    [House Hearing, 111 Congress]
    [From the U.S. Government Publishing Office]

              RAMIFICATIONS OF AUTO INDUSTRY BANKRUPTCIES (PART I)

    =======================================================================

                                    HEARING

                                   BEFORE THE

                           COMMITTEE ON THE JUDICIARY
                            HOUSE OF REPRESENTATIVES

                         ONE HUNDRED ELEVENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                  MAY 21, 2009

                                   __________

                               Serial No. 111-22

                                   __________

             Printed for the use of the Committee on the Judiciary

          Available via the World Wide Web: http://judiciary.house.gov

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                           COMMITTEE ON THE JUDICIARY

                     JOHN CONYERS, Jr., Michigan, Chairman
    HOWARD L. BERMAN, California         LAMAR SMITH, Texas
    RICK BOUCHER, Virginia               F. JAMES SENSENBRENNER, Jr.,
    JERROLD NADLER, New York                 Wisconsin
    ROBERT C. ``BOBBY'' SCOTT, Virginia  HOWARD COBLE, North Carolina
    MELVIN L. WATT, North Carolina       ELTON GALLEGLY, California
    ZOE LOFGREN, California              BOB GOODLATTE, Virginia
    SHEILA JACKSON LEE, Texas            DANIEL E. LUNGREN, California
    MAXINE WATERS, California            DARRELL E. ISSA, California
    WILLIAM D. DELAHUNT, Massachusetts   J. RANDY FORBES, Virginia
    ROBERT WEXLER, Florida               STEVE KING, Iowa
    STEVE COHEN, Tennessee               TRENT FRANKS, Arizona
    HENRY C. ``HANK'' JOHNSON, Jr.,      LOUIE GOHMERT, Texas
      Georgia                            JIM JORDAN, Ohio
    PEDRO PIERLUISI, Puerto Rico         TED POE, Texas
    MIKE QUIGLEY, Illinois               JASON CHAFFETZ, Utah
    LUIS V. GUTIERREZ, Illinois          TOM ROONEY, Florida
    BRAD SHERMAN, California             GREGG HARPER, Mississippi
    TAMMY BALDWIN, Wisconsin
    CHARLES A. GONZALEZ, Texas
    ANTHONY D. WEINER, New York
    ADAM B. SCHIFF, California
    LINDA T. SANCHEZ, California
    DEBBIE WASSERMAN SCHULTZ, Florida
    DANIEL MAFFEI, New York

           Perry Apelbaum, Majority Staff Director and Chief Counsel
          Sean McLaughlin, Minority Chief of Staff and General Counsel

                                C O N T E N T S

                                  ----------

                                  MAY 21, 2009

                                                                       Page

                               OPENING STATEMENTS

    The Honorable John Conyers, Jr., a Representative in Congress
      from the State of Michigan, and Chairman, Committee on the
      Judiciary......................................................     1
    The Honorable Lamar Smith, a Representative in Congress from the
      State of Texas, and Ranking Member, Committee on the Judiciary.     2
    The Honorable Steve Cohen, a Representative in Congress from the
      State of Tennessee, and Member, Committee on the Judiciary.....     3
    The Honorable Steve King, a Representative in Congress from the
      State of Iowa, and Member, Committee on the Judiciary..........     4
    The Honorable Daniel Maffei, a Representative in Congress from
      the State of New York, and Member, Committee on the Judiciary..     5
    The Honorable Brad Sherman, a Representative in Congress from the
      State of California, and Member, Committee on the Judiciary....     7
    The Honorable Darrell Issa, a Representative in Congress from the
      State of California, and Member, Committee on the Judiciary....     7
    The Honorable Howard Coble, a Representative in Congress from the
      State of North Carolina, and Member, Committee on the Judiciary     7
    The Honorable Sheila Jackson Lee, a Representative in Congress
      from the State of Texas, and Member, Committee on the Judiciary     7

                                   WITNESSES

    Mr. Lynn M. LoPucki, Professor, Security Pacific Bank Professor
      of Law, UCLA Law School
      Oral Testimony.................................................     8
      Prepared Statement.............................................    10
    Mr. Damon Lester, President, National Association of Minority
      Auto Dealers
      Oral Testimony.................................................    14
      Prepared Statement.............................................    15
    Mr. Randolph B. Henderson, Jr., President, Henderson Automotive
      Family, National Automobile Dealers Association
      Oral Testimony.................................................    18
      Prepared Statement.............................................    20
    Mr. Andrew M. Grossman, Senior Legal Policy Analyst, The Heritage
      Foundation
      Oral Testimony.................................................    22
      Prepared Statement.............................................    24
    Mr. Bruce Fein, Principal, The Lichfield Group
      Oral Testimony.................................................    41
      Prepared Statement.............................................    42
    Mr. Clarence M. Ditlow, Executive Director, Center for Auto
      Safety
      Oral Testimony.................................................    43
      Prepared Statement.............................................    46
    Mr. Ralph Nader, Consumer Advocate
      Oral Testimony.................................................    66
      Prepared Statement.............................................    67
    Ms. Joan Claybrook, President Emeritus, Public Citizen
      Oral Testimony.................................................    70
      Prepared Statement.............................................    71
    Mr. David A. Skeel, Professor, S. Samuel Arsht Professor of
      Corporate Law, University of Pennsylvania Law School
      Oral Testimony.................................................    75
      Prepared Statement.............................................    77

                                    APPENDIX
                   Material Submitted for the Hearing Record

    Prepared Statement of the Honorable Daniel Maffei, a
      Representative in Congress from the State of New York, and
      Member, Committee on the Judiciary.............................   111
    Prepared Statement of the Honorable Trent Franks, a
      Representative in Congress from the State of Arizona, and
      Member, Committee on the Judiciary.............................   112
    Prepared Statement of the Honorable Nick J. Rahall, II, a
      Representative in Congress from the State of West Virginia.....   120
    Material submitted by the Honorable Steve King, a Representative
      in Congress from the State of Iowa, and Member, Committee on
      the Judiciary..................................................   121
    Letter to the Honorable Steven Rattner, Counselor to the
      Secretary of the Treasury, submitted by the Honorable Daniel
      Maffei, a Representative in Congress from the State of New
      York, and Member, Committee on the Judiciary...................   166
    Material submitted by Ralph Nader, Consumer Advocate.............   172
    Prepared Statement of Jeremy Warriner, submitted by Joan
      Claybrook......................................................   177

              RAMIFICATIONS OF AUTO INDUSTRY BANKRUPTCIES (PART I)

                                  ----------

                             THURSDAY, MAY 21, 2009

                              House of Representatives,
                                    Committee on the Judiciary,
                                                        Washington, DC.

        The Committee met, pursuant to notice, at 1:07 p.m., in
    room 2141, Rayburn House Office Building, the Honorable John
    Conyers, Jr. (Chairman of the Committee) presiding.
        Present: Representatives Conyers, Watt, Jackson Lee,
    Waters, Delahunt, Cohen, Johnson, Sherman, Maffei, Smith,
    Coble, Goodlatte, Issa, King, Gohmert, and Jordan.
        Staff Present: Danielle Brown, Majority Counsel; Susan
    Jensen, Majority Counsel; Daniel Flores, Minority Counsel; and
    Zachary Somers, Minority Counsel.
        Mr. Conyers. Good afternoon. The Committee will come to
    order.
        This oversight hearing is one of a series that the
    Judiciary Committee has held on business bankruptcy
    reorganization in this Congress and in prior Congresses.
    Today's hearing will consider a wide-ranging ripple effect and
    possibly unintended consequences presented by automobile
    industry bankruptcies. In particular, I want to focus on how
    various constituencies are being affected--the workers, the
    retirees, the auto dealers, the automobile owners and consumers
    in general.
        We have thousands of dealers, many of whom are small,
    family-run businesses, but have been passed sometimes from one
    generation to the next, being summarily terminated by Chrysler
    and General Motors. Some say it makes no economic sense to
    terminate these dealerships, and that doing so could actually
    undermine the ability of our Nation's auto industry to regain
    its financial stability.
        Customers are already anxious about whether their repair
    warranties will be honored. Now they will also have to worry
    about whether their local dealer will even be in business long
    enough to service their car, or whether they will have to drive
    a long distance to some other dealer--or whether they should
    just purchase their next auto from a foreign car dealer to have
    some assurance of continued service.
        The lack of consumer confidence in American cars is largely
    what drove this industry into bankruptcy. But what the industry
    now proposes to do to its dealerships may actually exacerbate
    the industry's financial difficulties by further undermining
    consumer confidence.
        So we need to consider the consequences of these
    bankruptcies on American workers and their families. Right now
    thousands of Americans are either losing their jobs or at risk
    of losing their jobs. And not just at GM and Chrysler, but also
    at the thousands of suppliers and other businesses directly or
    indirectly connected to the automobile industry in some way.
        In Detroit, the official unemployment rate is at an amazing
    22 percent, three times the national average; and the
    unofficial rate is assuredly even higher than that. In
    addition, many of the retirees may lose or have already lost
    their hard-won health and medical benefits as a result of these
    bankruptcies.
        Some of these costs will be shifted to budget-strained
    State and local governments. Witness California. Others will
    fall onto the already overburdened shoulders of the retirees
    and their families.
        Just the other day we learned that General Motors may close
    more than a dozen as yet undetermined plants, and shift
    production to Mexico, Korea, China and other foreign locations.
    This latest development is particularly egregious in light of
    the fact that American workers, as taxpayers, as loyal
    citizens, are being asked to bear the burden of funding General
    Motors financial reorganization, a process that now appears to
    be designed to either intentionally or unintentionally
    eliminate American jobs by shipping them overseas.
        We should consider how safety and legal accountability
    concerns will be affected by these bankruptcies. And so I am
    happy and proud that this Committee and those witnesses that we
    were able to assemble are here.
        I will insert the rest of my statement in the record and
    turn to our friend from Texas, the Ranking Minority Member
    Lamar Smith for his comments.
        Mr. Smith. Thank you, Mr. Chairman.
        The events the Nation has witnessed with Chrysler and
    General Motors are very troubling. An attorney for senior
    secured creditors of Chrysler has said, quote, ``One of my
    clients was directly threatened by the White House and, in
    essence, compelled to withdraw its opposition to the deal,
    under threat that the full force of the White House press corps
    would destroy its reputation if it continued to fight,'' end
    quote. For a brief moment, these creditors held firm refusing
    to hand over their property to the Administration and the
    United Auto Workers union. They stood their ground until the
    President himself demonized them on April 30th before the White
    House press corps. Seeing a threatened plan unfold before their
    eyes, they backed down. In short order, other
    dissonantcreditors went with them.
        Let's be clear about what is happening to America's
    automakers. Union labor costs priced these companies out of the
    market and drove them to the brink of bankruptcy. What is the
    President's proposed solution? Deliver the companies over a
    union ownership through bankruptcy.
        Poor management is said to have hastened the demise of
    these companies. So what was President Obama's solution? To
    sack the senior management and appoint himself CEO. Thanks to
    the Administration, GM now stands for Government Motors. That
    is my own line.
        While the UAW is cashing in, it is the dealers, creditors
    and the American taxpayers who are being forced to cash out.
    Secured creditors, pension funds for teachers, fire fighters
    and State workers, like the dealers, are being sacrificed to
    appease the demands of the UAW.
        And what has happened to the taxpayers' money? The
    Administration is now using taxpayer dollars to rescue UAW.
    What is worse, the money will be written off as a forgiven
    debt. The UAW gets the piggy bank and the American people won't
    see a dime.
        The Administration's handling of Chrysler and General
    Motors should give all Americans great concern. In Chrysler and
    GM the Administration is replacing CEOs and strong-arming
    senior secured creditors. Corporate bondholders are being asked
    to sacrifice their property rights to deliver companies into
    union hands.
        In the TARP program the Administration is giving billions
    to banks and refusing to let the banks pay them back. That is
    hijacking the banks. In the GM negotiations, billions of
    dollars in TARP aid appeared slated to be completely forgiven.
    Call it a gift on the taxpayers to the UAW, courtesy of
    President Obama.
        Mr. Chairman, today we have an opportunity to scrutinize
    the unprecedented actions that have brought us to this point
    with these two auto dealers, and I thank you for having this
    hearing.
        Mr. Conyers. Lamar, you always manage to get a zinger in
    there in the opening statements. Thank you.
        I would like to recognize Subcommittee Chair Steve Cohen of
    Memphis, Tennessee, for any comment that he would like to make.
        Mr. Cohen. Thank you, Mr. Chairman.
        There are few things as firmly woven into our fabric as a
    Nation and our customs as the automobile. Everybody wants to
    get a car when they turn 16, or soon thereafter, and learn how
    to drive. There are cars that inspire songs: Beach Boys' GTO
    and Little Deuce Coupe; the first rock and roll song ever,
    Jackie Brenston's Rocket 88; unfortunately, another company
    that didn't do good, My Little Nash Rambler, BP; Mustang Sally,
    Warren Zevon's Studebaker.
        You will notice, none of those songs are about Toyotas or
    Hondas or Isuzus. It is American cars. And American cars are a
    lot about what our country has been about and what we have
    defined ourselves as with our cars--which cars we drive and
    what we do.
        General Motors, Ford and Chrysler produced those cars and
    employed millions of Americans and been a great part of our
    engine. At one time it was said what is good for General Motors
    is good for the Nation. I am not sure we can say that today.
        They have employed many people, and they still do, and they
    continue to employ hundreds of thousands of people who work in
    the industry and for suppliers and at dealerships.
        U.S. Automakers support thousands of retirees who are
    concerned about losing their pensions and their health care,
    and we need to be concerned about how these people come out in
    this bankruptcy of Chrysler and possible bankruptcy of General
    Motors, for these people gave their lives and expected
    payments. There are literally tens, probably hundreds of
    thousands of individuals in this class.
        The automobile industry is important for many areas in our
    country's economy and historically in east Tennessee, far away
    from my home, but in my State, people went from east Tennessee
    to Anderson, Indiana, and places in Michigan to gain employment
    and have since returned to retire. But their retirements are in
    jeopardy.
        The American automakers have stumbled badly. Some blame
    President Obama for the situation. I had a lady call me last
    week who said, ``President Obama has closed the Chrysler
    dealership in South Haven; he doesn't know anything about how
    to run a car company.''
        Well, apparently the people that were running the car
    companies didn't know much either. They failed initially to
    respond seriously to the challenge from foreign competitors
    until after those competitors had established strong footholds
    in our country and taken over the marketplace with cars that
    had better fuel efficiency and better records as long-lasting
    and safe vehicles. They resisted fuel efficiency standards and
    resisted making fuel-efficient vehicles. Even last year there
    were folks coming to my district and opposing better fuel
    standards for our cars.
        While American automakers have made great strides in
    addressing some of these problems, they are suffering because
    of their past missteps. Now one American icon, Chrysler, is in
    already in bankruptcy. Another, GM, faces an imminent
    bankruptcy filing. And while I hope to learn more about the
    details of both companies' restructuring proposals, I am
    particularly interested in a few points based on my
    understanding of their proposals.
        I am concerned about reports indicating GM intends to shift
    a significant amount of its production out of the country while
    depending on American moneys to keep it going. I hope we don't
    end up subsidizing the shipping of American jobs to other
    countries.
        Additionally, I wonder about the fate of GM stockholders,
    particularly the retirees, who will end up with very little in
    their investments. And I wonder how Chapter 11 is going to
    affect these people, and if these experts could tell us what
    they think the old Chapter 11 would have been at addressing the
    concerns of the American automobile companies, the workers, the
    retirees that might be different from this new Chapter 11,
    because Chapter 11 is the bailiwick upon which my Committee is
    looking.
        So I thank Chairman Conyers for holding this important
    hearing on the actual and potential bankruptcies of these
    automobile giants. I thank our witnesses for making themselves
    available to testify on short notice. And I am eager to learn
    about their thoughts on Chapter 11 and the possible
    consequences to the American public of the bankruptcy of these
    two most heralded and traditional American companies.
        Thank you, Mr. Chairman.
        Mr. Conyers. You are welcome.
        Steve King, Iowa, is recognized for any comments he may
    choose to make.
        Mr. King. Thank you, Mr. Chairman. I very much appreciate
    being recognized. And I appreciate this hearing today. This is
    a subject matter the American people need to know about, and I
    am going to be very interested in the perspective that each of
    the witnesses brings before this Committee.
        What is on my mind is, how do we preserve free enterprise,
    how do we preserve the rights of property, the rights of
    contract, the rights of franchise? What is happening to the
    capital investment in America if it fears that it will be taken
    over by the Federal Government or some machinery that results
    in the same?
        As I look at the sequence of events, we passed, over my
    objection, the TARP funding last fall, the $780 billion. Some
    of that went to bail out investment companies; some of the
    investment companies were secured holders of collateral in
    Chrysler and in General Motors. Some of those investment
    companies were leveraged out of their position to force a
    Chapter 11 result, which would have been a better result for
    the secured creditors if that had been the case. But they were
    leveraged out of their position because they received TARP
    money. One after another they dropped out until only about 5
    percent of the secured creditors were left when they gave up
    their position and the shares that get proposed to be handed
    over to the unions rather than the secured creditors, which
    turns this collateral and property right upside down.
        While that is going on we have franchise holders across
    this country that are told you are out of business and we
    handed your neighbor your assets of maybe $1 million or
    multiple millions of dollars in values of these franchises.
        Now, the rights of property are essential to the vigor in
    the free enterprise system. And how this could unfold and we
    end up with companies that are run for the benefit of the
    people working for them rather than for the profit of the
    investors, it is anathema to me and my entire philosophy about
    how the economy in the United States of America should work.
        If you want somebody's business, go buy it. If you don't
    like that, then start your own business and compete. That is
    what has made America great. And those are some of the things
    that I hope come out in the hearing today. And I know there
    will be differing viewpoints on the panel.
        Mr. Chairman, I ask unanimous consent to enter into the
    record an objection filed in bankruptcy court in the Chrysler
    bankruptcy case. It is a group of Indiana State pension funds,
    and the objection is to the Obama administration's Chrysler
    bankruptcy plan. This brief I would ask unanimous consent to
    enter into the record.
        And, without objection, I would also be willing to yield
    back the balance of my time.
        Mr. Conyers. Without objection, so ordered.
        Mr. King. I would yield back and I thank the Chairman.
        Mr. Conyers. Let me yield for an introduction: Mr. Daniel
    Maffei, our distinguished colleague from New York.
        Mr. Maffei. Thank you, Mr. Chairman. I will not take more
    than a couple of minutes, but I do want to welcome a
    constituent of mine. He is one of the members of the panel,
    Randolph B. Henderson.
        Mr. Chairman, Mr. Henderson is one of the many dealers in
    my district that had stories that concerned me and prompted me
    to get together with a number of my colleagues and write a
    letter to the White House Auto Task Force. I would ask
    unanimous consent that that letter, along with my full opening
    statement, be submitted into the record.
        Mr. Conyers. Without objection, so ordered.
        Mr. Maffei. Thank you very much.
        Mr. Randolph Henderson, Randy Henderson, is the owner of
    Webster Chrysler Jeep in Webster, NY, which is just east of the
    city of Rochester. He has been selling Chryslers for 15 years,
    and in fact, in 1998, was named a five-star dealer.
        Before opening up the dealership in Rochester, he worked
    his way up in retail business. He is also very active in the
    community with his charitable work supporting many nonprofit
    organizations such as Action for a Better Community.
        Late last year Chrysler Financial froze Randy's floor line
    plan threatening his dealership. And now he is one of the 789
    affected dealers who were given just 3 weeks in the middle of
    this recession to close their doors after being notified that
    Chrysler was terminating his franchise agreement.
        So, Mr. Chairman, I do want to welcome particularly Mr.
    Henderson here to the Committee on the Judiciary.
        Very, very grateful that you would take the time to come,
    along with the rest of the panel. And I appreciate your story
    since it is so important to what we are doing.
        I yield back.
        Mr. Conyers. I thank the gentleman. We have a large panel,
    but it is a distinguished panel.
        We welcome Professor David Skeel from the University of
    Pennsylvania Law School; the redoubtable Ms. Joan Claybrook,
    President Emeritus of Public Citizen; consumer advocate,
    author, activist Ralph Nader; Clarence Ditlow, Treasurer,
    Executive Director of the Center For Auto Safety; the Honorable
    Bruce Fein, a principal in the Lichfield Group; Mr. Andrew
    Grossman, Senior Legal Policy Analyst of the Heritage
    Foundation--welcome; Mr. Randy Henderson, President of
    Henderson Automotive Family of the National Automobile Dealers
    Association; President Damon Lester of the National Association
    of Minority Auto Dealers; and Professor Lynn LoPucki, the
    Security Pacific Bank Professor of Law, UCLA Law School.
        Mr. Conyers. We will stand in recess until Sheila Jackson
    Lee of Houston, Texas, returns. And she will then commence the
    hearing while the rest of us finish voting.
        And so the Committee stands in recess.
        [Recess.]
        Ms. Jackson Lee [presiding]. Thank you for your patience.
    We are going to reconvene the hearing on the ramifications of
    auto industry bankruptcies. We have just completed our opening
    statements because we are very interested in the very important
    testimony that is coming forward. Would you allow me to yield
    to Mr. Watt, if he wanted to have 1 minute.
        Mr. Watt. I came to the hearing to hear the witnesses.
        Ms. Jackson Lee. Thank you.
        He yields back.
        Mr. Sherman.
        Mr. Sherman. Obviously, saving the auto industry is very
    important. At the same time, we have to make sure that all
    creditors are treated according to the law.
        I look forward to hearing how we can accomplish that and
    how we are not straining too far to help those creditors that
    these auto companies are going to need to do business with in
    the future, as opposed to those creditors who are not part of
    their future, but are part of their past.
        I yield back.
        Ms. Jackson Lee. I thank the Chairman very much.
        Mr. Issa. Madam Chairman.
        Ms. Jackson Lee. I thank Mr. Sherman very much. And I hear
    another voice seeking to be recognized. We are now 1 minute
    because of the witnesses and because we want to proceed.
        Mr. Issa of California.
        Mr. Issa. Madam Chair, I appreciate this opportunity to
    hear from such a panel of witnesses and to begin the process of
    reminding the entire world that we are a country of laws and
    that our bankruptcy laws and our contract sanctity matter. And
    I hope by the time we leave today that people far and wide will
    begin to realize that regardless of the actions of the
    executive branch, ultimately rule of law is paramount and must
    be obeyed.
        And certainly Chrysler seeking bankruptcy and the
    protection has never been more protection than it is now.
        I yield back.
        Ms. Jackson Lee. The gentleman has yielded back.
        I understand Mr. Coble would like to be recognized for 1
    minute.
        Mr. Coble. One minute. Thank you, Madam Chairman.
        I am just concerned about what cost benefit is realized by
    the factories in reducing the number of franchise dealers,
    number one. And what savings were realized by eliminating
    Chrysler dealers with a 30-day notice, as opposed to a 1-year
    notice.
        Those are two questions I would like to hear from.
        I yield back, Madam Chairman.
        Ms. Jackson Lee. I thank the Chairman, former Chairman very
    much. And let me take my 1 minute very briefly.
        I think the questions that have been raised by my
    colleagues are crucial; but I am here for one reason, and that
    is the lack of appreciation and understanding of the
    utilization of Chapter 11 and the negative impact and the
    seemingly pointed impact on automobile dealers and, in
    particular, minority automobile dealers. My concern is, how do
    you go into Chapter 11 and harm those who have been part of the
    infrastructure of your business? How do you go into Chapter 11,
    and before you even go in, you rid yourself of dealerships who
    have proven themselves to be financially worthy?
        I find it to be unacceptable, and I believe that even in
    this late time, as these companies are in bankruptcy, there
    should be an immediate legislative fix that we hope can be
    signed by the President that specifically designates and points
    out the automobile dealers who were, in essence, creditworthy
    doing their work, and with a particular focus on the minority
    automobile dealers that I believe have been both offended and
    certainly not defended.
        So I hope that there can be some guide even beyond the
    instructions that have been given by this government for
    Chrysler and GM to fix itself. Why then is the burden falling
    heavy on the heads of those in our community that are doing
    business and doing it right every single day?
        And I yield back.
        We will now start with Mr. LoPucki and we would appreciate
    the presenting of your testimony for 5 minutes. And we would
    ask that you revise your statement, or summarize your statement
    and we would be willing to submit the statement into the record
    in its full completion. Thank you.

