[Senate Hearing 111-227]
[From the U.S. Government Publishing Office]
S. Hrg. 111-227
THE STATE OF THE DOMESTIC AUTOMOBILE INDUSTRY: IMPACT OF FEDERAL
ASSISTANCE
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
ON
EXAMINING THE ROLE OF THE FEDERAL GOVERNMENT'S AUTO TASK FORCE IN THE
RESTRUCTURING OF AMERICA'S AUTOMOBILE INDUSTRY
__________
JUNE 10, 2009
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
CHRISTOPHER J. DODD, Connecticut, Chairman
TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York JIM BUNNING, Kentucky
EVAN BAYH, Indiana MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey MEL MARTINEZ, Florida
DANIEL K. AKAKA, Hawaii BOB CORKER, Tennessee
SHERROD BROWN, Ohio JIM DeMINT, South Carolina
JON TESTER, Montana DAVID VITTER, Louisiana
HERB KOHL, Wisconsin MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia KAY BAILEY HUTCHISON, Texas
JEFF MERKLEY, Oregon
MICHAEL F. BENNET, Colorado
Edward Silverman, Staff Director
William D. Duhnke, Republican Staff Director and Counsel
Amy Friend, Chief Counsel
Neal Orringer, Professional Staff Member
Jonathan Miller, Professional Staff Member
Deborah Katz, Legislative Fellow
Mark Oesterle, Republican Chief Counsel
Andrew Olmem, Republican Counsel
Chad Davis, Republican Professional Staff Member
Dawn Ratliff, Chief Clerk
Devin Hartley, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
C O N T E N T S
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WEDNESDAY JUNE 10, 2009
Page
Opening statement of Senator Dodd................................ 1
Opening statements, comments, or prepared statements of:
Senator Shelby............................................... 5
Senator Brown................................................ 44
Senator Bennet............................................... 45
WITNESSES
Ron Bloom, Senior Advisor on the Auto Industry, Department of The
Treasury....................................................... 7
Prepared statement........................................... 45
Response to written questions of:
Senator Reed............................................. 57
Senator Bayh............................................. 57
Senator Martinez......................................... 57
Edward Montgomery, Director of Recovery for Auto Communities and
Workers, The White House....................................... 9
Prepared statement........................................... 51
Response to written questions of:
Senator Reed............................................. 58
Senator Bayh............................................. 59
(iii)
THE STATE OF THE DOMESTIC AUTOMOBILE INDUSTRY: IMPACT OF FEDERAL
ASSISTANCE
----------
WEDNESDAY, JUNE 10, 2009
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee convened at 2:36 p.m., in room SD-538,
Dirksen Senate Office Building, Senator Christopher J. Dodd,
Chairman of the Committee, presiding.
OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD
Chairman Dodd. We are here this afternoon for two purposes,
the first of which I don't think we are going to get to because
I don't see 12 of us here yet and I don't want to delay the
hearing. What I would like to recommend, and I have already
chatted briefly with Senator Shelby about this, is on the
Executive Session nominees that there is going to be a vote
sometime, I think tomorrow morning, on the tobacco bill and my
recommendation would be during that vote or right after that
vote we meet to consider these Executive Session nominations. I
think based on conversations, they should be relatively
noncontroversial. I would invite my colleagues to take a look
at them, let me know if there is some problem that would
require some further discussion and we will save it for another
moment. But if we could do it tomorrow, then it will save us
waiting around today.
Yes, Bob?
Senator Corker. I wonder, the FHA nominee, I am just
curious about the status. I know that obviously it is a----
Chairman Dodd. Which one is this?
Senator Corker. The FHA nominee that is not on here. I am
just curious about where we are there because I know it is a
very important position and very important time.
Chairman Dodd. Well, let me turn to Senator Shelby for any
comments.
Senator Shelby. If I could answer that, there is a HUD
investigation going on, as I understand it from staff, dealing
with the RESPA and some of the companies. We don't know if he
is involved or not, but we are waiting to see what comes out of
the investigation. So that is my interest, is making sure that
all nominees are--and I feel like he will probably be OK, but
we want to make sure. So I am waiting for a little more
information before I agree to move him forward.
Chairman Dodd. Let me just say to my colleague, I don't
know Mr. Stevens personally. I have never met the man. But he
comes highly recommended, I must say, by people who are
knowledgeable. In fact, Senator Martinez and I have talked
about him. I think, Bob, you and I have talked about him. I
have constituents in my State that are very knowledgeable about
FHA work and know Mr. Stevens well and have recommended him
highly.
Senator Shelby points out some issues that, candidly, the
Committee cannot ignore in the midst of all of this. I have
talked to the Secretary of HUD about the nominee and what steps
they might be willing to take to provide some assurances to the
Committee dealing with RESPA and other matters. I just don't
believe in necessarily forcing this on the Committee. I would
like the consultation and advice of my colleagues, as well, on
a matter like this rather than just kind of bringing up the
matter without any--I always like on these matters, where we
can, to have bipartisan support for a nominee rather than
getting into an acrimonious battle, and particularly if there
is an outstanding issue, we are all aware of what can happen.
It sounds fine in this letter, but 6 months from now or a
year from now, something pops up, then obvious questions are to
us, well, you had some idea this might happen. Why did you go
forward? I am not sure that always ought to be the standard if
there is anything out there, but nonetheless, that is sort of
where we are, Bob, on this one.
Do you have any comments you want to make? Mel?
Senator Corker. I would just say that I have talked to the
HUD Secretary and I think he has gone out of his way to try to
alleviate those. I will say that, based on what I know about
the case, and I know we are going to do some more due
diligence, apparently, but we wouldn't have anybody serving in
the administration, I think, or maybe in any other body. I
mean, these are not to him personally, to my knowledge. But in
any event, I appreciate that. I know he does come highly
recommended, but there may be some issues and I certainly will
defer to the Chair and Ranking Member to ensure that there is
no problem. But it is a pretty important position that is not
in place and he does come very, very highly recommended, so----
Chairman Dodd. Senator Shelby?
Senator Shelby. I would just like to say again that this
gentleman might be very well qualified. He might be pristine
clean. I hope he is. I have heard good things about him. But I
think that we ought to, where there is a HUD investigation
involved involving one of these companies that he was involved
with, we ought to have a clean bill of health from the man
before I vote on him. I don't know. You vote at your peril up
here, but I have been here a few years.
Senator Corker. Thank you.
Chairman Dodd. OK. Well, let me also--I just want to make a
couple of observations about the hearing today. Because of the
rulings on the Chrysler bankruptcy at the Supreme Court last
evening, Mr. Bloom, one of our witnesses here, was unable to
have his full testimony ready for us on time yesterday. We will
give you a waiver on that, knowing how busy you were. Normally,
we like to get this testimony, but understanding the
circumstances. However, members are rightly concerned that
testimony was not delivered here until 11:30 today and our
Committee has strict rules on this. I know that you are aware
of that, but I do understand the problems of last evening.
As members of the Committee understand, General Motors
Corporation filed for protection under Chapter 11 of the
Bankruptcy Code on June 1. I have therefore been informed that
Mr. Bloom may not be able to answer questions that bear on
specific matters that are the subject of that ongoing
litigation, and so if that is the case, a question may be asked
and you will have to respond accordingly, Mr. Bloom.
But I raise those two issues that have been brought to my
attention and I want to welcome our two witnesses as part of
the table.
I am going to take a couple of minutes here on an opening
statement, turn to Senator Shelby, and then we will get to the
hearing.
Let me just say at the outset what the bottom line for me
is, and every member here will have a different point of view.
