dr.
Zandi says, far worse than the costs that you have outlined.
Second, bankruptcy, I think it is pretty clear, is not a
viable option because no one is going to buy a car from a
bankrupt company, and it takes so long and it is so complicated
that it does not work. And I would--this is my own 2 cents. I
think one of these pre-packed bankruptcies has similar problems
because you cannot bring the others in. So we have to do
something. That is on the side of making sure you are viable,
which I think I want to do and I think most of us want to do.
On the other hand, our real problem is this: I think that
there is a general view that we want to see the conditions
before we give you the money, and you folks sort of want the
money and say let the conditions work out. Mr. Nardelli said
let us see how things are on March 1st. And in all due respect,
folks, I do not think there is the faith that those next 3
months will work out given the past history.
And so what I think some of us are searching for us here is
a way that we can make sure you continue, make sure you are
viable on into the future. My third point is make sure that the
burden is spread evenly. I think the workers, Mr. Gettelfinger,
have taken more of the hit, and I have not heard much about the
bond holders, the lenders who are getting paid 12 percent, and
people like that. And the only way this is going to work is if
everybody gives. If everybody gives.
And so the question I have is: Why isn't the best solution
for us to pass something on Monday--and, again, I do not care
where the money comes from, frankly. OK? That is a dispute that
others have. I would take it out of the TARP, if need be,
temporarily out of the 136 funds. That to me is not the issue.
The issue is how are these real conditions that are created and
imposed by someone who is overlooking you outside. So I do not
like the words ``oversight board,'' like Mr. Dodaro.
Second, who is going to do this negotiating? You may not
have leverage, frankly, over the dealers or over the bond
holders or over the others, except to threaten to go out of
business? Which is not very good leverage. You are saying,
well, I will cut my nose to spite my face. Why isn't the best
solution the one I was sort of positing before, that we pass
legislation that gives, you know, a specific amount of money,
not a small sum, to a designee of the President in a certain
sense. He has control. It could be the Treasury Secretary. That
person quickly calls in all the players and says we have some
carrots for you. We not only have money, but we have the
ability. We give him the ability maybe to impose for a period
of time a guarantee of the warranties and maybe even some help
with the funding, because the funding is part and parcel. But,
in return, every one of you around the table, you executives,
the workers--which have already given quite a bit based on
yesterday's statement--the bond holders, the dealers, everyone
gives.
That seems to me to be the best model given that we do not
have much time, that there is not much taste for giving the
money and then seeing if the conditions are met down the road,
and that the alternatives of either letting you go under a
bankruptcy are the worst. And you have said you agree with the
Chrysler model when Senator Dodd posited the question to each
of the three of you. Would you agree with this kind of model?
What do you think of the--what are the pros and cons? Would you
agree to the kind of thing that I am mentioning here? Go ahead,
Mr. Wagoner.
Mr. Wagoner. Senator, yes, it would be very helpful for us,
whether it is a board or an individual, to have someone to work
with on this to submit our proposals, and then for that person
to say, OK, don't agree with that, you have got to change this.
And if that person was to have strong powers to execute it,
that would be fine with us.
Senator Schumer. Good. Yes. You see a board, when you have
3 or 4 months like Chrysler, a board may work. You don't have
much time.
Mr. Wagoner. Yes, sir.
Senator Schumer. And we may not even have time until the
next administration.
Mr. Wagoner. That is correct. Yes, sir.
Senator Schumer. What do you think, Mr.--well, let me ask
Mr. Gettelfinger. What do you think of that idea?
Mr. Gettelfinger. Well, I think it would work. I mean, it
is difficult, but I think there is something we are missing
here, quite frankly -unfair trade agreements, supporting our
competition to come in, not doing anything about health care in
this country. And I will just use as an example South Korea.
Here we are talking about a country that can ship whatever that
number of automobiles is, 669,000, and every manufacturer in
this country can ship back less than 5,000. How do we compete
with that?
Senator Schumer. Right.
Mr. Gettelfinger. How do we compete when we subsidize the
competition, or how do we deal with currency intervention, or
what do we do about not having an industrial policy? Those are
the things that I think we are missing in this picture. We keep
saying, are we going to be competitive? Can we compete? Who are
we competing against becomes the question, and how low do you
go. We use the term ``race to the bottom,'' and it appears to
me that we are missing that as part of this discussion.
Senator Schumer. Right.
Mr. Gettelfinger. Thank you.
Senator Schumer. Although those are longer-term than the
kinds of things--we are having sort of an urgency here.
Mr. Gettelfinger. I agree, but indirectly, Senator, they
are tied. They are interlinked.
Senator Schumer. What do you think of the idea, Mr.
Mulally?
Mr. Mulally. We would be open to your suggestion.
Senator Schumer. Mr. Nardelli?
Mr. Nardelli. Yes, Senator. Basically, it is the same, and
you are just asking to compress the schedule.
Senator Schumer. Yes, exactly. Yes. And one person as
opposed to a board.
Mr. Nardelli. Fine, sir.
Senator Schumer. Mr. Fleming?
Mr. Fleming. The dealers absolutely would want to
participate in that with the manufacturers and the regulators.
But if I can, Senator, the one concern that we have is that
there can be some unintended consequences, as well, for dealers
depending on what those details are, and so as long as we are
at the table as a partner----
Senator Schumer. You would be at the table, but you would
have to give something.
Mr. Fleming. We are giving a lot now, Senator----
Senator Schumer. OK.
Mr. Fleming. ----let me tell you.
Senator Schumer. Yes, everyone is--look, if we do nothing,
everyone is giving a lot, too.
Mr. Wandell?
Mr. Wandell. Yes, I think absolutely, and I think, just
speaking for our company and I am sure for most of the supply
base, I think most of the suppliers are more than willing to
line up and, I think, have for a long time, and I think what
the suppliers are looking for is a healthy industry where they
can be more competitive.
Senator Schumer. Right. Dr. Zandi?
Mr. Zandi. I think it is a reasonably good idea, given you
have a short period of time to make some very tough decisions.
One person makes sense if you are confident in that person.
Senator Schumer. Thank you, Mr. Chairman.
Chairman Dodd. Thank you, Senator Schumer.
Just before I turn to Senator Corker, I think that idea has
been raised and I like the idea of a trustee. I think a
trustee--I think we use the word ``trustee'' and I think it
takes on a different connotation than a broad idea, but I think
it has a lot of merit, as well, particularly in the short term
here. We are talking--the timeframe we have, as you point out,
with the Chrysler, I think they went back, and I wasn't in the
Senate in those days, but it was months in working that out. We
don't have months, to put it quite candidly. We don't have
weeks. In fact, Mr. Gettelfinger, when you raised the issue,
said in the near term. Before I turn to Senator Corker, how
near term do you think bankruptcy is?
Mr. Gettelfinger. I do not believe at this point in time,
on the data that I have seen, that General Motors will make it
out of the end of the year.
Chairman Dodd. So this month? You think they would be
bankrupt in the month of December?
Mr. Gettelfinger. Unless something changes dramatically,
and I would hope that it does. But again, we are--in looking at
the companies, Chrysler is in trouble. I had mentioned that at
the last hearing. I believe I was asked to rate the companies--
--
Chairman Dodd. Yes, you did.
Mr. Gettelfinger. ----where they stood. And that is the way
I rated them. However, there is still additional data coming
in. We do need the market to turn in our favor a bit. But
honestly, we are down to the wire.
Chairman Dodd. Yes.
Mr. Gettelfinger. We would not, Senator, have called the
meeting we called yesterday and took the action that we took as
a union if we didn't believe that was real. We brought in an
outside analyst to help us make that determination. So I think
that time is of the essence, and in our testimony we said that
we needed to do something this month and that was the reason.
Chairman Dodd. And so your conclusion is by the end of this
year, by the end of this month, we could lose General Motors as
a corporation?
Mr. Gettelfinger. I believe that we could lose General
Motors by the end of this month.
Chairman Dodd. Thank you.
Senator Corker.
Senator Corker. Mr. Chairman, thank you, and gentlemen,
thank you all for being here. Just to follow on that thought,
Mr. Chairman, there is nothing like a crisis or a worry about
being alive that does more to heighten the senses and create
focus, and I hope that whatever happens here, that does not go
away without proper things occurring. And I think that Senator
Schumer is alluding to that. I think Senator Crapo was alluding
to that.
We talked a great deal about Chapter 11 reorganization. I
don't want to waste my time hearing the talking points against
that. I have certainly met with analysts that represent
stockholders and bondholders and others. I have certainly
talked to each of you and your representatives, the UAW. So I
am not going to go down that line of questioning today, even
though I still believe that there are many things that will be
very, very difficult to work out without Chapter 11
reorganizations.
You know, I could follow one narrative which, you know, I
know this is somewhat loose, but in essence, what many of you
have said, there are so many problems to work out that you
would be in Chapter 11 forever. Now, I know that there are
disruptions with the supply chain and I know they are thinly
capitalized, so I am going to take a little different tack, and
again, I thank you all for being here.
But I want to start by just sort of laying out how things
are. I spent 2 days meeting with analysts in your industry and
I notice the new word that they are using is not the ``Big
Three,'' but the ``Detroit Three.'' And much of it has to do
with the market cap of these organizations. I think GM's market
cap today is about $3.4 billion. I think--excuse me. Ford's is
$3.4 billion. GM's is $1.8 billion. And I will throw a little
change on the table and say Chrysler is worth a half-a-billion
and that is probably exaggerating. So we are talking about $6
billion.
And just to compare this to companies around the world,
Toyota is worth $138 billion. I mean, even little BMW, which is
just kind of a niche company, has a market cap, a value, if you
will, of about $14 billion. So I just want to put that in
context of these large loan asks, if you will, that are
underway.
And then from that, I know that each of you have added up
your particular ask to about $38 billion, and then there are
some of you that are asking for TARP money, I understand, as
part of your finance company operations. I just want to set
those aside. I know that Chrysler have said they have asked for
$8.5 billion through Section 136, which passed last year, which
put $25 billion on the table for efficiencies, for investing in
new technologies, and I would like for Ford and GM each to tell
us how much you have asked for under that vehicle, too.
Mr. Wagoner. Yes. We filed a little while ago $3.7 billion,
and later, at the end of this week, our second batch of
projects will go in and if all approved, those would be, as I
recall, about $4.5 billion.
Senator Corker. So about $8 billion?
Mr. Wagoner. About eight, although they obviously have to
be approved, Senator.
Senator Corker. OK. I understand that. And Ford?
Mr. Mulally. We think that it will be around $5 billion
cumulative.
Senator Corker. OK, so that is $21.5 billion, so about $60
billion in requests, Mr. Chairman, are already in. I do want to
highlight that certainly this is vastly different than $25
billion.
I did talk to Secretary Bodman yesterday, who oversees this
program in Energy, and he said he had sent a letter to everyone
rejecting their proposals. Just for a moment, how important is
this 136 funding that has been rejected? Would you rate it high
or low? Is this very important to the capital structures? I
don't want a long narrative, just--you haven't seen the letter
yet? OK. I can give you a copy after the meeting. But all
applicants were turned down. But how important is that to the
overall capital structure of these companies?
Mr. Wagoner. Well, it is included in our cash-flows. As you
know, it is not advance money, though. It is spread out as the
money as spent, and so as I recall, the amount that we would
receive next year in our cash-flows is about $2 billion.
Senator Corker. OK. Important, not important?
Mr. Mulally. I think it is important, and we have in ours
through 2011 that $5 billion. But I think it also is important
because of what it is focused on, and that is the basic
enabling technology to really make a step forward in fuel
efficiency.
Senator Corker. OK.
Mr. Nardelli. Senator, of the $8.6 billion you referenced,
we have put six into this plan. That is why I wanted to be very
clear with Senator Menendez that in addition to the 34, there
is 25 of this money. We put in about 70 percent of our request.
We were told the guidelines would be somewhere around 80. I
haven't received the letter, but I have heard of the letter and
one of it was that there was not an audit report, but they
subsequently found that.
Senator Corker. So these are important parts of your
capital structure which is now, we are talking roughly in
formal applications--I consider this today a formal
application--of about $60 billion.
The interesting thing to me all along has been that all
three of you have come in together. I have read the plans and
re-read the plans and I would sort of qualify them this way.
Ford's plan is kind of life is wonderful. You have already done
a lot of the things that need to be done, and fortunately,
whether you were lucky or smart back in 2006, you borrowed
money at lower rates and were able to fund yourself. I think it
was probably because you all were forward thinking and
congratulate you for that.
Chrysler doesn't really want to be a stand-alone business.
I mean, that is well documented. The fact is that, basically,
what your plan is about is you want to hang around long enough
so that you can date somebody and hopefully get married soon,
before you run out of money.
So I have to tell you, I have a little trouble when I look
at that plan. I know that you haven't invested in product
development. I know you don't have the technologies to really
compete as a stand-alone. I know that your dealership levels
all across the State might be really valuable to a foreign
company coming in, but I have to tell you that it troubles me a
little bit knowing that basically all we are really doing is
providing a little capital for you all to hang around long
enough to get married.
And I consider you to be a very honest broker, Mr.
Nardelli. I really appreciate the conversations we have had,
and so I want to ask you this question. I talked with a board
member last night at Cerberus, and I know that they own 80
percent of your company and I know there has been a lot of
narrative, and I don't know whether this is true or not, that
in essence, what they really wanted out of the purchase from
Daimler-Benz was the finance companies and the auto stuff was
sort of a bonus, OK. And I talked to the board member last
night and said, look, you guys are in asking us for public
money today. Cerberus owns 80 percent of this company and has
cash, lots of cash, that they are unwilling to put into this
company. You mentioned about what a great partner they were. I
don't know.
I have to tell you, I have some trouble. These other guys
have a different problem because they cannot access cash. They
don't have a father sitting up here with cash that can inject
into their companies. They have to go out on the public
markets. You are in a different situation. You are a portfolio
company in a private investment firm that has lots of money and
they are unwilling to invest that money in your company.
And I want to add one other thing to it. We wouldn't be
here if it weren't for GM, and we are going to talk about them
in just 1 second. We all know this. It is almost like you
lucked up. I mean, you guys were getting ready to be bankrupt
and all of a sudden GM is in trouble and they have sort of the
clout, if you will, and Ford joins in, to come up here and ask
for public monies and this is like a flyer for you guys. All of
a sudden, this is life again, OK. We might get $7 billion even
though our portfolio parent won't inject any more cash in us.
And I have a little trouble with that, and I wonder if you
might just make me feel better about that.
Mr. Nardelli. Well, I am going to make myself feel better.
The fact is, we got a divorce last August and so--
Senator Corker. Well, they still own 80 percent of your
company, though, right?
Mr. Nardelli. No, sir. Daimler owns 20.
Senator Corker. They still--no. Cerberus owns 80 percent,
is that correct?
Mr. Nardelli. That is correct.
Senator Corker. OK.
Mr. Nardelli. But I wanted to say, last August, we got a
divorce from Daimler, and so some of your criticism is spot on,
the fact that the company was somewhat hollowed out, the fact
that it was functionalized. The fact is that all functions
reported back to Stuttgart. The fact is that there were
European designs trying to be sold in the U.S. market. We
canceled some of those products upon my arrival. We immediately
terminated four nameplates. We immediately started on our
restructuring plan and we have taken out 1.2 million. I can
assure you, Senator, that I don't wake up every morning
thinking about how to sell the company. We are busting our
guts, and the people that are left there are busting their guts
to make this thing work.
Senator Corker. But there is no future for the company as a
stand-alone, is that correct?
Mr. Nardelli. I don't agree with that, sir, or I wouldn't
have been here, and I appreciate your comment as being a stand-
up guy. For 38 years, I have made my reputation on delivering
on my----
Senator Corker. Speak to the investment company that owns
you that has cash and has a portfolio of companies that I
assume are earning money that they could borrow against if they
didn't. What is it that keeps them from making you whole?
Mr. Nardelli. If you think about--again, the misconception
of a private equity company is that there are a few guys with a
lot of money who invest in various companies.
Senator Corker. No, I know this is a lot of guys with a lot
of money, so----
Mr. Nardelli. No, sir. This is the same investors that he
has as shareholders and that Rick has as shareholders. These
are pension funds. These are----
Senator Corker. So they are not willing to give you the
lifeline. What the board member said to me--and I want to move
on because I am going to run out of time--what the board member
said to me is that there is no way they would make additional
investments in the automobile industry at this time. And so
here we are as a public entity being asked to do that, and I
just want to say--and I will come back to you in a minute, if I
can. I am going to run out of time here----
Chairman Dodd. Bob, would you just, because I want to pick
up on this point that you just raised, which I think is a
valuable one--Mr. Nardelli, I am reading your report here----
Mr. Nardelli. Yes.
Chairman Dodd. ----and on point three, major business
assumptions, let me read it to you. ``Chrysler remains focused
upon developing partnerships, strategic alliances, or
consolidation as a fundamental element of its restructuring to
expand its product portfolio, generate incremental revenue, and
create additional operational synergies related to
manufacturing, purchasing, and distribution.'' That hardly
sounds like a go-alone deal. I apologize, but I just----
Mr. Nardelli. May I respond to that, sir? It is----
Senator Corker. Look, there is not a human being alive in
the automobile world that thinks that Chrysler is doing
anything other than finding somebody to marry and that this
cash is here long enough for you to do that, and I want to move
on. I certainly will never be convinced of anything different
and I don't think there is an analyst on Wall Street, not that
we should be paying particular attention to them----
[Laughter.]
Senator Corker. ----that believes that. But let me just
move on, if I can.
Mr. Nardelli. May I just for the record disagree, sir?
Senator Corker. All right. I understand you disagree, but I
would go back to your plan and your plan says that you want to
consolidate. So let me move on, then, to----
Mr. Nardelli. Sir, may I respond to that just 1 second?
Those comments are, as in my opening comment, that alliance,
for example, where we produce all of Volkswagen's minivans for
North America; two, that alliance with Nissan, they have
entrusted us with their entire product line of trucks for 2011.
Those are alliances and partnerships. It is sharing
manufacturing facilities to avoid heavy capital expenditures on
transmissions, on axles. So that is really trying to improve
our viability----
Senator Corker. Right.
Mr. Nardelli. ----sustainability, not selling ourselves.
Senator Corker. OK. I know that you and GM spent an
inordinate amount of time trying to figure out a consolidation.
That is a fact. I know that both of you were intricately
involved in that. That is a fact. I know that a plan was
presented that actually showed that there would be less public
money necessary if the two of you consolidated. And I know that
Chrysler has been very excited about that possibility but GM
rejected that at the board.
And again, these are the kinds of things that we need to
force to happen. There is nobody that I know of that thinks
that three companies with the market share that you have, the
downward trend that exists, the unsustainable debt that it out
there, there is nobody, no thinking person thinks that all
three companies can survive, OK.
So I go back and I just want to ask--I want to get into GM
more deeply. I gave up a little time earlier, but I would like
to ask Mr. Wagoner, I know that this plan exists and I know
that you were very involved in putting it together. I know that
the board turned it down. And I know that you have tremendous
issues to deal with and maybe turned it down because you have
got too many fish to fry right now. But what was the reason
that you turned that down?
Mr. Wagoner. We did consider an acquisition. I would say
two things happened during the process. One, the market dropped
dramatically so our own funding needs increased more than we
thought, and so as we discussed that with the board, they said,
boy, we had better make sure we have enough funding to take
care of our own business. And as you know, any kind of merger-
acquisition activity is pretty human resources intensive.
Second of all, at the beginning of these conversations,
there was a lot of discussion about public funding, be it
public market funding being available. And as the credit market
conditions deteriorated, that opportunity changed. And so as a
result of that, the whole issue of focusing on the very
important issue of liquidity for GM was, I think, appropriately
at the top of the issue for our board.
Senator Corker. Let me ask you this. The plan at the time,
and I realize things have changed, it did say that there would
be lesser outside money necessary, a pretty large amount, if
the two of you all merged, did it or did it not?
Mr. Wagoner. Well, I--what I can tell you, Senator, is at
the time that we made the decision not to proceed, we did not
have the capital, cash--we were concerned we didn't have the
cash to make it until the deal could be closed and the
financial institutions could not assure us that they could
provide that funding.
Senator Corker. OK. Let me get into your plan just briefly,
and again, thank you for your patience. I looked at your plan
and I would agree with others that I think your plan was fairly
thoughtful. I told your COO that yesterday. And I think it is a
nice first step, OK. And you can tell that the senses have been
heightened a little bit over the last couple weeks and it is
obvious that you guys have put a lot of thought into survival.
There are a couple of things. Your debt loads are
unsustainable at any level of sales, OK. I know we had 17
million sales recently. We are on about a ten million sale run
now. Next year, you are projecting about 11 million. But at the
debt levels you have and the liabilities you have, it doesn't
matter if you were at 20 million. You can't survive, OK. So
that has to change. The makeup of your capital structure has to
change.