    TESTIMONY OF LYNN M. LoPUCKI, PROFESSOR, SECURITY PACIFIC BANK
                     PROFESSOR LAW, UCLA LAW SCHOOL

        Mr. LoPucki. Thank you for the opportunity to be here.
        The United States bankruptcy courts have a progressive
    disease. That disease is forum shopping and competition for big
    cases.
        Chrysler is a Detroit company. So is General Motors.
    Chrysler has filed in New York, in the New York bankruptcy
    court, and GM will probably do the same.
        In the 1980's, this phenomenon, forum--this is called forum
    shopping, filing away from where the company is located--in the
    1980's, about 30 percent of large public companies forum
    shopped. The last time I addressed this subcommittee, in 2004,
    the number was 65 percent forum shopping, and today it is 75
    percent. Seventy percent of all the larger public bankruptcies
    in the United States are filed now in just two courts--Delaware
    and New York.
        The cases don't just come to those courts; the courts have
    to do something to attract the cases. The result is that
    Chapter 11 is evolving a bias, and it is a bias in favor of the
    people who control the choice of a court: the managers of the
    company, the professionals who represent the company, and
    whoever finances the bankruptcy. And here that is the United
    States.
        So the United States is, in the Chrysler case, the
    beneficiary of this bias.
        But every bias in favor of someone is a bias against
    someone else. And the people on the other side of this bias are
    the creditors, the suppliers, the employees, the landlords, the
    tax authorities, the dealers, the communities, literally
    hundreds of thousands of people. It is not a level playing
    field for the rest.
        I want to just give you two examples of this evolution.
    Chapter 11 takes about a year to 2 years if you go through the
    ordinary procedure. Managers want to get out more quickly,
    though. They would like to be out in 30 to 60 days, and there
    is a procedure whereby someone can do that. It is a 363 sale, a
    sale of the company. It is an exception for unusual cases, the
    unusual case being where there is a buyer for this company,
    where the company is actually being sold.
        Now, GM and Chrysler are presented in the form of a sale,
    but they are really reorganization plans. They shouldn't be
    approved by the court, but everybody knows that they will be
    approved. If the New York court did not approve the Chrysler
    case, the New York court would not get the GM case, it would go
    to Delaware instead. And once those two sales are approved,
    then a lot of future debtors are going to want to do the same
    thing--30 to 60-day bankruptcies, not the year to 2 years. And
    the courts will be unable to deny them because if one court
    says ``no'' to them, they will simply go to a different court.
        Now, the second example is professional fees. They have
    been increasing at the rate of 10 percent per year over a
    period of 10 years. I think that is higher than the rate of
    increase in health care costs. The effect is to drain funds
    that could have been used in the reorganization, could have
    made the company stronger. If a court tries, though, to control
    the fees, again it has no effect, because the cases will simply
    go to a different court that doesn't control the fees.
        So the system that has been set up by Congress for
    reviewing the fees has atrophied. The courts are simply
    ignoring the statutes and rules.
        We have documented this in a report. It was released a few
    weeks ago, and it contains--it is linked to all of the evidence
    out of the court files that these laws are being broken.
        The United States Trustee is the agency that monitors
    compliance with the fee control system. To date, they have had
    no comment on our report; and it is one of my hopes in coming
    here today that this Committee or some Member of this Committee
    will ask them for a comment.
        Thank you very much.
        Ms. Jackson Lee. Thank you very much for your testimony.
        [The prepared statement of Mr. LoPucki follows:]

                     Prepared Statement of Lynn M. LoPucki

                                   __________

        Ms. Jackson Lee. We will now hear from Mr. Lester. Mr.
    Lester, I believe in your representation of the National
    Association of Minority Automobile Dealers you are joined by a
    number of members, which include Carl Barnett of Houston, Sam
    Wright, Alfred Glover, Warren Allen, Alan Moore, officers or
    principals in the organization, and many others. So we thank
    you for your presence. You, too, may submit your statement for
    the record and summarize your statement.

     TESTIMONY OF DAMON LESTER, PRESIDENT, NATIONAL ASSOCIATION OF
                         MINORITY AUTO DEALERS

        Mr. Lester. Thank you, Madam Chairwoman.
        Again, my name is Damon Lester. I am the President of
    NAMAD, the National Association of Minority Automobile Dealers.
    NAMAD represents ethnic minority automobile dealers in the
    United States which--currently there are a total of 19,000 new
    automobile dealers of which less than 1,200 or 5 percent are
    owned by ethnic minority dealers in the United States.
        Since the auto bailout hearing last year and with the
    submission of both Chrysler and General Motors viability plans,
    it has been well documented by these manufacturers to either
    rationalize or reduce their dealer body by consolidation and
    brand elimination.
        In fact, dealerships are independently owned and
    independently financed franchises. They are the middleman
    between the manufacturer and the consumer, they represent the
    only distribution channel for manufacturer products, and they
    generate revenue for the manufacturers and are not an expense
    line item to the manufacturers. So using the excuse for
    consolidating and eliminating brands as a reason to save a
    manufacturer money is simply not true.
        Today's small dealerships throughout the U.S. are in a
    crisis and we need help now. The help needed is largely due to
    the lack of consumer confidence, the lack of confidence for
    retail credit, the lack of lender confidence to provide loans
    to automobile dealers for both working capital and floor plan
    loans even with government-backed loan guarantees. In fact,
    since our government provided working capital loans to
    automobile manufacturers, fair consideration should have also
    been given and needs to be given now to automobile dealerships
    via directly from the SBA, similar to what was done during the
    Carter administration in 1980.
        As the Chrysler bankruptcy filing and its announcement to
    terminate 789 dealerships in which these stores must close
    their doors by June 9, 2009, will result in over 40,000 direct
    dealership job losses, a projected loss of over $10 billion in
    local and State economic dealership contributions and
    employees, taxes, customer services, suppliers and charities,
    the bankruptcy filings will save Wall Street, but will tear
    down Main Street as many of these displaced employees do not
    have another option to seek employment quickly.
        For minority dealers, our representation has always been
    disproportionate compared to the entire dealer network. At our
    peak we have reached a maximum of over 2,000 dealerships in the
    United States, and today we are less than 1,200 with another
    reduction due to the Chrysler and General Motors terminations.
    This reduction in our dealer body will and has begun the
    elimination of wealth in the minority communities.
        The bankruptcy filing will allow Chrysler to evade the
    dealer franchise laws in various States. More importantly, the
    Federal statute intended to protect dealers in the Automobile
    Dealers Day in Court Act is negatively implicated by the recent
    filings. It is because of the filing that allows Chrysler and
    any other manufacturer that may file for bankruptcy to hide
    behind the Bankruptcy Code and the bankruptcy filing in order
    to terminate the dealer's franchise agreement and reduce its
    dealer body without providing reasonable and just compensation.
        Therefore, we request that Congress consider relieving the
    individual small dealers from personal liability as guarantors
    on floor plan and term loans. In addition, we believe that the
    small dealers should be allowed to keep the sales proceeds from
    the parts inventory, special tools and fixed assets to provide
    these dealers with a fresh start. Any financial institution
    that received TARP money, as well as captive finance companies
    such as Chrysler Financial, should take back their inventory
    and sell it themselves.
        Thank you.
        Ms. Jackson Lee. Let me thank you very much Mr. Lester for
    your testimony.
        [The prepared statement of Mr. Lester follows:]

                       Prepared Statement of Damon Lester

                                   __________

        Ms. Jackson Lee. And, Mr. Henderson, as you address the
    Committee, allow me to acknowledge that I believe accompanying
    you today is Mr. Henry Ware, owner of the South Haven Pontiac-
    Buick-GMC in South Haven, Mississippi, and the President of the
    General Motors Minority Dealers Association. We welcome him to
    the hearing. Would he raise his hand?
        Thank you very much. I just greeted you. Thank you very
    much.
        Mr. Henderson.

     TESTIMONY OF RANDOLPH B. HENDERSON, JR., PRESIDENT, HENDERSON
       AUTOMOTIVE FAMILY, NATIONAL AUTOMOBILE DEALERS ASSOCIATION

        Mr. Henderson. Thank you Madam Chair. I am here today as a
    member of the National Automobile Dealers Association, the
    Chrysler Minority Dealers Association, the National Association
    of Minority Automobile Dealers, as well as----
        Ms. Jackson Lee. Mr. Henderson, would you please pull the
    mic closer and make sure your green light is on.
        Mr. Henderson. I am here today as a member of the National
    Automobile Dealers Association, the National Association of
    Minority Automobile Dealers, the Chrysler Minority Dealers
    Association; and as you indicated, I am accompanied by Mr.
    Ware, who is President of the General Motors Minority Dealers
    Association.
        I am also here to present the perspective of many of my
    fellow Chrysler and General Motors dealers across the Nation.
        We want to inform you of, one, the devastating impact of
    the Chrysler Corporation's bankruptcy and possible GM
    bankruptcy on the dealership body; two, the lack of
    transparency and the accountability in the taking of our
    properties and livelihood; and three, the disparate impact of
    the proposed dealership reductions on the minority dealer
    community and the communities in which they serve.
        I have been in the automotive retail area for 15 years--for
    27 years, the last 15 of which as a Chrysler corporation
    dealer, working my way up through the ranks and at one time
    employing over 130 people between three dealerships and
    generating annual revenues up to $85 million.
        My wife and I have donated hundreds of thousands of dollars
    over the years to our churches and community and have been an
    asset to Chrysler Corporation. However, the events that have
    developed around us recently have created an economic
    environment that is causing us financial ruin. Chrysler has
    slated my dealership franchise agreement and hundreds of others
    for termination through the rejection mechanism of the
    bankruptcy process.
        Over the last year, natural disasters, high gas prices and
    a drop in consumer spending made selling Chrysler vehicles very
    difficult. In spite of these factors, Chrysler told us we
    needed to order unneeded and unwanted vehicles to help to keep
    the plants going if we wanted to see the company survive. These
    very vehicles on June 9th could become a personal liability to
    many dealers.
        As you know, Chrysler filed for bankruptcy protection on
    August 30, 2009. There was a great deal of uncertainty among
    the dealer body because of no clear criteria regarding who
    would remain and who would not. On May 14th, Chrysler announced
    a list of 789 dealerships slated for termination. These
    businesses are slated for rejection and closure as Chrysler,
    Jeep or Dodge dealers on June 9th, and it creates challenges to
    some dealers as it relates to the Warren Act.
        Once our names were announced, we were inundated by the
    media, our employees went into shock and dealers saw 10, 30, 50
    years of hard work go down the drain; and the hardworking men
    and women that we employ, through no fault of their own, face
    the prospect of joblessness and inability to support their
    families.
        There has still been no clarity or clear criteria presented
    to us. There are dealers with identical profiles on both lists.
    There is no accountability, transparency or equity in the
    process by which the termination decisions are being made.
    Chrysler is not buying back vehicles, parts or special tools,
    and there is no right to appeal this decision within the
    company, yet the company has received billions of dollars in
    Federal loans and is currently receiving Federal taxpayer
    dollars.
        Because of Chrysler's action, Chrysler Financial has frozen
    many of our accounts. I am sad to say that many dealers are
    unable to even afford to retain individual legal representation
    to defend ourselves in this very expensive bankruptcy
    procedure. Deadlines to file individual objections to being
    rejected are approaching next week.
        For the 2,300 dealers on the assumed list, their survival
    is no less certain. They also could be moved to the rejection
    list.
        For minority dealers, the prospect of Chrysler's bankruptcy
    are tragic. Less than 5 percent of Chrysler's dealerships are
    minority owned, yet the Census Bureau reported last week that
    minorities make up 34 percent of the U.S. population. Out of
    Chrysler's 3,181 dealerships, minority business people own only
    158, yet Chrysler, in the first phase of its eliminations,
    plans to reject and thereby eliminate 24 percent of those
    minority dealers. By ethnicity, that is a 15 percent reduction
    for Hispanic dealers, 22 percent for Native American, 27
    percent for African American and 32 percent for Asian American
    dealers. The statistical evidence of disparate impact is hard
    to ignore.
        Similarly, the projected impact on the GM minority dealers
    is catastrophic as well. Out of General Motors' 6,000
    dealerships only 298 are owned by minority business dealers,
    representing less than 5 percent of the entire GM dealer
    network. It is estimated that 57 percent of the GM minority
    dealer body will be impacted by the Pontiac brand eliminations
    and the potential sale and spin-off of Saturn, Saab and Hummer
    franchises.
        The statistical evidence of disparate impact is hard to
    ignore. Moreover, given that Chrysler and General Motors are
    utilizing Federal funds, we believe there should be reasonable
    representation of minorities in this dealer body.
        In conclusion, I regret that I am here today on behalf of
    thousands of majority and minority business owners who face the
    prospect of financial ruin and the taking of their property
    without due process and fair compensation. This bankruptcy
    should not isolate Chrysler from accountability to this
    Judiciary Committee, dealers or consumers.
        I am proud to live in a country where I can call these
    hardworking small and large business people my friends and
    colleagues. We appeal to the leaders of this great Nation for
    direct intervention and assistance.
        Thank you, Ms. Chairman.
        Ms. Jackson Lee. Thank you very much, Mr. Henderson, for,
    as has been by the previous witnesses, very astute testimony.
        [The prepared statement of Mr. Henderson follows:]
                Prepared Statement of Randolph B. Henderson, Jr.
        Good morning Mr. Chairman, Congressman Smith, and members of the
    committee.
        I am here today at your invitation with Mr. Henry Ware, President
    of the General Motors Minority Dealers Association, and on behalf of
    the National Automobile Dealers Association, the Chrysler Minority
    Dealers Association and the National Association of Minority Automobile
    Dealers to present the perspective of many of our fellow Chrysler and
    General Motors Dealers across this nation. We want to inform you of 1)
    the devastating impact of the Chrysler Corporation's bankruptcy and
    possible GM bankruptcy on the dealership body; 2) the lack of
    transparency and accountability in the taking of our properties and
    livelihood; and 3) the disparate impact of the proposed dealership
    reductions on the minority dealer community.
        I am a Chrysler Jeep dealer in Webster, NY. Like many dealers, I
    grew up in the automobile business, started at the bottom by washing,
    gassing, and repairing cars, and then moved into the retail area for 27
    years, the last 15 of which as a Chrysler Corporation dealer. I have
    enjoyed the opportunity to strive for the American dream. Like many
    dealers, I have worked my way up through the ranks of the dealership
    world, competing on a national level, winning numerous awards, and
    employing over 130 people at one time between three dealerships and
    generating annual revenues of up to 85 million dollars. My wife and I
    have donated hundreds of thousands over the years to our churches and
    community and have been an asset to the Chrysler Corporation. However,
    the events that have developed around us recently, have created an
    economic environment where preventable circumstances are causing
    financial ruin. Chrysler has slated my dealership franchise agreement
    and hundreds of others for termination through the rejection mechanism
    of the bankruptcy process.
        This situation was not created overnight. It started with Chrysler
    strongly encouraging it's dealers to sell or purchase additional
    franchises as part of its consolidation plan--``the Genesis Plan'' and
    in many cases to also build new upgraded and expensive facilities. At a
    time when many challenges were arising in the market, lenders refused
    to assist many of us with our working capital needs. The financial
    sector froze and access to capital evaporated. In addition, Chrysler
    pressured dealers repeatedly during 2007 and 2008 to order additional
    new vehicles for our inventory to help the company even though we were
    unable to move the vehicles currently on our lots. Natural disasters,
    high gas prices and a drop in consumer spending because they were
    facing their own economic challenges, made selling Chrysler vehicles
    very difficult.
        Nonetheless, Chrysler told us we needed to help keep the plants
    going if we wanted to see the company survive. They sought federal
    financial assistance but did not provide any of those assistance funds
    to dealers despite the fact that at their request, we assisted them
    side by side in visits to capital hill to discuss the need for auto
    industry funding. Towards the end of the year, Chrysler Financial froze
    my floor plan lines in spite of the fact that we were and always had
    been current on our capital line, floor line, and mortgage payments to
    them and also denied us access to our working capital account deposits.
    Mine is not an isolated story, it has been repeated many times in the
    last several months all over the country. Chrysler has systematically
    used low working capital or low profits as the reason to shut down many
    dealers.