Getting out of the automobile industry by the U.S. Government
yesterday would not be soon enough for me. My hope is that
whatever else, whatever we like or dislike about the present
configuration, that I want to see us get out of this business
as quickly as we can. That is my interest. Obviously, there are
matters to discuss on how this is all working, but I start any
discussion and debate from that point of view. And again, my
colleagues will express their own views on the matter, but from
my standpoint here, it can't be soon enough on that matter.
So I want to welcome our witnesses, both Mr. Bloom and Dr.
Montgomery, to the third in this Committee's series of hearings
on the state of the American automobile industry. Today's
hearing is unique because for the first time we will be hearing
directly from the administration officials overseeing Federal
assistance to America's domestic auto industry.
Failure of any one of Detroit's Big Three poses obviously,
I believe, a grave systemic risk to the economy, threatening
hundreds of thousands of jobs directly provided by these
companies and imperiling over a million more jobs in related
industries, from suppliers to car dealers to some 20,000 people
in my home State of Connecticut alone that are directly
employed or indirectly by the automobile industry.
It is for these reasons that President Bush and later
President Obama marshaled the resources of our government, not
only to preserve countless American jobs, but to help
reestablish a foundation for a viable and competitive domestic
auto industry.
With General Motors and Chrysler buckling under colossal
liabilities racked up after years of incompetent management,
over $170 billion in debt for General Motors and $55 billion in
debt for Chrysler, the Obama administration's Auto Task Force
helped develop a plan to recapitalize and overhaul the
industry's strategic, financial, and organizational structure.
The plan has largely been adopted as part of the prepackaged GM
and Chrysler bankruptcy proposals. I believe that once
finalized, they will result in the savings of thousands of
American jobs--certainly that is my hope--and potentially the
preservation of a very critical manufacturing sector.
Nonetheless, communities all across the Nation are not
going to be spared plant shut-downs, dealer closings, mass
layoffs. Moreover, if approved, the deals that we know about
will continue to raise important questions over unprecedented
government involvement in private industry's restructuring. To
me, these questions can be summed up as follows: How exactly
are taxpayer dollars being used to restructure the auto
industry? Why is the government taking such large ownership
stakes in these companies? Is the government doing everything
it can to protect American jobs? What assistance is being
provided to communities devastated by auto plant and dealer
closings? And when can we expect the American taxpayer to
receive a return on the investments that we have made?
Before turning to my colleague from Alabama, I would like
to address what I regard to be a false debate percolating over
the treatment of key stakeholders. Some critics have decried
the restructuring plan as a windfall to auto workers. They
point to an arrangement in which creditors are being asked to
forgive debt for a smaller stake in the company than being
offered to the Employee Health Care Trust known as VEBA.
In the case of the GM proposal, for example, bond holders
will be asked to forgive $27 billion in debt in exchange for
equity in the company. They are being offered 10 percent equity
plus the option to acquire an additional 15 percent later on.
The VEBA, on the other hand, will forgive half of its remaining
$20 billion in debt in exchange for acquiring 17.5 percent of
GM's common stock, $6.5 billion of preferred shares and $2.5
billion in a $2.5 billion note.
But as I am sure our witnesses can explain, VEBA's debt
forgiveness and equity stakes do not reflect the extent of the
auto workers' concessions. Indeed, the companies have announced
tens of thousands of layoffs as a result of the restructuring.
Retirees are being told they will lose 30 percent of their
health benefits as well as pension benefits. In GM's case
alone, 21,000 additional people are likely to lose their jobs
as a result of the bankruptcy and many UAW wages will be
slashed below foreign transplant wages.
The courts have been reviewing these restructuring
proposals to ensure an equitable outcome for auto workers as
well as other stakeholders. Hundreds of thousands of Americans
and countless businesses will be affected by the courts'
decisions. It is for this reason that the President was right,
in my view, to task his administration not only with assisting
GM and Chrysler, but with addressing the effects of the auto
industry's years of downturn on various communities.
But the President's plans are not without controversy. One
aspect of the government's proposal is unprecedented. That is
the government is taking a huge equity stake, 8 percent in
Chrysler and a whopping 60 percent in General Motors.
Understandably, the administration believes that this structure
avoids the imposition of further debt on these companies, but
it also begs the question, how will the government extricate
itself from such a commitment in the future?
As Mr. Posner recently wrote in an essay in the Atlantic
Monthly, and I quote him, ``We should be concerned lest GM
become a kind of economic Vietnam, where the Federal Government
throws good money after bad year after year in a vain quest for
victory.''
I know that our witnesses today stand fast against such a
notion. They worked tirelessly, I want to say, to establish the
domestic auto industry's viability. But they also have toiled
to rekindle our competitive edge in a truly iconic sector of
the United States economy. Let us remember, not too long ago,
it seems that an American could not walk a city block without
sensing the strength of an American automaker's brand. Their
labels adorned buses, rail cars, aircraft. They dominated the
U.S. automobile market, in fact, the global market in many
ways, and owning a Buick was the stuff of American dreams.
Today, those images have faded. For the first time, the
domestic market share of Ford, Chrysler, and GM has slipped
below 50 percent, going from 66 percent in 2001 to just 40
percent today--47 percent in today's market. The U.S. industry
has long abandoned a diversified product mix and instead has
had to play catch-up with foreign transplants. Only now have
they recognized that they must shift their focus from SUVs and
pick-ups to marketing more fuel-efficient automobiles.
Fortunately, one thing has remained constant, the skill,
determination, and ingenuity of the American worker. Even in
tough times, Americans are resilient, and they are certainly
proving it these days. Given the proper tools, our domestic
auto industry, I think, will keep fighting until we are back on
top once again, and I believe that can happen.
So I look forward to the hearing today on how you, Mr.
Bloom and Dr. Montgomery, are helping set the stage for such a
comeback in our country. Indeed, Mr. Bloom has been intimately
involved, I would point out, in negotiations with various
stakeholders as well as the decisions on how best to invest
taxpayer dollars in GM, GMAC, and Chrysler. I look forward to
exploring the rationale behind these decisions and the
administration's plans for the future.
Dr. Montgomery is tasked with a far different and a far
more difficult responsibility, and that is to steer Federal
assistance to communities devastated by auto-related job
losses, plant closings, and dealer consolidations. So I look
forward to hearing about your travels around our nation and
learning of the resources you believe are required to
coordinate these recovery efforts.
With that, let me turn to my colleague from Alabama for any
opening comments, and then we will hear from our witnesses.
Senator Shelby?
STATEMENT OF SENATOR RICHARD C. SHELBY
Senator Shelby. Thank you, Mr. Chairman.
When the Detroit Three came before this Committee to ask
U.S. taxpayers for bailout money, they cited the financial
crisis as the reason for their troubles. The financial crisis
was certainly a reason, but it was by no means the only reason
these companies were failing. Although structural and
managerial problems in these companies were decades in the
making, they managed to convince Congress in the last
administration that bankruptcy, the normal course of companies
in their condition, at that time was not an option, even if it
came with government financing. This was a few months ago.
Instead, they said they just needed some cash to make it
through until the economy returned to normal and consumers
started buying cars again. Combined, the two firms received
then $24 billion.
These initial billions, however, were not enough to prevent
the inevitable from happening. Both Chrysler and GM have now
entered the Chapter 11 bankruptcy process and each company once
again needs additional taxpayer support. The Obama
administration has set forth a plan for the two companies post-
bankruptcy. Choosing to bypass the normal bankruptcy process,
the administration presided over the restructuring through an
alternative, ad hoc process.
Today's hearing, I hope, will give us the opportunity to
understand how the administration came to the conclusion that
this support was warranted and expectations about how the new
taxpayer investments will be managed and ultimately unwound.