So I noticed yesterday in your plan that you had about $28
billion in unsecured debt. We checked yesterday and your
unsecured debt is selling for 19 to 21 cents, the bonds. And so
basically you had given about a 50-cent haircut to bond holders
that we understand will be glad to be taken out at 30 cents on
the dollar. So again, a not very aggressive step as it relates
to what could happen, if you will, by March 31.
The problem is the UAW is there and bond holders are not
willing to take a haircut unless he takes what I would call a
real haircut. Now, there has been a lot of lauding about the
changes the UAW has made. To be candid, in this proposal, not
so much, OK, and so let me sort of move into that.
You have got VEBA liabilities of about $21 billion,
Voluntary Employment Benefit Association payments. If you go
into bankruptcy, those are toast. They are gone. And I think
the UAW knows that.
Most of the people that are looking at your structure say
that VEBA, at least half of it has got to be equitized. In
other words, instead of taking money, they have got to take
equity, OK, and those are the kind of things that it seems to
me that we would want to put in the legislation if we did
anything other than Chapter 11 debt financing.
And so I guess I would ask, it starts with Mr.
Gettelfinger, because the bond holders are not going to take a
haircut of 30 cents on the dollar unless he is willing to
change his capital structure, and I would just like for him in
front of all of us right now to give us a little sense of how
heightened his senses are as it relates to this company
surviving.
Mr. Gettelfinger. Well, first of all, let me just back up
to the changes that were made----
Senator Corker. I have read all those and it was in your
testimony.
Mr. Gettelfinger. No, please----
Senator Corker. I know we went through this last time. I
understand about jobs bank, and I want to get into that. I
understand about the--I am very understanding of the changes. I
met with UAW representatives yesterday. We went through them
again. So I understand about jobs. If there is something else
other than jobs bank and if your numbers work out by 2012, I
will say it is going to be tough to reach that because you are
not hiring new employees. It is going to be tough to reach
those levels. But if you would, just respond to VEBA.
Mr. Gettelfinger. VEBA.
Senator Corker. Yes, $21 billion----
Mr. Gettelfinger. Oh-five changes roll through. It is a
negative plan amendment, Senator, instead of a curtailment. And
so the company does not get the full benefit of that until 20--
--
Senator Corker. Twenty-ten.
Mr. Gettelfinger. ----2009----
Senator Corker. The company will not be here in 2010, OK,
unless we do something, and I am asking you if by March 31, to
get back on Senator Schumer's line of thinking, I am asking you
if by March 31, you would agree to equitize, turn half of that
obligation into equity so that this company has a balance sheet
that will allow them to survive. I am asking that question.
Mr. Gettelfinger. And what I would respond to that,
Senator, is that we have brought in two professional groups to
help us. We took action yesterday to delay or to defer the
payments that are due on January the first of 2010.
Senator Corker. But I am not going to get the payments if
they go bankrupt, so again, I would like to ask--it is a
serious question. Are you willing to take to your membership
that type of proposal, which is the only way these guys--you
have got to look at the fact they have X-debt today. They need
to do away with at least two-thirds of their bond indebtedness.
They have got to do away with at least half of their VEBA
obligations in order to survive. And I am just asking if you
are willing to do that, because otherwise, there is really no
reason for us to be contemplating all these things.
Mr. Gettelfinger. I understand that, Senator, but I also
understand that I am here as a representative of people. Right
here is a letter from a person that gets $322 a month in
pension, $322 a month. We gave her a bonus. Do you know what
she did with it, Senator? She gave 10 percent to charity, she
kept $100 out for Christmas, and she put the other $300 in an
emergency operating fund. That is the people we are talking
about.
And I cannot answer your question directly without expert
advice, and I have suggested, sir, that we have brought in the
Lazard Group to assist us. While it may not mean anything here,
we took action yesterday to talk about a deferral of our 2010
VEBA payments because we recognize the liability that is out
there on the company's books. We also recognize the value of
spreading that out, that payment. But that is a tremendous risk
that we are willing to take. It may not mean a lot to many
people, but to others, when we are talking about people that
worked on their lines, that gave their entire life for that,
and their pension is at risk, that is very critical----
Senator Corker. Well, all of their benefits are at risk,
OK----
Mr. Gettelfinger. I understand that, Senator.
Senator Corker. Let me ask you another question.
Chairman Dodd. Bob, can I----
Senator Corker. Yes.
Chairman Dodd. I am going to come right back to you----
Senator Corker. OK.
Chairman Dodd. ----but I have got three other members, and
I wanted to give you some more time because you deferred
earlier, and I will come back to you on that, but let me turn
to Senators Casey, Tester, and then back and forth here.
Senator Casey. Thank you, Mr. Chairman.
Chairman Dodd. Thank you, Bob.
Senator Casey. First of all, I wanted to thank the
witnesses who are here for your testimony and for the work that
went into this testimony. For me, this debate is pretty simple,
as complex as the financing, as complex as the challenges are.
It is about jobs, and I come from Pennsylvania, which is not
normally considered an auto State, but when you look at the
numbers in our State on supplier jobs, direct and indirect, it
is more than 80,000, more than 83,000 jobs in that sector. When
you look at dealerships--and Mr. Fleming, we appreciate the
testimony you provided--look at dealers in Pennsylvania, 50,000
jobs.
I was looking at unemployment data from September 2007 to
September 2008 in Pennsylvania. September to September, up
91,000 unemployment. Our State, and I know the country, as
well, but I can speak for my State, cannot sustain any more
hits. I am not saying that if we don't act, we are going to
lose every single one of those jobs, but we can't afford to
lose another 5,000 or 10,000 or 15,000 or 25,000 jobs.
Our State, candidly, is a been there, done that State. We
went through this in the steel industry way back in the 1970s,
where hundreds of thousands of people in a couple of counties
in Pennsylvania lost their job in three or 4 years, hundreds of
thousands of people in one fell swoop. We can't allow that to
happen again.
I was just talking to some dealers this morning. We lost 56
dealers in Pennsylvania last year. This year, it is above 60
already. Just yesterday, there were three. This is happening in
real time. This isn't some theory. Jobs are being lost right
now. So in our State, we cannot afford to do anything, in my
judgment, but to act and to do something here.
I have to say also, with regard to the labor concessions,
Mr. Gettelfinger, I wanted to review some of those because I am
stunned by the kind of--when you hear the talking heads on
television, when you read what some people say in this town and
across the country about the mythology that is out there about
how we got to this situation, and, frankly, the scapegoating of
the men and women of organized labor, in particular auto
workers.
Point number one, in 2005, cuts in wages for active workers
and health care benefits for retirees, point number one. I am
reading from your testimony. Cuts for new workers, bringing the
wage level down to $14 an hour. How many industries are doing
that? Reducing the companies' liabilities for retiree health
care by 50 percent. And I realize these have been in the record
before, but it is very important. And wages and benefits, you
said yourself that they are about 10 percent of the budget. You
would think, listening to some of the people talk out there,
some of the so-called experts, that wages and benefits were 70
percent of the costs. So there is a lot of mythology, a lot of
myth generally that has been put on the record.
Since 2003, downsizing by the companies has reduced their
workforce by 150,000 people. That doesn't get said very often.
The labor cost gap with foreign transplant operations will be
largely or completely eliminated, OK. So I think it is
important to put this information on the record for this
hearing.
And then we have heard this garbage about $73 an hour. It
is a total lie, and some people have perpetrated that
deliberately in a calculated way to mislead the American people
about what we are doing here. It is a lie and they know it is a
lie.
So with that as my predicate, and I know I am almost out of
time, at least according to the original time agreements, I
have a question for the three CEOs with regard to
accountability. One thing that I think is very important here
is that we not just talk about but demonstrate to taxpayers
that we get it on the question of accountability and that you
get it. And I know you have a lot built into your plans.
I think it is very important that we take a look at this on
a monthly basis. If I had my way with regard to this
legislation, I would insist upon monthly reporting, monthly
benchmarking or compliance with benchmarks, monthly compliance
or the meeting of milestones. I think it is very important that
we have provisions that talk about it from month to month.
So I would ask all three of you, starting with Mr. Wagoner,
two questions, really. One is with regard to monthly reporting
and the distribution of public dollars based upon that monthly
reporting, would you agree to that, and also would you be
willing to make government assistance the most senior debt
secured by the assets that we have talked about here today.
Would you agree to both of those?
Mr. Wagoner. Yes on the first one, and on the second, we do
have some secured debt, but we have a lot of collateral that is
not secured, and so for that piece, we could cover any near-
term funding. So yes to the second one, as well.
Senator Casey. And Mr. Nardelli?
Mr. Nardelli. Yes, sir. Certainly on the monthly, we have
committed to that in our testimony. The majority of our equity
is secured and therefore I certainly am not in a position to
commit that that would automatically become unsecuritized or
subordinate to the government. As what was talked about earlier
about having or appointing someone, I think it was said that
this Committee certainly has the power to make that happen. So
I would ask certainly this panel and Congress, if that is their
wishes and that is the criteria, then that is something
certainly this panel has the authority to do.
Senator Casey. Mr. Mulally?
Mr. Mulally. If we needed to access the taxpayer money,
then monthly is very understandable and we would comply. On
your second question, our current covenants right now with the
debt we have, we would be breaking those covenants and we could
be put in default. But having said that, there just has to be a
way and I would be committed to figuring out that way to get us
all together to figure out a way to protect the taxpayer. I
understand completely.
Senator Casey. On the question of credit, each of you have
credit financing entities that we all know about, but my
question on that is one of the ways that I think would give
taxpayers some assurance here that the dollars would get to
where they are supposed to get to and rectify some of the
problems is that we focus on getting direct help on financing.
Would it be helpful to you to have direct infusions of capital
into your credit entities so that you have, and I would assume
that this would be helpful, that you would have, unlike the
banks, who have been sitting on a lot of our taxpayer money--
without a lot of questions asked, by the way--you would be
infusing an entity with dollars where you would have lending
that would happen almost immediately because of the inability
for most people to walk in and buy a car without access to
credit. I would just ask each of the three of you to tell me
briefly.
Mr. Nardelli. Sir, it is not helpful, vital. Just this past
Saturday, we have 240 dealers that have thrown their keys in
because they have not been able to get access to financing. We
have another 250 that have been put on credit hold. That has
impacted us another 63,000 units on an annualized basis.
Senator Casey. Mr. Mulally?
Mr. Mulally. Yes. I think a couple of other things to get
at your real question that are helping and could help even more
is with respect to the Federal Reserve, they have put in place
now a near-term asset-backed commercial paper facility which we
are already accessing which helps free up the credit, which is
terrific. They are also working with Treasury on a medium-term
asset-backed commercial paper facility.
Another thing that would really help on the credit being
made available for the customers is if we can get our
application for an industrial loan approved by the FDIC, which
again would help on freeing up the credit for our customers.
Senator Casey. Thank you.
Mr. Fleming. Senator, could I just----
Senator Casey. Sure.
Mr. Fleming. From the dealers' perspective, credit is a
very, very important issue and it is different across the
country. Areas where there were more difficulties with the
subprime loans, the local and regional banks don't even have
access to credit to help the dealers out. One of the concepts
that we have discussed on a local level in Connecticut is
trying to free that capital up that right now Treasury is
buying in some of these local and regional banks.
The hold-up is that these small commercial banks and
community banks and regional banks don't have the expertise for
financing automotive paper and credit. Some of these
organizations that are represented here, the captive credits
have that expertise. If you can free the--if the credit is
freed up at that local level and you can provide some central
ability for the expertise, the backroom operation, if you will,
that could free a tremendous amount of credit up at the local
level, and that is money that is already out there that is
sitting in those banks right now.
Senator Casey. Thank you, and we want to hear more about
that.
Mr. Wagoner, and then I am done.
Mr. Wagoner. Certainly, additional capital in the finance
companies would be helpful. Our approach has been to file for a
bank holding company, and as part of that we will need to raise
some capital there, as well, assuming we get it approved.
Senator Casey. Thank you.
Chairman Dodd. Thank you very much, Senator Casey.
Senator Tester.
Senator Tester. Thank you, Mr. Chairman, and I also want to
echo, thank you for being here again. Those of you that haven't
testified before, thanks for being here.
Just a couple of things, actually for my benefit. Senator
Bayh brought up an issue about nothing is for certain. Trust
me, as a farmer, I know nothing is for certain. The best-laid
plans can go upside down in a hurry. But I do want to know what
the landscape is and I do want you guys to be as honest as
possible. If the chances you are going to be back here in a
year are high, be honest and tell me. I think your industry is
important. I think the manufacturing industry is important.
So just go down the line and just tell me. If things stay
the way they are now, are you going to be back here in a year?
Just go right down the line, the Big Three, the Detroit Three
or whatever you call it.
Mr. Nardelli. Sir, if we are fortunate enough to get the
funding, as I said, we have built in some 136 money. We have
identified $4 billion of cost out starting March 31. We have
made the point about the importance of the finance company. I
believe, I believe, sir, that we will get through 2009 because
we have laid in a very conservative plan.
Senator Tester. And if the economy stays static, will you
get through 2010?
Mr. Nardelli. Yes, sir. We----
Senator Tester. That is good enough. Next?
Mr. Mulally. Yes. As we discussed, we believe we have
sufficient liquidity today, but clearly, your point is very
important. If the economy and the industry degrade
significantly, we would be asking for that bridge loan, too, to
keep going.
Senator Tester. Got you. Yes?
Mr. Wagoner. Our downside plan and our submission was based
on 10.5 million units next year, which is about where the
industry has been running the next couple of months, so that is
why we added the additional $6 billion credit facility. If the
10.5 continued for a couple more years, then we would need to
either cut more costs or get more funding because our baseline
plan assumes it goes up by about a million units a year.
Senator Tester. Thank you. I would just say this. You guys
have been put under far more scrutiny, far more scrutiny than
the people up here on the board for far less money. And I am
not happy about the transparency or the accountability, as I
said before, of what the administration has done in regard to
throwing hundreds of billions of dollars out the door. And the
fact when I listen to you guys testify that you can't even get
credit, and that is what this was for, is nothing short of
ridiculous and I would love to have those birds in here again
because they need to be talked to, or at least get some
questions answered.
One of the things that they have done with----
[Interruption from gallery.]
Senator Tester. I hope this doesn't count against my time.
[Interruption from gallery.]
Senator Tester. I would like to tell you that one of the
problems I have got with the use of the TARP funds is for bank
consolidation, and I would hope that--well, for example,
Capital One is just acquiring Chevy Chase Bank. They are a
recipient of TARP funds. We have a similar situation that could
be here, and Senator Corker has talked about it, and that is
the potential consolidation. You talked about it in your plan,
Mr. Nardelli. I just need assurance that no dollars given to
you would be used for a merger, either domestic or foreign.
Mr. Nardelli. Sir, I can assure you that if that is
incorporated into the guidelines, then it will not be. I would
come back and--for example, one of the things in my proposal
was if you take the $25 billion out of 136 and the three of us
were to create an independent technology center, I would submit
to you that it would be more efficient and more effective, as
evidenced in the hybrid technology that we jointly developed,
that Rick and I did in, as a matter of fact, a vehicle that I
drove down here.
Senator Tester. I understand. It is just that I don't want
to make the same mistake again. We should have asked tougher
questions with the previous----
Mr. Nardelli. Yes, sir----
Senator Tester. and I don't want to--and we will get onto
this with some other folks, too, as we go forward.
You know, Mr. Wandell, you have not been asked any
questions, and I feel an obligation that at least you get
involved in this. How is your business doing at this point in
time with the economic turndown?
Mr. Wandell. Well, as I mentioned, luckily, we are
diversified into several businesses and we are global, so in
general, we are doing well. But----
Senator Tester. OK. That is basically what I needed to
know, because you are going to be asked to be part of the
equation to reduce some of your costs, too, to be able to make
these folks whole. You see that as an absolute, no problem,
possibility?
Mr. Wandell. Yes. That is the way we come to work every
day. Every year, we are asked for price-downs from our
customers and that is part of the equation.
Senator Tester. The 136 dollars to be used to increase your
CAF? standards, as I read it, and I just want you to confirm
this, as I read your business plan, those were critical to make
this $34 billion work across the board. I don't want to put
words in your mouth, but yes?
Mr. Nardelli. Yes.
Mr. Mulally. Yes, they are included.
Mr. Wagoner. Yes.
Senator Tester. OK. The issue of dealerships, and I don't
want to get into this very deep because we can spend all day on
this, but we are talking about potentially closing some
dealerships. At least that is what I read. Have you identified
what the metrics are going to be to close dealerships?
Mr. Nardelli. The program we started last August when we
became privately held was to go out to every region and
identify the dealers that are in that region and work in
harmony with them to facilitate a consolidation that would make
the remaining dealers more profitable and we would put all
three brands under one roof.
Senator Tester. OK. Is that fairly typical of the way the
other two would answer the question?
Mr. Mulally. Yes, and I would just add a little bit more
clarity. We have a tremendous set of dealers throughout the
United States----
Senator Tester. I know you do.
Mr. Mulally. ----and we are very, very strong in, of
course, all the small and medium-sized communities. The area
that we are working together with the dealers, and they are
very encouraged by this, too, are in the big metropolitan
areas, because the most important thing we do is to get their
throughput and their profitability up and we are on plan for
that.
Senator Tester. What about the rural areas?
Mr. Mulally. They are in very good shape. They are doing a
great job.
Senator Tester. You have got dealerships in towns of less
than 3,500 people. Are you going to keep them?
Mr. Mulally. You bet. They are the fabric of the community.
Senator Tester. The same with GM?
Mr. Wagoner. Yes. What we do, the individual dealers make
the calls there. That number has been slimming down gradually
over time just because of the economics of the car business,
but it is their call.
Senator Tester. I come out of the State legislature, and I
will tell you a big complaint we had from the Auto Dealers
Association is that the manufacturers were trying to
consolidate, consolidate, consolidate the dealerships. I heard
it over and over and over again. We had to deal with that at
the State level, State laws. You are saying that attitude
doesn't exist anymore?
Mr. Wagoner. If we have a situation, let us say, where you
have three dealers in a community and none of them can be
profitable, we try to work with them. But, I mean, they have to
make the calls.
Senator Tester. OK. A last question, and I have got a bunch
more but time is of the essence so just bear with me just for a
second. The 136 money, $8 billion, $8 billion, and $5 billion,
where is that 136 money going to be spent? I know it is going
to be spent to increase CAF? standards. Is it going to be spent
in the U.S.?
Mr. Nardelli. One of the requirements is that it is based
here in the U.S. and we are spending it primarily on our
electric vehicles.
Senator Tester. OK.
Mr. Mulally. Yes, and all enabling technology, power train,
weight, aerodynamics.
Senator Tester. And GM?
Mr. Wagoner. Yes, and I would just add, and obviously a big
piece of our initial money is to fund batteries--
Senator Tester. One of the things I talked about earlier,
and I will stay with you, Mr. Wagoner, real quick, in the
earlier question was, is this money, if we put up $25 or $34
billion now, if it is going to be spent in the U.S. I heard a
rumor that you were going to expand a facility, or at least
announced the expansion of a facility in Mexico, a
manufacturing facility. Can you tell me if there is any
credence to that?
Mr. Wagoner. We have--all the announcements we have about
Mexico, I am not aware of anything additional. I mean, we have
got three assembly plants there. We don't plan any more.
Senator Tester. How about expansions of the existing ones
that are there?
Mr. Wagoner. No, sir, I am not aware of anything.
Senator Tester. OK. I will just tell you--
Mr. Wagoner. I will get back to you----
Senator Tester. ----whether it is millions of dollars that
you have in Mexico or whether it is this, if we allocate this
money and 2 weeks from now you guys announce an expansion of a
manufacturing plant in Michigan, I am going to be unhappy.
Chairman Dodd. Not Michigan----
Senator Tester. Mexico. What did I say?
[Laughter.]
Senator Tester. I said Michigan, didn't I?
[Laughter.]
Senator Tester. Exactly, in Southern Montana. In Mexico,
right. By the way, thank you for the correction.
[Laughter.]
Mr. Wagoner. Let me check, and if there is anything that
comes up, I will get back to you, but I don't think there is--
--
Senator Tester. I mean, the part of my justification to
keep you folks solvent and in business and employ folks at good
wages with good benefits is, number one, we need a
manufacturing base in this country. We can't afford to lose it.
But number two, I don't want to give American taxpayer
dollars to somebody who is going to invest it in some other
country than this country. That has been a problem.
Mr. Wagoner. Senator, let me just be clear. No funding that
comes out of this would go to fund a facility overseas.
Senator Tester. We had the conversation before on that, and
I will tell you that it is really tough for people to
differentiate if you guys get a $34 billion loan, bailout,
whatever you want to call it, that within a few months if there
is an expansion announced and it is not in Michigan, or some
other place in the United States--Ohio, Montana--it is going to
be very, very tough to justify.