                              CHRYSLER BANKRUPTCY

        Then came the Bankruptcy--Chrysler filed bankruptcy on April 30,
    2009. There was a great deal of uncertainty among the dealer body
    because of no clear criteria regarding who would remain and who would
    not. On May 14, 2009, Chrysler announced the list of 789 dealerships
    slated for termination. These businesses are slated for rejection and
    closure as Chrysler, Jeep, or Dodge franchises on June 9th.
        Once our names were announced, we were inundated by the media, our
    employees went into shock, and dealers saw 10, 20, 40, 50 years of work
    go down the drain, the value of our assets disappeared and the
    hardworking men and women we employ, who through no fault of their own,
    faced the prospect of joblessness and the inability to support their
    families. Our sales have dropped or in some cases completely stopped.
    Customers are staying away because of the uncertainty regarding both
    the future of Chrysler and their local dealer.
        Why were we on the list? There has still been no clarity or clear
    criteria presented to us. There are dealers with identical profiles on
    both lists. There is no accountability, transparency or equity in the
    process by which the termination decisions are being made. Chrysler is
    not buying back vehicles, parts, or special tools and there is no right
    to appeal this decision with the company. Yet the company has received
    billions of dollars in federal loans and is currently receiving federal
    taxpayer dollars. What do the dealers receive? A few cents on the
    dollar, maybe. We have put our life savings into our businesses.
    Because of Chrysler's actions and the economy, we are cash poor and
    Chrysler Financial has frozen many of our accounts. I am sad to say
    that many dealers are unable to even afford to retain individual legal
    representation to defend ourselves in this very expensive bankruptcy
    proceeding. Deadlines to file individual objections to being rejected
    are approaching next week, but what can we do?
        For the 2300 dealers on the Assumed list, their survival is no less
    certain. They could be moved to the rejection list at Chrysler's whim.
    Even if they stay on the assumed list, many cannot afford the extensive
    facility upgrades and the working capital that Chrysler requires.
    Chrysler knows that with no access to capital in the private sector or
    direct aid from the federal government, these dealers will not be able
    to continue to operate in the current environment. As a dealer in Texas
    who is on the assumed list says, ``whether you will go away by
    rejection or attrition, you still go away.''

                                MINORITY DEALERS

        For minority dealers, the prospects of Chrysler's bankruptcy are
    tragic. Less than 5% of Chrysler's dealerships are minority owned. Yet
    the Census Bureau reported last week that minorities make up 34% of the
    U.S. Population. We drive cars, we help build the cars and we service
    the cars. We contribute to our communities and minority dealerships
    employ 50 people on average, both skilled and unskilled workers.
        Out of Chrysler's 3,181 dealerships, minority business people own
    only 158. Yet Chrysler, in the first phase of eliminations, plans to
    reject and thereby eliminate 24% of those minority dealers. By
    ethnicity, that is a 15% reduction for Hispanic dealers, 22% reduction
    for Native American dealers, 27% reduction for African American and 32%
    reduction for Asian American dealers. The statistical evidence of
    disparate impact is hard to ignore.
        Similarly, the projected impact on the GM minority dealers is
    catastrophic as well. Out of General Motors' 6,000 dealerships, only
    298 are owned by minority business people, representing a little less
    than 5% of the entire GM dealer network. While the actual number of
    ethnic minority dealers who received a franchise termination letter
    from General Motors last Friday is not yet confirmed, it is believed
    that a disproportionate number of those 1,124 dealers were ethnic
    minorities. Furthermore, it is estimated that 57% of the minority
    dealer body will be impacted by the Pontiac brand eliminations and
    potential sale or spin-off of the Saturn, Saab and Hummer franchises.
        The statistical evidence of disparate impact is hard to ignore.
    Moreover, given that Chrysler and General Motors are utilizing federal
    funds, there should be reasonable representation of minorities in its
    dealer body.

                                   CONCLUSION

        In Conclusion, I regret that I am here today on behalf of thousands
    of majority and minority business owners who face the prospect of
    financial ruin and the taking of their property without due process and
    fair compensation. This bankruptcy should not isolate Chrysler from
    accountability to this Judiciary Committee, dealers or consumers. I am
    proud to live in a country where I can call these hardworking, small
    and large business people my friends and colleagues. We appeal to the
    leaders of this great nation for direct intervention and assistance.
    Thank you, Mr. Chairman and God Bless.
                                   __________

        Ms. Jackson Lee. Mr. Andrew Grossman, you are recognized
    for 5 minutes. And you may summarize your statement and submit
    your entire statement into the record.
        Mr. Grossman.

     TESTIMONY OF ANDREW M. GROSSMAN, SENIOR LEGAL POLICY ANALYST,
                        THE HERITAGE FOUNDATION

        Mr. Grossman. Good afternoon, and thank you for the
    opportunity to testify today.
        My name is Andrew Grossman, and I am Senior Legal Policy
    Analyst for The Heritage Foundation. My research there focuses
    on law and finance, economic regulation and the proper role of
    the government in structuring markets, and I will begin this
    hearing with the use of bankruptcy in the automotive sector, a
    subject on which I have published and spoken extensively.
        The testimony this afternoon concerns the very serious and
    negative consequences of the Obama administration scheme to
    evade the requirements of the bankruptcy system and reward a
    labor union at the expense of senior creditors.
        I have three points:
        First, this approach sacrifices the pragmatic discipline of
    a standard Chapter 11 reorganization, leaving both Chrysler and
    General Motors at a disadvantage;
        Second, the President besets risk-gutting bankruptcy law
    and facilitating corporate looting and freeze-outs; and
        Third, trampling senior lenders' contractual and property
    rights undermines the rule of law and threatens to do great
    damage to our economy.
        Contrary to the Administration's claims, these cases are
    not real bankruptcies. Instead, the Administration is abusing
    the Bankruptcy Code to grease the wheels of a massive automaker
    bailout. When this sort of sham transaction has been attempted
    by the private sector, the results have been close scrutiny by
    regulators and even prosecutions. Think Enron.
        My first point is that the scheming is counterproductive.
    Chapter 11, with its strict focus on maximizing the value of a
    business' assets, is designed to address the kind of deep-
    seated, long-term problems that have plagued the automakers.
    Replacing Chapter 11 with a political process will impede the
    reforms that these companies need to be competitive. There is
    already evidence of this.
        For example, both Chrysler and General Motors have
    announced cuts to their dealer networks, an essential step. But
    the cuts are nowhere near as deep as industry veterans say are
    necessary, and this is probably due to politics. The result is
    that neither automaker will come close to achieving the
    efficiencies of Toyota's world-class distribution network.
        Another example is work rules. These Byzantine arrangements
    govern nearly every facet of automobile production at a major
    cost in terms of flexibility and efficiency. In its deal with
    Chrysler, the UAW did agree to simplify them a bit, a step in
    the right direction, but again, the gains are nowhere near what
    might have been had in a regular Chapter 11 case.
        This leaves Chrysler at a severe competitive disadvantage,
    and General Motors will probably suffer the same fate. The
    bottom line is that a regular Chapter 11 reorganization would
    have had better results than the Administration's bailout
    scheme.
        My second point is that the precedent set by the scheme
    puts our bankruptcy system at risk. Chapter 11, as crafted by
    Congress, works well to turn around troubled businesses.
    Research by Elizabeth Warren and others shows success rates of
    up to 72 percent for companies that were once on the verge of
    failure.
        The system is threatened when it is abused to steal from
    one party to give to another. That is exactly what happened in
    the case of Chrysler. Secured creditors holding super-safe debt
    were told to take a hike so that their assets, with some
    additional from the government added in, could be handed over
    to union control.
        This precedent will facilitate the looting of companies by
    insiders and the freezing out of investors. It is that
    dangerous.
        My third point is that trampling senior lenders'
    contractual and property rights undermines the rule of law and
    threatens grave damage to our economy. The rule of law means
    clear, generally applicable laws applied consistently by which
    individuals can organize their affairs. As James Madison
    explained in The Federalist, ``The rule of law is a
    prerequisite to due process and a protection against the
    arbitrary exercise of power,'' in other words, tyranny. Tossing
    aside well-established rights merely because they are
    inconvenient or expensive to the government strikes directly at
    the rule of law, and it will have consequences.
        Several are obvious. The automakers, of course, will have
    limited access to financial markets for years to come. When
    they are able to borrow, it will be expensive and on
    unfavorable terms. This will impede their recovery.
        More generally, unionizing industries will suffer a major
    blow. As one hedge fund manager explained this week, the
    obvious lesson of this episode is, don't lend money to a
    company with big legacy liabilities. That means unions. The
    automaker bailout will cost jobs in unionized industries.
        Finally, lending across the entire economy could be
    affected. Investor Warren Buffett has expressed this fear.
    Tinkering with the rule of law does not come cheap.
        I conclude with a recommendation. This episode of
    lawlessness began in Congress with the legislation that
    established the Troubled Asset Relief Program, or TARP, which
    has become the Administration's slush fund. Congress also has
    the power to put an end to these abuses by blocking future
    bailouts and beginning the slow process of unwinding those
    already made.
        Thank you for the opportunity to appear before you today. I
    stand ready to answer your questions.
        Ms. Jackson Lee. Thank you very much, Mr. Grossman.
        [The prepared statement of Mr. Grossman follows:]

                    Prepared Statement of Andrew M. Grossman

                                   __________

        Ms. Jackson Lee. And now we recognize Mr. Fein, who is well
    familiar with this Committee. We thank you for coming again,
    and we ask you if you might summarize your statement and submit
    your entire statement into the record. You are recognized for 5
    minutes.

                  TESTIMONY OF BRUCE FEIN, PRINCIPAL,
                          THE LICHFIELD GROUP

        Mr. Fein. Thank you, Madam Chairman and Members of the
    Committee.
        I am here representing the Constitution of the United
    States. It is a document that you, of course, are all sworn to
    uphold and defend under Article VI, that has been viewed as
    quaint in recent years, I think much to the disadvantage of the
    rule of law and otherwise.
        And I am compelled to make this analogy, I think, hearing,
    I think, the consensus of the enormous impact the
    reorganizations of General Motors and Chrysler will have across
    the spectrum of the American economy, and the complaints about
    what the bankruptcy judges might be doing, what the executive
    branch is doing.
        And I recall a statement from Pogo in the 1970's, ``We have
    met the enemy and we are they,'' because the only reason why we
    are here complaining and worrying about bankruptcy judges and
    the executive branch is because this branch has given away all
    of the power without any guidelines whatsoever.
        Let's review exactly how we got to where we were through
    the delegation of power. It was this branch, through the TARP
    funds, that enabled the executives to utilize virtually
    unchanneled discretion to decide which businesses, which
    companies, would get money; which would not; what limitations
    would be placed on the money. There were no guidelines.
        And compared to the Supreme Court's invalidation of the
    National Recovery Act in Schechter Poultry, that statute was
    micromanagement compared to the TARP. And from there we go to
    bankruptcy.
        Well, bankruptcy judges serve for 14 years. They are
    appointed by courts of appeals, who also are appointed and
    serve life tenure. Where is the accountability to the
    bankruptcy judge, despite the fact that their decisions will
    have the enormous impact that you have described in your
    opening statements and the witnesses have described?
        The reason why the Founding Fathers entrusted legislative
    power to this branch was because you are politically
    accountable. Constituents have the ability to communicate
    directly, and you have to pay a price if you do something that
    turns out to be untoward.
        The Founding Fathers did not want platonic guardians
    sitting as bankruptcy judges, standing at the commanding
    heights of the economy, doing whatever they wanted and if it
    turned out wrong, that is too bad. Who is going to go pick at a
    bankruptcy judge? You can't have the response that the
    democratic process anticipates.
        And this is not an impractical suggestion that this branch
    should be deciding the fate of Chrysler and General Motors or
    other big companies. When the railroad industry was in peril,
    and I remember--I am sure Chairman Conyers remembers--that in
    the 1970's, Amtrak was established to take over the passenger
    service, out of bankruptcy, and it was a statute that enacted
    Amtrak.
        Conrail ended up taking over the freight rail service, and
    it was this branch that enacted the Conrail statute. It was
    called the Regional Railroad Reorganization Act of 1973, and it
    was this branch that privatized Conrail. They said, well, it is
    just too complex, it will be too lengthy a bill.
        Well I remember testifying and you voting on the World
    Trade Organization, over 1,000 pages long. I think ERISA was
    the one statute that no one had read completely, it was so
    long. So there are clear precedents for this branch enacting
    very complicated statutes and taking the accountability that
    the Constitution anticipates.
        Moreover, there are serious other constitutional questions
    than the unconstitutional delegation at issue here, and they
    have been raised with regard to the contracts clause. The
    bankruptcy laws basically endow unelected officials the
    authority to void executory contracts involving hundreds of
    thousands of persons, whether retirees, employees, dealers or
    otherwise. That is a very, very alarming power to delegate to
    someone who sits for 14 years because the court of appeals
    appointed him there. More reason than otherwise why it should
    be this branch should be taking that review process. That
    doesn't mean that ultimately this legislation that you would
    enact would be subject to judicial review, but every branch of
    government has the obligation to uphold and defend the
    Constitution of the United States, not just the bankruptcy
    courts.
        And I am worried seeing a broad spectrum of problems this
    country confronts of the repeated effort by this branch to
    yield to the executive branch all the important decision-making
    power, whether it is war and peace, whether it is the TARP
    funds or otherwise.
        You are elected here to make decisions, not to duck them;
    and that is what your obligation requires you to do. And I
    think this demonstration and hearing today shows what enormous
    ramifications will flow from the Chrysler and General Motors
    reorganizations that you should decide and let the politics
    work as they will.
        That is how democracy works. It doesn't mean you will be
    infallible, but at least we will have the dignity to know we
    will charting our own economic destiny, not a bankruptcy judge.
        Thank you, Madam Chairman.
        Ms. Jackson Lee. Let me thank the witness for his
    testimony.
        [The prepared statement of Mr. Fein follows:]

                        Prepared Statement of Bruce Fein

    Dear Mr. Chairman and Members of the Committee:

        I am pleased to share views on the impending bankruptcy
    reorganizations of Chrysler and General Motors. I strongly believe the
    Congress of the United States should enact laws to stipulate the terms
    of any reorganization of these twin motor companies because of their an
    enormous affect on interstate commerce. If Congress fails to act, the
    reorganization decision will fall to politically unaccountable
    bankruptcy judges appointed to serve a 14 year terms by federal
    appellate courts. The Constitution does not contemplate the regulation
    of interstate commerce by Platonic Guardians standing over the
    commanding heights of the economy. The legislative power was assigned
    to Congress for a reason: self-government is a farce unless major
    decisions are made by political actors representing the collective
    voice of the people.
        General Motors and Chrysler employ tens of thousands. Even a
    greater number of retirees depend on the companies for various
    benefits. They also support dealer networks. Vehicle sales are in the
    millions. The Constitution entrusts the legislative power to regulate
    interstate commerce to Congress. When the railroad industry was
    reorganized in the 1970s, Congress played a pivotal role. It enacted
    the National Railroad Passenger Corporation Act of 1970 to form Amtrak
    to operate a passenger railroad system. Congress later enacted the
    Regional Rail Reorganization Act of 1973 to authorize the creation of
    Conrail to operate a railroad freight system. Conrail was later
    privatized at the direction of Congress with the Conrail Privatization
    Act of 1986.
        There is no sound reason based on precepts of democracy and the
    Constitution for Congress to play a lesser instrumental role in
    reorganizing major auto companies. Their impact on the economy is
    comparable. Bankruptcies entail the revision or voiding of executory
    contracts, which is in tension with the Contracts Clause and the due
    process clause of the Fifth Amendment. Further, the vast discretionary
    authority enjoyed by bankruptcy judges to readjust economic relations
    and contracts with toothless legislative guidance is in tension with
    the non-delegation doctrine of separation of powers.
        Members of Congress are elected to make significant economic
    decisions because they are closest to the people whose lives and
    livelihoods will be significantly affected. Members should decide on
    the economic destinies of General Motors and Chrysler. They would be
    neglecting their constitutional obligations by shuffling off the
    decisions to appointed bankruptcy judges shielded from the American
    people.
                                   __________

        Ms. Jackson Lee. Let me now recognize Mr. Clarence Ditlow
    for 5 minutes.
        And, likewise, you can summarize your statement and submit
    your entire statement into the record. Mr. Ditlow, you are
    recognized for 5 minutes.

    TESTIMONY OF CLARENCE M. DITLOW, EXECUTIVE DIRECTOR, CENTER FOR
                              AUTO SAFETY

        Mr. Ditlow. Thank you, Madam Chairman and Members of the
    Committee.
        Before I begin my testimony, I would like to introduce two
    people who have come from California and from Indiana. Fargood
    Norian, who was injured when a Jeep failed to hold it in park;
    and Jeremy Warriner, who was burned tragically in another Jeep
    in a fire impact.
        Mr. Warriner. Thank you very much for having this hearing.
        Mr. Ditlow. At this point----
        Ms. Jackson Lee. Before you continue, let me--with the
    difficulty of standing, let me again welcome Mr. Fargood Norian
    and Jeremy Warriner to this hearing. We understand that they
    are plaintiffs in a personal injury and product liability suit
    with Chrysler.
        Your presence here today is recognized and it is
    acknowledged as very important. We thank you for your presence
    here today.
        Mr. Warriner. Thank you.
        Ms. Jackson Lee. The witness may continue.
        Mr. Ditlow. Thank you, Madam Chairman.
        I want to go from the lofty ideals of the Constitution,
    just expounded, to the world of the consumer who is
    dramatically affected by this Chrysler bankruptcy. And what we
    are looking at are consumers who purchased lemon automobiles
    today, who will lose their lemon rights under the bankruptcy
    proceeding and consumers who buy an automobile who have the
    misfortune of being in a crash in the future. Because under the
    bankruptcy, the Chrysler, the new Chrysler will purchase the
    assets free and clear of interest in property. And basically
    what that means is that the new Chrysler will not assume
    litigation costs for an accident, no matter how significant
    that accident is; and for the consumer who gets a lemon, they
    won't assume the lemon rights under the litigation.
        So now what we are really looking at is that seldom have
    consumers needed a voice more today, when fundamental rights
    are jeopardized by this proceeding; and, in fact, the rights
    are being taken away with the assistance of payment of billions
    of taxpayer dollars.
        Now, what are we talking about: What we are talking about
    are defects such as the lack of a brake shift interlock in a
    car that allows Mr. Norian to be run over and injured, fire
    systems in vehicles that caused the burn injuries of Jeremy
    Warriner and others.
        We are talking about seat backs that are so weak that when
    you are hit from behind in a minor collision, they collapse and
    cause injuries. What we are talking about are roofs that are
    weak and, in a rollover crash, the roof doesn't hold.
        Now, not all Chrysler vehicles are this way, but some are.
    We have a recall system in place in this country. Recall rights
    are preserved. But recalls come about because consumers are
    injured, come to the attention of the National Highway Traffic
    Safety Administration, and we get the recall.
        But the very consumers who are injured, that generated the
    recall, have no rights under this new proceeding because their
    liability litigation rights are taken away. They won't receive
    compensation for those injuries that led to a recall. And even
    when we do have a recall, ones like the Chrysler tailgate
    latch, there were--almost half of those vehicles were never
    fixed in the recall, so they are still out there on the roads.
    So we have a tremendous gap that is not covered.
        And when we look at this, the consumers in the future--I
    mean, we are not talking about an enormous amount of money, but
    we are putting tens of billions of dollars into this
    reorganization of Chrysler and GM, but we are not taking care
    of the consumer. Their rights are being wiped out. And to the
    consumer, it is their entire life.
        The automobile--as the dealers have indicated, it is the
    primary means of transportation in this country. If you have a
    lemon and you lose your vehicle, it is not reliable, you are
    not going get to work; you may lose your job, that causes
    family problems. But yet every single State has a lemon law,
    but the rights under that lemon law are now being jeopardized
    by this bankruptcy.
        In addition, when you look at a consumer who is injured,
    often a consumer in a rollover crash becomes paralyzed. If
    there is no coverage through a liability claim, their insurance
    will often run out; they become wards of the State.
        So sooner or later the taxpayers are going to pick it up.
    The system is not designed to work that way. And what we would
    recommend is that the new Chrysler recognize those liabilities
    and assume them from the old Chrysler in the future, that they
    take out an insurance policy to cover it.
        And if all else fails, and we can't get this bankruptcy
    court to listen to reason and take care of the consumer, then
    we should create a fund from the government to take care of the
    consumer, just like we are taking care of the corporation.
        So I want to thank you for that, and I want to assure you
    that there are just tremendous impacts on the consumers that
    have been overlooked in this entire proceeding.
        Thank you.
        Ms. Jackson Lee. Mr. Ditlow, we thank you again for that
    instructive testimony.
        [The prepared statement of Mr. Ditlow follows:]

                    Prepared Statement of Clarence M. Ditlow

                                   __________

        Ms. Jackson Lee. And we recognize a gentleman that needs no
    further introduction, but we acknowledge his long years of
    service and commitment to the consumer.
        Mr. Ralph Nader is recognized for 5 minutes.