I look forward today to understand what considerations
drove the outcomes of both the GM and the Chrysler
negotiations. Why didn't the administration address the
significant excess capacity in the U.S., possibly by merging
Chrysler and GM? Why did the administration instead favor a
merger between Chrysler and the Italian car maker Fiat? And on
what did the administration base its conclusion that the new
Chrysler will be viable in the long run? Did the administration
take into consideration the effects that the aid to GM and
Chrysler would have on other auto manufacturers in the U.S.?
What underlies the determination that the U.S. Treasury should
hold approximately 10 percent of the new Chrysler and 60
percent of the new GM?
By taking such significant equity stakes in the two
companies, the administration has embarked on a disturbing, and
I believe a difficult, road. We have been assured that the
administration will stay out of day-to-day management and that
it will not allow politics to influence the decisionmaking
process within the companies. On the one hand, that is very
reassuring. On the other, it illustrates the inherent
difficulty posed by large government interventions in private
markets.
If the government intends to be a silent partner of sorts,
how do they intend to protect the interest of the American
taxpayer as a shareholder? I am not sure you can have it both
ways. Restraint may be difficult when jobs are at stake. Plants
need to be closed and environmentally friendly vehicles prove
not to be commercially viable. Given the government's bigger
investment in GM than in Chrysler, will it make decisions that
favor the former at the expense of the latter? Will the
administration be tempted to use political means to boost
annual car sales in an effort to shore up the perceived
viability of the two companies?
The most difficult question, of course, is how Treasury
intends to get out of this. Are assurances that the
government's involvement in the auto industry will be
temporarily realistic? Did the administration, as any private
investor would, work through possible exit strategies before
making its investment?
Another question: Does the administration anticipate that
the taxpayer will make money on his investment, and if so, how?
And do the write-offs that it has already taken in connection
with its investment in these companies foreshadow more losses
to come? Does the administration here envision a long-term
government participation in the auto financing business?
Of course, government action is not the only factor at play
in determining the ultimate outcome for GM, Chrysler, and the
taxpayer. Private sector responses are critical. Will the
private sector lend to or do business with these companies?
Will there ever be private sector interest in owning these
companies, particularly if the government retains an ownership
interest?
I look forward to hearing the administration's thoughts on
these and other issues this afternoon and I commend you, Mr.
Chairman, for calling this hearing.
Chairman Dodd. Thank you very much.
We now have a quorum and I am going to move into executive
session, if we quickly can, and deal with these two nominees.
[Recess.]
Chairman Dodd. With that, we will turn to our two
witnesses. Ron Bloom is a very experienced individual, advising
labor and business leaders. That qualifies him, I think, to
assist the Secretary and members of the Auto Task Force. He
previously served for 13 years as the Special Assistant to the
President of the United Steelworkers. He is a founding partner
of the investment firm, banking firm of Keilin and Bloom, has
an MBA from Harvard, and is a graduate of Wesleyan University
in Connecticut. We have Wesleyan connections at this dais, as
well, I would point out.
Ed Montgomery, Dr. Montgomery joins us as President Obama's
Director of Recovery for Auto Communities and Workers. He
formerly left his post as Dean of the College of Behavioral and
Social Sciences at the University of Maryland. He attended Penn
State University and earned a Ph.D. in economics from Harvard.
We are delighted to have both of you with us and we will
begin in the order I have introduced you, so Mr. Bloom, you are
up first. Try and keep your remarks relatively brief. Let me
just say to all of my colleagues, testimony, evidence,
supporting documents will all be included as part of the
record.
STATEMENT OF RON BLOOM, SENIOR ADVISOR ON THE AUTO INDUSTRY,
DEPARTMENT OF THE TREASURY
Mr. Bloom. Thank you. Good afternoon, Chairman Dodd,
Ranking Member Shelby, members of the Senate Banking Committee.
Thank you for the opportunity to testify before you today.
First, let me apologize for the snafu with getting the
material to you late and appreciate your indulgence on it and
to commit to you that it will not happen again.
Over the past several months, the Obama administration has
been working to manage an historic crisis in the American auto
industry. President Obama inherited an auto industry that had
lost 50 percent of its sales volume and over 400,000 jobs in
the year before he took office. Two companies, General Motors
and Chrysler, had received substantial loans from the prior
administration and were requesting substantial additional
assistance that only a government could provide. Without this
assistance, both of these companies faced uncontrolled
bankruptcies and a most certain liquidation, which would have
caused significant job loss with a ripple effect throughout our
entire economy.
Even so, President Obama was unwilling to put additional
taxpayer dollars on the line unless these companies and their
stakeholders were willing to fundamentally restructure, address
prior bad business decisions, and chart a path toward long-term
financial viability without ongoing government assistance.
Therefore, the President decided to give both GM and Chrysler a
chance to work with their stakeholders and secure the
sacrifices necessary to make them stronger, leaner, and more
competitive in a way that would justify an investment of
additional taxpayer dollars.
In only a few months, GM and Chrysler, working with their
stakeholders and the President's Auto Task Force, have achieved
a level of restructuring that many thought impossible,
positioning both companies for future viability. As a result,
the President has decided to stand behind these restructurings
with additional financial assistance. Consistent with prior
administration's actions, this assistance is being provided
from the U.S. Treasury out of the TARP program.
After proceeding through a fair and open bankruptcy
process, the new Chrysler-Fiat alliance closed its sale
agreement earlier today and has now emerged from bankruptcy.
Its future is in the hands of its executives, managers, and
workers, as it would be for any private company.
While General Motors is likely to take somewhat longer to
move through the bankruptcy process, we are confident that it,
too, will emerge quickly as a stronger, more viable global
company. Because GM needed substantial capital that only a
government could provide, and because we were committed to not
piling on irresponsible amounts of new debt on top of the new
GM, the U.S. Government will become a reluctant shareholder in
General Motors.
The administration did not seek this outcome, but arrived
at the conclusion that it represents the most responsible way
to protect taxpayers while giving GM an opportunity to succeed.
As the President made clear, we will manage this investment
commercially and exit our position as quickly as is
practicable.
Both the GM and Chrysler restructurings have required deep
and painful sacrifices from all stakeholders, including
workers, retirees, suppliers, dealers, creditors, and the
countless communities that rely on a vibrant American auto
industry. But the steps that the President has taken have not
only helped to stabilize the auto industry and saved hundreds
of thousands of jobs, but for the first time in decades, they
have also given GM and Chrysler a chance to become viable,
competitive American businesses with bright futures.
Before taking your questions, I want to give a brief
overview of the process the administration has taken in
addressing these issues. On February 15 of this year, the
President appointed an Auto Task Force to oversee his
administration's effort to help support and restructure the
industry. The Task Force is co-chaired by Treasury Secretary
Timothy Geithner and National Economic Council Director
Lawrence Summers and includes representatives from a broad
range of agencies and offices throughout the executive branch.
The Task Force is staffed by a joint Treasury-NEC team, of
which I am a senior member. This team reports to the Task Force
and its co-chairs, who report up to the President.
From the beginning of this process, the President gave the
Auto Task Force two clear directions. The first was to refrain
from intervening in the day-to-day management of these
companies. Our role has been to act as a potential investor of
taxpayers' resources, and as such we have not become involved
in specific business decisions like where to open a new plant
or which dealers to close. This is the job of management, and
while we have been engaged in dialog and discussion about their
approach, we have not substituted our judgment about specific
decisions for theirs.