Thank you for being here. I appreciate your time. You have
done far more as far as justifying your case than any of these
folks up here. Thank you.
Chairman Dodd. Thank you. Let me just raise the question,
and I will go ahead to my colleagues, as well, but I can just
tell you, to the CEOs, at least talking to my dealers in
Connecticut, and Mr. Fleming is here, one of the problems is on
this rebate issue, where they are providing rebates to
customers who can come in and qualify for a loan but the
dealers are not getting compensated from the manufacturer very
quickly from the rebates, so their margins are very small,
putting tremendous economic pressure on these dealers. I don't
know if that is just unique to my State. I suspect it is not.
And I will wait for a turn to come around, but I raise that
issue because it is one that really the dealers are not happy
with the manufacturers about some of these issues. I wouldn't
want the time to go by and assume somehow this is all kumbaya
between the manufacturers and the dealers. It is not.
Senator Carper.
Senator Carper. Thank you, Mr. Chairman.
Every now and then in our business, we face the voters and
one of the questions that is sometimes on their mind is what
have you done for me lately? And I think you all are going
through a little bit of that here today in terms of what have
you done for us lately in terms of productivity? What have you
done for us lately in terms of bringing down the labor costs?
What have you done for us lately in terms of improving quality?
What have you done for us lately in terms of improving the fuel
efficiency of the vehicles that you build?
Actually, I think any fair-minded person would say on every
one of those fronts, you have done a lot. You have done a lot.
That doesn't mean it is time to stop, but I think I am a fair-
minded person. I think most of us are. But I want to commend
you for what you have done and commend you for what I believe
you are willing to do next to merit the support that we are
talking about providing.
Mark Zandi over here at this end of the table is a smart
guy, and whenever we were trying to put together a stimulus
package, he was good enough to provide something that I call
the ``bang for the buck chart'' and what are the things that we
could do when we are looking into a recession, moving into a
recession, to try to turn that around. Does it make sense, do
we get more bang for the buck for Food Stamps? Do we get more
bang for the buck for extending unemployment benefits? Do we
get more bang for the buck by providing these stimulus checks,
these tax rebate checks that go out? And he is always very,
very helpful.
If you had to--this is an unusual thing to ask, but
thinking about that ``bang for the buck chart,'' would the
money that we are talking about providing here, whether it is
$34 billion or $25 billion, sort of where would that be on the
``bang for the buck chart,'' Dr. Zandi?
Mr. Zandi. It would have a high bang for the buck. I mean,
just to give you kind of a range, the infrastructure spending
has the highest, $1.80. Certain kind of tax cuts, $1.10, close
to a dollar. This is more like direct government spending, so
it would be $1.50 to $1.80, somewhere in that range, I would
think. On the fly, that would be sort of the bang for the buck,
I would think.
Senator Carper. All right. Well, that is what I am looking
for.
You make four points, and I have gone back and re-read
these several times. You make four points in your testimony,
and I want us to revisit them again and I want to especially
dwell on the fourth point, if we could. Would you just sum them
up really quick, starting with the first one, I think your
first point about--just take it and just summarize very briefly
in your own words.
Mr. Zandi. Sure. Point one is that the Federal Government
should provide aid. Without it, they would go into liquidation,
there would be mass layoffs, and at this point in our economy's
economic situation, that would be extremely damaging. So I
don't think you have a choice.
Point two is that the cost of ensuring that the auto makers
don't go into bankruptcy at some point in the next couple of
years is going to end up being measurably higher than $34
billion. I give you a range of $75 to $125 billion, but I think
the odds are high that it is going to be measurably more than--
--
Senator Carper. I saw that number and I wondered, does the
higher number, your higher number, $75 or $125 billion, does
that include the so-called Section 136 money which we have
already offered----
Mr. Zandi. Yes.
Senator Carper. ----for retooling the plants so the folks
can make more energy-efficient vehicles?
Mr. Zandi. Sure.
Senator Carper. OK.
Mr. Zandi. I mean, Chrysler is basically saying, I don't
need to come to you today for as much money because I am going
to use that money. So yes, that would be part of it, yes.
Senator Carper. Was it Chrysler that said that or Ford that
said that?
Mr. Zandi. I think all three of----
Mr. Nardelli. All three of us.
Mr. Wagoner. All three of us said it.
Senator Carper. Fair enough.
Mr. Zandi. All right. So yes, I think that is----
Senator Carper. All right.
Mr. Zandi. And when I say $75 to $125 billion, I am talking
the total commitment taxpayers are going to have to make to
these organizations to ensure that they do not go into
bankruptcy over the next 2 years. That is TARP money, that is
Section 136 money----
Senator Carper. Go on to point number three, if you will.
Mr. Zandi. Yes. Point number three is that if they can
stick to the script that they have laid out, they will become
viable companies on the other end of this with that help. But
sticking to the script outside of bankruptcy is going to be
very, very difficult to do because you have so many
stakeholders, creditors, UAW, suppliers, dealers. All have
different interests. It is going to be very difficult for them
to stick to the script, and therefore in theory, it looks
great. In practice, I think it is going to be tough. And I
would plan it on the likelihood that they are not going to
stick to the script.
And that gets to point four, what I would do. I would give
them $34 billion. I would----
Senator Carper. All at once?
Mr. Zandi. No. I would say, you need, according to the
plan, I think roughly GM needs $10 billion to make it through
to March 31. Chrysler needs $7 billion. Ford doesn't need
anything. I would give them $17 billion and that should ensure
that we don't go into bankruptcy liquidation through March 31.
I would establish a mechanism, a board or I think Senator
Schumer's idea is probably a better one in the context of the
time limitations, someone that says, are you meeting--we are
going to have very clear benchmarks. Are you meeting the
benchmarks? We get to March 31. We say, this is a good
investment, we are going to give you the next tranche, or it is
not a good investment and we are going to be throwing good
money after bad.
And use the time between now and then to get ready, to
prepare for a bankruptcy. Really think through, what does it
mean for the financial system? What does it mean for the PBGC?
What do I need to do as a government to provide dip financing?
What do I need to do to guarantee the warranties? You know, all
those things. You have got 3 months and you should have it
figured out, what is next.
But I think I would also make it very clear to everyone
that this is it, because when you say this is it and you stick
to this is it, then that makes a much greater chance that I am
wrong on point three, and that is the most important thing.
Senator Carper. Yes. I think your point about sticking to
the script is an important, real important point.
In your testimony, and when you talked about point number
four, you talked about the Federal Government providing the
support in two tranches you talked about the first one maybe
being $17 billion--in exchange for warrants and restrictions on
a variety of things, including executive compensation, dividend
payments, and that sort of thing.
In the situation with Chrysler--GM and Ford, I can see
where the warrants work out. We did Chrysler warrants 29 years
ago, I think it was 29 years ago.
Mr. Nardelli. We have done $300 million additional----
Senator Carper. But that was when Chrysler was publicly
held, and my question of you, Dr. Zandi, is how do we do
warrants with Chrysler in this situation or something akin to
warrants so that we have a reasonable return for the taxpayers
in light of our willingness to take on this risk?
Mr. Zandi. You know, I think it is a great question for Mr.
Nardelli. How would they compensate the government for this?
Senator Carper. Mr. Nardelli?
Mr. Nardelli. Well, I know that Cerberus has already
committed to forego all of their carry-forward interest. They
are more than willing to make sure that all of the upside
benefit goes back to the taxpayers. And so I think when you
bring everybody to the table, Cerberus is more than willing to
provide the security and the commitment that the taxpayers do
recover from their investment in this company, sir.
Senator Carper. All right. Let me just say, Mr. Chairman,
this is a smart group of people, as you know, and I think the
folks on the auto side and the labor side, they don't get
enough credit for what they have already done. They have
actually, I think, positioned these companies and this
industry, domestic industry here, within a couple of years, and
Ford is a little bit ahead of the game and we commend them for
that, but they have actually positioned themselves to make a go
of it. And part of the key is providing, as Dr. Zandi suggests,
enough money to keep the wolf from the door here for the next
couple of months while the necessary further concessions are
made by not just labor, not just management, not just the
shareholders, not just the bondholders, but the whole kit and
caboodle.
And the idea--I am going to come back to it, but a point I
think we touched on earlier, where would this, if it is $17
billion here in this first tranche, where would it come from,
and I would like for us to explore whether it might come from
some of these financial institutions that have gotten, I think
close to $250 billion of capital injection in return for making
loans to these companies that might be guaranteed by the
Federal Government.
I want to thank you all, but I especially want to thank
you, Dr. Zandi, for again bringing, I think, a lot of wisdom to
this hearing. I think you have given us a lot to think, not
just think about, but I think a lot to act on.
Thank you, Mr. Chairman.
Chairman Dodd. Thank you very much. Thank you very much,
Senator.
I just point out, and again I understand other obligations,
but I had asked the Treasury to be here, the Federal Reserve to
be here to talk about it. There are options for dealing with
this. To ask 535 Members of Congress in the space of 72 hours
to try and craft something here is challenging, to put it
mildly. There are other means by which this could be dealt
with. That chart says it all. But looking about--trying to get
some help out of an authorized fund to assist at a moment like
this, not to mention the 13(3) provisions within the Federal
Reserve Bank that could help give us time to come back and do
some things that may be necessary would be the way I would like
to suggest to go, or the idea that you have suggested has some
merit, as well, but it is----
Senator Carper. Well, this oversight board that we have
been talking about, not just an oversight like to kind of be a
spectator, but----
Chairman Dodd. We don't need legislation to create that.
That could be done automatically by the very powers that exist
today that could help out of this. I will get back to that in a
minute.
But also, I just want to make a quick point, your money,
Dr. Zandi, doesn't have to come from public money. That money,
that gap could be made up, in fact, by private capital coming
into these institutions, as well, is that correct?
Mr. Zandi. Sure.
Chairman Dodd. OK.
Mr. Zandi. If private capital came in----
Chairman Dodd. If we start doing things properly here and
things start to move in the right direction, you might see
those resources.
Senator Bennett?
Senator Bennett. Thank you very much, Mr. Chairman, and
thanks to all of you. This will come to an end. You can look
forward to that with some confidence.
A few reactions and then some questions. I don't think you
need any more loans because loans carry interest with them and
interest is part of your problem right now. Even if the loan
has a government guarantee, it is something that has to be
repaid and what you need is more capital that is patient
capital that can wait out the scenario that Mr. Wandell has
talked about, or I guess it was--whichever. Yes, you are the
economist.
Mr. Zandi. I am the economist.
Senator Bennett. You are the economist on the end. OK. I
have got it straight.
Let us talk about capacity. The industry has too much, and
based on what we heard in our last hearing, Mr. Chairman, that
is not going to change. As the industry becomes more efficient
and produces longer-lasting cars, people are not going to trade
as often and the overcapacity problem is going to continue to
be there.
I will confess that I am adding to your problem. Mr.
Mulally, my Ford Escape is 4 years old and has got at least
another 4 years left in it. Mr. Wagoner, I have got a 1996
Oldsmobile that is still running just fine, and as long as you
are producing spare parts, it has only got 82,000 miles on it,
and I am not going to trade it in. And therefore, I am adding
to your problem because it used to be that people changed their
cars every three or 4 years. You are making them well enough
and lasting long enough that this is a problem. When I
congratulated the dealer that sold me the Oldsmobile, he said,
``I can't make any money if you keep driving that car.''
What we are really talking about here is creating for the
first time in America an industrial policy for a particular
segment of the industry. This is America's version of MITI, if
you will, where we look at the question of capacity in the
industry as a whole. We look at the question of competitiveness
around the world. We look at the question of how much public
money is going to go into the industry. All of these are
questions that the Japanese have addressed, and we have never
had an industrial policy for a variety of good reasons, and
whether we should or shouldn't is a discussion for another time
and another place.
But as we address all of these issues, it falls under that
general rubric of should we have an industrial policy for the
auto industry, and if we should, what should it be and what
should be the Federal role. And to come up with the answer to
those very complicated questions, as you say, Mr. Chairman, in
72 hours is something the Congress, frankly, is not equipped to
do.
So I think there needs to be some very heavy discussions
very quickly on that issue, not just how are we going to bail
out this industry in this circumstance, but what is going to be
the long-term goal and role of the American government in the
21st century in a globalized economy competing with other
countries that do have an industrial policy and should we
rethink our decision not to have one, and if we do have one,
who in the world is it going to be? What is going to be the
American equivalent of MITI? And how do we address all these
issues? It is a very, very tough question that this industry
and this circumstance has thrown back in our face after we
thought we were through with it when we discussed the Japanese
back in the 1970s.
Now, back to the question of overcapacity, everything I
have seen with this says to me that a merger between General
Motors and Chrysler is a good idea. It is not a shotgun
wedding. It is not something you do dramatically and
drastically because of the difficulty of the circumstance. It
is a marriage that makes sense. All the work has been done so
that it could be done and papers could be signed very quickly,
and out of it, the synergies you get are there and the
economies you get.
Now, I know, Mr. Gettelfinger, you don't like it because it
would mean losses of assembly line jobs. It is the middle
management and top management that would get hit the first,
because instead of two corporate structures, you would have
only one. And the acres and acres of MBAs that are there in the
middle management for both companies would be shrunk
significantly.
I understand, Mr. Wagoner, you said, well, we had other
priorities. We were pressed by this. We couldn't think about
it. I think you need to talk about it again. Can you react to
that, not from the standpoint of this crisis, but from the
standpoint of the business synergies that would occur if there
were not a crisis and the two of you were looking at it
strictly in terms of what it would do for you long-term.
Mr. Wagoner. The analysis, as we have reported in other
places, showed significant cost savings, some of those--
significant cost savings, and some of those were--a large
portion initially were exactly the point you raised, Senator
Bennett, the sort of squishing together of two headquarters.
There was some significant job loss, but beyond that, it looked
like there was material savings, platform savings as we
combined product platforms together. And then over time, some
possibilities of actually incremental sales. For example,
Chrysler hasn't historically had a big overseas distribution
network. General Motors does, so that would open up prospects.
But as you correctly said, as it became clear that such an
opportunity would not generate incremental funding from the
market--initially, we had been told it would, but as the market
conditions deteriorated, it wouldn't--then we had to move our
focus to the near-term cash issues that we are facing.
Senator Bennett. Mr. Nardelli?
Mr. Nardelli. Senator, let me just add to that. When we
were looking at that, the range of opportunities were somewhere
between $8 to $10 billion annually. In the case that you have
cited where we are running a factory with one shift and Rick is
running one with one shift, I am not sure there is a
significant labor reduction, in talking with Ron, the
opportunity to move those direct workers from one factory
across town to another.
I think the thing Rick talked about is one of the biggest
costs we face is developing a new platform, somewhere around $1
billion to $1.3 billion, for example, if we were able to as an
industry or two of the three in the industry here share common
platforms with different top hats. I have mentioned before in
my oral comments with the charts, if you just look at
annualized savings on all of the NAFTA buy, you are talking
about $3 to $4 billion in aggregation for suppliers. You are
looking at increasing plant utilization from 70 to 90 percent.
There are opportunities significantly in advanced technology,
as Rick and I cooperated on the hybrid.
So the point here, I think, is not whether there is
significant synergies and opportunities. I think the issue has
become one of survival in the immediacy. How do we keep our
doors open between now and the end of the year, and in looking
month by month? And I think if the challenge is how might we
look at getting more synergies between two of us or the three
of us so that the U.S. auto industry really does become not
only a competitor among States, but a competitor among nations,
I think that is a fair question and a fair challenge to put to
us.
Senator Bennett. The reason you don't do it is because--is
not for business reasons. Let me tell you what I am hearing and
you can correct me if I am wrong. The reason you don't do it is
not because it is not a good business decision. Long-term, it
is a very good business decision. Eight to ten billion dollars
a year in savings is not trivial in the circumstance we are
talking about here.
The reason you don't do it is because it will not attract
short-term financing. We are not talking about short-term
financing. We are talking about government financing.
Government capital is the most patient capital there is. What
if we made as a condition of giving you patient capital, among
all the other requirements that you have been talking about of
stick to the script, what if we made as a condition of giving
you patient capital the requirement that you do this, because
saving $8 to $10 billion a year on behalf of the creditor
sounds to me like a good idea.
Now, if I am a creditor who has to get interest payments
next month on my loan, it does not. But if I am a creditor who
has to answer to the taxpayers of what is going to happen over
several years, it does.
So if we write in the proviso that you don't get a dime
unless General Motors and Chrysler combine, how would you react
to that? Mr. Gettelfinger, I would like to hear your response,
too.
Mr. Gettelfinger. Well, I think having an outside expert
look at that, also. I think there may be a disagreement on the
real advantages to it. I appreciate what the companies are
saying. But, you know, when the transaction came about with
Daimler, a couple of things happened. Number one was the
financial arm was split off from the company, and indirectly,
the equity stake that we had in that as workers drifted apart.
There was additional liability that was shifted to the company,
debt, if you will. And the synergies that we have talked about
here, I think that that is debatable, just how effective they
would be.
But you are right on the mark, though, when you said the
concern about what would happen, because it would be
unbelievable, the number of people that would lose their jobs,
and you are right as far as it would be the management people
first, because they do, they have dual headquarters.
But beyond that, you are talking about now taking a
Chrysler product manufactured by General Motors. I would say
that, to me, when General Motors, Chrysler, and I believe it
was BMW come together and developed the two-mode hybrid, there
was an alliance that helped those companies go. And I truly
believe that that is the kind of alliance that Chrysler needs
as opposed to a merger with General Motors.
Senator Bennett. Mr. Wagoner?
Mr. Wagoner. It would have been my presumption that given
the near-term funding requirements that we have put forth, that
this whole role of what we call the Federal oversight board, or
industry trustee or whatever, if there was a desire to
integrate, as you say, industrial policy as part of it, we
would obviously be very willing to look at any of this stuff on
their merits. Given where we are today, though, you know, our
focus is the near-term liquidity.
Senator Bennett. Yes, but you are talking to a potential
lender of patient capital in large amounts. Forget what you
have just said about the short-term and where you are today.
Mr. Wagoner. OK.
Senator Bennett. If I say to you, this is a condition,
would you resist it? Mr. Gettelfinger would because he thinks
the past history says it won't work.
Mr. Wagoner. I would be very willing to look at it
seriously. I would prefer to do it in a way that Mr.
Gettelfinger felt comfortable proceeding, because a lot of them
affect his workforce, and so I think we would want to work with
him together on it, but we would certainly be willing to look
at it and consider it very seriously.
Senator Bennett. Mr. Nardelli?
Mr. Nardelli. Senator Bennett, the first job that would go
would be mine, but if, in fact, that is the criteria that means
we get money to save Chrysler and the people that have worked
there for 80-some years, I would do it.
Senator Bennett. OK. Doctor, do you want to comment on that
in terms of sticking to the script?
Mr. Zandi. I don't have a strong opinion on this. The only
thing I will say is, you know, I think this might be a good
question for the trustee or for the board, and it is probably
wise--I am always a little concerned about trying to engage in
very specific industrial policy. I think that is a difficult
thing for government to do well, so I would be very cautious in
that respect. But I don't have a strong view on it one way or
the other.
Senator Bennett. Well, I agree, it is difficult for the
government to do well, but we are doing it whether we like it
or not.
Mr. Zandi. Well, there are different flavors of that.
Senator Bennett. Yes.
Mr. Zandi. Right.
Senator Bennett. But that is the situation we are in with
respect to this.
Thank you, Mr. Chairman.
Chairman Dodd. Thank you, Senator. First, I appreciate the
candor of our witnesses. It is a rather profound question that
Senator Bennett has raised and your responses have--I have been
sitting on the Committee for a long time. That was rather
unique responses to the question. Mr. Nardelli, I must admire
your answer. I am not sure it is the right policy or not, but I
appreciate your answer to the question.
And it is why I always get a little nervous about Congress,
with 535 of us up here. We do a lot of things well. Some
things, we don't do terribly well, and micromanaging a lot is
what I get nervous about. That is why we sometimes gives
broader authority on the assumption people will exercise that
authority with some discretion and prudence, but I appreciate
Senator Bennett raising it. A very provocative set of
questions. Thank you.
Senator Brown.
Senator Brown. Thank you, Mr. Chairman.
There was discussion earlier that suggested that the
Department of Energy had rejected the auto companies' 135
applications. My staff checked with DOE and that is not the
case. As is very common in grant or loan applications, as you
all know, DOE, I believe, has asked for more information. I
just wanted to set the record straight there.
I wanted to follow up on Senator Tester's question. Auto
suppliers, of course, as auto companies, have a lot to worry
about these days. One of these concerns is that the tax dollars
will go into this program and their concern is that they not be
used to offshore American supplier jobs. I know some products,
as I think Mr. Wagoner said, like batteries for electric
vehicles are not produced sufficient to your needs
domestically, but I would like just yes or no on each of the
three CEOs for you to commit or pledge to maintain or to
increase your U.S. value-added content if you receive taxpayer
support, both from your companies directly that you will
increase or keep the same the value-added content, and on your
suppliers that you use, if you would commit that if you get tax
dollars.