              TESTIMONY OF RALPH NADER, CONSUMER ADVOCATE

        Mr. Nader. Thank you, Madam Chair and Members of the House
    Judiciary Committee for this hearing.
        The government-led restructuring of Chrysler and General
    Motors has been twice delegated, first by Congress to the
    executive branch and then by the President to a task force.
        The task force is made of up cabinet official an high level
    political appointees, but the predominant ones have from Wall
    Street. They have a financial approach to this problem, they
    are not reflecting manufacturing knowledge at all. And I
    mention Secretary Geithner, economic director Larry Summers and
    Steve Rattner. In law school we used to study cases involving
    excess delegation of congressional authority to agencies and
    departments in the government. Those problems are really quaint
    compared to the wholesale delegation these days. I think
    Congress feels it is so overwhelmed that it is exhibiting
    evidence of cognitive dissidents.
        And it is important historically to know that Congress has
    conducted hearings and pronounced policies into law that are
    very complex, the tax laws for example, the pension laws, the
    Trade laws. As Bruce Fein pointed out a very detailed analysis
    of that led to the Conrail legislation, Amtrak legislation. And
    in 1979, the House and Senate had extensive hearings on the
    Chrysler bailout. What is the difference it now except that the
    ramifications are horrifically greater. Whatever the difference
    now except the damage to checks and balances constitutionally
    are greater than ever.
        I think it is important to note that if the GM is going to
    go into bankruptcy without any shareholder approval, notice
    that, the business judgment rule now extends that a few bosses
    under prodding from Washington can throw a company into
    bankruptcy without a shareholders vote of either approval or
    denial. The shareholders, common shareholders, preferred
    shareholder shunt to the side.
        Today we had a press conference where small bond holders
    were making their plea. If GM goes into bankruptcy, what will
    emerge, what will be launched would be a conclusive death star
    to tens of thousands of jobs, thousands of smaller businesses
    and adverse effects it to hundreds of communities around the
    country. And Congress is entitled to ask does this have to
    happen. When a company in 2008 can sell 8.1 million cars, 3
    million in this country, over 1 million in China, the rest
    around the world and be considered a basket case unworthy of
    detailed congressional examination and policy making, along
    with the rest of the industry, we are entitled to ask a lot of
    questions. Workers are entitled to ask questions, the dealers
    are entitled to ask questions, rural dealers, minority dealers
    are entitled to ask questions, auto suppliers.
        Toyota has been conducting people here saying if GM goes
    bankrupt, its suppliers, a lot of its suppliers will go
    bankrupt because they sell the GM and Toyota. There are a lot
    of issues in your opening statements, Members of the Committee
    and in the prior statements here that argue overwhelmingly for
    this task force to be considered in its final report in a few
    days as an advisory committee to the Congress. And it comes
    back here to the Congress for thorough areas, policy resolution
    and legislation. This is, if anything is, a responsibility of
    the Congress.
        When an unelected little task force, operating in secret a
    few days ago can tell Chrysler to terminate 780 dealers,
    averaging 60 jobs per dealer, that is 45,000 jobs, against
    Chrysler's will, because it doesn't cost anything for Chrysler
    to have dealers and they sell more cars, and it is more
    convenient to motorists, especially in poorer areas an rural
    areas. When that can happen, that is just a harbinger of
    congressional delegation run riot.
        I would like to note, in conclusion, that the fly in the
    ointment here is the China strategy of General Motors, years
    ago General Motors realized that the U.S. market was a
    stagnant, declining market for itself, it couldn't compete with
    Toyota and others, and that China was the future. And now China
    is being used as the platform to reexport to the United States
    to further hollow out communities and jobs on behalf of General
    Motors.
        I don't think you can ever have free trade with a country
    that is a dictatorship, because a dictatorship dictates costs,
    it dictates wage levels and no unions and dictates pollution at
    will, it dictates bribery. And those are serious unfair methods
    of competition. Whatever you can say about China violating
    repeatedly for visions of the World Trade Organization, you can
    also add that if Congress does not examine the China policy and
    examine all these other issues that have been raised here, it
    will go down as one of the greatest abdications of
    congressional responsibility in the economic realm. And that
    death star will turn into a fire ball of political protests
    that will come back to Washington, and it will not be directed
    at the Republican party, it will be directed at the party in
    power.
        And I will conclude with a short comment by a worker in the
    Kenosha Chrysler plant in Wisconsin, an award winning modern
    engine plant when he said--this is Rudy Kuzel, K-U-Z-E-L, he
    said, ``the government's coming in saying we have to shape
    these communities up and providing the money to do it. That's
    good, that's what we want. But if the companies use the
    government's support, the tax money to shut factories and move
    the jobs out of the country, what are we saving, the company
    name?''
        In short, what is at stake here is a huge demand for
    congressional policy making, bringing together all the various
    variables, all the value systems that only Congress can bring
    together. And the other day, I was astonished by a legislative
    agent to a senator who told me, we don't want this to come back
    from a task force to a congressional fish bowl, Congress cannot
    make tough decisions. Well, if Congress cannot make tough
    decision, I think it better have a major hearing on itself.
        Thank you, Mr. Chairman.
        [The prepared statement of Mr. Nader follows:]

                       Prepared Statement of Ralph Nader

    Dear Senator Dodd and Congressman Frank:

        The government-led restructuring of Chrysler and General Motors has
    been twice delegated--first by Congress to the Executive, and then by
    the President to a task force. Formally made up of cabinet officials
    and high-level political appointees, control over the process has in
    fact been delegated, without adequate standards, to a handful of
    special advisers. Thus has the future of a centerpiece of American
    manufacturing capacity been delegated to a small unelected and largely
    unaccountable group arranged to avoid the Federal Advisory Committee
    Act. The Congress must, at the least, reclaim its oversight role in
    this process, and subject the Auto Task Force's proposals and plans to
    careful scrutiny before irreversible measures--such as a GM bankruptcy
    filing--are undertaken.
        The President has stated that ``I am absolutely committed to
    working with Congress and the auto companies to meet one goal: The
    United States of America will lead the world in building the next
    generation of clean cars.'' That is a laudable sentiment, and it is
    imperative that this goal be achieved.
        But it is not befitting our system of checks and balances for
    Congress to rely on a presidential statement of good intentions--
    particularly when it is a small, informal group of appointed non-
    experts who are charged with rescuing the auto industry.
        The Auto Task Force has guided Chrysler into bankruptcy, and
    appears on course to do the same with GM. The government overseers are
    hoping for a quick bankruptcy reorganization, resolution of creditor
    claims that were not resolving themselves through private negotiation,
    and emergence of a debt-free company, shorn of encumbering assets,
    post-bankruptcy.
        However, there is enormous risk in such a move. The bankruptcy
    process may not move as quickly as imagined; it is after all,
    independent judges who control the process, not the executive branch.
    Especially if the bankruptcy process lingers--but even if it does not--
    there is a serious risk of impairing consumer purchasing confidence in
    a once-bankrupt auto company. This was conventional wisdom just six
    months ago. It is not clear why this conventional wisdom has been
    abandoned, notwithstanding the government guarantee of GM and Chrysler
    warrantees.
        The matter of impaired consumer confidence deserves much more
    attention than it has received, at least in any public fashion.
    Already, reports are emerging of further declines in Chrysler sales
    after its bankruptcy filing, and of widespread belief among consumers
    that the company is liquidating.
        Lost consumer confidence in GM could quite conceivably overwhelm
    the ``benefits'' to the company of eliminating outstanding liabilities.
    Thus the plans of the task force may prove to be a house of cards.
        The bankruptcy route for GM is also likely to have important ripple
    effects especially on suppliers, with a ripple of supplier bankruptcies
    likely to follow such a move by GM. Even Toyota has commented to
    Members of Congress on its concern that a GM bankruptcy will pull down
    suppliers that sell to both companies. Such a ripple will mean more
    lost jobs, more pain for communities across the country, and a loss of
    some the most dynamic and innovative parts of the industry.
        It is obvious that GM needs a new direction, and the removal of its
    CEO was a welcome step. The rest of the incumbent management though,
    remains in place, raising concerns about the ability of the company to
    remake itself.
        While the company needs a new direction, and probably a
    contraction, it is not obvious that it needs to contract as much as the
    secretive task force envisions, and in the ways apparently planned.
    Before the task force's plans with GM are enacted--and certainly before
    the company declares bankruptcy--Congress should hold deliberative
    hearings to protect taxpayers' investments and seek answers to these
    questions, among many others:

              Is the task force right in pushing for elimination of
            as many brands as it has demanded?

              Is the task force asking for too many plants to
            close?

              Do GM and Chrysler really need to close as many
            dealerships as have been announced? Is the logic of closing
            dealers to enable the remaining dealers to charge higher prices
            (See, for example, Peter Whoriskey and Kendra Marr, ``Chrysler
            Pulls Out of Hundreds of Franchises,'' Washington Post, May 15,
            2009); and if so, why is the government facilitating such a
            move? Is it reasonable and fair for GM to impose liability for
            disposing of unsold cars on dealers with which it severs
            relations, as Chrysler has apparently done?

              Has the task force evaluated the social ripple
            effects on suppliers, innovation, dealers, newspapers, banks
            and others that hold company stock and/or are company
            creditors, and other unique harms that might stem from
            bankruptcy?

              Would a government-driven bankruptcy process comport
            with the rights of owner-shareholders?

              Why has the task force maintained the Bush
            administration-negotiated obligation for unionized auto workers
            at GM and Chrysler to accept wages comparable to those in non-
            unionized Japanese company plants in the United States? This
            requirement is especially troubling given the low contribution
            of wages to the cost of a car (10 percent), and that it may set
            off a downward spiral of wages, with the non-union plants no
            longer needing to compete with union wages, and union wages
            following those in non-union plants.

              Is the task force obtaining guarantees that, after
            restructuring with U.S. taxpayer financing, GM cars sold in the
            United States be made in the United States? If not, why not?

              How will bankruptcy affect GM's overseas operations,
            with special reference to China and GM corporate entanglements
            with Chinese partners? Are they and their profits being
            exempted from the restrictions and cutbacks imposed on domestic
            operations? If there is such a disparity, is it reasonable and
            unavoidable?

              How will bankruptcy affect GM's obligations to
            parties engaged in pending litigation in the courts with GM
            regarding serious injuries suffered because of design or
            product defects?

              What guarantees is the task force obtaining to ensure
            that the GM of the future invests in safer and more fuel
            efficient vehicles, and what investments will the new company
            make in ecologically sustainable technologies? How will a
            potential bankruptcy filing affect, ignore or preclude any such
            future investments and commitments?

        Among the most worrisome components in the restructuring plan is
    the willingness to sacrifice U.S. manufacturing, and permit GM to
    increase manufacturing overseas for export back into the United States.
    Recent news reports indicate that the company will rely increasingly on
    overseas plants to make cars for sale in the United States, with cars
    made in low-wage countries like Mexico rising from 15 to 23 percent of
    GM sales in the United States. For the first time, GM plans emerged to
    export cars from China to the United States, in what may be a harbinger
    of the company's future business model; although the company has stated
    after negative publicity that it will not export from China, there is
    no evidence that it is abandoning the business model of outsourcing
    production for the U.S. market, and questions remain about how binding
    is the recent commitment not to export to the United States from China.
        Not surprisingly, industry analysts have quickly weighed in to
    emphasize that ``political considerations'' should not interfere with
    obtaining purported ``efficiencies.'' But such talk is gibberish in the
    context of a government bailout. What is the point of the U.S.
    government bailing out GM if not to respond to the political
    considerations of preserving jobs, communities, manufacturing capacity
    and directing the mismanaged company to an ecologically sustainable
    future?
        Will the U.S. Congress abdicate its responsibilities while such
    plans are finalized by the delegated task force? Such a willful
    abdication would contrast starkly with the dutiful legislative hearings
    and legislation regarding the Chrysler bailout in 1979.
        At the very least, the Congress must exercise its oversight powers.
    It should, at the very least, urge the Obama administration to defer
    any plans for bankruptcy or other irreversible moves until after the
    task force plan has been subjected to close and careful review via
    thorough Congressional hearings. If delay requires some additional
    bridge funding for GM, surely such funding with suitable equity
    positions is appropriate, in light of the potential risks of bankruptcy
    to millions of families and further governmental relief programs, and
    the vastly greater sums that have been so recklessly expended on the
    virtually condition-free Wall Street bailout.
                                   __________

        Ms. Jackson Lee. I thank the gentleman for his testimony.
        Mr. LoPucki, you have a schedule departure time, what time
    is that?
        Mr. LoPucki. I will need to leave shortly after 3.
        Ms. Jackson Lee. All right. I think we might be able to get
    in the last 2 witnesses and then the questioning will begin
    with you.
        Again Ms. Claybrook needing no extensive introduction, but
    we thank you for your long-standing service to the consumer,
    Ms. Claybrook is recognized for 5 minutes.

    TESTIMONY OF JOAN CLAYBROOK, PRESIDENT EMERITUS, PUBLIC CITIZEN

        Ms. Claybrook. I thank you, Madam Chairman, and I will try
    and take less than that so that your other witnesses can be
    questioned. The major point that I want to make is that the
    United States taxpayers are shelling out about $35 billion to
    Chrysler and General Motors and GMC, another 5 to suppliers and
    as much as 60 billion more to come. And yet there is, in both
    the bankruptcy decisions and in the bailout decisions, that has
    already been explained are being made by a small group of
    individuals. There is no give-back by the companies in terms of
    safety. Now, I would have said that about fuel economy until
    the President's announcement on Monday or Tuesday, which I was
    extremely pleased about, so I can't go into that detail. But
    what the President has pushed for and is going to implement is
    vastly improve fuel efficiency and a national standard for
    emissions and fuel economy.
        But the issue that is on the table as well for this Nation
    is health care and in the President's meeting with industry
    leaders and others last week, he talked about the importance of
    prevention. While there are 40,000 people killed every year,
    and 2\1/2\ million people injured on our highways. There is a
    lot that can be done about it. And the automotive industry has
    spent decades trying to prevent safety standards from being
    adopted. And yet there is a very important unrealized agenda
    for safety improvements. I would like to briefly mention them
    for the record, and that is stronger rules inside window
    glazing, and important safety belt protection for occupants in
    rollover crashes. They kill 10,500 people a year, so much more
    than almost any other issue that we are so concerned about
    obviously in wars and other things.
        Stronger seats and seat backs which fail, causing terrible
    injury, not only to people in those seats but to children who
    we now insist be put in the back seat. And protection for rear
    seat occupants as well with side impact air bags and belt use
    warning signals, improved latching for child seats, testing
    them in real crashes. And pedestrians protection, most people
    don't realize it, but a car can be designed so that pedestrians
    are far less likely to be seriously injured and also bicycle
    riders. And Honda is leading the way on this, but the U.S.
    Government has no standard on pedestrian protection.
        And then compatibility and safety requirements between
    vehicles of different size, which is very important, given the
    different size vehicles on our highway and event data recorders
    in all vehicles, some have them, some don't. It is not a
    systematic requirement so that we know what happens on the
    highway.
        My view, Madam Chairman, and Mr. Chairman, is that if we
    are going to give all this money to the auto industry, we ought
    to at least get improved safety on the highway and not just
    give it to them and let them to continue to oppose safety
    improvements for our people. I, of course, endorse all the
    other statements, particularly about the automobile dealers and
    closing the plants. I would like to submit for the record an
    excellent article called The Case for Kenosha in the Nation
    Magazine this week that talks about this great plant that is
    being closed arbitrarily. Thank you so much.
        Ms. Jackson Lee. With unanimous consent and without
    objection it will be submitted into the record. Hearing no
    objection.
        [The prepared statement of Ms. Claybrook follows:]

                      Prepared Statement of Joan Claybrook

                                   __________

        Ms. Jackson Lee. Mr. Skeel, you are Professor Skeel, you
    are recognized for 5 minutes and you might summarize your
    statement and submit the entire statement into the record.

        TESTIMONY OF DAVID A. SKEEL, PROFESSOR, S. SAMUEL ARSHT
      PROFESSOR OF CORPORATE LAW, UNIVERSITY OF PENNSYLVANIA LAW
                                 SCHOOL

        Mr. Skeel. Thank you, Madam Chairman and Members. Of the
    Committee, it is a great honor to appear before you this
    afternoon. I would like it make two basic points in my opening
    remarks. First, our bankruptcy laws are well designed to handle
    the financial distress of Chrysler and General Motors and to
    facilitate their restructuring.
        Second, the Administration's handling of the Chrysler
    bankruptcy and its apparent plans for GM have violated the
    basic rules of bankruptcies in ways that could have and I think
    may well have dangerous consequences. Let me briefly expand on
    each of these points. First our bankruptcy laws, in particular
    Chapter 11, are well designed to successfully restructure the
    automakers. There is a widespread misconception in this country
    that bankruptcy means the death of a business. In many
    countries, this would be accurate, but the American bankruptcy
    laws are uniquely designed, as they have been, since corporate
    organization was first devised over a century ago to preserve
    and restructure viable enterprises like the car makers.
        The first major mistake with the car makers, in my view,
    was waiting so long to consider the bankruptcy option. General
    Motors lost $20 billion last year. The company surely would
    have lost less and would be much further along in its efforts
    to restructure if it's former management had not refused to
    plan for or even consider the possibility of a bankruptcy until
    late last year. The arguments GM's management made for avoiding
    bankruptcy, such as the claim that customers would refuse to
    buy the cars of a company in bankruptcy were never plausible.
    In my view, the decision finally to use Chapter 11 has thus
    been a good and overdue decision. But the Administration's
    handling of the bankruptcy process has been deeply problematic.
    This is the second of my two points.
        In a case like Chrysler, the parties ordinarily would
    negotiate over the terms of the reorganization plan and then
    each class of creditors or shareholders would vote whether to
    approve the plan. Rather than use the traditional process, the
    Administration has structured Chrysler's bankruptcy as a shame
    sale of most of Chrysler's assets to a new entity to called new
    Chrysler for roughly $2 billion. The goal of this strategy
    seems to circumvent the voting process and to alter the
    ordinary rules of priority. Under the usual priority rule known
    as absolute priority, senior lenders are entitled to be paid in
    full before lower priority creditors, including employees
    receive anything. The sale in Chrysler undermines the rights of
    senior lender by setting an artificially low sales price that
    will give them less than 30 percent of what they are owed,
    while promising a substantial recovery to lower priority
    creditors.
        I believe that the Auto Task Force and the Administration
    generally believe that their plan is the best strategy for
    restructuring the you a tore industry and making it profitable
    again. But they have distorted the bankruptcy rules to achieve
    this result. The Chrysler strategy could have at least two very
    dangerous consequences. First, the subversion of basic priority
    rules could interfere with lenders willingness to extend credit
    to troubled corporation. Senior lenders have been burned in
    Chrysler, they will take steps not to be burned again. Lenders
    will be especially reluctant to make loans to any company that
    might be the subject of government intervention, such as the
    suppliers to the auto industry. More generally, the unsettling
    of the priority rules could appreciably increase the cost of
    borrowing for any company that is in financial distress in the
    coming years.
        Second, the Chrysler sale sets a dangerous precedent. In
    future cases the insiders of a company that files for
    bankruptcy will be able to propose a similar sham sale that
    benefits favored creditors, perhaps the managers of the company
    at the expense of disfavored creditors. Interest already are
    reasons to worry about bankruptcy sales that are proposed by
    insiders. But the Chrysler precedent goes well beyond anything
    that previously would have been thought possible. I don't
    believe that the sham sale in Chrysler will be treated as an
    extraordinary one time event. Much like the Supreme Court
    decision in Bush versus Gore, it will influence future cases on
    these issues in the years to come.
        In sum, I believe that our bankruptcy laws are well
    designed for restructuring of the troubled car makers, but it
    is very dangerous for the Administration to distort the
    bankruptcy laws to achieve its preferred outcome. Thank you.
        [The prepared statement of Mr. Skeel follows:]

                   Prepared Statement of David A. Skeel, Jr.