Second, the President was clear that he wanted us to behave
in a commercial manner. That is to be sure that all
stakeholders are treated fairly and receive neither more nor
less than they would have simply because the government was
involved. Because the investments made by both the prior and
current administrations to support the auto companies have come
from the TARP, the Task Force and its staff activities have
been subject to the full range of disclosure and reporting
requirements under the EESA statute. This includes oversight by
the GAO, EESA's Financial Stability Oversight Board, the
Special Inspector General for TARP, or SIGTARP, and the
Congressional Oversight Panel established under EESA, as well
as required reporting to multiple House and Senate committees.
In a better world, the choice to intervene in these
companies would not have had to have been made. But amidst the
worst economic crisis in three-quarters of a century, the
administration's decisions avoided a potentially devastating
liquidation and put a stop to the long practice in the auto
industry of kicking hard problems down the road. While
difficult for all stakeholders involved, these restructurings
provide GM and Chrysler with a new lease on life and a chance
to fundamentally restructure and succeed. Thank you.
Chairman Dodd. Dr. Montgomery, welcome.
STATEMENT OF EDWARD MONTGOMERY, DIRECTOR OF RECOVERY FOR AUTO
COMMUNITIES AND WORKERS, THE WHITE HOUSE
Mr. Montgomery. Thank you, Chairman Dodd, Ranking Member
Shelby, and members of the Committee. I appreciate this
opportunity to appear here today to discuss assistance that is
being provided to and being sought by communities and workers
affected by auto job losses.
As you are well aware, the current recession is arguably
the most severe since the Great Depression and has had a
profound impact upon our businesses, workers, homeowners, and
homeowners throughout the country. As striking as this decline
has been for the country as a whole, the situation is even more
severe in much of the auto manufacturing heartland.
Just as Mr. Bloom has discussed the challenges to our two
biggest auto companies, or two of our biggest auto companies,
and the steps we are taking to help meet these challenges, I
want to briefly discuss the process we have begun to help the
hundreds of auto communities struggling to deal with rising
unemployment.
When President Obama appointed me as the new Director of
Recovery for Auto Communities and Workers, my mandate was to
cut through red tape and assure that the full resources of our
Federal Government are leveraged to assist the workers,
communities, and regions that have historically relied upon the
auto industry. The administration is developing a comprehensive
effort that will help lift up the hardest-hit areas by using
the unprecedented levels of resources and funding provided by
the Recovery Act and available through regular government
programs. We have also been engaged in our effort to identify
new initiatives that may be helpful going forward in this
effort to support auto communities.
Upon appointment, my first order of business was to get out
and directly hear from affected workers, businesses, and the
communities. We have held town halls and meetings in Michigan,
Ohio, Indiana, with hundreds of stakeholders to identify ways
in which the Federal Government can be helpful. We plan to
continue these sessions in a broader range of communities in
the weeks and months ahead. These sessions have been more than
just listening tours. We have established an interagency team,
including representatives from the Department of Labor, Energy,
Commerce, the Small Business Administration, Transportation,
Justice, Health and Human Services, EPA, and Treasury that have
accompanied me to these meetings to hear first-hand what works
and what doesn't. As a result, they have already started
implementing next steps and working with local officials on how
to address problems and issues that are raised.
The Recovery Act has made possible a wide range of
investments in auto and other communities to both combat the
current economic developments and begin to transform our
economy for future long-term growth. Some examples of ways
agencies have targeted support for auto communities in
particular include the General Services Administration's
accelerated purchase of over 17,000 new fuel-efficient
vehicles, adding over $280 million in demand for new cars.
Secretary Solis from the Department of Labor announced a $50
million targeted Green Jobs Training Initiative that is
targeted toward auto communities. In January, the Department of
Labor also announced--since January--over $16 million in
National Emergency Grants to support dislocated auto workers in
various States.
Recently, Secretary Duncan announced $7 million in a
special competitive grant to establish innovative and
sustainable community college programs to prepare displaced
auto and other workers for second careers. This grant program
will be used to develop national models that can be replicated
around the country.
The Small Business Administration has announced extensions
to its 7(a) lending program and recently announced development
of a floorplan financing program for auto dealers, RV dealers,
and boat dealers.
And EPA has announced millions of dollars in grants to help
revitalize former industrial and commercial sites in auto and
other communities. Recently, Michigan was the largest recipient
of those funds.
One of the most pressing challenges is to ensure that auto
communities have access to existing Federal programs and new
funding available in the Recovery Act. We have taken steps to
ensure that auto communities have an equal chance to access
Federal funds. Some examples of that include the Department of
Energy recently held workshops for county and local
municipalities to train leaders in how to apply for the Energy
Efficiency Conservation Block Grants. The Department of Energy
also held meetings with local businesses and financial
officials to talk about how to make sure small businesses can
access their new loan guarantee programs.
The Commerce Department, through the Manufacturing
Extension and the Economic Development Administration, have
held numerous workshops in the auto region to help companies
diversify and provide tailored assistance as well as to help
regions with their strategic planning.
And recently, the Department of Labor convened all the
rapid response coordinators throughout the Midwest to make sure
that we provide a consistent level of service and to help
States with their planning efforts.
The administration approach realized that there is no
single agency that holds the key to economic growth and that
there is no magic bullet. The challenges that the regions face
did not appear overnight and they will not be resolved
overnight. Credit for businesses cleaning up private
properties, transportation issues, job training, schools,
public safety, and health care are all integral parts of the
solution. Local and national foundations also have a role to
play and we have begun to find ways to reach out and partner
with them. State and local governments have and must play a
central role in these efforts, reflecting choices that each
area must make about how best to use their assets. Our
comprehensive recovery strategy will not only recognize, but it
will support these heterogeneous local efforts.
Families and workers in auto communities face challenges
unlike many of us have faced in our lifetimes. I share the
President's commitment to helping these workers and communities
both in the near term as we go through the recovery, but over
the long term to make sure that they fully share in our
economic prosperity.
I look forward to working with the members of this
Committee, and thank you for the opportunity to be here today.
Chairman Dodd. Thank you very much, Doctor, and I am going
to ask the clerk to put us at 5 minutes and follow it fairly
religiously here. We have got a lot of members, and we want to
get a round in. The second round usually thins out the
membership, and we can spend a little more time in the second
round if we get to that point. And I will leave the record
open. I know some will be coming and going, and so the record
will remain open for questions to be submitted. To our
witnesses, I would ask that you respond to them in a timely
fashion.
Let me begin with you, Mr. Bloom, if I can, and I will have
a question for you, Mr. Bloom, and for you, Dr. Montgomery, and
then give both of you a chance to respond to them.
First of all, the administration has taken bold action, and
it has been controversial, clearly. As you have heard both in
Senator Shelby's and my opening comments, a lot of questions
are being raised by people across the spectrum. And while there
are going to be a lot of job losses obviously associated with
this restructuring, I for one subscribe to the notion that had
you not taken this action or tried this action, the job losses
and the effect on our economy would be far more calamitous than
it is even with the kind of erosion. We are talking about maybe
down to like 90,000 jobs in automobile manufacturing from some
340,000 only months ago, not to mention the impact on retirees
and benefits and pensions. So it has been a major blow to our
economy. But inaction, as I said, I think would have been
worse, and the liquidation of GM and Chrysler would result in
hundreds of thousands of jobs and related jobs being lost.
So the questions are the following: Treasury's proposed
equity stakes in GM and Chrysler are giving people great pause,
as you have heard already just in the two opening statements
that Senator Shelby and I have made. Why did the Treasury such
large equity stakes rather than providing these companies with
more loans? Number two, explain if you would how the Treasury
determined the size of these stakes to be taken? And given the
Treasury's large stakes in these companies, particularly GM,
how will the U.S. Government quickly extricate itself?