Mr. Wagoner, if you would start first, just yes or no.
Mr. Wagoner. Senator, I have to look at the data.
Certainly, our intention--we are finding the U.S. suppliers
are, frankly, more competitive today in a lot of areas than
they have been in years. So I feel like that that will be the
direction, but I would like to look at data and respond to you,
if I could.
Senator Brown. Mr. Mulally?
Mr. Mulally. The vast majority of all our research and
development is led out of the United States. We have no plans
to change that.
Senator Brown. Not just research and development. I am
talking more than research and development. I am talking about
everything you do. The concern I hear from so many people,
because they have watched what has happened with the banks,
they have watched money go for all kinds of purposes, including
buying other banks. Put that aside. But they want to make sure
this money is meant for American jobs in the United States,
whether it is suppliers, whether it is directly with Ford.
Mr. Mulally. No, I understand and we operate, as you know,
all around the world in the markets and our plan is to
profitably grow our operations in the United States.
Senator Brown. OK. Mr. Nardelli?
Mr. Nardelli. Senator, in my testimony, again, 73 percent
of our sales are in the United States. Sixty-one percent of our
production is in the United States. Seventy-four percent of our
employees are United States. And 78 percent of our material is
purchased here. So we are, I like to say, the most
quintessential American company you have got here.
Senator Brown. But 100 percent of these dollars will come
from U.S. taxpayers.
Mr. Nardelli. I understand that, sir, and again, I couldn't
agree with you more that we have to make sure as we work toward
gaining independence on oil, we can't become dependent on
foreign technology. So your point about battery technology and
the future of this industry needs to be right here.
Senator Brown. OK. People will be watching.
Mr. Nardelli. Yes, sir.
Senator Brown. Mr. Gettelfinger, I get the sense that some
people think it is OK if domestic auto makers go bankrupt
because all those jobs will be replaced by foreign transplant
companies. Do you think the jobs lost in one of the Big Three
and all the jobs to it will be replaced by a like number by
Honda and Toyota and other transplants?
Mr. Gettelfinger. I think there is an organization called
the Level Field Institute and they measure cars, the value of
cars to workers, and I am going off the top of my head, but I
believe for every--if you use 2,500 vehicles as a benchmark,
the domestic auto companies would employ 78 workers for every
2,500 vehicles they sold, and if you combined the foreign
nameplates, it would be 33. And the reason is because of the
imports that they bring in now.
So no, if we lose the auto companies, the jobs are gone.
There will be some of them replaced. There would be an
expansion of production, I am sure, in some places. But it is
gone. And it is also significant to point out that while we
sell about 50 percent of the automobiles, they buy 80 percent
of the parts.
Senator Brown. OK. Thank you.
Mr. Wagoner, I don't think a lot of us fully appreciate
what goes into changing a product in your business. As we have
seen gas prices go to $4 and then come back down in the space
of a few months, we get frustrated when your industry's
response lags.
If I could be parochial for a minute, what does it take to
ramp up production, for example, for building the Chevy Cruze
at Lordstown or a similar product change?
Mr. Wagoner. It depends on how the plant has been tooled,
but a good rule of thumb would be half-a-billion dollars or so
just to get the car up and running.
Senator Brown. In what kind of time period, typically?
Mr. Wagoner. Usually, it takes from the go, I mean, if we
have to develop the product, as well, that is a three-year
cycle. If you can use a product that has been developed for
other reasons and bring it in, then you can do it faster than
that. But it is a long-cycle business.
Senator Brown. If Congress approves this money next week,
what happens in Lordstown with building your most fuel-
efficient vehicle?
Mr. Wagoner. We are going to proceed ahead.
Senator Brown. On what time table?
Mr. Wagoner. Time table, the Cruze is scheduled to start in
2010.
Senator Brown. OK. Mr. Mulally, my last question. You, I
assume, I know more about the airline industry likely than
anybody in this room. We have heard that Detroit should
reorganize, should do Chapter 11 and reorganize just like the
airlines have done. Give us your thoughts on whether bankruptcy
would work from your perspective and give us a quick tutorial,
if you will, on the financing of bankruptcy. I mean, I know
your company, Boeing, was close to those that went through
bankruptcy. Tell us what you can tell us based on that
experience.
Mr. Mulally. Yes. I am very glad you pointed out that
clarification, because I was with Boeing Commercial Airplanes,
not the airlines, which I love the airlines and our
relationship with them.
I think that I absolutely agree with the testimony of my
colleagues and also our other professional witnesses in that in
the United States, the customers have great choices, great
choices in automobiles. Part of that decision process is
believing in the company that you are buying your car from, and
you want to know that they are going to be there, they are
going to be there for you, the residual values are going to be
in place. This is a very, very important relationship and I
think that any threat of a company going into bankruptcy
really, really hurts sales.
I agree with, I think, everything that has been said, that
the sales would fall off so fast that you couldn't restructure
enough to get back out. So I think, you know, continue to
improve your business year over year is just absolutely the
right thing to do.
Senator Brown. Thank you. Thank you, Mr. Chairman.
Chairman Dodd. Thank you, Senator Brown, very much.
I am going to turn to Senator Corker in a minute, but let
me ask something, if I can, of you, Mr. Fleming, in dealing
with the dealers, auto dealers. And again, this may be more
anecdotal than not, but the issue of franchise laws in our
various States. Even if, in fact, we have here the industry
making decisions about reducing the number of consolidating
dealerships around, to what extent is that impeded by the
inability of them to do so because of State laws on franchises?
You might tell me the genesis of these laws, and as I
understand, it is not a total prohibition. It just makes it
rather difficult to do it, to put it mildly. And obviously,
would you support an effort here that would allow us in a way
to trump, in effect, State statutes in these areas if this is a
major area of reducing cost, by consolidation of dealerships?
Mr. Fleming. Senator, there is a very great danger, I
think, in preempting franchise laws at a State level. The first
issue, I think, that would arise is that the lending
institutions in the States depend on the franchise laws with
respect to the risk that they are going to assume. So one of
the unintended consequences of Federal preemption of State
franchise laws, or another concern, of course, would be going
into bankruptcy, would be that the lending institutions would
further tighten credit.
I also think, Senator, that there is a misunderstanding
about whether or not franchise laws could prevent the Big
Three, in this case, from doing the things that they are
recommending to you today. I don't think that State franchise
laws do that. I brought a copy, Senator, of a boilerplate
franchise agreement, General Motors agreement. When I was
Commissioner of Consumer Protection, one of my jobs was to make
sure that contracts that renters sign, for example, the average
consumer wasn't lopsided. This agreement is absolutely lopsided
toward the manufacturer. They can basically do anything they
want. Many of the franchise holders in Connecticut that are--
Chairman Dodd. What do you mean by that, James? What do you
mean, they can do anything? Can they shut down a franchise,
even though franchise laws exist?
Mr. Fleming. There is no veto in--I can't think of any
State law where there is an absolute veto over termination. And
given the economic situation that exists right now, many
dealers are going to voluntarily move to do that because of
economic decisions. In that instance, there would be little or
no liability on the part of the manufacturer. I think the
liability would occur in that we could end up in bankruptcy, of
course. I think we could end up losing dealerships that we did
not want to lose.
So if some entity was to be put together where the dealers
had input into it, some board, as members have talked about
today, I think that certainly the dealers would be willing to
work with that board to discuss those types of issues within--
we are not exempt from antitrust, so that is why we don't have
those types of discussions with the manufacturers now. But that
type of discussion could, I think, occur. But I think you will
find that dealers add such a tremendous value at that level
that you may not want to go in that direction.
Chairman Dodd. Tell me quickly, I mentioned to you earlier
about the issue of the rebates. Obviously, we see all the
advertisements that there are so many thousands of dollars that
you get if you go in and you purchase so-and-so car, and based
on, at least as I recall the conversations we had over those
two or 3 hours a week or so ago in Connecticut, the concerns
about whether or not dealers were actually being compensated
for the rebates they provide and the pressures that it puts on
them economically.
Mr. Fleming. Dealers carry about 110--nationwide, about
$110 billion worth of inventory costs. When the car, for
example, leaves Detroit, the dealer owns it from that point.
That is about $110 billion in inventory costs.
Another thing happens with respect to the issue that you
raise. When the manufacturers offer our dealers some kind of an
incentive, they are actually floating with the dealers' money
during the time period that that car is sold and when the
manufacturer decides to reimburse the dealer for that cost,
because remember the dealer is carrying the car that entire
time. So there are tremendous benefits to the franchise system
that is in place. But I don't think you will find that State
franchise laws would do anything to prohibit what the
manufacturers are trying to discuss with the Committee today.
Chairman Dodd. Tell me about the floor plans, the costs.
And I want you to explain that, as they had to explain it to me
the other day. I am learning more about this than I understood
before, about what a floor plan is and how it works.
Mr. Fleming. We have tried to, as our dealers are talking
to members of the Connecticut delegation and around the
country, make sure that we don't use jargon which is going to
be misunderstood. But what a floor plan is is the ability of a
dealer to finance his inventory. And again, that is how you are
paying for the $100 billion worth of inventory that the
manufacturers sell to the dealer before it ends up in a
consumer's hands.
So the issue that most dealers are facing right now is that
the credit situation is such that they cannot get good access
to financing for floor planning. The captives, the GMACs, have
made it more difficult and they have economic reasons why they
have done that. The regional banks, in Connecticut, there are
two. If they were step out of that business, the dealer would
have no ability to finance that inventory. That hurts Detroit
because they can't move their product, and in the case of a
dealer in East Hartford that I was talking to, they have
actually had to cut back on the inventory that they have on
their lot because they cannot get that proper financing.
Chairman Dodd. And this goes back to the point that until
consumers start buying automobiles, the long-term success of
these plans don't work.
Mr. Fleming. That is correct.
Chairman Dodd. That is why this is such a circular--that is
why I think it is so important to understand this piece of the
business, that if you can't finance the floor plan, the
manufacturer cannot provide the automobiles to the dealer. The
consumer can't afford to buy the car because the restrictions
on the FICA scores are so high. You have the choking, not
unlike what we are talking about in the financial system, and
you end up clogging up the system and it doesn't work. And so
it is important, we are all talking about this from a Detroit
perspective, a lot of that today, I think we are paying enough
time, and why I wanted you here and the suppliers, in a sense,
because you need to understand how this works on these
dealerships all over the country and what problems they face in
terms of having that product move and the consumers having the
access to it.
Can I ask the CEOs quickly to respond to what Mr. Fleming
has just talked about here in terms of the rebate issues and
these other questions and just any comments you may have on
that?
Mr. Nardelli. I will make a couple of quick comments. One
of the things I inherited was an inventory in the field of
about 600,000 units. We have consciously tried to reduce that.
We wanted to get it down significantly. We have not been able
to do it, but it is down 200,000 units. That saves our dealers
about a million dollars a day in floor planning costs, point
one.
Point two, we have not consciously made a decision to delay
payments of incentives. We have a current schedule, and at this
time, we are continuing to pay as per rearranged on the
incentive payment----
Chairman Dodd. How quickly does that happen, Mr. Nardelli?
Just give me a----
Mr. Nardelli. Generally, we pay about once a week. So we
pay down our incentives to our dealers once a week. So as they
report the sale of the car, we will pay it.
On the last one, on the wholesale costs, back to the credit
situation, on your chart, sir, our floor planning costs have
gone up a couple hundred basis points and some of the
governance that has been put on our new conduit is that the
dealers now have to pay their floor planning--in other words,
they can have nothing on floor plan beyond a certain period of
time. So these new restrictions have been imposed on these
dealers as a result of the financial crisis. So in addition to
your point that you have made about consumer availability to be
able to buy a car or a dealer to order it, just what they have
on the floor plan is going up and their ability to get access
to order is not available. So we have this perfect storm, if
you will----
Chairman Dodd. I presume some of these banks that we
provided this financial injections of cash are exactly the very
institutions on whom you rely for the credit you are talking
about.
Mr. Nardelli. Those financial institutions provided the
conduit to the Chrysler Financial Company, yes, sir.
Chairman Dodd. Do the other two have comments? Mr. Wagoner?
Mr. Wagoner. Yes. We pay dealer cash incentive with about a
2-week delay, is the normal process we have been using for
them.
I would like to add a comment, though, that you were onto.
Just if you look at one of the reasons why our cash needs are
going up so much, or funding needs going up so much in the near
term, it is exactly this issue that dealers, because they can't
get as much credit, are having to reduce their wholesale
inventories.
And just, for example, in the month of January, our current
estimate, which I think is optimistic, is that we will produce
about 30 percent less vehicles than we did in January a year
ago and it is possible that we could actually produce even more
than 50 percent less. And part of that is to try to help
dealers get their inventories down so they can have the
possibility of surviving, given the tight credit for them.
But it obviously drives huge cash needs at our level and I
think it really makes your point that this whole system is very
reliant on a reasonable flow of credit from consumer to dealer
to manufacturer and also to supplier, as well. And so this
tightness of credit certainly has hurt the financial industry
and the housing industry, but the auto industry has
traditionally been a huge relier on credit and we are seeing it
play right through.
Chairman Dodd. Before going to Ford, I raised this question
2 weeks ago with you because obviously it would address some of
the Treasury's concerns about they only presume to be
interested where there was a systemic financial risk involved,
and while we have talked about credit default swaps and what
can happen here, which is a little complicated, people
understand, but certainly that is there, this also relates very
directly in my view to the systemic financial issue.
That is why when I asked the question candidly, I didn't
get a very good answer. I was trying to set it up a little bit
so you could explain why this was, in fact, fell into the very
category that Treasury is using for its rejection of utilizing
the TARP authority, in a sense, and why I specifically gave
them that authority, along with my colleagues, obviously, 2
months ago to be able to respond to situations like this.
Well, Ford, do you want to respond?
Mr. Mulally. You bet. Senator Dodd, just on your last
comment about the systemic risk, Goldman Sachs did a study and
made an assessment of your very question and they came up with
a trillion dollars----
Chairman Dodd. Right.
Mr. Mulally. ----following your systemic risk----
Chairman Dodd. I think that was J.P.Morgan. Was it
J.P.Morgan or was it----
Mr. Mulally. I thought it was Goldman Sachs. But anyway, it
is to your point. It validates it.
Mr. Fleming, I think, really summarized the situation well
with credit. In Ford's case, we are very unique in that our
finance company, we finance nearly 77 percent of that floor
plan that you have been talking about on the wholesale sales
and it is a real competitive advantage for us. We haven't
changed our policy on the payments that you described, but----
Chairman Dodd. How often does Ford----
Mr. Mulally. But back to the----
Chairman Dodd. How often do you pay your----
Mr. Mulally. Let me just check. I will have to get back to
you on that, but I think that the really important point is
that freeing up the credit is the most important thing we do,
because that is where it starts, because they are on the front
line with the consumer.
Chairman Dodd. Thank you very much.
Senator Corker.
Senator Corker. Mr. Chairman, thank you.
This hearing is ending, I realize, and this will be the
last time that we talk about this before either action is taken
or action is not taken. We have had a lot of involvement with
all of you, and I have to tell you candidly, each of you are
very likeable as human beings and I think have been very
forthcoming in many, many ways. But this is not about
personalities. This is about trying to solve a problem.
And so Chairman Dodd has got to decide, it seems, as to
whether he is going to try to pursue some legislation that has
sort of broad-based bipartisan support or whether he is going
to--he sees that that is not possible and he punts, or he with
Senator Reed and others decide to punt and sort of throw it
back to the administration to either do something through
Treasury or maybe let Chairman Bernanke at the Fed do something
through 13(3). So we are kind of at that point, it seems.
The issue, it seems, is that there are lots of--there are a
number of Republicans that would be willing to consider if you
were all to go bankrupt through Chapter 11 reorganization, they
would be willing to consider government money, debtor in
possession financing, that has first priority, but this would
be in new companies that had shed all the many problems that
each of you have because of the histories of your companies.
So what we have discussed today a little bit, and numbers
of people have done it, is how do we get a scenario like that
set up where the sense of survival is still there and that
parties come to the table and are willing to negotiate in good
faith? I think Dr. Zandi hit it on the head. I mean, it is
really tough to keep people following a game plan, I learned,
after the money has left your hands, OK. There is really no
stick left for us to keep the discipline in place.
And so there has been a discussion about maybe some amounts
of money being put forth and something having to occur by March
31. And so I am going to try it one more time. I know I didn't
get very far this last time, but there are things that--you
know, GM is the reason that we are here, in essence. There is
no way we would be having these meetings if it weren't for
General Motors. I think that is pretty much a fact. Ford, Alan,
your parents didn't raise a fool. I mean, if you can come up
here and get $9 billion worth of unsecured financing at 2.5
percent, certainly you are going to come, and I applaud you for
being here. But we are really here because of GM. Chrysler
would have never been able to be here on their own, I don't
think.
And I applaud Senator Bennett's exchange with Mr. Nardelli
and certainly Rick Wagoner regarding the consolidation. I would
like to see that happen. I am a little bit remiss because I
don't sit in your seats and I think to force that when we don't
know the circumstances is a little bit problematic. But
candidly, I have told Mr. Nardelli and I have told the board of
Cerberus that I hope that is an outcome because our country
cannot really deal with three separate U.S. auto makers. And I
know that there are some synergies there.
Let me clarify one thing. I got a frantic e-mail from
Secretary Bodman, OK, and so I just--I know Sherrod Brown did a
good job clarifying----
Chairman Dodd. People are watching. That is good.
[Laughter.]
Senator Corker. He, in essence, sent your applications back
asking for more information, OK. So I take that as a rejection.
Maybe I was a little bit too harsh. But the fact is that under
136, to receive funds, which you have all said are important to
you, you have to be going entities. The Secretary has to
certify, and this is pretty important, that each of you are
going entities.
Well, so I will go back to GM, which is why we are here,
and again, I think you put forth a thoughtful plan, is you meet
with people who follow you and invest in you. There are three
things that basically cause you not to be a viable entity. As a
matter of fact, we just got a quote while we were talking. In a
5-year credit default swap right now in your companies,
basically, it is predicting that GM will default on its loans,
96 percent chance, OK, and Ford will default, 91 percent
chance, and the large suppliers at 80 percent. So, I mean, you
are really close to the end in most people's minds.
There are three things that have kept GM, according to, I
think, you and others, from being competitive. One is you have
an unsustainable debt level. That has just occurred over time,
and I realize we have had a pretty big peak to trough drop in
cars sold, that it is unsustainable. And the fact is that all
of you have got to be companies, in order to be successful,
that whenever we get through doing whatever it is we might do,
people are going to want to invest in you, right? I mean, that
is the measure of a going concern. Will somebody else invest
dollars in you?
So reorganization is an interesting thing, because we know
that going through that process, as painful as it is, you guys
would come out without all the legacy stuff. To the dealers--I
have had a lot of them calling in--probably a lot less dealers,
and I am certainly not advocating that. That is just probably a
fact of what would occur after bankruptcy. And the fact is,
your cost structure would be far different.
So I am going to try one more time, and I am going to ask
Mr. Wagoner, if we put language in, and I know that we are
somewhat paying attention here more so than we did I know the
others, and probably because we didn't with the others, we are
paying more attention with you--if we put something in--here is
what is going to happen. If we put government dollars into
General Motors, immediately, immediately, the day that money is
deposited, your bond holders all of a sudden, instead of being
willing to take 19 to 21 cents on the dollar, it is going to go
way up because all of a sudden, we are in the game. And as
Senator Bennett mentioned, we are patient and we print money
here. I mean, there is no end to it, unfortunately. So that is
a problem. That is a real problem.
The bond holders, on the other hand, as I mentioned, are
not going to take the kind of haircut they would unless Mr.
Gettelfinger at UAW takes a bigger haircut, and Mr.
Gettelfinger, you and I--I have to tell you, you have been an
honest broker in this, too, in the way that you have talked
with us and you have done a lot of things in the past, but the
past is the past. We have got companies here that are about to
go bankrupt and all of the contracts that you have negotiated,
if they go bankrupt, are out the window, toast. It is over. All
these VEBA arrangements, they are gone.
So let me just ask of this as a reasonable thing to sort of
put in place a bankruptcy-type situation where we would say
that your bond holders would have to take 30 cents on the
dollar, which is a 50 percent premium over where they are
trading today, by March 31; that the UAW, and there are two
representatives here that represent the folks in Tennessee and
I have found them great to work with. The problem is that the
rest of the citizens in our State and in Montana and in
Connecticut and Utah, they have a tough time thinking about us
loaning money to companies that are paying way, way above
industry standard to workers while they are not getting paid
that money. So in essence, they are subsidizing that through
their taxpayer dollars.
So my question would be, would it be reasonable to ask that
the UAW by that time have agreed to pay scales that are
equivalent to the transplants, and would it be reasonable that
the UAW not just do away with the jobs bank, which is a
situation where you continue to pay people whether they are
working or not, but they also do away with the sub piece?