                                   __________
        Mr. Conyers. [Presiding.] Thank you so much, I want to
    begin by thanking our colleague, Sheila Jackson Lee, for
    Chairing the Committee through this very important and serious
    testimony that has been rendered 2, 4, 6, 8, 9 panelists; and
    we are grateful to them. And I would like to ask any of my
    colleagues if anyone has any burning questions they would like
    to put to Mr. LoPucki before he may have to depart at whatever
    time is required of him to leave?
        I would like now to yield to Lamar Smith, who has been
    extremely cooperative with the Committee in terms of us coming
    together as quickly as we were able to.
        Mr. Smith. Thank you, Mr. Chairman.
        Mr. Grossman, let me direct my first question to you. There
    have been serious allegations that is Chrysler senior secured
    creditors were strong armed into agreeing to the auto task
    force Chrysler deal. What are the ramifications of that for
    creditors, the bankruptcy system and our overall financial
    institutions.
        Mr. Grossman. Thank you, Mr. Smith for that question. As
    you noted, there have been ample news reports that multiple of
    holdout creditors were holding senior debts of Chrysler were
    approached by officials of the Administration and were in
    various terms threatened that their reputation would be
    tarnished and that is the Administration would use various
    means at its disposal to impact their businesses. The effect of
    these almost thuggish techniques on lending and on really the
    availability of credit to corporate entities I think will be
    very severe. Politically connected companies, companies that
    have large union work forces, and other companies that may be
    subject to government intervention will find it tougher to
    access capital markets.
        When they are able to arrange loans, those loans will be
    more expensive. The results will be that those companies and
    those industries will suffer competitive disadvantage and that
    will cost job and economic growth.
        Mr. Smith. Thank you. Mr. Nader, individuals in the room
    who are under 40 or 50 may not know that back in the 1960's and
    1970's, you were a campus hero. And I had several classmates,
    in fact, who worked for you after graduation.
        My quick question for you has a couple of words that will
    be familiar only to those of us over 50 or thereabouts. And my
    question is this, do you believe that the Auto Task Force is
    unsafe at any speed?
        Mr. Nader. Yes. Worse than that.
        I just want to add I disagree with my colleague here,
    Professor Skeel, when he said that consumers be less willing to
    buy cars from companies in bankruptcy. He called it
    implausible. I don't think it is implausible, do you, Clarence?
        Mr. Ditlow. Absolutely not.
        Mr. Nader. The whole structure is built on a house of
    cards. If there is another strong dip in sales for GM. As
    Chrysler has been down from last year big time, but it is down
    even more if I am not mistaken since the bankruptcy. You know
    there is resale value and all these things. And the fact that
    the government is guaranteeing warranty, I don't think that
    solves the problem and it hasn't sunk in. This is a task force
    that looks at these companies in very financial terms and
    doesn't take into account enough variables around the country.
    It is ideological, empirically starved and this is what happens
    when you put Wall Street people in charge of heartland
    manufacturing companies fate and the future. I am not saying we
    have the answers, I am saying Congress has got to get this back
    before it is too late in the next 10 days because they will go
    into bankruptcy court within hours after this task force
    reports.
        Mr. Smith. Thank you, Mr. Nader. I liked your one-word
    initial response, yes.
        You said that the Chrysler bankruptcy deal is a sham, what
    does it mean to the rule of law under our bankruptcy system?
        Mr. Skeel. I think it is very dangerous, as I said in my
    opening statement, what this is, it is not a real sale. If
    there had been a real urgency about selling the assets right
    away or this had been a sale we are there were real buyers out
    there, it would be one thing, but this is a completely
    artificial sale devised by the government to achieve the
    results it wants to achieve, which is turning the ordinary
    priorities on their head. My fear is not only is that going to
    have significant negative consequences for Chrysler itself in
    the Chrysler restructuring itself, but in the future, it is
    going to tempt other people to do the same sort of thing. Once
    the government does it, other companies that are in trouble are
    going to do this as well. They are going to get into
    bankruptcy, instead of going through the ordinary restructuring
    process with the voting rules, what they will do is propose a
    sale to the company that they will--a shell company that they
    will set up and ask the court to bless it and I fear that some
    courts will.
        Mr. Smith. Thank you, Professor. Thank you, Mr. Chairman.
        Mr. Conyers. The Chair is pleased to recognize the
    gentleman from North Carolina, Mel Watts.
        Mr. Watts. Thank you, Mr. Chairman. And I thank the Chair
    for convening this hearing, a somewhat distressing hearing, but
    unfortunately that is not unique over the last several months
    as a Member of the Judiciary Committee and the Financial
    Services Committee. We have had a number of very, very
    difficult choices to make and it is always difficult to hear
    some of the projected consequences of those choices, but let me
    confine myself to this aspect of what we are talking about
    rather than the overall financial malaise that we have been
    trying to deal with in my other Committee, Financial Services.
        We obviously have been working very closely with the
    minority automobile dealers, trying to save them. We tried to
    get them included in the original bailout with the manufactures
    that did not succeed. We have worked with them to try to get
    them included under TARP in some various ways to increase the
    size limits of the SBA. So we have a very strong interest in
    trying to assist minority automobile dealers who have been
    underrepresented in the industry for years. And now that they--
    the one who were represented in the industry are finding
    themselves at a very, very difficult crossroads.
        I am interested in knowing, and I will address this
    question to Professor Skeel. What different outcome there would
    be in a regular bankruptcy proceeding that proceeded in the way
    you perceive Chapter 11 should proceed, what would be the
    consequence for the dealers, let's just deal with the dealers,
    then if we have time maybe you can address the suppliers and
    the other creditors. What would be the different consequences
    as you perceive it had there been a regular Chapter 11
    bankruptcy.
        Mr. Skeel. I think in my respects the consequences would
    have been similar. I think there would have been a
    restructuring of the dealerships, but I think it would have
    been more planned out and it would have been developed earlier
    and perhaps there would have been more discussion about which
    dealerships will be cut and which ones not.
        Mr. Watts. When would have had those discussions.
        Mr. Skeel. Presumably Chrysler and its dealerships.
    Chrysler or GM as well should have been talking to them before
    bankruptcy.
        Mr. Watts. I am not sure what process there would be in a
    regular Chapter 11 bankruptcy process. We make it sound like
    the regular bankruptcy process is when we have a choice we have
    to figure out what the choice is between. And I understand the
    potential consequences of gaming the system by setting up sham
    sales going forward for future bankruptcies. And that is
    something I guess we will have to deal with as a legislative
    body going forward, but I am not sure that your implication
    that somehow the dealers, the creditors, the other creditors
    who got this Hobson's choice presented to them as Mr. Grossman
    has testified about. I don't see a pleasant end game for any of
    them in a regular Chapter 11 bankruptcy.
        Mr. Skeel. Well, the first thing I would want to say in
    response is that with respect to the dealerships, this is a
    regular bankruptcy. I mean, one way to look at this is the
    government is picking and choosing who it wants to favor. And
    it is----
        Mr. Watts. That is the answer to a question, I am just not
    sure it is the answer to the question I am posing.
        Mr. Skeel. I think it is. I think the answer in terms of
    what the rights of the dealerships are and how they are treated
    is the same under this bankruptcy----
        Mr. Watts. Basically the answer then is the dealers were
    going to get really taken advantage of regardless of whether
    this played itself out the way this is playing itself out now
    or whether there wasn't this honeymoon deal that is in the
    process of being made.
        Mr. Skeel. The rules would have been the same. I think if
    the restructuring had begun earlier, it is quite possible fewer
    dealerships would have been cut. If Chrysler were in healthier
    shape when the restructuring took place, they wouldn't be
    thinking about cutting lots of dealerships.
        The rest of what I would say is I think the most effective
    way to protect dealerships, particularly minority dealerships
    going forward is to put pressure on Chrysler and to say this
    restructuring is not the end of the came. They are going to be
    a car company afterwards, they better have an equitable
    distribution of their dealerships.
        Mr. Watts. I think my time has expired. I am glad we got to
    an opportunity to hear some affirmative suggestions other than
    just take back your authority. When we take back our authority,
    then we have to have some responsibility to deal with it. We
    delegate to governmental agencies in virtually every aspect of
    government. And I guess I get a little impatient with the
    people who say we ought to take back all the authority that we
    have given to the Federal Reserve. I don't know that I would
    want these decisions made in a political context by the 435
    Members of this body or the 100 Members of the other body other
    than in the framework of giving them general guidance that we
    hope will lead to some kind of thoughtful results.
        Mr. Fein. May I respond to that?
        Mr. Watts. I am sure Mr. Lichfield has a response to it. He
    thinks we ought to abolish the Federal Reserve too.
        Mr. Fein. I'm Mr. Fein, that is all right.
        It is matters of degree and what is the extent of the
    delegation. It is one thing to delegate with----
        Mr. Watts. I appreciate it. My time has expired, Mr.
    Chairman. I am going to yield back and I have heard your speech
    before Mr. Fein and I am not arguing with you, I just--
    everything in life is a matter of degree. I guess I agree with
    you on that.
        I think I am finished.
        Mr. Conyers. Well, if Mr. Fein insists on a response, I
    think the least we can do is hear what he has got to say.
        Mr. Fein. Thank you, Mr. Chairman.
        I want to say that it may seem like a platitude but matter
    of degree count in term of how much the responsibility for
    making these decision is given to those who are not politically
    accountable and can do whatever they want with that discretion.
    That is not the exercise of judgment by this body as to what
    the policy ought to be. It is something akin to saying let the
    IRS write the Internal Revenue Code and let it be fair. That is
    different than saying you have a 4,000 page bill and then the
    Internal Revenue Service can add additional regulations or
    gloss on it. And with regard to accountability and process,
    that is what democracy is about. The Federal Reserve Board is
    not only relatively secret, but these are members who are
    independent. You would want to say Mr. Watt, that we don't want
    political accountability for an institution that affects the
    jobs of tens of millions of people? That seems to me silly.
    That is what self-government means. That is critical to their
    entire lives. We want it to be political. You may make errors,
    but that means you get to decide your own fate. These people on
    the Federal Reserve Board, they sit there 14 years, they are
    independent, they can't be removed by this body whatsoever. I
    think that is a real concern. Thank you.
        Mr. Conyers. The Chair is pleased to recognize yet another
    Member from North Carolina. This time it is Howard Coble,
    senior Member of this Committee.
        Mr. Coble. Thank you, Mr. Chairman. Thank you for calling
    the hearing. Thank you all for being with us. I addressed these
    two questions earlier but I don't think either of you
    responded. Mr. Grossman, let me ask you this, what is the cost
    benefit realized by the factories of reducing the number of
    franchise dealers, A.
        And what savings is produced in eliminating Chrysler
    dealers with a 30-day notice as opposed to a 1-year notice?
        Mr. Grossman. Mr. Coble, according to independent
    automotive analysts, the automotive companies actually do spend
    a fair amount of money to service their various dealers. There
    are certain fixed costs that they face for every single dealer
    no matter the number of cars that that dealer sells.
        In addition, there is a question of focus, the amount of
    attention that an automaker can devote to any particular
    franchisee. An that attention is diffused when it has too many
    franchisees. There is also the issue of canalized sales when
    you have franchisees that are located in areas that are too
    near one another, there is the risk that those franchisees will
    compete against themselves in a way that is bad for the
    automaker, and that may be bad for the stability of that
    company and that brand.
        So I think the key answer to your question is a question of
    focus, it is a question of resources and it is a question of
    making sure that customers have the best experience that they
    can when they visit dealers.
        Mr. Coble. Thank you, sir.
        Mr. Henderson, what criteria was used to determine what
    dealers were sent termination notices, A and B what is the
    practical outcome are to those dealers who wish to appeal a
    termination letter.
        Mr. Henderson. Thank you, Mr. Coble, we have not gotten any
    clarity on what criteria was used. We have been raving those
    questions and Chrysler is giving indications that there have
    been a combination of factors that have to do with market
    share, location, facility and so forth. But as we look at the
    dealers on the assumed list and the dealers on the list that
    would not have their agreements assumed, there are very similar
    profiles with dealers on both lists. There is no clarify on
    that question.
        Mr. Coble. Now, I have been told that there was a
    disproportionate number of semi rural or small town dealers
    that were terminated; is that, in fact, accurate or do you
    know?
        Mr. Henderson. That appears to be the case that there is
    some disproportionate termination. What happens is that it
    makes it a lack of convenience for customers to be able to have
    dealers in their locality to be able to service their vehicles.
    And also it takes away some level of competition.
        If I may respond to Mr. Grossman, while there is some
    potential savings according to the manufacturer for eliminating
    dealers, dealers are the customers of the manufacturers, we buy
    cars. Less dealers typically is going to mean will mean less
    vehicles, it will mean less competition for consumers and the
    pricing will be less convenient for consumers in getting that
    car serviced.
        Mr. Coble. How about the rights of a terminated dealer if
    he wanted to appeal that, any thoughts on that?
        Mr. Henderson. According to Chrysler, there are no internal
    deal process. The process at this point is going to be
    objection that would be filed in the bankruptcy court, which is
    very expensive process and very difficult for dealers to embark
    upon.
        Mr. Coble. Thank you, Mr. Henderson.
        Mr. Nader, you responded very promptly to Mr. Smith's
    question regarding the unsafe at any speed, and I don't mean to
    speak for you but I suspect you would probably go an additional
    step and say to us that the deals that the auto task force have
    negotiated are equally unsafe at any speed, would you not.
        Mr. Nader. Well if you want to extend that metaphor. You
    can see the testimony here, there are safety consequences.
    There are health consequences. There are burdens on the
    taxpayer because more unemployed people will have to go on
    social welfare so it is a very sad situation. I have always
    been excessively sensitive to excessive congressional
    delegation, knowing full well you have got huge burdens on you,
    you can't micromanage. But what I think Bruce has been saying
    and others is that you are delegating basic policy decisions,
    basic policy decisions. I am old enough to remember the Dealer
    Day in Court Act that others did for the dealers to develop a
    better balance between dealers and auto companies. Those
    hearings were incredibly thorough, documented, detailed before
    the Congress then went to the Floor with the legislation.
        Mr. Coble. My red light has illuminated, so I yield back,
    Mr. Chairman. Thank you ladies and gentlemen.
        Mr. Conyers. Distinguished gentlelady from Houston, Texas,
    Sheila Jackson Lee.
        Ms. Jackson Lee. Thank you very much, Mr. Chairman. I want
    to thank the witness again and I thank the Chairman for
    yielding to me and sharing the Chairman's chair because the
    testimony from the position of that Chair seems to be intense.
    And you really do get it or you attempt to get it.
        Let me try to just recite some of the points that both Mr.
    Lester and Mr. Henderson made and it is startling and striking.
    I do want to acknowledge the work of many Members of this
    panel, meaning Members of the Judiciary Committee that have
    worked intently over the years. I would like to acknowledge the
    lessons that I received in meeting with the National
    Association Minority Automobile Dealers just recently or a
    couple of months ago in Houston and the strong arguments that
    were made and arguments that we tried to take to the table.
        And so here we are and I would just offer words such as
    brand elimination. The only distribution system that is in
    place to get from the manufacturer, the owner to the ultimate
    consumer, which is true, we need help now and the reduction of
    dealers certainly is reduction of wealth in the minority
    community. And one that I would add is that the dealerships,
    minority and otherwise are anchors in our community, they are
    the grounding of civicness, they are the Little League
    supporters and school supporters, the PTO supporters, the civic
    club supporters. And so I think this is more than a crisis.
        Mr. Henderson, you mentioned something I thought it as
    startling, that you tried to help, in this instance, Chrysler,
    by agreeing to buy vehicles that you may not have needed in
    your inventory. But as good citizens and good laborers, if you
    will, on behalf of your brand company, you stretched and stuck
    your neck out on the line. And this may have happened across
    America and this is tragic and disgraceful.
        It is disgraceful that you get this kind of thanks. Not
    that you extended yourself, but you get this kind of thanks.
    And certainly as the burden has been put at our feet, I don't
    believe and I know that Members of Congress did not intend to
    give unfettered control, but we wanted to be partners and get
    the team rolling, to get us back on our feet.
        Interestingly enough there is a little light at the end of
    the tunnel and the economy is turning at least as we look at
    the Dow. But what we have here I think warrants some kind of
    legislative fix. And so I want to pose my questions along those
    lines and ask quickly, though Mr. Fein has suggested that we
    have unburdened ourselves from our responsibility. I want to
    know besides the Constitution, do you think we need to rush in
    with a legislative fix? And I use as an example this issue of
    individual liability for the dealerships as they close and are
    left holding the bag on probably purchases that they made. Do
    we now come in and step along side of the bankruptcy proceeding
    and ask to protect certain creditors?
        Mr. Fein. It is certainly true that this body has authority
    by statute to override anything that a bankruptcy judge night
    be considering. Bankruptcy judge is acting under the delegation
    of the standards that this body enacted. So that makes quite
    sensible thing to do.
        In the railroad case, the Congress was acting, in some
    sense, in collaboration with the bankruptcy courts that were
    unable to fashion something that was viable and that seems to
    me quite appropriate decision for this body to make.
        Ms. Jackson Lee. I think it is more than appropriate. Mr.
    Grossman, what about a legislative fix, particularly in the
    issues of unwanted inventory so that the dealer may be now
    liable for a number of issues. The keeping of the fixed assets
    so that dealers that want to come back, so we would do a
    parallel action along side of the bankruptcy proceeding,
    meaning legislatively. Do we have to put all of our eggs in
    that basket? If, and I guess the question, the question of
    overriding the franchise laws which are allowed, or at least
    happening through the bankruptcy proceeding.
        Mr. Grossman. You are correct that State franchise laws are
    not applicable in a bankruptcy proceeding. I think the
    legislative fix you describe would have I think there are at
    least two concerns that it raises. One is that it will delay
    and impede the reforms necessary for General Motors and
    Chrysler to regain their competitive footing. We may wind up in
    a scenario where the two companies again are on the verge of
    insolvency or bankruptcy, despite the taxpayer that have been
    invested in them.
        Ms. Jackson Lee. So you are not looking for a fix.
        So Mr. Nader, these are consumers of sorts that you are
    talking about, even though an ultimate consumer may be the
    gentleman injured, plaintiffs now in proceedings, but also
    purchasers, but these dealerships. Is it just, say, from the
    moral representation of consumers, should we put our heads
    together on a legislative fix, if we are leaving dealerships
    holding the bag.
        Mr. Nader. I think Congress's role is to rearrange the
    equities, there are a lot of equities and inequities and that
    is way beyond bankruptcy court. I am not entirely unaware of
    the possibilities of remedies by the dealers if they are not
    faced with the bankruptcy of their parent, of their parent
    company, so to speak. Maybe that is what one answer you might
    be looking for. Do the existing contracts allow for a remedy
    absent any bankruptcy by Chrysler or GM, existing franchise?--
    on the way you have been treated--it is pretty shabby
    treatment, wouldn't you say?
        Ms. Jackson Lee. They are left holding the bag.
        I will conclude by saying I think the issue of a non
    existing health policy, Mr. Chairman, for America is more at
    fault than to suggest that we are scapegoating labor unions who
    are trying to provide health care for their members. So I
    think, Mr. Nader, you have given us a sidebar opportunity of
    possibly looking at this fix based upon either contractual
    relationships or the moral compass that we all need to use. I
    yield back and I thank you for this. Certainly I believe the
    points that you have given are worthy of study and worthy of a
    legislative fix, and I look forward to hearing from you and
    working with you in the future. I yield back.
        Mr. Conyers. Thank you very much. I am always pleased to
    recognize the gentleman from Texas, Judge Louie Gohmert.
        Mr. Gohmert. And I am also pleased to be recognized by our
    honorable Chairman. Thank you, Chairman Conyers. Appreciate you
    all being here today.
        Mr. Nader you and I met about 36 years ago, you came to
    Texas A&M when I was there and I got to escortyou a little bit.
    Are you still getting 4 hours of sleep at night?
        Mr. Nader. I keep meeting people who have picked me up at
    airports. We should have an alumni club. It turns out, the
    present Secretary of Agriculture picked me up when he was a
    student at Hamilton College.
        Mr. Gohmert. It was a pleasure then and now. You are
    probably the most recognized consumer advocate in the world.
    And I am sorry I was late, we had another hearing that goes on
    at the same time, but what does this mean, this deal with
    Chrysler for consumer prices, safety, choices and that the UAW
    will now be an owner of both Chrysler and GM the way it is
    looking now?
        Mr. Nader. Well, as the testimony around me asserted, there
    are serious questions about people who have product liability
    suits what have been seriously injured, two of whom are in this
    room pursuant to a Chrysler bankruptcy. There are serious
    questions about whether the government's investment in Chrysler
    is going to lead to elevation of long delayed safety standards
    that the auto companies have been fighting. And there are
    really serious questions about the intermediate consumers which
    obviously are the dealers. I think you have got about 8 or 9
    days before you can turn this around and bring it back to
    Congress. Your tens of billions of dollars that you have
    already loaned out or are about to loan out, there is a
    reciprocity involved there.
        Mr. Gohmert. Well, you have been innovative in some of your
    approaches to try to advocate on behalf of consumers. Do you
    see a suit by you through the Federal Advisory Committee Act to
    try to prevent some of these sacrifices that appear to be in
    the making?
        Mr. Nader. You mean, the way the task force is structured?
        Mr. Gohmert. Yes.
        Mr. Nader. It is very cleverly structured to avoid coming
    under the Federal Advisory Committee Act. It is basically run
    by existing high officials in the Administration and they have
    basically provided assistance in the form of the few people who
    are actually doing the operating work, and it is not called an
    advisory committee. Therefore, we can't demand representation
    in terms of the people on the advisory committee to represent
    the various stakeholders or a certain open records. All the
    other things that Ms. Claybrook, a public citizen, has worked
    very long and hard on, the Federal Advisory Committee Act.
        Mr. Gohmert. You had to be shocked that you weren't invited
    to be part of the Auto Task Force, I take it?
        Mr. Nader. I think it is very, very Wall Street-oriented. I
    don't want to stereotype Wall Street because it stereotyped
    itself in recent months, more than I could ever expect to.
        Mr. Gohmert. Now they are partners with the government,
    though, so it is a good thing, because the government and Wall
    Street have partnered, and now the government and the auto
    industry are partnering, and of course, insurance industry, we
    are partnering with them. It seems to have a theme I have heard
    of before in history that listed about 70 years before it was
    brought down. But let me ask----
        Mr. Nader. You mean in the corporate state, right?
        Mr. Gohmert. Yes.
        Mr. Nader. That is a very serious issue for Congress to
    have hearings on, because you just pinpointed a very serious
    giant step into the moral of the corporate state, that Franklin
    Delano Roosevelt warned us about in 1938 when he said, when
    government is controlled by private economic power that is
    fascism. Those are his very words.
        Mr. Gohmert. It seems like maybe Orwell had it wrong by
    about 25 years is the way it is appearing.
        Mr. Grossman, how can we possibly hope that giving the UAW
    major ownership in these companies could produce a successful
    bankruptcy or long-term lease structuring of these entities?
        Mr. Grossman. I think the answer is that we can't. The
    history of sorts of transactions is one that is filled with
    failures, that is filled with companies bouncing in and out of
    bankruptcy. I think the risk at that point is that taxpayer
    enormous investment in these companies. It will be entirely
    unrecoupable.
        Mr. Gohmert. Thank you, Mr. Chairman.
        Mr. Conyers. Please note I recognize the gentlelady from
    Los Angeles, Maxine Waters.
        Ms. Waters. I thank you very much, Mr. Chairman. I have to
    apologize for being in and out of the Committee. We have
    Secretary Donovan over in the Financial Services Committee on
    my section 8 legislation that is dealing with housing for all
    of these poor people in the country. But this is very important
    and I wanted to be back here.
        I have been working with Mr. Damon Lester for months now as
    he has walked these halls trying to get some attention to what
    has been happening with the minority auto dealers when we were
    spending the other $350 billion of the TARP money and trying to
    determine how they could be heard and what we could do to be of
    assistance, this is kind of disastrous here. I think everything
    has been said about the importance of dealerships to towns and
    communities and the economic value that they have.
        And I want to speak particularly to the minority auto
    dealers and the fact that we have been very proud that as
    African Americans have tried to build wealth in this country,
    that the minority auto dealers was at the top of the list of
    those who worked very hard and who brought jobs and
    opportunities into our community and helped us to build wealth
    and to stabilize our communities. Unfortunately all of that
    seems to be at risk at this point as we look at what is