As I said in my opening comments, I would like us to be out
of this business yesterday. Obviously, that is not going to
happen, but the point is I think a lot of us would like to see
us get beyond this, get out of it, and get these businesses
back functioning on their own. Given the stakes we have, how
easy is that going to be to achieve?
And for you, Dr. Montgomery, I admire you taking on this
job. The President obviously has a lot of confidence in you. As
I understand it, you have no budget to operate really with,
other than what exists around? So we need to know if we can do
anything to help. Obviously, all of us, some more than others,
our colleagues from, obviously, Detroit, Michigan, from Ohio,
Senator Brown, Senator Bayh come to mind immediately. I presume
all of us here are being adversely affected by job losses, some
more than others. And obviously we want to help our communities
during times of readjustment like this.
So what additional tools are you going to be ask of us or
will the administration ask of us in the Congress to be helpful
for you to perform your job? Holding town meetings is great and
listening to people are wonderful things to do, but I suspect
that the people who show up at those meetings want to know what
if any kind of help is going to be there for them as they try
to find a new economic path for themselves and their families
in the midst of this economic hardship.
So we need to get some additional specificity as to what
you are going to be asking of us and how we can help minimize
the kind of economic blows these communities are going to be
facing. Your response to the questions.
Mr. Bloom. Yes, thank you, Senator. Let me try to address
your three questions, if I can.
In terms of the equity stake and why equity and why not
debt, let me answer that this way. The size of the stake and
the determination was done through the following process: The
first thing that happened was the companies put forward a
business plan which we very vigorously reviewed and challenged
them on, but eventually came to a business plan, and through
that business plan really a financial need was determined
because we saw how much money they needed to right-size their
business, to take the necessary steps, in the case of General
Motors in the bankruptcy to pay off some of the secured debt.
So there were a whole variety of needs that the company had,
and that really determined the sort of starting point from the
discussion.
The second step was directly on your point, which was how
do you determine how much of it should be debt and how much of
it should be equity. And, obviously, as I said in my opening
comment, the President did not start out with wanting to be a
shareholder, but the dilemma we faced was that one of this
company's core problems for a lot of years was that it was too
highly leveraged. So for us to try to fix General Motors with
more debt would simply have not fixed the problem.
General Motors' key competitors, among them companies like
Toyota and Volkswagen, have very minimal levels of debt--debt
approximately equal either to the amount of cash they have on
the balance sheet or to 1 year's profit. So we were very
mindful of trying to set up General Motors to have a
competitive balance sheet because that is one of the
competitive weapons in the marketplace.
And so that really left us that if we were not going to
overburden the company with debt, then the only remaining
security we could have would be equity, and certainly we did
not want to give this money away. This is the taxpayers' hard-
earned money. And so the determination was to take equity.
In terms of the size of the stake and how that was
determined, that was determined in arm's-length dealings with
the other key stakeholders to the company who wanted to also be
owners. That included the bond holders where we had a vigorous
debate and the UAW on behalf of the retiree trust, and they
obviously wanted more equity than we wanted to give them, and
we wanted to give them less because, on behalf of the taxpayer,
the objective should be to get as much as you can to get as
much value as you can out of the enterprise. So it was really
determined through arm's- length negotiation. The other equity
shareholder in General Motors is the Canadian Government, who
was also making a very sizable investment, but in that case,
they are investing side by side with us, and so they are
proportionally getting the same amount of equity as we are per
dollar invested. That part of it was just straight up, but to
the others it was simply arm's-length bargaining.
On the question of how we get out, obviously this is a key
issue. The President has been quite clear that he is a
reluctant shareholder and he wants to exit as soon as
practicable. Now, ``as practicable'' in this company is not
going to mean tomorrow morning. When this company comes out of
bankruptcy, it is going to be a private company. The new
General Motors is not going to be publicly listed. It will take
some time for it to achieve a listing on the stock exchange, do
what is called an IPO and begin to trade its shares publicly.
We would expect that would likely happen sometime in 2010, and
that would be our goal. And then after that, there will be an
orderly process where these shares will be disposed of. But it
needs to be orderly because, again, these are taxpayer dollars,
and while the President did not want to be a shareholder, once
we have become a shareholder, we certainly want to achieve fair
value for those shares so the taxpayers can get back this
investment.
Chairman Dodd. Thank you.
Quickly, Dr. Montgomery. My time is already----
Mr. Montgomery. Yes, the initiative that we are undertaking
is using the current resources provided under the Recovery Act,
which really provides an unprecedented level of dollars that we
can use to either support--as Mr. Bloom has pointed out, to
support the industry, to make sure that the companies are
viable, step one; to talk about how we support the suppliers
and the Treasury through its supplier support program, the
Small Business Administration through its 7(a) loan program,
and through its dealer program all have made efforts to support
suppliers and keep that part of the sector viable.
As far as the workers are concerned, there are over a
billion dollars in additional funding, multiple billions of
dollars in additional funding for job retraining assistance on
top of which, of course, we have extended and expanded
unemployment insurance.
As we think about going into the longer term and the new
growth potential, there are in the Recovery Act funds within
the Department of Energy to make new investments in different
sectors, to grow different areas of the economy, everything
from smart grid to alternative energy to modern fuel-efficient
cars, the next-generation vehicles.
And so there are a variety of different currently available
resources to make investments, and my job at this point is to
make sure that people in these regions have full access to
those dollars.
As we go forward, it may turn out that additional
investments are necessary, but right now we want to make sure
that the current investments are being fully utilized.
Chairman Dodd. I am sure my colleagues will have some
additional questions along that similar line, but let me stop
there and turn to Senator Shelby.
Senator Shelby. Mr. Bloom, following up on Senator Dodd's
question a minute ago, how many years do you think the
Government will be involved in General Motors and Chrysler as
far as their investment? Would it be in your judgment 3 years,
5 years, 10 years, 12 years, or what? You have got some kind of
judgment there. You say it is not going to be quick to get out.
Mr. Bloom. Yes, Senator, as I indicated, the sort of legal
framework in which we are, which is to say a private company
and then an IPO is a certain amount of kind of a runway period.
Senator, at this point, we do not have a specific target in
terms of years. The factors that will influence that will be
many, how the market is doing, how the capital markets are
doing. We are going to be a very large shareholder in a
company, and so as you know, for a large shareholder to be
selling share can be disruptive to the other shareholders. And
so we want to be mindful of that.
At this point, the President's direction is to get out, his
phrase and order to us, ``as soon as practicable.'' But beyond
that, we do not have at this point a defined timeframe.
Senator Shelby. Will you put together a plan, though, that
you could operate, a blueprint, some architecture? You got in.
The question is: How long will the Government be involved in
running a huge manufacturing or owning a huge manufacturing
plant? I think that is a fair question.
Mr. Bloom. It is, sir, and I want to appreciate your point.
We are owning it. We are not managing it, sir. And that is
important, and the President has been clear on that.
But to your question, I think----
Senator Shelby. But you are involved, aren't you, as a
stockholder?
Mr. Bloom. There will be a very limited involvement as a
shareholder. The President has issued a series of guidelines of
how he intends us to act as a shareholder. We do not intend to
involve ourselves in day-to-day management, those sorts of
decisions. The shares will only be voted on what we call core
governance issues, which is to say the election of directors or
a change of control transaction. So, yes, there will be some
involvement, but it will not be onerous or overbearing
involvement.
But back to your question, there will be a strategy to get
out. It will be to access the public markets and to sell when
it is determined that the market is appropriate for selling.
But I do not anticipate there will be a detailed blueprint,
again, because the mere issuance of that blueprint we believe
would be market disruptive and would cause an overhang in the
stock, which, again, would defeat the very purpose we are
trying to achieve, which is to get out quickly but to do it in
a way that maximizes the shares for the benefit of the
taxpayers.