Now, it is interesting sitting where I sit, because when
labor comes in, they say, by the way, will you ask the
companies this and make sure that they do that. And when the
companies come in, they send me e-mails back saying, by the
way, will you make sure that labor does away with these sub
payments because they are worse by far than the job banks. They
make us very, very uncompetitive.
So again, if money goes out the door, we lose that
leverage. It is over. The concern that Dr. Zandi has becomes
real. It is never going to happen. There is no way the bond
holders will do the things they need to do if they know the
spigot is unlimited, and there is no way you can survive
without a vastly changed capital structure.
So if the Senate and the House were to say, we will forward
the money to get you through March 31, period, and potentially
more will come with a trustee, if your bond holders have gotten
rid of their debt at 30 cents on the dollar, because if you
bankrupt, it is toast, and if the UAW will get their wages
rationalized to where we are paying exactly the same, not a
penny more, to what the transplants are making, would that be
something that you think would cause your companies to be where
they need to be for the long haul? And by the way, I would add
to that the VEBA payment of $21 billion is no small deal. That
is a big deal. You can't pay that right now. That is not
possible.
So I would add to that that at least half of that would
have to be equitized into the company to get the capital
structure where almost every analyst in the world is looking at
your company says you have to be to be that kind of going
entity that would actually allow people to invest in you in the
future, which is what you have got to have to be a successful
company. Is that something that would be reasonable?
Mr. Wagoner. Thanks, Senator Corker. I appreciate you
taking so much time to look into our plan and meet with our
people. It is helpful to have the conversations.
The plan we submitted, which you know because we went
through, I think tries to address exactly what you want, not as
specific in the amounts, either vis-a-vis the VEBA or the bond
holders, but frankly, your idea of advancing money and saying,
if you don't have these buttoned up, and you are putting more
terms on it than we were specific on by a certain date, it is
over, conceptually is one that I think would be constructive.
And I think, frankly, having our idea of then as we were
calling it the Federal oversight board as a forcing mechanism
to force all of the pieces to come together as a contingency
for getting this significant amount of additional money is a
valid one.
I guess I am, frankly, a little reluctant to give a
specific sort of set of parameters between Mr. Gettelfinger and
I because there are a lot of levers that we can pull to get
their costs down, and he indicated yesterday in his comments he
is willing to work with us. I guess if we were given a target
of the kind of savings from each bucket, I would prefer the
opportunity to work with him on that and figure out what is the
best way to do that.
Senator Corker. And I realize that you have--let me put it
a different way. If we put those stipulations in place and said
that by March 31, either you met those stipulations, which are
a lot like a bankruptcy proceeding, OK, a lot like it except
you are not bankrupt, and we said that if you don't do that by
March 31, you either have to pay us back 100 percent of the $10
billion that would have been forwarded or immediately file
Chapter 11, would you take our money?
Mr. Wagoner. Yes, I would. I am taking your point to be
that--and I really think it is consistent with what we filed
here, that----
Senator Corker. Well, you made a step in that direction,
and I will say that we got on the phone after your proposal
came out and sort of got back with all the analysts and they,
too, said it was thoughtful and it was a step in the right
direction, but that you couldn't be a going entity if that is
all you did, OK.
And so what I would like to do is to--I know that--here is
the rub that is probably going to exist. Look, I was a card-
carrying union person in my earlier life and I was a trustee on
a pension fund to make sure that people got good benefits and I
prided myself in paying our employees above industry standard
wages always. The problem is that you have this built-in
problem that is not going to be solved unless it is forced to
be solved, and there is no way that Mr. Gettelfinger, there is
no way that he is going to sit down and do the things that he
has to do to make you competitive unless he knows the end game
is bankruptcy. He is not going to do it. It is not possible. He
can't get his membership--it is not just that he is not the
best there is at Dale Carnegie attributes, OK. He can't make it
happen with his membership without that happening.
So I would just say to the Chairman, I realize that we will
have a partisan divide on some of these issues, but it sounds
to me like everybody's senses, if you will, are pretty alive
right now and are willing to do some things that might make
sense for the company. Usually when the government says, ``We
are here to help you,'' most people run away, and that is for a
good reason. I actually see that a big stick by the government
in this case could actually cause your company for the first
time in modern history to have the tools and the leverage to
actually do the things that will make you strong for the
future, because the fact of the matter is you have to build a
company that can do well during the troughs, right----
Mr. Wagoner. Sure.
Senator Corker. ----and that is not where you are, and then
do really well during the peaks because they come every seven
or 8 years.
Now, let us move over to----
Mr. Wagoner. Can I just make one comment, Senator?
Senator Corker. OK.
Mr. Wagoner. I agree with you, and I think what has played
out here is we have sort of redefined the trough, because if
you had asked me, and I suspect my colleagues, what is the
probability of the U.S. industry running to 12 million, we
would have said, boy, that sounds like a 1-percenter. So we are
going through a painful process of redefining the trough. I
think the opportunity is exactly as you indicate, OK, tough
times, you have really got to get leaned down. And when,
hopefully 1 day, the economy and the industry comes back, we
can be a very profitable enterprise and fund the advanced
technologies.
Your point about--and I am not here to defend Mr.
Gettelfinger and I am not even sure he wants me to, but I think
you have to look at what has been done between the companies
and the union over the last 3 years, and I don't necessarily
draw the conclusion that we can't continue to work together to
get that wage gap maybe with the same vehemence that you do. I
do think I need to recognize the fact that Mr. Gettelfinger has
done more to address competitiveness issues in the last 3 years
than I suspect have been done, I don't know, in the last 30 or
40. I just want to make sure that is fairly recognized.
Chairman Dodd. I sense that. I really do. The problem is
that with the industry, you are in a trending-down industry.
Each of you are losing market share within that downward
trending industry and you have got unsustainable balance
sheets, and so this is a draconian kind of thing that has to
occur. So let us move on.
Ford, of course, I think would like to benefit from any of
the negotiations that take place. I think they don't want to be
left out. If, in fact, your contract changes, I think they
probably want their contract to change.
But let me move to Chrysler then. I know that while this is
happening, you are going to be going to spas and getting
facials and hopefully finding someone to marry you, OK, but in
the interim----
Mr. Nardelli. I have been married for 38 years. I am doing
just fine.
Senator Corker. I am talking about the company. So what is
it that--what is the right thing to do as it relates to your
company when the best thing for our country and the best thing
for the automobile industry and the best thing for the
wonderful employees that work at your company is for you all to
go away as a stand-alone entity? So what, as we negotiate this
deal, is the best thing for us to do?
Mr. Nardelli. Well, if we use your suggestion, then the
best thing, I think, for you to do and for the auto industry is
to provide us the $4 billion that we said we needed to get us
through March 31.
Senator Corker. And you would agree to all of the things
that just were said? I don't know what we would do about--your
debt issue is very different, obviously----
Mr. Nardelli. It is all secured----
Senator Corker. Yes----
Mr. Nardelli. ----and so it is much different than an
unsecured. But this is the Committee that sets the rules, so if
you have got the power to consolidate an industry, you have got
the power to work on, I guess, secured debt.
Senator Corker. OK. So your debt is all unsecured----
Mr. Nardelli. Secured.
Senator Corker. Secured. So the problem, the one last
component that is very problematic is we don't have a way--GM
has about $20 billion in unsecured debt, but candidly, the
security we would have is kind of problematic. I mean, it is
franchise. It is the kind of stuff that goes away when the
company goes away, so there is not a lot to secure, is there?
Is there much real estate to go with that?
Mr. Wagoner. No, primarily trademarks and overseas
subsidiaries, which frankly could have some value under certain
circumstances.
Senator Corker. Yes.
Mr. Nardelli. So the point, Senator, is ours is secured and
I think this Committee, who has oversight over lending and
banking, would have a hell of a time if they just unilaterally
reject that on any future financial company's putting money
into a company and getting secured positions. But again, you
guys have the power to make that go away, I guess.
Senator Corker. Mr. Chairman, I thank you. I just want to
say that, to me, making them equivalent to the transplants
means all the things. It means sub. It means 50 percent on VEBA
equitized. It means all those things. But certainly to me that
is an interesting thing that apparently all three of these
folks, and I don't know what Mr. Gettelfinger and Mr. Wagoner
will talk about afterwards, but I think there is a potential
here at least for some serious discussion. I thank you for the
hearing and I thank all of you for participating.
Chairman Dodd. Well, I thank you, Senator, and again, I am
reading from an article here, and I presume you may have seen
it, as well, just talking about that equivalency. The base
wages between the Big Three and foreign companies are roughly
comparable, with a veteran UAW member earning $28 an hour in
the Big Three compared to about $25 an hour at Toyota's plant
in Georgetown, Kentucky. Toyota pays less at other American
factories. So there is some disparity, but there is a lot of
comparability, too, I am told. Now, again, I am relying on some
documentation here. I appreciate the point.
Let me say to our guests here at our hearing that Senator
Bob Corker, while a new member of the Senate and sitting in the
seat I sat in not that many years ago at the very end of the
table, works as hard as any Member of this Committee does to
understand issues that come before us. And as the Chairman of
this Committee, I am very grateful to him. He was invaluable
back several months ago in working through issues that were
tremendously complex and difficult. You are a workhorse and I
am pleased to have you a part of this Committee, and your
suggestions and ideas and always trying to figure out a way for
us to get things done.
This Committee doesn't function well on a partisan basis.
In the 22 months I have been Chairman of it, we have never
acted that way. On virtually every issue we come out of this
Committee with, we try to seek consensus and work forward, and
Bob Bennett falls into that category, as well, and most members
here. My Democratic colleagues have been tremendously helpful.
So I am very grateful to him and the rest of our colleagues.
We have kept you here for 6 hours today. That is a long
time, and I know you have got a full day tomorrow in the other
body, in the House, to deal with these issues. Obviously, we
have got some challenges in front of us over these coming days
to figure out how to move forward.
And while not predicting again a consensus here, I think
you get a sense that all of us appreciate up here that inaction
is unacceptable. I think that is a--obviously, I can't speak
for everyone, but my sense is that that is how many of us feel.
That is not an acceptable alternative. We also are not about to
write a check and just hand it over. That is not going to
happen, either, I promise you that.
The question is, can we in the hours given us here do a lot
of the things we have talked about today? Can we get some help,
frankly, from the administration level, where, frankly, I am
very disappointed that we didn't get participation today, that
there has been a flat-out rejection of even stepping up with us
to talk about this, that this falls all in our lap up here as
Democrats and Republicans in the waning hours of a Congress
with hours to go to try and answer this question, given the
implications.
I think most people concede it is probably the case, that
if this were to collapse, to use your language, Dr. Zandi, it
is a catastrophe, and I worry about that. Maybe history would
prove us wrong, but that is a hell of a bet to make with one
out of every ten jobs in this country and the implications if
you are wrong here.
And so we need to try and sit down over these next 24, 48
hours or so and see what we can do to pull something together
here to make some sense to allow us to get to a point where we
can do a lot of the things we have talked about here today. And
I take Bob Corker's point well. I realize you are right. When
you start writing checks and then try to do something after the
fact, it gets very hard. And to coin a phrase, nothing
concentrates the mind like a death sentence and we are looking
at a death sentence here if we don't respond intelligently and
prudently.
So I am very grateful to all of you. You have come back
again, and obviously you needed to be here, given the reaction
that people have. And I will make the point I made at the
outset. Those of us here who helped write this emergency
economic stabilization bill, in retrospect, I thought we gave
the kind of accountability standards and so forth that would
see prudent practices and I am disappointed, to put it mildly,
we haven't seen a lot of that, but intend to make sure that
those people are back before us here explaining why it is we
are making some of these decisions without greater
accountability. And I think those who said it earlier said it
well.
You are probably in a sense here paying a price because of
how some of these other matters have been handled, and
therefore we are sitting here demanding greater accountability
and greater protections for taxpayers in the midst of all of
this.
So I plan as Chairman of the Committee, and I have talked
to many members already, they are going to be here over the
next day or two or three to meet with the leadership of the
House and the Senate to see what possibly can be done here to
address this. But as the Chairman of the Committee, I want to
express my gratitude to all of you for coming out today and
sharing your thoughts with us. And as has been said, these
proposals, these plans were a giant step forward from where we
were a couple of weeks ago, and obviously more needs to be
done, but my intention as Chairman of this Committee is not to
walk away from this. We are not going to leave town without
trying. I am not a miracle worker, no one is here. But I am not
going to pack a bag and leave and go back to Connecticut. I am
going to stay here and try and get this done.
So I thank all of you for being here and we look forward to
your continuing cooperation and to work with us.
The Committee will stand adjourned.
[Whereupon, at 3:45 p.m., the hearing was adjourned.]
[Prepared statements and response to written questions
supplied for the record follow:]
PREPARED STATEMENT OF SENATOR DANIEL K. AKAKA
Mr. Chairman, thank you for conducting this hearing today. I am
greatly concerned about the potential consequences of the collapse of
the domestic automobile industry. With more than 730,000 workers
employed in the automotive vehicle and parts industries, the financial
condition of Chrysler, Ford, and General Motors is significant to our
economy. These automakers are tied to suppliers, dealers, bondholders,
and many others whose welfare is directly linked to their solvency.
An auto industry collapse would be devastating, particularly during
the current recession. However, we must make sure that the assistance
is coupled with business practice changes that ensure the near and long
term vitality of these companies. I look forward to continuing to work
with you and the other Members of this Committee to bring about
enactment of legislation that will help stabilize the financial
condition of our domestic automakers. Thank you, Mr. Chairman.
PREPARED STATEMENT OF GENE L. DODARO
Acting Comptroller General of the United States,
Government Accountability Office
December 4, 2008
PREPARED STATEMENT OF G. RICHARD WAGONER, JR.
Chairman and Chief Executive Officer,
General Motors
December 4, 2008
Thank you, Mr. Chairman, I appreciate the opportunity to return to
this Committee to speak about the urgent need for federal assistance
for General Motors and the domestic auto industry. It's fair to say
that last month's hearings were difficult for us, but we learned a lot.
For sure, we took very seriously the concerns raised by the Members of
this Committee, and that has accelerated a healthy internal review, and
a lot of good discussion with our partners and stakeholders.
It's no secret that GM, like our fellow domestic automakers, has
struggled in the face of increased competition from foreign
manufacturers with lower wage, healthcare, and benefit costs. We made
decisions that were right for the times, collective bargaining
agreements, investments in full-size trucks and SUVs that consumers
wanted, and others. But we made mistakes, as well, such as failing to
build sufficient flexibility into our operations, and not moving fast
enough to invest in smaller, more fuel-efficient vehicles for the U.S.
market.
We have addressed these and many other issues in the plan for long-
term viability that we submitted to this Committee 2 days ago. Our plan
demonstrates why GM needs temporary government funding, how it will be
used, how we intend to repay the taxpayers, and why such funding is
necessary for the company, and beneficial to the U.S. economy.
Our plan dramatically accelerates and expands the restructuring
that we've been driving in North America for the past several years.
It's a blueprint for creating a new General Motors, one that is lean,
profitable, self-sustaining, and fully committed to product excellence
and technology leadership, especially in alternative propulsion.
Key elements of our plan include:
Increased production of hybrid, flex-fuel, and other fuel-
efficient vehicles, and an increased commitment to new, energy-
efficient technologies like those in the Chevy Volt.
Significant changes to our market and retail operations,
including a reduction in brands, models, and retail outlets.
Further manufacturing and structural cost reductions.
Full labor cost competitiveness with foreign manufacturers
in the U.S. by no later than 2012.
Significant capital restructuring involving our debt and
post-retirement healthcare obligations.
Continued suspension of GM's common stock dividend for the
life of any federal loans associated with the plan.
Changes in executive compensation. For example, I will
reduce my salary to $1, Board members have elected to reduce
their annual retainer to $1, and the next four most senior
officers will reduce their total cash compensation by about 50
percent in 2009.
And as of this week, the cessation of all corporate
aircraft operations.
These and other actions detailed in our plan affect everyone
associated with GM, but we believe they're necessary to position the
company for long-term success. And we believe this success is fully
achievable, if we are able to weather the ongoing global financial
crisis and the lowest per-capita U.S. vehicle sales in 50 years.
Toward that end, our plan respectfully requests that the Federal
Government make available $12 billion in short-term loans, along with a
$6 billion line of credit in the event the current severe market
downturn persists. Specifically, we're seeking an immediate loan of $4
billion, and a second draw of up to $4 billion in January. Our intent
is to begin to repay the loans as soon as 2011, and under baseline
industry assumptions, fully repay them by 2012. And should GM share
prices increase as a result of the plan, warrants issued as part of the
loans would allow taxpayers to benefit.
Our plan also proposes the creation of a Federal Oversight Board to
help facilitate restructuring negotiations with a range of
stakeholders. This Board would oversee the loans and restructuring
plan, and protect taxpayer investments, in part by assuring that loans
are made contingent on GM achieving its benchmarks.
Let me close by noting that GM has been an important part of
American culture for 100 years, and for most of that time, we've stood
as the world's leading automaker. We're here today because we made
mistakes. And we're here because forces beyond our control have pushed
us to the brink. Most importantly, we're here because saving General
Motors, and all this company represents, is a job worth doing.
Thank you. I look forward to your questions.
EXECUTIVE SUMMARY
General Motors Restructuring Plan For Long-Term Viability
Overview
This Restructuring Plan is a blueprint for creating a new GM, one
that is lean, profitable, self-sustaining and fully competitive. The
Plan calls for:
A dramatic shift in the company's U.S. portfolio, with 22
of 24 new vehicle launches in 2009-2012 being more fuel-
efficient cars and crossovers
Full compliance with the 2007 Energy Independence and
Security Act, and extensive investment in a wide array of
advanced propulsion technologies
Reduction in brands, nameplates, and retail outlets, to
focus available resources and growth strategies on the
company's profitable operations
Full labor cost competitiveness with foreign manufacturers
in the U.S. by no later than 2012
Further manufacturing and structural cost reductions
through increased productivity and employment reductions
Balance sheet restructuring and supplementing liquidity via
temporary Federal assistance
Temporary Federal Bridge Loans
GM is seeking a term bridge loan facility from the Federal
Government of $12 billion to cover operating requirements under a
baseline forecast of 12 million U.S. industry vehicle sales for 2009.
In addition, GM is seeking a revolving credit facility of $6 billion
that could be drawn should severe industry conditions continue,
resulting in sales of 10.5 million total vehicles in 2009.
This bridge loan is expected to be fully repaid by 2012 under the
baseline industry assumptions. Also, warrants issued as part of the
loans would allow taxpayers to benefit from growth in the company's
share price that might result from successful completion of the plan.
GM anticipates an initial draw of $4 billion in December 2008 with the
next draw of $8 billion by March 2009. Any draws would be conditioned
on achieving specific restructuring benchmarks.
Product Portfolio and Fuel Efficiency
While remaining a full-line manufacturer, GM will substantially
change its product mix over the next 4 years, and launch predominately
high mileage, energy-efficient cars and crossovers. In addition, the
Chevy Volt, which can travel up to 40 miles on electricity alone, is
scheduled for production in 2010, with other versions to follow.
By 2012, more than half of GM vehicles will be flex-fuel capable,
and the company will offer 15 hybrid models. GM will continue
development of hydrogen fuel cell technology, which, when commercially
deployed, will reduce automotive emissions to just water vapor. GM
expects to become a significant creator of green jobs in the United
States, as well helping suppliers and dealers transform the U.S.
economy.
Market and Retail Operations
In the U.S., GM will focus its product development and marketing
efforts on four core brands - Chevrolet, Cadillac, Buick and GMC.
Pontiac will be a specialty brand with reduced product offerings within
the Buick-Pontiac-GMC channel. Hummer has recently been put under
strategic review, which includes the possible sale of the brand, and GM
will immediately undertake a strategic review of the Saab brand, and
explore alternatives for the Saturn brand.
Manufacturing and Structural Costs
GM will accelerate its current efforts to reduce manufacturing and
structural costs, building on significant progress made over the past
several years. With planned assembly plant consolidations, further
productivity improvements in the plan, and additional changes to be
negotiated, GM's wages and benefits for both current workers and new
hires will be fully competitive with Toyota by 2012.
Balance Sheet Restructuring
GM plans to engage current lenders, bond holders and its unions to
significantly reduce the debt currently carried on its balance sheet.
GM's plan would preserve the status of existing trade creditors and
honor all outstanding warranty obligations to both dealers and
consumers, in the U.S. and globally.
Compensation and Dividends
The plan calls for shared sacrifice, including further reduction in
the number of executives and total compensation paid to senior
leadership. For example, the chairman and CEO will reduce his salary to
$1 per year. The common stock dividend will remain suspended during the
life of the loans.