    happening with the major manufacturers and the deals that are
    being cut in order to reshape them, reform them, or realign
    them or whatever is being done.
        There are two aspects of this that I would like to speak to
    and I hope that I can center in on what I consider two major
    problems. Number 1, there are those who would like to stay in
    business and would like to have some assistance, and would who
    would like to find a way to do that needing very badly to have
    some financial assistance. And then there are those who are
    ready to get out of the business, but they don't want to be
    left stuck with all of this liability, whether it is the
    inventory forced upon them by the manufacturers or related
    liabilities, all having to do with the management of those
    dealerships.
        I suppose the questions I have in mind are those, number 1,
    as they make decisions about what dealerships will be cut and
    those that will stay, what is the formula? How are the
    determinations made? Does anyone have that information?
        Mr. Lester. For Chrysler, as Randy Henderson already
    mentioned, there was no criteria has been made publicly. We
    reached out to the head of Chrysler, Jim Press, on several
    occasions already. I am now being directed to the public
    relations department, inquiring as to why and what was the
    rationale for the 789 termination dealer lists.
        For General Motors they have made it public that their
    criteria was based on sales, expectancy, customer service,
    profitability, and capitalization, as well as the number of
    vehicles that were sold per year, but for Chrysler there has
    not been any transparency at all yet. It has just been very
    quiet as far as how they should be accountable to these dealers
    now.
        Ms. Waters. Professor David Skeel, can't this information
    be compelled?
        Mr. Skeel. I would think so. Certainly in the bankruptcy
    court, there is a very, very high premium on disclosure and
    transparency. The dealers as creditors in the bankruptcy have
    the right to question the debtor, and I think they should be
    able to compel.
        Ms. Waters. And should do that. And additionally, if
    inventory was forced upon dealers that is creating a liability
    for them, should not that information be made available and
    documented for the bankruptcy court?
        Mr. Skeel. I would think so. That would be part of the
    claim that the dealerships in the bankruptcy case.
        Ms. Waters. And could not the bankruptcy judge make a
    determination that that is unfair liability and they should not
    have to assume it and that the manufacturers would have to pick
    up those costs to absorb those costs, whatever they are, could
    that not be a determination?
        Mr. Skeel. That is harder. The normal rule would not be
    that that is part of your claim in the bankruptcy case and it
    would be treated like the rest of your claim in the bankruptcy
    case. So getting the court to actually force Chrysler to pay
    the expense, it may be there is some argument that you could
    make along those lines, but that is a little bit harder. The
    information part is easier.
        Ms. Waters. And maybe I should not be asking you this,
    maybe I should be asking myself and my colleagues this. As the
    government considers the assistance that they are going to give
    to the manufacturers, could not a case be made that the
    liability costs be assumed in whatever TARP funding may be
    forthcoming.
        Mr. Skeel. Certainly something that could be considered.
        And one point that I would like to make for you all that
    has been made indirectly is the most important thing, in my
    view, is to separate what goes on in the bankruptcy court from
    what is done outside of bankruptcy. And things like
    guaranteeing the warranties, which I think was a very good
    idea, helping particular constituencies, those can be done
    outside of bankruptcy. Where it becomes pernicious is when
    those two things are put and the bankruptcy process is
    distorted. I think it is very important to keep those two
    functions separate.
        Ms. Waters. And let me just ask, as decisions are made
    about what dealerships should be cut and if part of those
    decisions are a consideration such as you have dealerships that
    are in close proximity to each other and that that is not
    viable, that they will not be able to support, could one raise
    questions about who determined where dealerships would be in
    the first place?
        Mr. Skeel. Yes, you absolutely can raise those questions.
    In the bankruptcy process, it is very hard to win that kind of
    an argument. There is a lot of deference to the company itself,
    to Chrysler in making that decision. But certainly the
    dealerships are entitled to know exactly why they made those
    decisions and what the basis for them is. And all of that can
    be raised in the bankruptcy court.
        Ms. Waters. Thank you.
        I guess what I am getting out of this, Mr. Chairman, if I
    may, is that we may still have a role to play in all of this;
    and that role has to do with negotiating with this
    Administration about what they are going to do to help ease the
    pain on these dealers.
        We have the TARP money. That money is going to be used in
    some shape, form, or fashion. And if the dealers could put
    together a wish list of how they can be assisted in this
    terrible time that we are in, whether that is to maintain or to
    exit, and that was presented by way of negotiation or
    legislation with this Administration, we may be able to be of
    some real help. Could you conclude that?
        Mr. Skeel. I think so. TARP is extraordinarily broadly
    worded; and so the companies that are funded through TARP,
    there is a lot of flexibility there.
        Ms. Waters. We can do whatever. We lost the battle to have
    control of the second $350 billion, as you know. It is all over
    in the Administration with a lot of flexibility, and that may
    give us an open window here by which to try and impact the way
    that that is appropriated.
        Mr. Skeel. It is certainly an option.
        Ms. Waters. Thank you, Mr. Chairman. I think that shines a
    little bit of light on what is possible.
        Mr. Conyers. Thank you so much, Maxine Waters.
        Before I recognize Bob Goodlatte, I want to point out that
    there is a chronological warp we are in. The 8 or 9 days will
    have run out by the time we come out of the week's recess. And
    so assuming that we were going to have the staff working on a
    legislative redirection of some of these issues, unless we got
    an extension of this expiration date, we would be doing some
    noble things, but it would be after the fact. And I would like
    to just open up to the eight of you if anybody sees a way that,
    if we chose to do this, we would have to get some permission to
    extend the time line and then begin to work on the legislation.
        I just wonder what you eight and Mel Watt and Maxine Waters
    respond, how would you all respond to this chronological fix
    that I think we are in.
        Mr. Fein. I think, Mr. Chairman, you can maybe get
    unanimous consent by legislation. Just freeze or hold in
    abeyance the situation so you have more than 8 or 9 days.
    Because that is not complex legislation.
        And another method of at least temporarily providing some
    protection would be to just pass simple legislation saying that
    the bankruptcy court cannot preempt certain State protection,
    consumer protection, dealer protection laws. It is very simple
    legislation, and then it automatically would kick in to provide
    some to the dealer and consumer protections that have been
    mentioned here.
        Mr. Nader. Mr. Chairman, I just might add that the obstacle
    is a June 1st guideline for $1 billion payment on GM bonds by
    the company. If the Chrysler precedent is teachable, the task
    force will make its report before the end of May, and they can
    be in bankruptcy court in 48 hours. So the $1 billion payment
    is going to be put before you as an obstacle, and I think the
    Administration can handle that with its TARP money. So that is
    an insuperable obstacle on June 1, and you can ask for more
    time. And short of a resolution, I think just a political
    communication to the White House by leaders of the House and
    Senate saying, wait, don't rush to the bankruptcy court; we
    have to look at this.
        Ms. Claybrook. I would also suggest, Mr. Chairman, if you
    can't get it done through the leadership, you may just want to
    send out a, hey, dear colleague, and see how many Members sign
    on. And if you get more than 218 Members in the House or 50
    Members in the Senate, you have got a majority that spells
    problems for the Administration if they don't listen to you.
        Mr. Lester. I think our President is the only one that can
    really do this thing immediately for us. At this point in time,
    as you already mentioned, the time, the clock is ticking. And
    these gentlemen back behind me, we don't have time to wait for
    any legislative action, particularly since you guys are in
    recess. At this point, our President is the only one who can
    mandate this and get this thing done immediately.
        Mr. Conyers. Let's turn now to Bob Goodlatte, who, in
    addition to being a senior Member of the Committee, was the
    past Chairman of the Agriculture Committee.
        Mr. Goodlatte. Mr. Chairman, thank you very much for
    holding this hearing. I hope that it has been timely, given the
    rush of events that we have here. And, quite frankly, I view
    this as an oversight hearing of the actions taken by both the
    Bush administration and the Obama administration that raise
    considerable questions regarding what is the appropriate role
    of bankruptcy in this process.
        Quite frankly, I did not support the bailouts last year. I
    felt that there was an appropriate role to be played. I find
    Professor Skeel's and the comments of others, including the
    President, that the Congress could play a role in guaranteeing
    the warranties so that companies going into bankruptcy could
    still sell cars to people and hopefully come out of a
    bankruptcy on the other side--but I am very, very concerned
    about the role that is being played behind closed doors in the
    dark of night to decide the fate of this bankruptcy before it
    ever gets to the fair judicial process that it is supposed to
    undergo. And if there are some alternations that need to be
    made because of the magnitude of these bankruptcies or because
    of the impact on consumers, then the Congress should be playing
    an aboveboard and clear role, and it should not be occurring
    out of the sight of the public and the people who are funding
    these bailouts and are going to suffer the consequence of this
    action.
        So with that having been said, Mr. Grossman, let me ask
    you, are you concerned that the Chrysler bankruptcy plan is an
    illegal sub rosa plan cooked up in the dark of night by the
    Auto Task Force of the Administration without any meaningful
    input from Chrysler's senior secured lenders?
        Mr. Grossman. There is a strong argument to be made that
    the sale, the sham sale, that has been put together by the
    Obama administration does indeed violate the Bankruptcy Code.
    That said, the way that the appeals process works within the
    bankruptcy courts it seems very unlikely that the sale would be
    overturned or in any way annulled. It does, of course, as I
    think many people on this panel have discussed, create a very
    serious precedent that could allow more and more of these types
    of sales to go forward, whether aided and abetted by the
    government or by managers of a corporation that are seeking to
    freeze out outside investors or indeed to loot the company.
        Mr. Goodlatte. People playing outside the scope of the law
    as it has been structured by this Congress over centuries.
        Let me ask you, Professor Skeel, can you briefly explain
    what a sub rosa plan is, why it is illegal, and whether you
    believe the Chrysler plan is a sub rosa plan?
        Mr. Skeel. To answer your last question first, I do believe
    it is a sub rosa plan. What a sub rosa plan is, what it means
    is a disguised plan, where this is, in form, a sale of assets.
    In theory, we are just selling Chrysler's assets to this new
    company. But really what we are using this sale to do is to
    decide who gets what. We are not just raising money for the
    assets. We are deciding who gets that--that Fiat gets some
    stock in Chrysler, that the employees get some stock in
    Chrysler, that the dealerships are not protected by this sale,
    that other people are not protected by this sale.
        So, in effect, what we have is a reorganization plan
    without going through any of the reorganization process, the
    right to negotiate the plan, the right to vote on it. So, yes,
    I do believe it is a sub rosa plan; and I do believe it is
    illegal.
        Mr. Goodlatte. We have been sitting here concerned about
    the speed with which events are unfolding with the inability of
    the Congress to act. But let me ask you also, and others may
    want to answer this as well, the sale procedures for Chrysler's
    assets provided for just over 1 week for potential bidders to
    put in a final offer for substantially all of Chrysler's assets
    with no due diligence or financial contingency. Does anyone
    believe that this is an absurdly short time period for a multi-
    billion dollar transaction that was designed to do anything
    other than to preordain a bankruptcy plan that is being
    structured out of the sight of the public and before we are
    ever in the bankruptcy court somewhere in the corridors of the
    Administration?
        Mr. Skeel. I will start by saying, yes, I do think it is an
    absurdly short period of time. Short time period sales are
    sometimes appropriate if the assets are going to disappear
    suddenly or there are other extraordinary circumstances. A
    short time for a sale is not necessary here. We could have
    allowed much more time.
        Ms. Claybrook. I would like to say that when you have a
    very short period of time it means that the people who are less
    powerful don't have a voice because they don't have the time to
    get organized. If you have lawyers on your payroll, if you are
    normally involved in litigation, then you do have time.
        Mr. Goodlatte. And that is what a Chapter 11 reorganization
    is supposed to do. It freezes the situation as best you can and
    puts it in the court for a deliberative process to evaluate the
    assets, evaluate the rights of all of the parties involved and
    then come forward with the best plan in the judgment of the
    court, hopefully with the agreement of the parties, to be able
    to move forward and move this out of bankruptcy again and have
    the company survive and the employees survive and the consumers
    rights be protected and the cars that they purchased and want
    to have their warranties honored. Or, as Mr. Nader points out,
    the right to be protected if the car has been defective and
    want to have their rights protected in that process.
        All of that has to be carefully considered, and it ought to
    be done in a formal process under the rule of law, rather than
    have that all happen ahead of time and then drop down on the
    court and say this is what we expect to happen.
        Mr. Chairman, if I might be allowed one more question. Mr.
    Grossman, did the Troubled Asset Relief Program funds
    essentially to bail out Chrysler and General Motors violate the
    terms of the Emergency Economic Stimulus Act which only gives
    the Secretary of the Treasury the power to purchase troubled
    assets from financial institutions which are defined as, quote,
    any bank, savings association, credit union, security broker or
    dealer or insurance company, end quote.
        Mr. Grossman. I think the answer is that it does violate
    the terms of that Act. I think an automaker by anyone's
    estimation is not a financial institution. Under the
    Administration's logic, any corner restaurant that offers a tab
    to its customers would be a financial institution. I think that
    is ridiculous.
        Mr. Goodlatte. Well, Mr. Chairman, I have heard from many
    who were--I don't have any auto plants in my district, but I
    have a lot of auto parts manufacturing plants. I have many,
    obviously, auto dealers who I have heard from about this
    process. They believe that this is something that is not being
    decided by Chrysler; it is being decided by somebody somewhere
    in the Administration. And if there is anything that Congress
    can do to bring this to the light of day and restore an orderly
    process to it I certainly would be anxious to work with you,
    and I will bet many on my side of the aisle would be willing to
    work with you and others on your side of the aisle who have
    expressed concerns about where we have been brought to to this
    point.
        Mr. Conyers. Thank you, Mr. Goodlatte. Thank you very much.
        The Chair recognizes Bill Delahunt of Massachusetts, a
    Member of the Foreign Affairs Committee and himself a former
    prosecutor from Massachusetts.
        Mr. Delahunt. Thank you, Mr. Chairman.
        I would like to associate myself with the ending of the
    concluding remarks of the gentleman from Virginia. I think we
    have an obligation along the lines articulated by Mr.
    Goodlatte.
        But I think some of us are having difficulty understanding
    the basics. So I just want to have one of you walk me through
    the process. I have real process issues here, procedures. Now,
    I don't know who I could pick on. Mr. Fein I rely on on a
    regular basis. But in a typical Chapter 11 reorganization there
    is a plan, and the plan is either approved by the bankruptcy
    court or amended by the bankruptcy court after objections are
    filed and there are hearings. Am I correct?
        Mr. Skeel. Yes, that is mostly correct. The only
    distinction I would make is the bankruptcy court doesn't amend
    the plan. The bankruptcy court is meant to be a referee. So the
    bankruptcy court can hear objections on a plan, agree with the
    objections if they are correct, and then say to the parties,
    you need to go back and do this over; this does not square with
    the bankruptcy laws.
        Mr. Delahunt. Okay. So we are talking about a referee here.
        Now, we have this situation where one of the stakeholders,
    obviously a significant stakeholder, is the American public,
    the taxpayers. Government funds are here. Now, I have heard Mr.
    Nader and other panelists talk about accountability and
    delegation. Tell me if I am wrong. Is this particular process,
    since the government is, let's say, the centerpiece or the
    major stakeholder in this, given the bailout money, this
    Committee specifically, because we have jurisdiction of
    bankruptcy, has oversight. And I think that is what we are
    doing today. Mr. Nader, I hear you reference 8 or 9 days to go.
    That doesn't give us very much time.
        Mr. Nader. On your first point, which is the responsibility
    of the government, it is essentially--the moment a major
    company comes to Washington and asks Washington to save it, as
    General Motors did, it is a political process and a
    congressional responsibility. So anybody who says, well, we
    don't want to politicize this, you have crossed that Rubicon.
    It is a political responsibility with radiating concerns way
    beyond the General Motors headquarters in Detroit and
    communities all over the country.
        Mr. Delahunt. I guess what I am saying, Mr. Nader, is that
    we do that--we might have--you or others would argue or suggest
    that the delegation--I think this is Bruce Fein's point, too--
    is we have delegated too much.
        I guess what I am saying is when we passed a Bankruptcy
    Act, I guess one could say that was delegation and conferred
    upon the bankruptcy court certain powers. But I guess what I am
    saying, because of the unique nature or the unusual nature of
    this particular reorganization, the government has a different
    role. And what we do here is to exercise--Congress exercises
    its oversight responsibility to ensure--I think you used the
    term, Mr. Nader--that the equities are there. I don't think it
    really requires us to pass new legislation. Help me.
        Mr. Nader. I think it does. Let me tell you. I will give
    you an example.
        The task force has a very narrow focus, and it is secret,
    and it is not representative, but it has a full authority of
    the President to, right now, as we speak, dictate to Chrysler
    and General Motors certain things like closing down dealers.
        Mr. Delahunt. Let me just ask you about the task force.
    That is an executive branch----
        Mr. Nader. But there are no standards. You set no standards
    for it. Even for the independent--yeah, that is the point.
    There are no congressional standards. It is a two-tier
    delegation ending up in a secret negotiation.
        Mr. Delahunt. But I guess what----
        Mr. Nader. Just to go to your point. For example, the task
    force has not informed us how it is handling General Motors'
    assets and unrepatriated profits in China. Now, for example, if
    General Motors says, well, we don't have money to pay the $1
    billion on June 1st and the task force says, yeah, are we
    entitled to accept that on trust? What is the asset base and
    the unrepatriated profits, which are enormous in China?
        Mr. Delahunt. I guess what I am saying--I am not
    necessarily disagreeing with you. What I am saying is our next
    step in the process would be to call, to summons in or invite
    in the task force to this Committee to explain the process and
    how they concluded what decisions they made.
        Mr. Nader. Exactly. Before they rush to bankruptcy court.
        Mr. Conyers. Will the gentleman yield briefly?
        Why don't we rush into 1600 Pennsylvania Avenue and get
    this thing worked out and bring a bipartisan delegation?
        Mr. Delahunt. Well, Mr. Chairman, whatever you say. I know
    Mr. Gohmert would go. I know Mr. Goodlatte would be there.
    Darrell Issa, you know he would be there.
        Mr. Conyers. Well, what about Bill Delahunt?
        Mr. Delahunt. You know, I am just a lieutenant in the
    Conyer's army. Between trips overseas, I would be happy to
    accompany you.
        But I just kind of wanted to understand this conceptually.
    Mr. Fein.
        Mr. Fein. Mr. Delahunt, I think what could be done is,
    instead of having the bankruptcy judge be the referee, as we
    discussed who is ordering the priorities, the equities, you
    could require that the plan be presented to the Congress which
    has 60 or 90 days to vote on it. So it is not oversight. You
    are deciding whether the priorities are correct or not, which--
    and it doesn't have to be in every single bankruptcy. It could
    be where the government also has invested its own funds. It is
    not just a bystander. Or the size of the particular level that
    makes the equities far more significant than in a tiny case so
    you are not bombarded with these countless occasions. We are
    always told, well, these companies are too big to fail. Well,
    maybe they are too big to get bankruptcy judges to get them out
    and you have to decide that as well.
        Mr. Delahunt. Could I have an additional 30 seconds, Mr.
    Chairman?
        I am beginning to think that we should have a new standard
    in terms of our antitrust, our marketplace, and that is if it
    is too big to fail it never should have got there in the first
    place. Because I think we really do put at risk our economy.
    And who ends up getting tagged with the bill? It is the
    American taxpayer. And it diverts us away from a free market.
        If it is too big to fail, then you no longer have a--in my
    judgment, or at least in my limited economic perspective, that
    is not a free marketplace. That is not a marketplace that is
    working.
        I yield back.
        Mr. Conyers. Thank you very much, Mr. Delahunt.
        The Chair is pleased to recognize the gentleman from Ohio,
    Jim Jordan.
        Mr. Jordan. Thank you, Mr. Chairman. I thought Darrell was
    next, but I appreciate it.
        Mr. Conyers. Wait a minute.
        Mr. Jordan. I spoke too soon.
        Mr. Conyers. Now that I am looking at the gentleman from
    California----
        Mr. Issa. Thank you both.
        Mr. Conyers. Darrell Issa.
        Mr. Issa. Thank you, Mr. Chairman.
        When I was born in Cleveland, Ohio, I never knew how
    important my Ohio roots would be to me.
        Mr. Chairman, I would ask unanimous consent to include in
    the record articles from The New York Times, The Wall Street
    Journal, and The Financial Times.
        Mr. Conyers. Without objection, so ordered.*
    ---------------------------------------------------------------------------
        *Note: The information referred to was not submitted for inclusion
    in the record.
    ---------------------------------------------------------------------------
        Mr. Issa. Thank you.
        I would like to go down a fairly narrow track, but I think
    one that may not have been covered here. Professor Skeel--and I
    think the minority auto dealers may very well find this
    unexpectedly pleasant. From a bankruptcy standpoint, the monies
    that the American people put in to--let's just take Chrysler
    for a moment--those monies are, in a sense, monies that were
    outside a bankruptcy. In other words, they were put in under
    terms that, if not for those monies, these companies would,
    both GM and Chrysler, would have already been bankrupt. In
    other words, these are like debtor-in-possession funds, even
    though they weren't put in under those terms. Don't they have
    that sort of color to them, in anticipation of insolvency we
    rushed in?
        Mr. Skeel. Absolutely. In fact, I would go a step further
    and say they are debtor-in-possession funds. The government is
    a debtor-in-possession financier even in a formal sense.
        Mr. Issa. So I am going take the next step for a moment.
    Because I think the auto dealers, both GM and Chrysler, are
    getting a raw deal. And as a person that grew up in the
    industry I have got a concept I want to run by you as a
    professor knowledgeable with what we could do in bankruptcy. If
    in fact there but for the dollars all the dealers would have
    closed, then no dealer has any right to its franchise, is that
    correct, in abstract terms?
        Mr. Skeel. In a sense, yes.
        Mr. Issa. And in a bankruptcy all the franchises could be
    voided on day one, right?
        Mr. Skeel. That's right. The way it would work is Chrysler
    would terminate the agreements. It is known as rejecting an
    executory contract.
        Mr. Issa. So if we do A and B, then C would seem to be that
    all the dealers on some proportional basis have an equal right
    in new contracts, new franchises, assuming for a moment, as is
    planned, they are going to be issued for no dollars.
        Now, if Chrysler said, we are going to void all these
    things and we are going to go out and look for dealers and
    raise money, that would be a different story. But since they
    have nothing in their plan that is going to bring in new
    dollars, wouldn't it be fair for all of the dealers, including
    the many dealers being closed, some of them minority dealers,
    to say that they have an equal right to the common new
    dealerships, even though some are being given and some are not?
        Mr. Skeel. As a matter of equity, you can make that
    argument. As a matter of bankruptcy law, that is not going to
    work. The bankruptcy law rule is that Chrysler gets to decide
    which dealerships to keep and which not to keep. So to the
    extent you are making an equitable argument, it may be a
    powerful argument. It is not a bankruptcy argument.
        Mr. Issa. But back to the bankruptcy point, you said none
    of the dealers have a claim.
        Mr. Skeel. Well, they do have a claim.
        Mr. Issa. Well, okay. Let me rephrase that. None of the
    dealers have a right to keep their dealerships.
        Mr. Skeel. Right.
        Mr. Issa. And they can all be voided, and they would just
    be unsecured creditors. Given that situation, I am going
    hypothecate something. Chrysler and GM should in fact in
    bankruptcy in their plan void all the contracts and require
    people to bid value to be franchise dealers again.
        In other words, there is a pot of money, of value that GM
    and Chrysler are not looking to which the corpus has an
    obligation to seek. To the extent that they waive that for some
    legacy reason, fairness, whatever, or to the extent that the
    DIP financier is waiving his own funds--which we are doing, we
    are going to forego our own funds--we in a sense buy that deal.
    We say, you can't go out and charge more.
        If you make those logical arguments, that in fact nobody
    has a right, you absolutely could and should try to seek new
    monies for whoever wants those valuable franchises, whatever
    the amount are, because there is certainly going to be a lot of
    people with empty dealerships looking for a business
    opportunity and willing to pay new money to not have an empty
    building. To the extent that they forego that, they have to
    forego it for a reason; and to the extent that we, the
    taxpayers, are giving--literally giving money into this deal,
    is it not reasonable for those of us here that represent the
    taxpayers to ask for that equity?
        And is there anything in bankruptcy law that would prevent
    essentially--and I will just throw out an abstract. For each
    car you sell, you get a share. The sustaining dealers, the ones
    that are chosen to continue, have X amount of shares, but in
    order to buy their dealership they essentially have to find the
    rest of the shares, which means they have to make whole these
    other shareholders who do not get their dealers open.
        From a bankruptcy standpoint, there is nothing prohibiting
    it. From a standpoint of the people who are literally giving
    money into a deal, there is no problem.