Senator Shelby. Do you believe the Government has put as
much money in GM and Chrysler as they are ever going to put in?
Or do you anticipate more down the road as Mr. Montgomery did
not say ``anticipated'' but could be more money?
Mr. Bloom. Yes, sir. Let me----
Senator Shelby. In all fairness to us and the taxpayers.
Mr. Bloom. It is a very fair question, sir. It is our
absolute intent that this be the last assistance provided to
these two companies. We have spent a tremendous amount of time
diligencing the companies, and we have worked very hard to
assure ourselves that this is their last visit. You never say
never in this world, but our whole work, the basis of our
analysis has been that this is a one-shot affair. We are going
to do this, and then we are going to construct an orderly exit,
and then it will be back to business as usual.
Senator Shelby. What if GM and Chrysler--what if it does
not work out as you anticipated? Will you then recommend more
money just to keep it going, to keep a few people employed?
Maybe more than a few. A lot of people employed.
Mr. Bloom. It is very hard to speculate about a
hypothetical, Senator, but I can tell you----
Senator Shelby. That could be more than a hypothetical.
Mr. Bloom. Well, I believe it is a hypothetical because I
believe----
Senator Shelby. OK. It is at the moment.
Mr. Bloom.----we have constructed a conservative plan. We
have what we call stress-tested it. We have looked at cases
where the recovery is slower than most economists believe it
will be, where the company is not fully capable of executing
its turnaround. So we have looked hard at this question, and it
is our belief and our confident belief that this will be the
last trip to the well.
Senator Shelby. I have just got a few seconds. What I deem
conflicts of interest, the Federal Government is now the
principal labor, environmental, and safety regulator, a
customer, tax collector, financier, and pension guarantor of
two of the three domestic auto manufacturers. Unprecedented. It
also holds considerable equity positions we are talking about
in each entity, and managing these varied responsibilities will
engender conflicts everywhere. Other conflicts will arise by
way of the Government's investment in two competing entities.
What process have you put in place, if you have, to help
identify, to manage, and then report such conflicts to the
Congress, especially this Committee?
Mr. Bloom. Well, let me talk generally about the
President's admonitions in this area. He has been very clear
that the policy directives regarding things like the
environment or CAF? or health and safety are not within our
purview. We have no authority to deal with the companies on
those matters and do not expect to have any authority. Whatever
the Congress passes and the President signs that becomes the
law of the land we would expect would apply to all companies
who do business absolutely similarly, and the President's has
been crystal clear that he expects no special accommodation to
either of these two companies in any of those areas.
We intend to be essentially a passive shareholder who is
trying to get our money back so we can give it back to the
American people. And we will leave to others to determine what
the proper policies are regarding other matters.
Senator Shelby. Thank you.
Senator Brown.
[Presiding.] Thank you, Senator Shelby.
Senator Bennet of Colorado.
Senator Bennet. Thank you, Mr. Chairman. Thank you, Mr.
Bloom and Mr. Montgomery, for being here today. I wanted to
start by saying congratulations on the speed at which the
Chrysler situation was dealt with in bankruptcy. As somebody
who used to make his living restructuring companies in
bankruptcy, nothing this complicated, this has been lightning
quick. And there were a lot of people that said it could not be
done, that you were not going to come in in 30 days. You did
not, but you came in pretty close to it. And I think that at
least in my view is a major step forward to trying to create
some credibility here on these matters. I want to say
congratulations on that.
With all that said, I want to echo the Chairman's view that
the American taxpayers want to be out of these companies as
soon as possible, ``as soon as practicable'' is the language
that you have used, and all I can say is that I hope you are as
successful at that as you have been getting this bankruptcy
accomplished.
I guess, Mr. Bloom, my first question for you is whether or
not you would be willing or could shed some light--I am sure it
is in the bankruptcy documents--on some of the underlying
assumptions that underlay the arm's-length negotiation that you
were talking about. What were some of the assumptions relating
to sales of automobiles in the United States, the cash-flow of
the companies? How did you and the other parties think about
how to value first the enterprise itself and then to distribute
it to the constituencies in the bankruptcy?
Mr. Bloom. Yes, sir. Let me first thank you for those kind
words relative to the speed. I think Benjamin Franklin said
that an imminent hanging tends to concentrate the mind. I think
that is what we had in the case of Chrysler, and I think it was
a good tonic.
Relative to how we went about our business and this
bargain, essentially the process was the following: The
companies in each case came up with a business plan, and it is
the management, obviously who is responsible for putting
forward a business plan. We viewed ourselves essentially as a
potential investor of the taxpayers' money. And so as an
investor, we went and then diligenced that plan. We criticized
it. Whatever they said, we asked, ``Did you consider this? Did
you consider that?'' So whatever assumption they made, we kind
of flipped it on its head and asked the reverse. And,
obviously, we used our own assumptions, too. If they believed
that SAR was going to be X, we asked what would happen if it
was 0.8x or 1.2x.
We did not fasten on any single point estimate but, rather,
as a lender and an investor, what we really did is simply
acted, I think, as traditional investors were, which is to say
we looked at a variety of scenarios. We asked ourselves if SAR
is higher, if SAR is lower, if execution is better or worse
than planned, how do these things look? And that brought us to
an enterprise value using relatively traditional financial
techniques--multiples of earnings, discounted cash-flows, I
think the things that you would expect any third-party investor
to look at.
Now, obviously, you know, we are the Government, and we are
doing this because the President has directed that this is a
critical industry. But, nevertheless, we tried in every aspect
of this to be commercial, to ask ourselves what is the cash-
flow capability, what is the likely earnings capacity of the
company, et cetera. From that we created models of potential
enterprise value, and from there we engaged in the kind of
bargaining that I described, which is to say arm's-length
bargaining between a lender/investor and the various other
stakeholders to the case.
Senator Bennet. The tension the Ranking Member talked about
between--or the Government not involving itself in the day-to-
day management decisions of the company, which I think is
certainly the right approach. But sitting here thinking about
what--if those projections do not come true, if you have
quarter upon quarter of growth or lack of growth, if the
companies do not, for example, begin to produce automobiles
that will compete in the marketplace, what is the Government's
role at that point as the investor of our taxpayer money in
this enterprise? What if they do not live up to your
expectation?
Mr. Bloom. Well, as a lender in Chrysler and as a lender in
General Motors, there will be covenants--there are covenants
regarding performance, and lenders, as you know, have rights
that we would expect to avail ourselves of. But I know that the
President is highly committed to not having this be--to wander
into the middle of the company and take it over. The company
will have a board of directors. It will be comprised of
independent businessmen. And I would point you to the two
gentlemen who have agreed to serve as Chair of Chrysler and GM,
respectively, Mr. Whitacre just announced yesterday and Mr.
Kidder a week or so ago, two excellent individuals. We expect
them to run the company.
Senator Bennet. My time is up, regrettably, Mr. Chairman,
so I will yield back.
Senator Brown. Thanks, Senator Bennet.
Senator Corker.
Senator Corker. Thank you, Mr. Chairman, and thank you both
for being here. I do want to point out that you are fudging a
little bit on the history side of this. I think the
administration prior to you all coming in laid out a loan
program that said if the companies put forth a viable plan by
February 17th, they would not call the loan by the end of
March. They did not do that, and that would have precipitated
you calling the loan.
So I think somehow or another everybody is letting you get
away with this precedent thing. The fact was that the prior
administration had set in place a set of procedures that said
if the companies did not present a viability plan that was
appropriate, they would call the loan. You all did not do that.
They did not put in place a plan, and instead you are putting
in place a plan. So I just want to get the record straight
there.