Federal Oversight Board
Given the importance and urgency of this restructuring for GM,
other domestic manufacturers and the U.S. economy as a whole, the
company supports the formation of a Federal oversight board. The board
would help facilitate restructuring negotiations with a range of
stakeholders.
Sustainability
Once GM has completed the restructuring actions laid out in the
plan, the company will be able to operate profitably at industry
volumes between 12.5 and 13 million vehicles. This is substantially
below the 17 million industry levels averaged over the last nine years,
so it is considered to be a reasonably conservative assumption for
gauging liquidity needs.
The complete Plan is attached to this testimony. I look forward to
working with your Committee on legislation that addresses the liquidity
challenges facing GM and the auto industry.
PREPARED STATEMENT OF RON GETTELFINGER
President,
International Union, United Automobile, Aerospace, and Agricultural
Implement Workers of America
December 4, 2008
Mr. Chairman, my name is Ron Gettelfinger. I am President of the
International Union, United Automobile, Aerospace and Agricultural
Implement Workers of America (UAW). The UAW represents one million
active and retired members, many of whom work for or receive retirement
benefits from the Detroit-based auto companies and auto parts suppliers
across the United States. We welcome the opportunity to appear before
this Committee to present our views on the state of the domestic
automobile industry: Part II.
The UAW believes the situation at GM, Ford, and Chrysler is
extremely dire. As is evident from the materials which have been
submitted by the companies in response to the letter from Speaker
Pelosi and Majority Leader Reid, it is imperative that the federal
government act this month to provide an emergency bridge loan to the
domestic auto companies. Without such assistance, GM could run out of
funds by the end of the year, and Chrysler soon thereafter. These
companies would then be forced to liquidate, ceasing all business
operations. The collapse of these companies would inevitably drag down
numerous auto parts suppliers, which in turn could lead to the collapse
of Ford.
The UAW appreciates the desire by Congress, as expressed in the
letter from Speaker Pelosi and Majority Leader Reid, to ensure that any
assistance from the Federal Government is conditioned on strict
accountability by the companies and a demonstration that they can be
viable businesses in the future. We fully support both of these key
principles.
Specifically, the UAW supports conditioning any emergency bridge
loan on strict accountability measures, including:
tough limits on executive compensation, prohibiting golden
parachutes and other abuses, and making it clear that top
executives must share in any sacrifices;
a prohibition on dividend payments by the companies;
giving the federal government an equity stake in the
companies so that taxpayers are protected; and
establishing an Advisory Board to oversee the operations of
the companies to ensure that all funds from the emergency
bridge loan are spent in the United States, that the companies
are pursuing viable restructuring plans, and that the companies
are meeting requirements to produce advanced, more fuel
efficient vehicles.
We are prepared to work with Members of this Committee to
incorporate other accountability requirements that may be appropriate.
In addition, the UAW supports conditioning any emergency bridge
loan 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 bondholders, suppliers, dealers, workers and retirees, and
management--must come to the table and share in the sacrifices that
will be needed.
The UAW and the workers and retirees we represent are prepared to
do our part to ensure that the companies can continue as viable
operations. As indicated in our previous testimony, workers and
retirees have already stepped forward and made enormous sacrifices.
In 2005 the UAW reopened its contract mid-term and accepted
cuts in wages for active workers and health care benefits for
retirees.
In the 2007 contract the UAW agreed to slash wages for new
workers by 50 percent to about $14 per hour, and to exclude new
workers from the traditional health care and pension plans. The
UAW also allowed the companies to outsource cleaning work at
even lower rates.
Under the 2007 contract, beginning January 1, 2010, the
liabilities for health care for existing retirees will be
transferred from the companies to an independent VEBA fund.
Taken together, the changes in the 2005 and 2007 contract
reduced the companies' liabilities for retiree health care
benefits by 50 percent.
As a result of the 2005 and 2007 contracts, workers have
not received any base wage increase since 2005 at GM and Ford,
and since 2006 at Chrysler. All of these workers will not
receive any increase through the end of the contract in 2011.
Workers have also accepted reductions in cost of living
adjustments.
New local operating agreements at many facilities provided
dramatic flexibilities and reductions in classifications, and
have saved the companies billions of dollars.
Reforms in the 2007 contract have largely eliminated the
jobs banks.
Since 2003 downsizing by the companies has reduced their
workforce by 150,000, resulting in enormous savings for GM,
Ford, and Chrysler.
Thanks to the changes in the 2005 and 2007 contracts, and changes
that have subsequently been agreed to by the UAW, the labor cost gap
with the foreign transplant operations will be largely or completely
eliminated when the contracts 3 are fully implemented. Industry
observers applauded the sacrifices made by workers and retirees,
calling the 2007 contract a ``transformational'' agreement.
The UAW is continuing to negotiate with the domestic auto companies
on an ongoing basis over ways to make their operations more efficient
and competitive. We recognize that the current crisis may require all
stakeholders, including the workers and retirees, to make further
sacrifices to ensure the future viability of the companies. We are
willing to do our part. In particular, we recognize that the
contributions owed by the companies to the retiree health care VEBA
fund may need to be spread out. The UAW has retained outside experts to
work with us on how this can be accomplished, while still protecting
the retirees. We also recognize that adjustments may need to be made in
other areas.
But the UAW vigorously 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
costs of the domestic auto companies. So the current difficulties
facing the Detroit-based auto companies cannot be blamed on workers and
retirees.
Contrary to an often-repeated myth, UAW members at GM, Ford, and
Chrysler are not paid $73 an hour. The truth is, wages for UAW members
range from about $14 per hour for newly hired workers to $28 per hour
for assemblers. The $73 an hour figure is outdated and inaccurate. It
includes not only the costs of health care, pensions and other
compensation for current workers, but also includes the costs of
pensions and health care for all of the retired workers, spread out
over the active workforce. Obviously, active workers do not receive any
of this compensation, so it is simply not accurate to describe it as
part of their ``earnings.'' Furthermore, as previously indicated, the
overall labor costs at the Detroit-based auto companies were
dramatically lowered by the changes in the 2005 and 2007 contracts,
which largely or completely eliminated the gap with the foreign
transplant operations.
The UAW submits that it is not feasible for Congress to hammer out
the details of a complete restructuring plan during the coming week.
There is simply not enough time to work through the many difficult and
complex issues associated with all of the key stakeholders, including
equity and bondholders, suppliers, dealers, management, workers and
retirees, as well as changes in the business operations of the
companies.
What Congress can and should do is to 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 current
environment a Chapter 11 reorganization--even a so-called ``pre-
packaged" bankruptcy--is simply not a viable option for restructuring
the Detroit-based auto companies. As previously indicated, research has
indicated that the public will not buy vehicles from a company in
bankruptcy. It also is doubtful that the companies could obtain debtor-
in-possession financing to operate during a bankruptcy. In addition,
attached to this testimony is a more detailed analysis prepared with
the assistance of experienced bankruptcy practitioners explaining why a
``pre-packaged'' 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. Thus, the UAW wishes to underscore that any
bankruptcy filings by the domestic auto companies at this time would
inevitably lead to Chapter 7 liquidations and the cessation of all
business operations.
The collapse of the domestic auto companies would have disastrous
consequences for millions of workers and retirees and for the entire
country.
Hundreds of thousands of workers would directly lose their
jobs at GM, Ford, and Chrysler, and a total of three million
workers would see their jobs eliminated at suppliers,
dealerships and the thousands of other businesses that depend
on the auto industry.
One million retirees could lose part of their pension
benefits, and would also face the complete elimination of their
health insurance coverage, an especially harsh blow to the 40
percent who are younger than 65 and not yet eligible for
Medicare.
The Pension Benefit Guarantee Corporation could be saddled
with enormous pension liabilities, jeopardizing its ability to
protect the pensions of millions of other workers and retirees.
To prevent this from happening, the federal government could be
forced to pay for a costly bailout of the PBGC. The federal
government would also be liable for a 65 percent health care
tax credit for pre-65 retirees from the auto companies, at a
cost of as much as $2 billion per year.
Revenues to the Federal, State, and local governments would
drop sharply, forcing cuts in vital social services at a time
when they are urgently needed.
The ripple effects from the collapse of the Detroit-based
auto companies would deal a serious blow to the entire economy,
making the current recession much deeper and longer.
There also would be a serious negative impact on many
financial institutions that hold large amounts of debt from the
Detroit-based auto companies and their auto finance associates.
This could pose a systemic danger to our already weakened
financial sector.
For all of these reasons, the UAW submits it is imperative that
Congress and the Bush administration act next week to provide an
emergency bridge loan to the Detroit-based auto companies. The
consequences of inaction are simply too devastating; the economic and
human toll are too costly.
The UAW believes that the recent actions by the federal government
to provide an enormous bailout to Citigroup reinforce the case for
providing an emergency bridge loan to the Detroit-based auto companies.
The total assistance provided to Citigroup will dwarf that being sought
by the domestic auto companies. Citigroup received this assistance
without being required to submit any ``plan'' for changing its
operations or demonstrating its future viability. It was not required
to change its management. And it is still able to continue paying
bonuses and other forms of lucrative executive compensation.
If the Federal Government can provide this type of blank check to
Wall Street, the UAW submits that Main Street is no less deserving of
assistance. Since the domestic auto companies have come forward with
detailed plans relating to accountability and their future viability,
there is simply no justification for withholding the emergency bridge
loan that is necessary for them to continue operations.
The UAW also notes that other governments around the world are
actively considering programs to provide emergency assistance to their
auto industries. In particular, the European Union is considering a $51
billion loan program for automakers. And there are ongoing discussions
with Germany, Great Britain, Sweden, Belgium, Poland, South Korea,
China, and other nations about steps their governments can take to
assist their auto industries. Clearly, other governments recognize the
economic importance of maintaining their auto industries. The UAW
submits that the economic importance of GM, Ford, and Chrysler to the
U.S. economy is no less important and no less deserving of assistance.
It is not enough, however, for the federal government to provide an
emergency bridge loan to the Detroit-based auto companies, and to
oversee and facilitate the restructuring of the companies. The 111th
Congress and the Obama administration have a responsibility to pursue
policies in a number of areas that will be critically important to the
future viability of the domestic auto companies, as well as the well
being of our entire nation.
First, the UAW is very pleased that Congressional leaders and the
Obama transition staff are already making plans to move forward quickly
with a major economic stimulus package that will create jobs and give a
boost to the entire economy. We believe this is urgently needed to
prevent the economy from slipping into a deeper and more serious
recession. This is particularly important for the auto sector. In order
for the Detroit-based auto companies to succeed, it is vital that auto
sales rebound from the record low levels we have seen in recent months.
The single most important thing that can be done to increase auto sales
is to reinvigorate the overall economy.
Second, the UAW believes it is critically important that Congress
and the Obama administration move forward quickly with plans to reform
our broken health care system, and to put in place programs that will
guarantee health insurance coverage for all Americans, contain costs,
ensure quality of care, and establish more equitable financing
mechanisms. In particular, we believe any health care reform initiative
should include proposals to address the challenges associated with
providing health care to the pre-Medicare population aged 55-65.
There can be no doubt that one of the major financial challenges
facing the Detroit-based auto companies in future years is the cost of
providing health care to almost a million retirees. Although the 2005
and 2007 contracts greatly reduced the companies' retiree health care
liabilities, they are still enormous and a major problem that hinders
the ability of the companies to obtain financing from private lenders.
All of the other major auto producing nations have national health
care systems that spread the costs of providing health care across
their societies. As a result, the automakers in these countries are not
burdened by retiree health care legacy costs. Accordingly, the UAW is
hopeful that the enactment of national health care reform in the United
States would help to establish a level playing field among all
employers, and alleviate the retiree health care legacy costs facing
the Detroit-based auto companies.
Third, during the coming year Congress and the Obama administration
are likely to consider major new initiatives dealing with energy
security and climate change. The UAW strongly supports prompt action in
both of these vital areas. Specifically, besides requiring automakers
to comply with the tougher new fuel economy standards that were enacted
in 2007, we believe Congress and the Obama administration should take
steps to ensure that fuel economy improvements continue in the years
following 2020, and that the companies move expeditiously to introduce
advanced technology vehicles. In particular, we support an aggressive
program to increase domestic production of plug-in hybrids and their
key components, and to expand the infrastructure that will be needed to
support these vehicles. To help achieve these objectives, Congress and
the Obama administration should make sure that the Section 136 Advanced
Technology Vehicles Manufacturing Incentive Program (ATVMIP) continues
to be fully funded, and that additional resources are provided to
ensure that production of advanced, more fuel efficient vehicles and
their key components is ramped up quickly. In addition, the UAW
strongly supports the enactment of an economy-wide cap-and-trade
program to aggressively reduce emissions of greenhouse gases that are
causing climate change.
Although these initiatives pose challenges for the auto industry,
the UAW also believes they can provide great opportunities. Properly
structured, these initiatives can not only ensure that our nation
reduces its consumption of oil and emissions of greenhouse gas
emissions. They also can ensure that the more fuel efficient vehicles
of the future and their key components are built in the United States
by the domestic auto companies and American workers. In effect, these
initiatives can be an important part of the restructuring that is
necessary to ensure the future viability of the domestic auto
companies.
Fourth, Congress and the Obama administration must make sure that
our nation's trade policies promote fair trade, not so-called ``free
trade'' that fails to provide a level playing field and instead places
our domestic automakers at a significant competitive disadvantage. In
particular, prompt action needs to be taken to eliminate unfair
currency manipulation by China and Japan. In addition, Congress and the
Obama administration should insist that the U.S.-Korea free trade
agreement must be renegotiated to require that Korea dismantle the non-
tariff barriers that have kept its market closed to U.S.-built
automotive products, before it is granted any further access to the
U.S. market.
By pursuing all of these policies, Congress and the Obama
administration can benefit our entire country. The UAW also believes
that these policies can provide a basis under which a restructured
domestic auto industry can remain viable and strong in the coming
years.
In conclusion, the UAW appreciates the opportunity to testify
before this Committee on the state of the domestic automobile industry:
Part II. We strongly urge this Committee and the entire Congress to act
promptly to approve an emergency bridge loan to the Detroit-based auto
companies to enable them to continue operations and to avoid the
disastrous consequences that their liquidation would involve for
millions of workers and retirees and for our entire Nation.
Pre-Packaged Bankruptcy Is Not the Path To Revitalize the Domestic Auto
Companies
Some commentators have suggested a pre-packaged bankruptcy as an
alternative to (or as part of) government-backed relief for the
domestic auto companies. But the promoters have not explained how pre-
packaged bankruptcy procedures can be successfully brought to bear in a
case with the complexity and scope of one or all of the Detroit-based
auto companies. Indeed, bankruptcy experts are skeptical that pre-
packaged bankruptcy can work. As one noted business writer who has
consulted with bankruptcy experts has concluded, ``it makes no sense.''
\1\
---------------------------------------------------------------------------
\1\ Joe Nocera, ``Road Ahead Is Long for G.M.,'' The New York
Times, November 22, 2008.
---------------------------------------------------------------------------
In a pre-packaged bankruptcy, a company negotiates a financial
restructuring with its major creditors outside of bankruptcy, lines up
all or most of its major creditors in support of the proposed debt
restructuring, and then uses the bankruptcy process to achieve a quick,
consensual approval of its repayment plan. Any minority, dissenting
creditors are out-voted by the pre-arranged majority support for the
plan. Bankruptcy law permits pre-packaged deals as an efficient form of
business restructuring.
Pre-packs can work with financial restructurings, i.e., those that
do not involve substantial operational issues. Where a company must
restructure its balance sheet, but the business is otherwise sound,
large creditors holding secured and unsecured debt are more likely to
agree on the business fundamentals, and therefore more likely to reach
a negotiated agreement on restructuring terms--for example, swapping
debt for equity or extending debt maturities. But the domestic
automobile manufacturers are in the midst of a much broader
restructuring which is, to a large degree, operational. They are
shifting their product mix; they are developing new-technology
vehicles; and they are revamping their production locations. None of
these issues can realistically be addressed in a pre-packaged
bankruptcy, which is aimed at obtaining the consent of creditors to
renegotiated terms on their financial debt instruments. Pre-packs were
not intended for operational restructuring scenarios.
In fact, no one has explained how the basic elements of a pre-
packaged bankruptcy can be achieved in the case of the domestic auto
companies. Who are the debt holders, and can enough of them agree on
negotiated terms? The New York Times reports that the domestic
automakers owe more than $100 billion to banks and bondholders. The
originating banks have probably syndicated, or sold off, pieces of the
debt to others. Some $56 billion in new debt securities was reportedly
issued to investors such as pension funds, insurancecompanies and hedge
funds. \2\ For a pre-packaged bankruptcy to work--or even get
organized--the lion's share of the outstanding debt holders need to be
identified, agree to come to the table, and then agree on restructuring
terms. This process would be a lengthy and expensive one, undertaken in
an uncertain and weak economic environment.
---------------------------------------------------------------------------
\2\ Zachary Kouwe and Louse Story, ``Big Three's Troubles May
Touch Financial Sector,'' The New York Times, November 24, 2008.
---------------------------------------------------------------------------
The same types of problems would exist for other claimants. The
various creditors engaged in the process would likely want to see a
business plan before negotiating restructured terms. Thus, the pre-
packaged bankruptcy would be the proverbial tail wagging the dog.
Assumptions made by some proponents of a pre-pack about whether
stakeholders will participate in a pre-packaged effort and what the
likely outcomes would be are unsupported supposition. Also unanswered
are questions about how a bankruptcy filing would deal with GMAC and
the other auto finance entities or the companies' overseas operations.
A pre-packaged bankruptcy could disintegrate into a regular,
contested bankruptcy proceeding. First, the likelihood of obtaining the
requisite consents is already challenged by the size, potential scope,
and lack of transparency of the debt holders. Second, pre-packs must
follow solicitation rules which are governed by securities laws, not
bankruptcy law. The company would have to put together a solicitation
that successfully navigates these rules. And, once in bankruptcy court,
the efficient nature of the approval process would depend on sufficient
compliance with the solicitation rules, and a sufficient supporting
majority, to overcome challenges by dissenting creditors or others. If
the approval process became prolonged, then the advantages of speed and
efficiency would be lost.
Pre-packaged bankruptcy would not eliminate the risks associated
with a bankruptcy filing. It would not eliminate the threat of systemic
risk resulting from the effects of a bankruptcy by one or all of the
domestic automakers on the financial markets. \3\ Moreover, a pre-
packaged bankruptcy is still a bankruptcy as far as customers are
concerned. The promoters have not explained how pre-packaged bankruptcy
would allay the concerns of the majority of consumers who have said
they would not buy an automobile from a company in bankruptcy. Given
this consumer reaction, a bankruptcy filing by any one of the domestic
automakers in the current environment is a dangerous ``bet the
economy'' proposition.
---------------------------------------------------------------------------
\3\ Zachary Kouwe and Louse Story, ``Big Three's Troubles May
Touch Financial Sector,'' The New York Times, November 24, 2008.
---------------------------------------------------------------------------
None of the elements of an auto industry restructuring require a
bankruptcy proceeding. Restructuring milestones, repayment terms,
taxpayer protections and other conditions of a loan can be established
through legislation. Moreover, legislation can establish a process
under which the actual restructuring of the domestic auto companies is
supervised by the next administration. This can ensure that all
stakeholders come to the table and share in the sacrifices that will be
required, and that the domestic auto companies will be viable
businesses after the restructuring is completed. In contrast, putting
the fate of an auto industry restructuring in the hands of a bankruptcy
court, even if a pre-packaged plan were realistically possible, would
put narrow creditor interests ahead of all other stakeholders and ahead
of important national concerns, including health care and pension
policy, energy and transportation policy, and the negative effects of
the economic downturn. These are interests that must be addressed and
balanced by our elected government.
______
PREPARED STATEMENT OF ALAN R. MULALLY
President and Chief Executive Officer,
Ford Motor Company
December 4, 2008
Mr. Chairman, Senator Shelby, and Members of the Committee. Thank
you for the opportunity to share Ford's plan. We appreciate the valid
concerns raised by Congress about the future viability of the industry.
We hope that our submission and today's testimony will help instill
confidence in Ford's commitment to change, including our accountability
and shared sacrifice during this difficult economic period.
On Tuesday, Ford Motor Company submitted to your Committee our
comprehensive business plan, which details the company's path to
profitability through an acceleration of our aggressive restructuring
actions and the introduction of more high-quality, safe and fuel-
efficient vehicles-including a broader range of hybrid-electric
vehicles and the introduction of advanced plug-in hybrids and full
electric vehicles.
In addition to our plan, we are also here today to request support
for the industry. In the near-term, Ford does not require access to a
government bridge loan. However, we request a credit line of $9 billion
as a critical backstop or safeguard against worsening conditions as we
drive transformational change in our company.