        And, back to my original question, which is the only one I
    am going ask here, if they do not do something like this, if
    something is not done to equalize this, then why in the world
    shouldn't we, the taxpayers, expect in order to have the
    maximum wholeness they void all the contracts and resell their
    franchises if there is a net value that would go to the
    creditors?
        Mr. Skeel. Again, you can make this argument. It is
    Chrysler's decision whether to do that or not. You can make an
    argument they----
        Mr. Issa. But Chrysler has a fiduciary obligation to its
    creditors to maximize that value.
        Mr. Skeel. That's right.
        Mr. Issa. And is there any way that anyone can say that if
    you voided all the contracts you couldn't go out and sell new
    dealerships for more than $1?
        Mr. Grossman. Mr. Issa, if I may, in a traditional
    bankruptcy, where a plan is proposed and creditors rights are
    taken seriously----
        Mr. Issa. Not this one, but in a traditional one.
        Mr. Grossman. That is the sort of proposal that would be on
    the table and that the company would have a possibility of
    executing. Because they would be taking their creditors' rights
    seriously. That is not this bankruptcy.
        Mr. Issa. Not yet.
        Mr. Grossman. The Obama administration has done something
    very different.
        Mr. Lester. For our standpoint, the issue still remains of
    access to capital. We can do a fire sale today, and the dealer
    still needs to get adequate working capital to survive. We can
    do a dollar buy-out, we can do a penny stock buy-out, but the
    issue is the credit markets as it relates to dealerships across
    this country today are not lending to automobile dealers.
        So we are still--no matter what value you want to place on
    this scenario, having access to capital is the problem. And
    then we are going to create a scenario where those that have is
    going to be versus those that have not that don't have, and the
    deep pockets will always win. So that balance is still going to
    be off scale because of the fact----
        Mr. Issa. I understand that the companies who do not have
    access to capital and are small dealers and are scheduled to
    not be renewed, they presently are getting zero. And even if we
    said you could stay in business, you would have to go find
    money, and it is not likely to be easy to find.
        What I am saying is, in an ordinary bankruptcy where this
    kind of money has come in and we are looking at the equities,
    is there any basis for the current deal that is on the table,
    which is we pick winners and losers, we tell the losers tough
    luck, and we don't actually exercise any recognition of the
    value given for those who get to keep their franchises for free
    versus those who lose them regardless?
        More than anything else, Chairman, that seems to be one
    of--we have lot of anomalies that may or may not be fixed in
    bankruptcy. I have taken my time to ask of this one because I
    am confounded to believe that people are simply told, you lose
    and you get no credit, but the people who get to continue being
    dealers, multi-million dollar, actually enhance the value, pay
    nothing for the enhanced value they are getting of their
    competitor down the street being closed out.
        I cannot--even though I am as conservative as the day is
    long, I cannot understand how that equity of closing your
    competitor and giving you the business doesn't have a value
    that needs to be equalized, particularly since we, the
    taxpayers, are giving billions of dollars in this transaction.
        Mr. Conyers. Would you be willing to present this argument
    on Pennsylvania Avenue?
        Mr. Issa. Absolutely. As long as we have got an American
    car to ride down the street to, I will go with you, Chairman.
    And it can be one of those made in America by any tag name.
        Mr. Conyers. Oh, gosh.
        Jim Jordan, Ohio.
        Oh, I am sorry, Brad Sherman, California.
        Mr. Sherman. Thank you, Mr. Chairman.
        I want to start off by mentioning the comments of two
    people who are no longer here. First, Mr. Goodlatte mentioned
    that there is a real question whether TARP money can be used to
    bail out auto dealers. I point out that this House passed a law
    that was thought to be necessary to give the Secretary of the
    Treasury the right to do that with the TARP money.
        I voted for that, because when I looked at all the ways
    they could use the TARP money, bailing out the auto dealers
    seemed to be among the better. And the law didn't pass the
    Senate. And the Treasury acted as if the law had passed the
    Senate, thus disempowering and making useless the Senate, which
    seemed to be a wonderful idea. But at least when we all voted
    for that law it was with the assumption that it was necessary.
        I should point out that there was discussion of evading the
    law--not evading, structuring around the law by having TARP
    give the money to GMAC or some other financial institution in
    return for--well, you basically have the bank buy stock from
    General Motors and then sell it to TARP or to the Treasury; and
    then we would have been buying a troubled asset, a/k/a stock in
    General Motors, from a financial institution.
        Also, Professor Lynn LoPucki--I believe is the correct
    pronunciation--made the point, Mr. Chairman, about how forum
    shopping in bankruptcy undermines not only the bankruptcy
    system but the financial services system. Because whenever you
    make a loan you have to ask what happens if the company goes
    bankrupt or at least has trouble. And I think he did an
    excellent job of outlining why we should be getting rid of
    forum shopping.
        Professor Skeel--and I don't know if your background
    encompasses bankruptcy law.
        Mr. Skeel. It does.
        Mr. Sherman. I could see why a judge in Delaware would
    really want the business because he could help support his
    whole community. It would be significant to the local economy.
    But why would a judge in New York City whose economy is not
    supported by the bankruptcy law business do violence to the law
    just to land some more cases? Most of the district judges I
    know don't want more cases. Why does the bankruptcy court in
    New York want to do everything possible to bring in more cases?
        Mr. Skeel. Well, it is dangerous to have me channeling Lynn
    LoPucki, because I don't agree with Lynn about many of his
    arguments in this area. Although I think we do agree on this as
    to--I don't think that forum shopping is worrisome, as Lynn
    LoPucki does.
        But I do agree with him on why judges might be interested
    in having the cases. Having one of these cases--I am not sure
    Chrysler is a good example--but having WorldCom or Enron, it is
    very exciting if you are a bankruptcy judge, and it is sort of
    in all of your career you might get two or three cases like
    this. So if you have an opportunity to have Enron or WorldCom
    or some other big case, it is exciting for you as a judge.
        Mr. Sherman. Got you.
        Mr. Henderson, I am trying to figure out why every article
    I read about GM and Chrysler says they would be much better off
    if they got rid of half their dealers or a third of their
    dealers. This strikes me as odd.
        I mean, Sony could have worked things out so that I could
    only buy a Sony TV in 5,000 places around the country. They are
    happy to have 50,000 places sell me a television. And that
    creates competition, which means there is less markup, which
    means either Sony can charge more and I pay less and the
    middleman--you being the middleman--in the automobile industry
    gets less.
        So why is it thought--I mean, I can see why if I was an
    auto dealer I would want the three auto dealers closest to me
    all shut down. But why would General Motors or Chrysler feel
    that they would benefit? How do they save money if they have
    only six dealers in L.A. County instead of nine dealers in L.A.
    County?
        Mr. Henderson. Mr. Sherman, I think that their argument is
    around a term called throughput. They believe that the more
    units solid per facility, the stronger those dealers will be.
    The more those dealers will be able to invest in their
    businesses, the more they will be able to compete against other
    franchises. That is their argument.
        Mr. Sherman. So their theory is that if you could make
    another hundred bucks a car for every car you sold you would
    make your showroom nicer. There would be the gourmet teas, not
    just the Lipton available for those of us who don't drink
    coffee.
        Mr. Henderson. That is part of their argument, yes, sir.
        Mr. Sherman. On the other hand, if you have got dealers
    three miles in each direction, you are going to have to cut the
    price of that car by another hundred bucks.
        Mr. Henderson. That is correct. It would present a more----
        Mr. Sherman. Don't give me the fancy tea. I want the
    hundred bucks.
        Is there somebody selling cars in the United States that
    has as their model, let's try to have lots of dealers and each
    one will sell only 500 cars or 1,000 cars? Or is it generally
    accepted in the business it is somehow great to have dealers
    that do 5,000 cars a year? I am making those numbers up. I
    could be off as to what is the difference between a small
    dealer and a big dealer.
        Mr. Henderson. There are arguments on both sides of that
    issue, and they have been ongoing for some time. And there are
    markets that dealers will be the first to agree that could
    stand to have less dealers.
        Mr. Sherman. Well, the dealers would, because you can jack
    up the price. And you may or may not then invest more money in
    the dealership. You may just invest more money in your vacation
    home.
        Mr. Henderson. Absolutely. The question becomes----
        Mr. Sherman. Back when this was a profitable business and
    you all had vacation homes.
        Mr. Henderson [continuing]. As it relates to a bankruptcy
    how that process is accomplished. Is it accomplished through
    market attrition or a dealer buying out and paying fair
    compensation or is it accomplished by just the stroke of a pen
    that allows people's wealth to dissipate?
        Mr. Sherman. Is there anyone else with expertise in the
    auto industry that can opine as to whether GM or Chrysler is
    actually making itself healthier by getting rid of dealers?
        Ms. Claybrook. I would like to comment on that, Mr.
    Chairman.
        I have dealt with many auto dealers over the years, and
    there are favored auto dealers and there are unfavored auto
    dealers by the factory, as they call it. And if there is an
    auto dealer who is a bit of a troublemaker, who complains a
    lot, who doesn't do their warranty work as well, who claims too
    many warranty claims, those dealers they would just as soon get
    rid of.
        This is an opportunity, particularly in the Chrysler case,
    where there is no standards, it is highly discretionary among
    Chrysler, to make their choices. And I don't know how much of a
    role that is playing in this, but I will tell you that it is a
    subject of conversation all the time at the factory level.
        Mr. Sherman. I mean, I can see them wanting to get rid of 5
    or 10 percent of their dealers who do bad warranty work or
    whatever. But I can't imagine you would want to get rid of a
    third of your dealers for that. Are there that many doing bad
    warranty work?
        Ms. Claybrook. No, no, no. As long as they have this wide
    discretion. So they are going do get rid of the ones they don't
    want, and then they are having to deal with the government
    saying they want to get rid of more of them so that they are
    slimmed down.
        But I am just saying that one of the factors probably is
    the factory wants have the discretion to make the choice about
    who to keep and who not to keep.
        Mr. Sherman. I would say it benefits consumers to have as
    many competitors as possible not only to compete to sell me the
    car but then when I want to get the car serviced I would like
    to take it someplace pretty close.
        Mr. Nader, do you have any comment on this? Are consumers
    benefited? No one has focused on consumers more than you have.
    Do consumers benefit by----
        Mr. Nader. Of course. If you are in the position of someone
    who wants to have a car serviced or buy a car, do you want to
    travel 10 miles, 15 miles? Do you want to travel 7 miles
    through a congested city or do you want one in your
    neighborhood? Already there are far less dealers than there
    were 20, 30 years ago. Take a look at Washington, DC.
        Mr. Sherman. Are there far less total dealers or just fewer
    domestic and more foreign auto dealers?
        Mr. Nader. No, no. Overall, overall. Your neighborhood
    dealer is almost extinct in terms of traveling three or four
    blocks for a dealer.
        The other thing is you are less likely to repair your car
    if you have to take more time out and go to the dealer. That is
    why there is legislation here in Congress to allow equal access
    by independent repair shops, because there aren't that many
    dealers. In the rural areas, they are being shut down; minority
    areas, they are being shut down. So for safety, convenience,
    and competition, the fewer dealers, the price is going to be
    going up. The Washington Post had an article on that very
    recently. So all to more dealers.
        Mr. Sherman. So it is bad for the consumers, I have got all
    the dealers complaining about it, and I can't get anybody on
    this august panel to tell me how it makes more money for the
    manufacturers.
        Mr. Grossman, you are raising your hand. How is putting the
    folks to your right out of business going to help these
    companies survive? Or just some of them, not all of them.
        Mr. Grossman. Well, I don't presume to know which dealers
    should be in business and which ones should not in particular.
    But I would note that the most powerful automotive retailer
    chain in the United States, the most powerful sales force, is
    widely considered in the industry to be Toyota's. Toyota's
    dealers have a throughput, on average, of about 1,100 vehicles
    per year. Many General Motors and Chrysler dealers sell as few
    as 50 or 70 cars per year. There are fixed costs that are
    associated with addressing every single dealer, and for many of
    those dealers----
        Mr. Sherman. What are these enormous fixed costs of dealing
    with a smaller dealer?
        Mr. Grossman. There are marketing costs.
        Mr. Sherman. There are marketing costs. What does that
    mean?
        Mr. Grossman. It means that they do joint marketing. For
    example, they may place ads in newspapers, on television, in
    the radio.
        Mr. Sherman. But a small dealer gets very little of that
    money, I mean, proportionately. If you only sell 50 cars----
        Mr. Grossman. Right. Proportionately, a small dealer will
    get less of that money. But, at the same time, the expense of
    creating those advertisements, creating those radio spots is,
    to some extent, a fixed cost.
        Mr. Sherman. Or it could be borne by the dealer. I can't
    imagine that there is a dealer about to be put out of business
    that wouldn't say, fine, leave me in business and I will design
    my own ads, or, hell, I will even just do my own advertising.
    This is not a situation where they are turning to some dealers
    and saying we are going to reduce your cooperative marketing
    budget. We would get a lot less angst from auto dealers if they
    said, well, we have got to do advertising on our own than what
    we hear from the dealer.
        Mr. Lester.
        Mr. Lester. There is absolutely no validity to a shrinkage
    of a dealer body that will show the viability of a
    manufacturer. As Mr. Nader pointed out, historically, there are
    less dealers than there were maybe 50 years ago; and that has
    been based on natural attrition. A dealer who just makes his
    own decision on when he or she decides to go out of business,
    that should not be dictated or demanded from our government or
    via the Auto Task Force.
        The Auto Task Force and I have had an opportunity to sit
    before them on several occasions, took a clean-sheet-of-paper
    approach and decided to use the model of Toyota that had very
    few dealerships across the country with the thought that their
    model of a successful dealer should also fit within the model
    of GM and Chrysler. That in and of itself is a model that may
    work for Toyota.
        It may not work for GM and Chrysler, who have historically
    been in those neighborhoods who get their car vehicles
    serviced, and to now have these consumers with these
    terminations with these dealerships closing to now be
    inconvenienced, to have to travel 10, 15, 20 miles to be able
    to sit 2 hours to get an oil change where they are accustomed
    to getting oil changes in 30 minutes. So it is not a valid
    point on a fixed cost----
        Mr. Sherman. I will agree with you. If you are starting to
    market cars for the first time in the United States you might
    very well say, oh, copy Toyota, that seems to be working for
    them. But if you already have dealers with goodwill all over
    the country, it should take more than Toyota envy to get you to
    close them all down.
        With that, I will yield back.
        Mr. Conyers. Thank you, Brad Sherman.
        Jim Jordan, Ohio, you are the last Member to question the
    panel.
        And then any member of the panel that wishes to make a
    closing comment, we would welcome it before we adjourn the
    hearing today.
        Mr. Jordan. Thank you. Thank you, Mr. Chairman.
        Last fall, when we were in the midst of this bailout fever
    that got ahold of Congress, whether you are talking the
    financial industries or the auto industry, I remember in the
    midst of the debate about the car czar and everything else, the
    headline in The Wall Street Journal, ``Do You Want a Car Built
    by Congress?''
        And it is actually worse, as Mr. Nader has pointed out. The
    headline should read now: Do You Want a Car Built by
    Bureaucrats? Because it seems to me that is where we are at.
        And I want to ask the gentleman here in the dealership
    business. This is from the press, at least what our office got
    from the Department of Treasury. Do we know if any of these
    individuals have, as Mr. Sherman just said, any expertise in
    the auto industry? Treasury.
        Secretary Geithner; Diana Farrell, Deputy Director of
    National Economic Council; Gene Sperling, Counsel to the
    Secretary of Treasury; Jared Bernstein, Chief Economist to the
    Vice President; Andrew Montgomery, Senior Advisor Department of
    Labor; Lisa Heinzerling, Senior Climate Policy Counsel to the
    EPA; Austan Goolsbee, Staff Director/Chief Economist to the
    Economic Recovery Advisory Board; Dan Utech, Senior Advisor to
    Secretary of Energy; Heather Zichal, Deputy Director, White
    House Office of Energy and Climate Change; Joan DeBoer, Chief
    of Staff, Department of Transportation; and Rick Wade, Senior
    Advisor, Department of Commerce. Do these individuals have any
    expertise on the manufacturing side or on the dealer side?
        Mr. Lester. None.
        Mr. Jordan. Does anyone else know if they have any
    expertise in how car manufacturing or car dealership businesses
    operate?
        Mr. Grossman. The Wall Street Journal actually did a survey
    of the members of the Automotive Task Force and discovered that
    a substantial portion of them don't even own cars.
        Mr. Jordan. Mr. Chairman, I think Mr. Delahunt's suggestion
    earlier--which I know Congressman Gohmert, as well as others--
    to have the task force come here would be great. I would love
    to ask them some questions.
        Just for the record, Mr. Lester or Mr. Henderson, is it
    your testimony--and I have heard conflicting testimony on this
    from various sources over the last week. Is it your belief that
    it is the task force making the decision about which
    dealerships stay in business and which don't, or is it Chrysler
    and GM making the decision and then getting the thumbs up from
    the task force?
        And, frankly, it may be the same difference. But just for
    the record, which is it? A or B?
        Mr. Lester. What we have been told by the task force is
    that they have no decision-making process between General
    Motors and Chrysler in the decisions that they have been
    making. It is our assumption that we think that they actually
    are pulling the strings of General Motors and Chrysler and
    directing them in the way that they want to be directed to see
    this outcome.
        Mr. Jordan. Mr. Henderson.
        Mr. Henderson. What we have been told by Chrysler is that
    the task force has been directing their large, drastic, quick
    reduction of the dealer body as part of the bankruptcy.
        Mr. Jordan. Well, that is sort of contradictory. Are you
    saying that it is starting with the task force and then going
    to the manufacturer?
        Mr. Henderson. It starts with the task force. The task
    force is not making the decisions on the specific dealers but
    the process of doing a large dealer reduction.
        Mr. Jordan. Is the task force saying, we want X number,
    this number, now GM and Chrysler get to that number. Is that
    going on? Are they making the determination on the----
        Mr. Lester. On the number? No, I think that number was
    coming from the manufacturers. I think the task force did not
    make an individual selection based on who stays and who goes,
    but I think the task force demanded that the manufacturers
    adhere to what they put in their viability plans last December
    19th.
        Mr. Henderson. Again, it is an acceleration, Mr. Jordan.
    The plan of reducing and consolidating dealers has been on the
    table at Chrysler for a number of years, but it has been
    dictated by the market, and people were being compensated
    fairly for their franchises.
        Mr. Jordan. Mr. Gross, if I can just sort of change--just a
    general question. And this is a guy who thought we never should
    travel down this road, this bailout road, voted against every
    single one of them, and thought it was the wrong approach
    because of the very mess we are in right now and the fact that
    we put this kind of taxpayer dollars at risk and what we are
    doing to the debt and everything else.
        But to use again the words that Mr. Nader used, when do you
    believe we crossed the line? Crossed the Rubicon, I believe is
    the word used earlier. Was it when we started the bailout with
    the auto industry last fall? Was it when the President of the
    United States told Rick Wagner to take a hike, he now decides
    who runs companies in this country, not the stakeholders, not
    the board? Was it when we did the first TARP bailout?
        I mean, in your judgment--or, frankly, anyone can jump in
    there, I guess, if they want. But, Mr. Grossman, in your
    judgment, when did we cross this what I believe is a very
    dangerous line in this country?
        Mr. Grossman. I think that line was crossed about 3 to 4
    days after the passage of the TARP legislation. That was the
    point when Secretary Paulson acknowledged that the original
    plan for the TARP to purchase troubled assets would not be
    followed and that the government would do something completely
    different. And I think that was an indication--and it should
    have been a clear notice to Congress--that the legislation that
    had been passed was something that gave pretty much
    unprecedented discretion to the Treasury and to the executive
    branch.
        Mr. Jordan. All right. Thank you, Mr. Chairman.
        Mr. Conyers. Any closing observations?
        Judge Gohmert.
        Mr. Gohmert. I have just appreciated the comments--Mr.
    Jordan, Mr. Sherman, panel members, Mr. Lester--your comments
    about the dealers and how that really helps the manufacturers
    to put people out of business. But I have been hearing
    specifically of one dealership where $2 million was paid to the
    former dealer to buy the dealership, been paying down on it,
    owe a million and a half still, and all of a sudden they are
    told by some group that met behind closed doors they are going
    to take that and give it to somebody down the street.
        I mean, what happened to contract law, what happened to
    bankruptcy law, what happened to secured creditors, all these
    things? If we continue down this course without getting back on
    track to the rule of law and the law of contracts and the
    bankruptcy law, then I am concerned that we degenerate to a
    third-world nation where some king says, oh, you are more
    favored as a duke today, so I am taking this one's land and
    giving it to you. It seems where we have gone, and I think it
    is up to this Committee to see that we don't stay there, we get
    back on track.
        So I very much appreciate the hearing, and I very much
    appreciate your input, and any in the future in writing is
    certainly welcome. Thank you very much.
        Mr. Nader. If I may say, Mr. Chairman, the contemplation
    that most delighted me, and I think some people here, was your
    statement that there might be a bipartisan journey to 1600
    Pennsylvania Avenue very quickly before it is too late.
        Mr. Conyers. Like tomorrow.
        Mr. Nader. Yes. And I think the bipartisan aspect is very
    important. I think some of the things that Congressman Delahunt
    was talking about would be supported by a lot of conservatives
    and vice versa.
        Mr. Conyers. Could Judge Gohmert help make it more
    bipartisan?
        Mr. Gohmert. Yes, absolutely.
        Mr. Conyers. Thank you.
        Mr. Lester. I want to definitely echo what Mr. Nader said.
    We have no time to waste.
        As dealers, just the amount of stress and the amount of
    stress on these dealers' employees from the Chrysler side that
    know they are on that termination list with no place to go,
    with no health care is just tragic. And to give these dealers
    an opportunity to survive and a chance to survive because they
    were surviving already even with the low economy is very well
    within this merit. And I think you guys going to the White
    House and demanding that the President act now because we don't
    have time to wait.
        Mr. Fein. Mr. Chairman, I would like to add a couple of
    examples which amplifies on the lawlessness of the attitude
    that is so alarming.
        It was Secretary Paulson--and this is even before the TARP
    funds were authorized--was bailing out Bear Stearns and he was
    asked, well, what authority did you have? And he said, none
    whatsoever, but I learned in this town if you lead everyone
    will follow. And it was Mr. Paulson who got these bankers
    around a table and said, even if you don't want the funds, you
    develop preferred stock so we can buy them. A coercion of the
    type that I think Mr. Grossman referred to with regard to
    getting the senior creditors to take a subordinate role.
        That is dangerous, that mentality. I mean, what do you mean
    to be so cavalier? We didn't have any authority. Then you
    should go to Congress and ask for it.
        Mr. Conyers. What about Paulson calling in the leaders of
    the Congress and laying down those three sheets of paper: one,
    I want more power than any Treasurer has ever had; two, I want
    $700 billion, and I want it fast; and, three, I don't want it
    reviewable by the Congress or the courts.
        Ms. Claybrook. Mr. Chairman, I would just like to say that
    the auto dealers are a tragic case, and I completely agree with
    everything that has been said here. But I don't want the record
    to close without saying that the individual consumer, the
    individual consumer that has been harmed by a defective
    product, the individual consumer who is likely to be killed or
    injured because there are not safety standards in these
    vehicles, they are the ones whose voices are rarely heard. And
    I hope that when you do go to the White House--and I urge you
    to do that as well--that you will be sure to bring those cases
    to their attention.
        Because the liability that these consumers have the
    potential to secure, to protect themselves in the future is all
    they have; and many of them are so badly injured they can't do
    anything else except to survive on those funds.
        Thank you.
        Mr. Conyers. We might want to make an expedited transcript
    of this record available to the White House.
        Mr. Ditlow. Mr. Chairman, if I may, I am very much
    concerned that at the end of the day this task force and the
    bankruptcy will create what looks like a financially viable
    corporation by getting rid of liabilities, focusing and cherry-
    picking the best assets, but will it sell cars? I don't think
    it is going to do that.
        Because you have to have a consumer who has confidence that
    if I buy a lemon, if I am in a crash, I have a right that I can
    exercise. No one wants to be in a crash. No one wants to buy a
    lemon. But consumers want to know that they have a right. And
    this reorganization doesn't do that.
        And, furthermore, from a dealer viewpoint, the consumer
    wants to buy a car from a dealer that they know and trust,
    someone in their neighborhood; and it doesn't even give them
    that. So it may have a good economic tune, but it is not going
    to be an organization that is going to sell cars.
        Mr. Grossman. Mr. Chairman, this issue is important because
    the fake bankruptcies of Chrysler and soon, apparently, General
    Motors are a microcosm of the abrogation of the rule of law
    that I think threatens our freedom and prosperity. I commend
    you for holding this hearing and thank you for having me
    testify.
        Mr. Conyers. The Chair notices the presence of other
    dealers and nonprofit organizations that have been working
    along with us, and we particularly appreciate the stamina of
    the eight of you to be here as long as we have been here.
        So we thank you all and adjourn this hearing.
        [Whereupon, at 4:40 p.m., the Committee was adjourned.]