Let me talk a little bit about the money that has gone in.
I think we have got about $85 billion in the companies now. We
have got $50 billion in GM, $16 billion in Chrysler. We have
got $14 billion in the fin-cos. We have got $5 billion in the
suppliers. I know that you have answered very affirmatively
there will be no more money, but my understanding is--and I see
some of the other Senators sort of moving around a little bit
with Section 136 money in the energy bill. How much has GM
applied there, and how much do you expect them to get out of
another pocket, if you will? It is all our money.
Mr. Bloom. Yes, sir. Let me try to answer your question.
The first thing, just a very small correction. I think that
the total U.S. Government commitment to Chrysler is $12
billion. The remaining funds are coming from the Canadian
Government. But that is----
Senator Corker. The $81 billion--you know, a lot of money,
yes. You know, we had a guy named Mark Zandi up here who told
us if we put $1 in these companies, we would end up between $75
and $125 billion. Obviously, we already have blown past that,
and I think a number of us were working to try to keep that
from happening. But to the 136, how much money have they
applied for and how much will they get out of another pocket?
Mr. Bloom. I believe both of the companies do have
applications in for 136 funding. My understanding is that is a
highly competitive process where many, many----
Senator Corker. How much have they applied for?
Mr. Bloom. I think they both applied on the order of $5 or
$6 billion, but I have no indication that they will necessarily
receive it. It is a competitive process. There are dozens of
companies applying for 136 assistance. If they are deemed
worthy, they will get it. If they are not, they will not.
Senator Corker. I just see some of the policy things that
are trying to be changed around 136, which looks like they may
have a really good chance of receiving it. But let us just say
that they get half of that. We are going to be, you know, in
the $86, $87 billion range.
On the UAW piece, I know there has been a lot said about
shared sacrifice. I would just like some yes/no's. It is my
understanding that the existing employees are making exactly,
per the new contract, per hour what they were making under the
old contract. Is that yes/no?
Mr. Bloom. The answer to that is no. Their base wages have
remained----
Senator Corker. Their base wages are exactly the same.
Mr. Bloom. I am going to try to answer your question. There
is a cost-of-living improvement, which they had in their
paycheck, which has gone away, of about $1 an hour.
Senator Corker. So the base wages are exactly the same.
Mr. Bloom. The cost-of-living----
Senator Corker. The health care benefits are exactly the
same. Is that correct?
Mr. Bloom. The active employee health is the same.
Senator Corker. I did notice that you did away with the
Monday after Easter holiday, but my guess is they do not get
very fearful when you come in the room to negotiate. How has
that been, that negotiation?
Mr. Bloom. Well, I would let them speak for whether they
are fearful or not. I think the negotiation between the UAW and
the companies has been extremely vigorous and arm's-length. I
believe they have made very difficult sacrifices.
Senator Corker. I do not want to go into a long dialog
here, but I have not heard many sacrifices yet. I am talking
about by active employees.
Mr. Bloom. About $7 an hour of reduction in their
compensation package. To me, that is a pretty big----
Senator Corker. Things like paying time-and-a-half after 40
hours instead of before and those kind of things.
Mr. Bloom. The companies value the total package of
concessions at about $7 an hour.
Senator Corker. Well, I guess what has troubled me about
this is I know politics are not involved, although I would like
to know who we call. I know you all are not involved in
politics. But what is the number Barney Frank called about
keeping the plant open in his district? Because if it is not at
your level, I would like to know who--we have got the same kind
of thing happening in Tennessee. Who is that people do call to
get those things changed?
Mr. Bloom. I can only speak for the administration,
Senator, and I can tell you what the President has directed us
to do and what we are doing, which is we are not meddling in
those matters.
Senator Corker. Well, who made that decision?
Mr. Bloom. The President.
Senator Corker. Oh, the President kept the plant open.
Mr. Bloom. No. I said the President directed the
administration----
Senator Corker. Well, who is it Barney Frank called to
get----
Mr. Bloom. I cannot comment on a conversation between two
people, neither of whom are in the administration.
Senator Corker. Well, let me go a different angle
politically then. You know, the Greatest Generation we all
hailed. We have statues and tributes to the Greatest
Generation, many of which invested in bonds in GM and thought
that throughout retirement GM was going to be something that
paid them and I imagine there are circumstances in our country
today where a GM bondholder, an 80-year-old veteran that
expected to get retirement, has been basically made toast by
the decisions of this task force.
And then if you look at the UAW's component, I mean, they
have come out really, really well from the standpoint of their
ownership. I know that you and Steve Rattner who I wish was
here; I really respect him and think he answers questions very
clearly, as do you. But, you know, I guess I have been a little
discouraged to hear that, well, we do not need them anymore.
They loaned us money, but we do not--but we have to have
workers. And I think there has been an overt concern that if
you did not do everything necessary on the workers' side that
they would strike. I know a number of occasions you all pointed
to what happened in New York State. I just wondered if you
might educate us a little bit into that thinking and basically
sort of these God-like decisions where, in essence, bondholders
are stuffed who invested in the company, you do not need them
anymore, but others are not.
Mr. Bloom. Well, let me try to answer that, sir. First, I
hope we never would act God-like or anything approaching that.
I think there is sacrifice in General Motors to go around
for everyone. There are enormous victims of the fact that
General Motors is a failed enterprise. Bondholders are clearly
among them. The communities who had come to rely on those jobs,
the dealers, the list is very, very long.
Tragically, this chairman became insolvent, very, very
insolvent, and it is a failed enterprise. And that meant that
the only way to revitalize it, if we wanted to revitalize it--
we really had three choices: One is we could have let it
liquidate, with all the damage that would have caused. Second,
we could have made good on all promises with taxpayer dollars,
and that I think would have been many multiples of the
investment that has already been made. And, third, we could
have taken a commercial--which is what we believe we did, a
commercial approach to this restructuring. And in a commercial
approach to a restructuring, a business owner, a financial
investor will look in a pretty hard-nosed way at who is needed
to make the company succeed going forward and who is not.
For instance, in General Motors, the decision was made, as
it was in Chrysler--which we supported--to take the suppliers
who supply the company with goods and services and essentially
pay them at 100 cents on the dollar, which nobody else got. And
the reason was not about bleeding hearts for suppliers. It was
about the commercial decision that if you do not have a
steering wheel, you cannot make a car. And so commercially
putting--taking those unsecured claims of suppliers and leaving
them behind did not make commercial sense.
There are warranty holders, people who had bought GM cars,
worth on its balance sheet many billions of dollars. The
commercial decision was made that those warranty holders, if
you made them angry, probably would not buy a new GM car, and
your best base of future car buyers is prior car buyers.
So in all these cases, we believe in a very clear-eyed way
and with the company in the lead and the Treasury questioning
them every step of the way, commercial decisions were made
about how to treat each constituent. I believe that everyone
has made enormous sacrifice, and I believe those sacrifices
have met two tests: one, in each case the stakeholder did
better than he would have if the Government had not intervened;
and, second, he was treated in a fair way given the commercial
realities of the marketplace.
As you know, in the Chrysler case, a bankruptcy judge heard
over 30 hours of testimony on this exact set of questions and
ruled completely in our favor in a very detailed 47-page
opinion. It was upheld unanimously by the court of appeals, and
the Supreme Court just decided not to take up the matter. They
did not see any issues that rose to them.
So I believe this has received enormous scrutiny by
judicial officials at all levels and enormous scrutiny in the
media, and we are quite comfortable and confident this has been
done in a commercial fashion.
Now, we understand there are a lot of disgruntled people,
unhappy people, but, unfortunately, in a failed enterprise that
is inevitable.
Senator Brown. Thank you. Thank you, Senator Corker.