One Plan: Beginning earlier this decade, we recognized the
challenges the domestic auto industry faced and began implementing a
disciplined global business plan to completely transform Ford, to
improve our efficiency, cut costs and champion innovation. Our plan
builds on the success we have seen in the past 2 years by accelerating
the development of our new products that customers want and value. Our
plan is anchored by four key priorities:
Aggressively restructure to operate profitably at the
current demand and changing model mix;
Accelerate development of new products our customers want
and value;
Finance our plan and improve our balance sheet; and
Work together effectively as one team, leveraging our
global assets.
One Goal: Our team and plan is dedicated and focused on delivering
profitable growth for all. While market, economic and business
conditions recently have deteriorated worldwide at a rate never before
seen, we have made substantial progress since we launched our plan in
late 2006:
We obtained financing by going to the markets in December
2006 to raise $23.5 billion in liquidity, consisting of $18.5
billion of senior secured debt and credit facilities,
substantially secured by all of our domestic assets, and $5
billion of unsecured convertible debt.
We have implemented our strategy to simplify our brand
structure. As a result, we sold Aston Martin, Jaguar, Land
Rover and the majority of our ownership of Mazda, and we're
considering our options for Volvo. We have divested other non-
core assets. These sales have also helped our overall liquidity
and generated $3.7 billion in additional capital to re-invest
in the business.
To achieve maximum efficiency, we will have reduced our
North American operating costs by more than $5 billion between
year end 2005 and 2008.
We have taken painful downsizing actions to match capacity
and market share in North America, including closing 17 plants
and downsizing by 12,000 salaried employees and 44,000 hourly
employees.
Ford is committed to building a sustainable future for the benefit
of all Americans, and we believe Ford is on the right path to achieve
this vision. I know the Members of the Committee have had an
opportunity to review our plans over the last 2 days, so I will
highlight new details about Ford's future plans and forecasts:
Ford's plan calls for an investment of approximately $14
billion in the U.S. on advanced technologies and products to
improve fuel efficiency during the next 7 years.
Based on current business planning assumptions--including
U.S. industry sales for 2009, 2010, and 2011 of 12.5 million
units, 14.5 million units and 15.5 million units,
respectively--Ford expects both our overall and our North
American automotive business pre-tax results to be break even
or profitable in 2011.
As part of a continuing focus on building the Ford brand,
we are exploring strategic options for Volvo Car Corporation,
including the possible sale of the Sweden-based premium
automaker. The strategic review is in line with a broad range
of actions we are taking to focus on the Ford brand and ensure
we have the resources to fund our plan. Since 2007, Ford has
sold Aston Martin, Jaguar, Land Rover, and the majority of its
stake in Mazda.
Half of the Ford, Lincoln, and Mercury light-duty
nameplates by 2010 will qualify as ``Advanced Technology
Vehicles'' under the U.S. Energy Independence and Security
Act--increasing to 75 percent in 2011 and more than 90 percent
in 2014. We have included these projects in our application to
the Department of Energy for loans under that Act and we hope
to receive $5 billion in direct loans by 2011 to support Ford's
investment in advanced technologies and products.
From our largest light duty trucks to our smallest cars,
Ford will improve the fuel economy of our fleet an average of
14 percent for 2009 models, 26 percent for 2012 models and 36
percent for 2015 models--compared with the fuel economy of its
2005 fleet. Overall, we expect to achieve cumulative gasoline
fuel savings from advanced technology vehicles of 16 billion
gallons from 2005 to 2015.
Next month at the North American International Auto Show in
Detroit, we will discuss in detail Ford's accelerated vehicle
electrification plan, which includes bringing a family of
hybrids, plug-in hybrids and battery electric vehicles to
market by 2012. The work will include partnering with battery
and powertrain systems suppliers to deliver a full battery
electric vehicle (BEV) in a van-type vehicle for commercial
fleet use in 2010 and a BEV sedan in 2011. We will develop
these vehicles in a manner that enables it to reduce costs and
ultimately make BEVs more affordable for consumers.
The 2007 UAW-Ford labor agreement resulted in significant
progress being made in reducing the company's total labor cost.
Given the present economic crisis and its impact upon the
automotive industry, however, we are presently engaged in
discussions with the UAW with the objective to further reduce
our cost structure and eliminate the remaining labor cost gap
that exists between Ford and the transplants.
As previously announced, Ford plans two additional plant
closures this quarter and four additional plant closures
between 2009 and 2011. We have announced our intent to close or
sell what will be four remaining ACH plants. And we will
continue to aggressively match manufacturing capacity to real
demand.
Ford will continue to work to reduce its dealer and
supplier base to increase efficiency and promote mutual
profitability. By year end, we estimate we will have 3,790 U.S.
dealers, a reduction of 606 dealers overall--or 14 percent from
year-end 2005--including a reduction of 16 percent in large
markets. In addition, Ford has been able to reduce the number
of production suppliers eligible for major sourcing from 3,400
in 2004 to approximately 1,600 today, a reduction of 53
percent. We eventually plan to further reduce the number of
suppliers eligible for major sourcing to 750.
After reducing our workforce by 50 percent in just three
years, we are also canceling all bonuses and merit increases
for North America salaried employees--including top
management--in 2009. And should Ford need to access funds from
a potential government bridge loan, I will work for a salary of
$1 a year--as a sign of my confidence in the company's
transformation plan and future.
We are moving ahead with plans we announced this summer to
leverage the company's global product strengths and bring more
small, fuel-efficient vehicles to the U.S. The plan includes
delivering best-in-class or among the best fuel economy with
every new vehicle introduced. We are also introducing industry-
leading, fuel-saving EcoBoost engines and doubling the number
and volume of hybrid vehicles.
This product acceleration will result in a balanced product
portfolio with a complete family of small, medium and large
cars, utilities and trucks. And we are increasing our
investment in cars and crossovers from approximately 60 percent
in 2007 to 80 percent of our total product investment in 2010.
Our plan is working, but there is clearly more to do--something
that is increasingly difficult in this tough economic climate. That is
why we are seeking access to a $9 billion bridge loan, even though we
hope to complete our transformation without accessing any of these
funds.
Despite the serious global economic downturn, Ford does not
anticipate a liquidity crisis in 2009--barring a bankruptcy by one of
our domestic competitors or a more severe economic downturn that would
further cripple automotive sales and create additional cash challenges.
In particular, the collapse of one or both of our domestic
competitors would threaten Ford because we have 80 percent overlap in
supplier networks and nearly 25 percent of Ford's top dealers also own
GM and Chrysler franchises.
The impact of a bankruptcy also reaches beyond Ford and the U.S.
auto industry. It would cause further stress to our domestic banking
industry and private retirement systems. Goldman Sachs estimates the
impact at up to $1 trillion.
We also believe effective restructuring involves a broader dialogue
with all our stakeholders. President-elect Obama has indicated an
interest in such a discussion. There are a number of complicated
questions that will need to be considered, for example:
How do we create a dealer body that meets market demand and
is profitable for all?
How do we develop a healthy and viable supplier base?
How do we work with the UAW to ensure that our cost
structure is competitive with the foreign transplants?
How do we address the significant debt obligation of the
domestic industry?
We are prepared to work together with this Committee and all of the
parties to address these critical issues as part of our plan.
Ford has a comprehensive transformation plan that will ensure our
future viability--as evidenced by our profitability in the first
quarter of 2008. While we clearly still have much more to do, I am more
convinced than ever that we have the right plan that will create a
viable Ford going forward and position us for profitable growth.
Thank you.
______
PREPARED STATEMENT OF ROBERT NARDELLI
Chairman and Chief Executive Officer,
Chrysler LLC
December 4, 2008
I appreciate the opportunity to represent the one million people
who depend on Chrysler for their livelihoods. Before I answer your
questions regarding our loan request, let me state clearly why we're
here: Chrysler requests a $7 billion loan to bridge the current
financial crisis.
In exchange, Chrysler is committed to: continue our restructuring,
including negotiating cost-saving concessions from all constituents;
investing in fuel-efficient cars and trucks that people want to buy and
beginning repayment of our government loan in 2012. I also want to
reinforce the need for Chrysler Financial to receive immediate
assistance from TARP--as its continued vitality is a critical
assumption to our plan.
Chrysler requires this loan to get back to our transformation that
began just over 1 year ago. As a newly independent company in 2007,
Chrysler was on track for financial profitability. Since August of
2007, we have eliminated more than 1.2 million units, or 30 percent of
our capacity. We reduced our fixed costs by $2.4 billion and separated
more than 32,000 workers, including 5,000 on the Wednesday before
Thanksgiving. And at the same time, we invested more than half a
billion dollars in product improvements in our first 60 days, improved
our J.D. Power quality scores and reduced our warranty claims by 29
percent. 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 second quarter of 2008. As consumer
confidence fell and credit markets remained 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 a year in 2007, to a
monthly annualized rate of 10.5 million last month--a 6.5 million unit
decline.
What does that mean for Chrysler? At 10 percent market share, it
translates to a loss of 650,000 vehicles, or roughly $16 billion in
lost revenue opportunity. With such a huge hit to our sales and revenue
base, Chrysler requires the loan to continue the restructuring and fund
our product renaissance.
Chrysler has a sound plan for financial viability that includes
shared sacrifice from all constituents. We have identified
approximately $4 billion of potential cost savings and improvements
that have been included in our plan. We are committed to negotiate with
all constituents to achieve our savings targets. 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 models. We plan on launching
additional small, fuel-efficient vehicles. ENVI is our breakthrough
family of all-electric and range-extended electric vehicles--similar to
the one parked outside.
Chrysler's long-range product plan is robust, realistic, and green.
The plan features 24 major launches from 2009 through 2012. It includes
a hybrid Ram truck and our first electric-drive vehicle 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 neighborhood electric vehicle
division, Chrysler is the largest producer of electric-drive vehicles
in the U.S. today. Combined with the new products from our ENVI group,
we expect that 500,000 Chrysler electric-drive vehicles will be on the
road by 2013.
Chrysler will continue to aggressively pursue new business models
that include alliances, partnerships and consolidations. This model is
currently successful in helping Chrysler increase the efficient
utilization of our manufacturing capacity. For example, in North
America today, Chrysler manufactures all Volkswagen minivans, and
beginning in 2011, we will produce all Nissan full-size trucks.
With government collaboration, our industry can accelerate how
America drives cutting-edge technology. An Automotive Energy Security
Alliance would: coordinate public and private spending already devoted
to advanced vehicle technologies; produce basic technology available to
all manufacturers; work with national labs and major research
universities and draw private investment to meet our national energy
and environmental goals. Such an alliance would help ensure that as a
country, we do not trade our current dependence on foreign oil for a
future dependence on foreign technologies.
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.
PREPARED STATEMENT OF JAMES T. FLEMING
President,
Connecticut Automotive Retailers Association
December 4, 2008
Chairman Dodd, Ranking Member Shelby, and Members of the Committee:
My name is Jim Fleming. I am President of the Connecticut Automotive
Retailers Association. We are comprised of approximately 300 members
who collectively employ more than 14,000 people in jobs that pay good
wages with benefits. Our dealer members are small businesspeople and
entrepreneurs, many of whose families have been in the business for
generations. Several of them are sitting behind me today. My testimony
also reflects the views of the National Automobile Dealers Association
and their 19,700 members.
We very much appreciate the fact that you are seeking the retail
dealer's perspective today on the important issue of assisting the
domestic automobile industry. What you end up doing or not doing will
have just as much impact on us as it will on the manufacturers. If they
go under, so do we. It is that simple.
You know how difficult times are--so do the small businesspeople
that run the dealerships in this country. People are not coming into
our showrooms and buying cars. Consumer confidence has evaporated.
Sales are way, way down and dealerships are going under. In 2007, we
had 325 new car dealerships in Connecticut. Now we have 300: a loss of
25 dealers in one year. Nationwide, nearly 700 mostly family owned new
car retail businesses have closed in the last 11 months--that equates
to some 20,000 newly unemployed women and men. Last year in
Connecticut, our employees totaled about 15,000 in good jobs with
benefits and retirement plans: now it is 14,300, down 700. That
reduction equals $23 million in lost payroll.
Let me put a human face on this issue. Senator Dodd already knows
this because he met with the small business people in Connecticut who
run the dealerships. If you have not done the same, please do so before
you vote on this issue. We are not Wall Street or Detroit: we are Main
Street in East Hartford or New Britain, Connecticut. Let me give you
just one example of what has been happening as our dealers head into
this holiday season. A Connecticut dealer who sells domestic and
foreign brands and has been in the Hartford area for three generations
has told me the following:
In the last month, thirty customers walked through his
doors and all were interested in purchasing a new car.
Normally, most of those customers would have qualified for
credit, but banks are so squeamish--they couldn't get financed.
Thirty sales were lost.
The dealer had no alternative but to cut back. He has had
to lay-off 30 employees, fully 10 percent of his workforce.
That's $1 million in payroll lost to those workers and their
families. It's also a loss in revenue to the government of
$200,000 through payroll, Social Security and Medicare taxes
that now won't be paid.
This dealer has also essentially wiped out his advertising
budget, slashing $1 million in that line item for the next
year. What will the Ad firm do? I think cut back as well. The
local newspapers, radio and television stations will feel those
cuts, and they, too, will cut back or lay-off employees as a
result. Auto advertising accounts for almost 35 percent of the
revenue to the local networks in our State. In many cases it is
now down to single digits.
This dealer has also reduced his inventory, compounding the
problems that Detroit is having. He is buying fewer cars from
the manufacturers. That also means less in sales tax revenue to
the state in the future. I might add that we traditionally sell
$9 billion in vehicles in Connecticut, with the State receiving
hundreds of millions of dollars in sales tax revenue; car sales
alone account for 17 percent of the State sales tax. With fewer
vehicle sales, there is a ripple effect: fewer mechanics, fewer
orders for parts or tires, and fewer shipments of these parts
by FedEx or UPS.
Members of the Committee, this is not a bailout bill for Detroit or
Wall Street. This is about investing in the future of our small towns
and businesses, in the economies and budgets of our State governments,
and ultimately, in the overall welfare of our country.
So, I guess the question is: will you help the industry? There are
two possible answers to this, a ``no'' or a ``yes.'' Saying ``maybe''
really means ``no''--taking no action or allowing bankruptcy will have
very real implications for the people who you represent back home.
Members of the Committee: I served in public office for 28 years in
Connecticut as a state senator and member of the Governor's cabinet. I
know what it is like to cast tough votes and make difficult decisions.
The right thing to do here is to provide the bridge loans to the
manufacturers.If you say ``no,'' then here is the bottom-line: If GM,
Ford, or Chrysler go bankrupt, our members who retail those cars will
also go under. There is just no doubt in my mind about that. Most
consumers will not buy a car made by a bankrupt company. The brand will
be tainted and consumers will lack confidence that there is anyone
standing behind the product or warranty. The retail dealership system
for any bankrupt brand will collapse. Consumer choice will be
drastically limited as to the choice of new automobiles and the
distance needed to travel for service and warranty work will increase
dramatically. Banks will not have confidence to deal with franchised
dealers if the risk is too great or the rules are abruptly changed.
If you say ``yes'' to some type of financing package for the
manufacturers, it will give us time to ride out this economic tsunami.
You are right to demand to know how the funds will be used and to
assure accountability with public funds. James Madison said that ``if
men were angels we would not need government''. Well men are not
angels, so put their feet to the fire, and hold these gentlemen and
their boards accountable; impose timelines, make sure the people's
funds are properly handled, and push them to produce more efficient
vehicles. The people I represent, the 300 dealers and their 14,000
employees, will sell them to the public. But do the right thing here
and support this legislation. A resurgence of the automobile industry
is necessary for a recovery of the overall U.S. economy. So hold the
industry accountable. But be sure that you leave a well-capitalized,
financially sound dealer network in place, as it is essential to the
success of every automobile manufacturer, especially a manufacturer
facing economic challenges.
Franchised dealerships are independent, mostly family-owned
businesses, not the ``company owned'' stores that many other retail
industries employ. As such, it is the dealer--and not the
manufacturer--that invests in the land, buildings, equipment,
computers, tools, personnel, training, advertising and promotions, and
good will necessary to sell and service vehicles. Through these
multimillion dollar dealer investments--$11.3 million per dealership on
average--manufacturers are able to externalize virtually all of the
costs associated with establishing and maintaining their national
retail distribution network.
A key element in preserving a strong dealer network is maintaining
the current state franchise laws; stability in the automotive industry
cannot be found by altering them. The pre-emption or suspension of
State franchise laws would further threaten the economic stability of
Main Street and further erode the national infrastructure essential to
the recovery of troubled manufacturers. If the manufacturers are
empowered to ignore these statutes, they will act precipitously to the
detriment of the dealers and the local communities they support. The
consequences of wholesale dealer terminations would include closed
businesses, terminated employees, increased foreclosures, and idle real
estate, thereby deepening the current recession and threatening even
the dealerships that the manufacturers would designate for survival.
Moreover, even in the absence of the this type of actual
manufacturer abuse, any elimination or suspension of the State
franchise laws would operate to increase the cost of the capital that
is needed for the efficient distribution of vehicles. Dealer
investments are premised on the existence of franchise law protections.
If the franchise laws were not present to protect those investments,
the investments would carry more risk. And that risk, in turn, would
command a risk premium. Indeed, publicly traded auto retailers
routinely disclose the possible repeal of State franchise laws as a
risk factor in their public filings. If those laws were in fact to be
removed, that risk would mature into a reality and the capital
investment markets would respond accordingly. Existing capital would
seek safer havens, and the cost of attracting new capital would rise.
While this would be very visible in the public capital markets, the
same phenomenon would play out in the private capital arena as private
dealers made decisions where to place their resources. And these
increased costs would have to be paid somewhere in the overall industry
value chain. Thus, far from saving manufacturers anything, the removal
of the State franchise laws would actually raise their costs of
operation.
Think carefully about the value that the dealer franchise network
provides. Keep it healthy and intact. The American dealerships absorb
massive costs to market, sell, finance, distribute and service the
vehicles produced by the manufacturers. The buildings, service bays,
the very signs on Main Street for GM, Chrysler, Jeep, and Ford are paid
for by the dealers. The American public makes two big purchases--homes
and cars. They want to eyeball the person who sells them a car, not
some computer screen or massive corporate entity. When they have a
problem they want to go to the local business and have it resolved.
So what am I asking? Pass this legislation and do so soon. Help
bring back consumer confidence in the automobile sector. You can play a
major role in doing that by saying ``yes'' to an assistance package for
the industry that will provide bridge loans for the domestic automobile
manufacturers and includes elements to stimulate business on Main
Street right now:
Allow a temporary deduction of interest on consumer new
auto loans and of the sales taxes on new vehicle purchases.
Senators Mikulski and Bond have a bill, S. 3684, that would do
this and I urge its swift passage.
Enact a temporary expansion of the definition of a ``small
business'' to provide dealers access to working capital through
Small Business Administration loan guarantees.
Provide for a temporary, refundable consumer tax credit for
car and truck buyers.
Fund state fleet modernization programs, often called
``cash for clunkers'' where consumers are given a direct
incentive to upgrade older vehicles to more environmentally-
friendly ones.
Enact temporary increases in the expensing and depreciation
of business vehicle purchases.
Finally, ensure that the recently announced TALF initiative
extends to floor planning loans or inventory financing for
retail dealers.
Mr. Chairman, we appreciate the fact that you have included the
retail automotive dealers in this discussion. I've just outlined
specific steps that you could take that will help us ride out the
current economic storm. The U.S. domestic auto industry hangs in the
balance--and so do dealers and their local communities. Thank you.
______
PREPARED STATEMENT OF KEITH WANDELL
President,
Johnson Controls, Inc.
December 4, 2008
Chairman Dodd, Senator Shelby, and Members of the Committee, thank
you for the opportunity to provide testimony on the state of the
domestic automotive industry. My name is Keith Wandell and I am
President and Chief Operating Officer of Johnson Controls, Inc., a
global multi-industry company with sales of $38 billion in 2008.
Approximately 37 percent of our sales involve the supply of systems and
services to improve the energy efficiency of nonresidential and
residential buildings worldwide. We are also the largest supplier of
batteries to the automotive aftermarket and original equipment
manufacturers.
In addition, Johnson Controls is the 7th largest automotive
supplier in the world. We are the third largest supplier in North
America behind Magna, a Canadian company, and Delphi, a U.S. company
which has been in bankruptcy since 2005. Our global sales of seats and
other interior products to the auto industry totaled $19 billion, $6.7
billion of which are to the North American market. We supply every
automaker with a presence in the U.S.: Chrysler, Ford, GM, Honda,
Hyundai-Kia, Mazda, Mercedes, Mitsubishi, Nissan, and Toyota. Johnson
Controls has 43,000 employees in the U.S. with operations in all 50
States. Some 22,000 are employed in the States represented by the
members of this Committee.
While Johnson Controls is a key supplier to the global automotive
industry we are an atypical automotive supplier. We are much larger and
more diversified by product, geography, and markets. Being a supplier
of interior systems, we are less capital intensive than many automotive
suppliers. We are profitable, and we have a strong balance sheet. We
do, however, share the same issues and concerns about the domestic
automotive industry as those suppliers which are solely dedicated to
the automotive market.