                                A P P E N D I X

                                  ----------

                   Material Submitted for the Hearing Record

    Prepared Statement of the Honorable Daniel Maffei, a Representative in
       Congress from the State of New York, and Member, Committee on the
                                   Judiciary

        Thank you, Mr. Chairman for holding this hearing, and I thank our
    witnesses for being here, especially on such short notice. While I am
    glad that we are holding this hearing today, I hope that we can explore
    this issue further in future hearings as well. This is obviously an
    important issue, and we need more time to fully understand the matter
    at hand.
        As I'm sure we are all aware, Chrysler and GM have begun to
    restructure their business model by drastically reducing their dealer
    networks. The closing of these dealerships will have a significant
    impact on local communities and will have a ripple effect on all the
    related businesses that depend on them. If these closings go into
    effect, we could possibly see 150,000 more people out of work. This is
    unacceptable in good economic conditions, and it is completely
    intolerable during a time of financial crisis. This goes beyond CEOs to
    hard working Americans across the country fighting to survive this
    recession.
        I think it is important to ask how the closing of hundreds of
    dealerships will be financially beneficial to these two auto companies.
    This is a question that I just cannot seem to answer. I have recently
    requested that the President's Auto Task Force help Congress get
    answers on why this is happening.
        Both GM and Chrysler accepted TARP money, so their restructuring
    plans should come under congressional oversight. There has been an
    utter lack of transparency in the means by which Chrysler and GM have
    chosen to reject dealers' franchise agreements. If there are too many
    auto dealers in the market, then maybe some do need to close, but the
    closings need to be justified. Trimming the dealer network is a
    situation that either needs to be done using very specific, very
    transparent criteria, or it needs to be done by the market through
    attrition and consolidation. At the very least, I think the Task Force
    should step in and slow the reduction, so communities can gradually
    absorb the jobs being cut.
        I would hope that the automakers reconsider their decision and
    really think about the damaging effects that this will have on local
    communities. I look forward to the testimony from our panel. Thank you,
    Mr. Chairman, I yield back.

     Prepared Statement of the Honorable Trent Franks, a Representative in
       Congress from the State of Arizona, and Member, Committee on the
                                   Judiciary

           Prepared Statement of the Honorable Nick J. Rahall, II, a
           Representative in Congress from the State of West Virginia

        Mister Chairman, first, please let me thank you for holding this
    important hearing. As you know, the state of the American auto industry
    is of crucial concern to all of us. Second, I want to express my
    sincere appreciation for allowing me to offer my opinion on this issue.
        I want to express my grave reservations with the recent
    announcement by Chrysler and General Motors to cut nearly 1,800
    dealerships nationwide. I am very concerned about the harmful impact it
    will have on local communities, as well as the future market-share of
    American car manufacturers.
        Such a drastic reduction of dealerships will be devastating to
    communities. Car dealerships are an important economic engine. As you
    know, they provide high paying jobs and significant tax revenue for
    local governments. In my home state of West Virginia, franchised
    dealers account for over $3 billion in sales, $165 million in sales
    taxes, and approximately $75 million in titling fees for the highway
    fund.
        It is not clear how each dealership was chosen for closing or if
    cutting such a number of dealerships will even have a significant
    impact on improving the manufacturers' viability. Dealers generate more
    than 90 percent of manufacturer revenue. A rapid reduction of
    dealerships undercuts that revenue while doing nothing to address
    concerns about production and innovation.
        In closing, I urge transparency and openness regarding the manner
    in which these dealerships have been chosen, and I ask that you pass
    along my opinion that the Presidential Auto Task Force revisit the
    current strategy as it relates to such a large number of dealership
    closures.
        I believe that dealerships, especially in West Virginia, can be
    part of the solution to improving the long term solvency of our
    nation's auto industry.
        Thank you for your consideration and, again, thank you for allowing
    me to comment on this important topic here today.

      Material submitted by the Honorable Steve King, a Representative in
    Congress from the State of Iowa, and Member, Committee on the Judiciary

     Letter to the Honorable Steven Rattner, Counselor to the Secretary of
           the Treasury, submitted by the Honorable Daniel Maffei, a
      Representative in Congress from the State of New York, and Member,
                           Committee on the Judiciary

              Material submitted by Ralph Nader, Consumer Advocate

      Prepared Statement of Jeremy Warriner, submitted by Joan Claybrook,
                       President Emeritus, Public Citizen