A Detroit 3, failure would have dire economic ramifications for the
vast interconnected supply chain of companies providing the parts and
components which enable the U.S. automakers to assemble vehicles. Our
main concern is that once cascading supply chain interruptions would
begin, many suppliers will fail due to the interdependence of the
supply chain, causing some companies to fail that could otherwise have
continued operations. Many of the companies which would be impacted are
small, women and minority-owned businesses.
At Johnson Controls we are proud to have many joint-ventures/
partnerships and supply arrangements with women and minority-owned
businesses. This year for the second time we were named ``Corporation
of the Year'' by the National Minority Supplier Development Council, in
part, in recognition of the $1.7 billion of goods and services we
purchased from minority and female-owned business. I can assure you
that each of the Detroit 3 is equally committed to the development of
women and minority-owned businesses with a combined purchase of
approximately $12 billion from such businesses in the last year. Should
any one of the U.S. automakers suddenly fail, the vast majority of
these businesses will fail and fail quickly.
Let me share an example with you. Recently, a minority supplier to
Johnson Controls, Plastech Engineered Products, failed and went into
bankruptcy. This supplier had $800 million of revenue, shipped 6,200
part numbers from 11,350 tool sets providing parts to 52 vehicle
assembly plants, 121 vehicle lines and 12 customers: General Motors,
Ford, Chrysler, Volkswagen, Mercedes, Honda, Toyota, Nissan, Hyundai-
Kia, AM General, Mazda, and Mitsubishi. Had Johnson Controls and the
first-tier lending group not acquired Plastech's assets out of
bankruptcy, assembled an operating team to manage the process, and
provided bridge financing, the supplier would have been liquidated, and
forced the shutdown of these 52 assembly plants to one degree or
another for varying durations.
A year ago approximately 20 percent of Johnson Controls automotive
suppliers were financially distressed according to independent third
parties. Since the rapid deterioration of industry volumes that number
has grown to beyond 35 percent and continues to grow. Johnson Controls
suppliers employ 100,000 people in the U.S. so you can understand how
serious this situation has become.
Should one of the Detroit 3 fail a significant number of supplier
failures would occur and become unmanageable. These suppliers, in
general, support all three automakers and many, like Plastech and
Johnson Controls, also supply the Asian and European transplants in the
U.S. I can assure you that even though Toyota, Nissan, Honda, and other
foreign automakers are not here today, they too are deeply concerned
about the viability of the U.S. supply base. The automotive suppliers
are financially distressed due to reduced cash flows resulting from the
recent volume reductions, they are experiencing higher borrowing costs
and many cannot access the credit markets at all.
None of us would disagree that major changes are needed in the
North American automotive industry. This is obvious as shown in the
plans submitted by the Detroit 3 for these hearings. It is in the best
interest of all constituents that these changes occur in an orderly
fashion which is unlikely if we allow even one of these companies to
fail.
It is extremely important that we have a sound, healthy and
sustainable U.S.-owned automotive industry that is competitive
globally. I do not believe that Americans want to yield an industry
that impacts millions of jobs, invests billions of dollars in
technology, and will help secure our energy independence through new,
innovative, and environmentally friendly transportation. It is just as
important that our domestic supply base is strong as it delivers 70
percent of the value-added components of a vehicle and 40 percent of
the research and development dollars spent.
The plans that have been submitted address many of the issues that
have been burdensome to the health of this industry: excess capacity,
proliferation of brands, a sub-optimized dealer network and an
uncompetitive cost structure. Given the opportunity to continue to
address these challenges the Detroit 3 would be able to invest at an
even greater rate to bring to market the consumer-desired fuel
efficient, environmentally friendly vehicles.
Our company is also a leader in helping to develop fuel efficient
vehicles. In our automotive seating and interiors business we are
constantly striving to reduce weight in our components to help increase
fuel efficiency and to introduce recyclable and renewable materials
into our products. We are also developing the next generation of
battery systems for hybrid and plug-in electric vehicles, and we are
working with the Detroit 3 to bring these environmentally favorable
vehicles to market.
I was also asked to comment on the potential impact of a Detroit 3
failure on Johnson Controls. Earlier I said that we are diversified,
profitable, and have a strong balance sheet. Unlike many automotive
suppliers, we would weather this storm largely due to our strong non-
automotive businesses. A Detroit 3 failure would have a short/mid-term
impact on our cash flow, access to capital and cost of borrowing. One
of the bigger impacts would be the curtailment of our investments in
new technologies in all of our businesses, including hybrid vehicle
battery technology.
The U.S. industry has a long and proud heritage; it has played a
significant role in the development of this country's strong economic
position in the world. Speaking for our company, and, I am sure for all
auto parts suppliers, we respectfully urge the Members of this
Committee, and the Congress as a whole, to provide the financial
support the automakers need at this critical time. Each is on their own
path to improve their performance and the fuel efficiency of the
vehicles they produce. But their progress has been hampered by the
current economic crisis which has tightened access to consumer credit
and further eroded vehicle sales.
To avoid drastic economic ramifications to the automotive industry
supply chain, including hundreds of small and medium-sized businesses
throughout the country, we hope the Congress will take positive action
to assist this vital U.S. industry.
Thank you for your attention.
PREPARED STATEMENT OF MARK ZANDI
Chief Economist and Co-Founder,
Moody's Economy.com
December 4, 2008
PREPARED STATEMENT OF ALLAN I. MENDELOWITZ
Member of the Board of Directors,
Federal Housing Finance Board
December 4, 2008
Summary
The downturn in the fortunes of the Big Three automakers has led
policy makers to revisit the 1979 Chrysler Loan Guarantee Act. The Act
is widely viewed as a successful government intervention in a private
company to achieve a public policy objective. In practice, the Act
caused Chrysler to be reorganized outside of bankruptcy with the
Federal Government providing the equivalent of ``debtor in possession''
(commonly referred to as DIP) financing.
The public debate about the Federal Government's potential role in
a rescue package for the Big Three has focused around two principle
alternatives: (a) government loans to bridge the companies through
necessary reorganizations and the economic downturn, and (b)
reorganizing the companies under Chapter 11 of the bankruptcy laws. The
purported choice between government loans and bankruptcy is, in fact,
not a choice at all. A restructuring in bankruptcy would require tens
of billions of dollars in short-term DIP financing to support
operations. In today's financial markets, DIP financing is difficult to
get--and at the levels of financing the Big Three will need--is
probably impossible. Therefore, for bankruptcy to be a viable
restructuring option, the Federal Government would need to play the
role of DIP financier.
Although often cited as a public policy success, the mechanics of
the Chrysler Loan Guarantee Act are generally misunderstood. Rather
than a single implementation of the loan guarantee program, there were,
in fact, two distinctive Chrysler transactions: The first, which I
refer to as Chrysler 1, gave Chrysler $800 million in loan guarantees
in return for a modest restructuring of Chrysler's balance sheet and
operations and granting the government a priority secured interest in
all company assets. The second transaction, which I refer to as
Chrysler 2, provided an additional $400 million of loan guarantees. In
return for this second tranche of support, the Federal Government
required the substantial restructuring of the company to which the
success of the loan guarantee program is linked. The required
restructuring was made possible only because of the leverage over all
interested parties that the government gained by taking a priority
security interest in all Chrysler assets as part of Chrysler 1.
In addition to the financing structure, there were other key
principals that made the Chrysler Loan Guarantee Act a success.
However, one of the most important lessons learned from the Chrysler
rescue is that if the decision is to grant funding outside of a
bankruptcy reorganization, the Federal Government must take a priority
security interest in the assets of the company prior to extending any
loans or loan guarantees. Only then will the Federal Government have
sufficient leverage to force a substantial restructuring to achieve the
public policy objectives.
Statement
Mr. Chairman and Members of the Committee:
Thank you for inviting me to submit this statement for the record
to supplement your hearing on this important matter. My name is Allan
I. Mendelowitz, and while I currently serve on the Board of Directors
of the Federal Housing Finance Board, I bring a special insight into
the topic of today's hearing. I spent 1980 as the representative of the
Comptroller General of the United States (one of the three voting
members of the Chrysler Corporation Loan Guarantee Board) and as one of
the principle government negotiators putting together the terms of the
Chrysler loan guarantee. In fact, one of my accomplishments during that
time is that I was directly and personally responsible for including as
a condition of the loan guarantee, the warrants which earned the
taxpayers more than $300 million. In addition, I spend the better part
of two decades directing a substantial body of work on the automobile
industry for the U.S. Congress.
The downturn in the fortunes of the ``Big Three'' domestic
automakers has led policy makers to revisit the ``Chrysler Corporation
Loan Guarantee Act of 1979'' (Public Law 96-185 signed into law by
President Carter on January 7, 1980) which is largely viewed as a
successful government intervention in a private company to achieve a
public policy objective. There are some similarities between the 1979-
80 Chrysler Corporation financial crisis and that of the Big Three
today. Like 1979-80, there has been recent volatility in oil prices and
the economy is in difficult circumstances. In addition, arguments made
in 1979 in support of the Loan Guarantee Act are very similar to
arguments made today, for example: (a) Chrysler could not be
successfully reorganized under the bankruptcy laws because consumers
would not buy cars from a bankrupt company, (b) bankruptcy would impose
excessively high economic costs, including lost jobs etc., in a time of
national economic difficulty, and (c) it would be cheaper for the
Federal Government to bail out Chrysler than to bear the cost of its
failure--unemployment insurance, lost tax revenue, etc.
Despite the similarities, there are significant differences today
relative to 1979-80. At that time, the government was dealing with one
sick company in an otherwise healthy domestic industry. In addition,
there was a credible business case for helping Chrysler. The company
required financing for a 6 to 18 month time horizon, during which time
the launch of the K-car would give the company a realistic shot at
returning to profitability. Today, all of the Big Three are in
financial trouble and face the very real prospect of bankruptcy.
However, none of the Big Three can propose a short-term turn-around
plan. For example, the Chevrolet Volt which may be an important vehicle
10 years from now will be launched in two years at such low initial
volumes and at such a high price, that it will not contribute to the
financial turnaround of General Motors when it goes on sale. Success
today will depend almost entirely on executing major restructurings of
the companies.
The public debate over the federal government's potential role in a
rescue package for the Big Three has focused on two principle
alternatives: (a) government loans to bridge the companies through
necessary reorganizations and the economic downturn, and (b)
reorganizing the companies under Chapter 11 of the bankruptcy laws.
These options are presented as alternatives, but both in reality put
the federal government in a similar position. The choice between
government loans and bankruptcy is, in fact, not a choice at all. A
restructuring in bankruptcy would require tens of billions of dollars
in funding to support operations, commonly known as ``debtor in
procession'' or DIP financing. In today's financial markets, any DIP
financing is difficult to get--and at the levels of financing needed by
the Big Three--is probably impossible. Therefore, for bankruptcy to be
a viable restructuring option, the Federal Government must be ready to
provide DIP financing.
As a result, if there is a public policy decision that the domestic
car industry should survive--the Federal Government's role will likely
be the same no matter which action is taken. Whether providing loans to
restructure the Big Three outside of bankruptcy, similar to the
Chrysler Loan Guarantee Act, or DIP financing for reorganization under
bankruptcy, the Federal Ggovernment will be acting as lender of last
resort.
The 1979 Chrysler Loan Guarantee Act is viewed as a successful
government intervention in a private company to achieve a public policy
objective: (a) Chrysler avoided bankruptcy, (b) with the introduction
of more fuel-efficient cars and the minivan concept, Chrysler
recovered, and (c) the Federal Government was well protected and well
compensated for the loan guarantee. However, the mechanics of the loan
guarantee program are generally misunderstood. Rather than a single
Chrysler loan guarantee transaction, there were in fact, two
distinctive Chrysler transactions: Chrysler 1 and Chrysler 2.
Chrysler 1 was put together in the spring of 1980 when Chrysler was
granted the first $800 million in loan guarantees. This was a partial
``first step.'' However, there was one absolutely key provision. In
return for the initial guarantees, the Federal Government took a
priority security interest in every asset of the company including
property, plant, equipment, inventory, work in progress, and even
patents and trademarks. In fact, existing lenders with offset rights to
compensating balances were required to cede those offset rights to the
federal government. In the event of liquidation, the Federal Government
held sufficient collateral to be made whole--and other creditors were
likely to receive nothing. However, the company itself underwent a
modest restructuring at most. For example, lenders did not forgive
principle and continued to receive substantial interest payments.
Chrysler 2 came about in the fall of 1980. At that point, Chrysler
had burned through the first $800 million of federally guaranteed
funding and came back for an additional $400 million in new guarantees.
However, the original basis for granting the first $800 million was no
longer credible to support this request. There had to be a new basis
for extending additional guaranteed loans. As a result, in Chrysler 2,
the government effected a reorganization of the company and its balance
sheet in a way to justify extending additional funds. It was only in
Chrysler 2 that the lenders gave significant debt forgiveness, i.e.,
$1.2 billion in loans were forgiven in exchange for payment of about 15
cents on the dollar. Workers gave significant wage concessions, as well
as changes in work rules and benefits. When Chrysler 2 was finished,
the company looked more like it would have looked had it gone through a
bankruptcy reorganization.
The structuring of the loan guarantee tranches was a critical
operational aspect of why the program succeeded. However, the ability
to restructure the company in the Chrysler 2 transaction was a direct
result of the key underlying principles that made the Chrysler Loan
Guarantee Act a success. The key principles include:
The Loan Guarantee Act had a clear public policy objective. In a
market with a severe shortage of 4-cylinder fuel-efficient cars, the
program set out to preserve the annual production capacity for three-
quarters of a million of such vehicles. In addition, the program
avoided the bankruptcy of Chrysler that would have resulted in the loss
of hundreds of thousands of manufacturing and ancillary service jobs
(at Chrysler, its suppliers, its dealers, etc.) in a time of domestic
economic weakness. Chrysler used the federally guaranteed funds to
maintain development and launch production of a modern 4-cylinder fuel
efficient car (the ``K-cars'') that was in high demand.
Powerful independent board required to approve disbursement of
funds. The Chrysler Corporation Loan Guarantee Board had three voting
members: the Secretary of the Treasury, the Chairman of the Board of
Governors of the Federal Reserve, and the Comptroller General of the
United States. The makeup of the board insured that all decisions had a
clear, credible, and transparent justification included in the
transcripts of board meetings and in board reporting the U.S. Congress.
There were no ad hoc or opaque decisions made by the Chrysler
Corporation Loan Guarantee Board.
The Federal Government had a reasonable assurance of repayment. The
guarantees could only be provided if the Chrysler Corporation Loan
Guarantee Board determined that there was a reasonable assurance of
repayment. This determination was based on credible operating and
financing plans, and the Federal Government taking a priority security
interest in every asset of the company (valued at more than $2.5
billion).
Well-defined time frame and scope. Chrysler was offered up to $1.5
billion of federal government loan guarantees for a maximum of 10 years
subject to stringent conditions. In addition, no permanent government
agency or permanent corporate entitlement was created.
Government resources were used sparingly with no free riders. Built
into the statute was the requirement that there be $2 dollars of
contributions from interested parties for every $1 dollar of federally
guaranteed loans. In addition, everyone who stood to gain from
Chrysler's turnaround was required to contribute to the program: (a)
existing lenders to Chrysler provided debt forgiveness, (b) Chrysler
employees agreed to wage and benefit reductions, (c) states and
localities where the company had plants contributed with additional
loans, (d) Chrysler was forced to sell off all assets not central to
the core automotive business including Chrysler Defense (that was a
shareholder contribution) and, (e) executive salaries and perks were
cut (Lee Iacocca worked for $1 a year and much to his chagrin, his
Gulfstream executive jet had to be sold).
Bad incentives and precedents were avoided. The stringent terms of
the Chrysler loan guarantee were so onerous that no business--based on
this precedent--would consider this program a desirable alternative to
anything else. The program was truly a last resort.
The Federal Government received the upside of success. In return
for the loan guarantees, the Federal Government received expense
reimbursement, guarantee fees, and warrants. When the Chrysler
Corporation eventually recovered and paid-off the guaranteed loans in
1984 (6 years early) the government sold the granted warrants for a
profit of over $300 million.
If the public policy decision is made--no matter what its form--to
attempt to rescue the U.S. auto industry, the government is going to be
involved as a lender either: (a) outside of bankruptcy like the
Chrysler Loan Guarantee Act, or (b) as debtor in procession lender as
part of a bankruptcy reorganization. Furthermore, no government
assistance can succeed without substantial restructuring of the
companies. If the government grants the requested billions in loans
without a bankruptcy filing, the single most important condition
precedent must be that the Federal Government takes a priority lien on
all assets of the companies prior to the distribution of funds. This
will give the government the necessary leverage to insure the proper
restructuring of the companies. Given the claims by at least two of the
companies that they need assistance before the end of the year, this
condition is all the more important to assure that the money is used to
support the public policy aim of restructuring the companies so that
they return to profitability and become again competitive players in
the automobile market.
RESPONSE TO WRITTEN QUESTIONS OF SENATORS BROWN AND TESTER FROM
GENE L. DODARO
Q.1. Information for the record in response to questions
regarding the state of the automakers' pensions and their
potential impact on the Pension Benefit Guaranty Corporation
(PBGC).
A.1. I have previously noted that the PBGC Director stated, in
a November 28, 2008, Wall Street Journal interview, that the
funding of the automakers' pensions is ``OK''; that is, the
plans are likely not to require any contributions in 2009, and
in some cases 2010, to meet the Employee Retirement Income
Security Act of 1974 (ERISA) minimum funding standards.
Additionally, the Director has noted that, in the event of an
immediate reorganization, the plans may continue rather than
being terminated. \1\ In a November 24, 2008, New York Times
interview, the Director stated that ``we would maintain that it
[GM] can afford to keep its plan intact,'' and that ``based on
past history, we think that argument has a reasonable chance of
success.''
---------------------------------------------------------------------------
\1\ For example, a number of auto parts suppliers in Chapter 11
with collectively bargained pension plans have emerged from
reorganization without terminating their pension plans.
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For the future, however, the automaker pension plans pose
considerable financial uncertainty to the PBGC. Current,
detailed information that reflects the true financial health of
the automakers' pension plans has not been made public.
However, PBGC is very concerned about the future health of the
automaker pension plans in light of the current problems facing
U.S. financial markets and the current economic downturn. For
example, automaker plans, like many others in the U.S., could
experience significant losses in asset value that would impact
plan financial health. The agency has also expressed concern
that automaker ``attrition'' programs, which seek to
restructure or reduce their workforces by offering severance
and early retirement packages to current employees, could also
undermine the state of the automakers' plans by creating large
obligations on the pension plans that have not been funded. For
example, in a recent letter to General Motors, PBGC noted that
the obligations on recently-negotiated attrition programs alone
have a present value of $5 billion.
If the automakers' plans were to result in a distress
termination, \2\ PBGC's accumulated deficit could increase
dramatically from its current level of about $11 billion. The
plans sponsored by the automakers represent a significant
portion of the assets, liabilities, and participants in the
defined benefit system. Although it is impossible to know what
the exact claims to PBGC would be until it were to take over a
plan, based on estimates of their current funded status,
termination of the auto companies' plans could double the PBGC
deficit from its September 30, 2008, level. Further, from an
administrative standpoint, PBGC would be presented with an
unprecedented number of assets to manage as well as benefit
liabilities to administer. As I noted during questioning, we
estimate that the automakers' plans include roughly 1.3 million
participants, which would double the total number of PBGC's
current or future beneficiaries.
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\2\ Employers end a plan through a process called ``plan
termination.'' If a plan has insufficient assets to meet the plan's
accrued benefit promises through the purchase of annuities and if the
sponsoring employer believes it is financially distressed it may apply
for what is known as a distress termination. To do so, however, the
employer must prove to a bankruptcy court or to PBGC that the employer
cannot remain in business unless the plan is terminated. If the
application is granted, PBGC will take over the plan as trustee and pay
plan benefits, up to the legal limits, using plan assets and PBGC
guarantee funds.
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PBGC's prior experience with the termination of plans of
financially troubled sponsors is not encouraging. In some of
its larger terminations the financial condition of the plans
was significantly worse than had been reported in their ERISA
filings in the years shortly before plan termination. GAO has
reported on the weakness in the funding rules in the past, \3\
and indeed the Pension Protection Act of 2006 (PPA) was
intended to address these weaknesses and strengthen plan
funding. However, it is not clear that the PPA contains the
provisions that will in the end protect the PBGC from assuming
rapidly deteriorating pension plans in the auto industry. The
possible impact this could have on the PBGC should be a
consideration in assessing federal financial assistance to the
automakers.
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\3\ GAO, Private Pensions: Recent Experiences of Large Defined
Benefit Plans Illustrate Weaknesses in Funding Rules. GAO-05-294.
Washington, DC: May 31, 2005.