Senator Bayh?
Senator Bayh. Gentlemen, I would like to thank you for what
you are doing. Mr. Bloom, I assume you could be making a lot
more money with a lot less aggravation doing something else, so
I am grateful to you, and Mr. Montgomery, it was good being
with you in Kokomo, Indiana. I am grateful for the town hall
meeting you had and for the floorplan financing that you
announced while you were in our State, so thank you both for
that.
Look, I am one of those who thought that it was not an
appropriate thing to run a gamble at this moment in time with
the economy of the country, and there were some pretty sober
analyses out there that if we just allowed these enterprises to
fail, it wouldn't have just been them. It would have been the
supply chain, as you were pointing out. It would have been
dealers across the country. It would have been middle-class
people. A lot of communities would have been hurt by this.
And if the economy had been growing by leaps and bounds,
maybe that is a risk worth running. But given the present state
of the economy, I think the better judgment was to not run that
risk as long as there was a credible--and I emphasize the word
credible--plan in place to try and maximize the chances that
the taxpayers were going to get a return on their money. You
don't just throw money after a losing proposition, but if you
have a reasonable prospect of getting repaid, then it was the
right thing to do. So I would like to focus on that issue.
Mr. Bloom, I understand you want to maintain maximum
flexibility here and there are just a lot of imponderables out
there we don't know. You are a bright businessman. You have
analyzed this, as you were saying in response to several of my
colleagues, from a hard-nosed business perspective. What do you
think the chances are that the taxpayers will ultimately be
repaid?
Mr. Bloom. Senator, I appreciate the question and it is a
fair question. I think the best I can give you is that we have
certainly looked at scenarios where, over time, a very
substantial portion and potentially all of the taxpayer
investment in General Motors will be returned. But I by
certainly no means would say that I am highly confident that
that will occur. But I think there are reasonable scenarios
where it could occur. There are obviously----
Senator Bayh. The word ``reasonable,'' at least in the law,
normally denominates a probability of greater than 50 percent.
A reasonable person would----
Mr. Bloom. I don't think I would put a probability on it.
You are perhaps a lawyer. I am not.
Senator Bayh. That is a handicap I constantly struggle to
overcome.
[Laughter.]
Mr. Bloom. And you are doing a fine job. No. Look, we have
looked at a lot of scenarios, and obviously that was a key
objective for us, is to say to the President that there is a
reasonable chance that this can happen, and that was a basis--
that was one of the key basis that we took when we insisted as
we did that the company be aggressive in its business plan,
because at the end of the day, the ability to pay back the
money through the sale of the shares is based on the
profitability of the enterprise. The profitability of the
enterprise is based on the hard--one aspect of it is based on
how hard-nosed they are prepared to be about dealing with their
realities.
Senator Bayh. Well, let me ask you this, then. Based upon
assuming that there is a reasonable improvement in market
conditions, we are not going to be selling this few vehicles
forever, God willing. So we are into, say, GM for $50 billion.
It looked to me like their total capital is, what, about $83 or
$84 billion? We are 60 percent. That would get you to about $50
billion. What kind of earnings per share at a normal market
multiple do they have to achieve in order to reach that kind of
market gap?
Mr. Bloom. Well, I am sure you and many others can do the
arithmetic. I mean, the company will have a trading multiple.
It is hard to know exactly what that will be. Again, it will
depend on a wide variety of factors, but honestly, I say what I
said, which is I think there is a reasonable chance. It will
obviously take a period of time and it will a recovery in our
economy. But obviously it is a key focus for us.
Senator Bayh. With the amount of holdings that the
taxpayers now have--you say there is no schedule, and I
understand that. I mean, the overhang is going to be
substantial. Therein lies the problem. Perhaps you haven't
contemplated this, but would just a periodic sale on some sort
of preordained basis, so you are not trying to time the market
and the market could kind of factor that in so that we would
gradually whittle down our holdings over a period of time,
would that be something you would contemplate?
Mr. Bloom. We have looked at a variety of exit strategies.
You know, there is some history out there. You have the
privatizations in Eastern Europe and in Western Europe and in
England. We have really tried to do a pretty wide canvass, and
I think the conclusion is there is no perfect system. We looked
at what Bill Gates did with Microsoft, which was a kind of a
timed schedule. I think our judgment at this point is that a
prearranged time schedule will create more problems than it
solves, but I can assure you that was one of the strategies
that we examined.
Senator Bayh. My last two questions, and I think you
already answered one of them, is in your view--I will just ask
them both and let you respond. The supply chain, is it in
reasonably healthy condition right now? That is number one.
Number two, if you are an employee or a shareholder of
Ford, what do you make of all this and how do you compete?
Mr. Bloom. Your first question, sir, is I can't tell you
that the supply chain is relatively healthy. The supply chain
is troubled. The OE sector is troubled. But we are monitoring
it very carefully. We are deeply aware of the interrelatedness
of the supply chain. When the supply chain goes down, even if
you didn't have a view about saving GM and Chrysler, you have
got Ford and Honda and Nissan connected to the same group of
suppliers. So we are deeply aware of the interconnectivity of
this and we are monitoring it closely. We believe it can hold
together, but we are very much mindful of that.
The Ford question is one that, again, we have looked at
carefully. We believe that Ford is a good and competitive
company. We believe they will be able to survive and thrive as
the economy turns around. But obviously, we are in constant
dialog with them. And I would also say that Ford has chosen
affirmatively not to participate in this program and that is
their choice, but that was their choice.
Senator Bayh. Thank you again, gentlemen.
Senator Brown. Thank you, Senator Bayh.
Senator Johanns?
Senator Johanns. Thank you, Mr. Chairman.
Mr. Bloom, reference was made in the previous question
about intervention from a Congressman, Barney Frank. You can
see why that leads to so much suspicion back home and even
amongst members of this panel. I don't have that kind of power,
and yet dealerships were closed in the State of Nebraska. Were
you aware of that? Did the CEO or somebody call you and say,
wow, what do I do with this? Barney Frank has called me and he
wants this facility left open.
Mr. Bloom. No, sir, we were not.
Senator Johanns. Did you learn about it then after the
fact?
Mr. Bloom. I learned about it pretty much the same way you
learned about it.
Senator Johanns. OK. Do you know of any other special deals
that have been made out there?
Mr. Bloom. We have not participated in any of that
activity. And again, I can only speak to what the President has
directed the administration officials involved in this to do
and what we have been admonished to do and what I believe we
have done----
Senator Johanns. So when you----
Mr. Bloom.----and I assure you we are going to continue to
do what he asked us to do.
Senator Johanns. So when you say you haven't participated,
does that mean you don't know of any other special deals that
were struck?
Mr. Bloom. I don't know what I don't know, sir. What I can
tell you is that the Auto Task Force has been explicitly and
very clearly discussed--this was discussed with them and I
have--and we have regular discussions internally about this and
I can assure you that nobody from the administration has been
involved in trying to pressure these companies to make specific
decisions regarding dealers or regarding plants, and I know
that we have been instructed not to do so in the future and
that we will not.
Senator Johanns. Let me, if I might, focus for a minute or
two here and talk to you about the rights of people. I didn't
do a lot of bankruptcy when I practiced law, but I did do some.
Is my understanding correct that if you are a shareholder and
you just go through a regular old bankruptcy, that on the other
end of that bankruptcy, you are going to basically end up with
nothing?
Mr. Bloom. I would say the overwhelming majority of
bankruptcy cases are premised on the company being insolvent,
and with the shareholders at the bottom of the totem pole, I
think a shareholder should expect to not receive any recovery.
There are a few exceptions to prove the rule, but yes, I think
that is a fair description.
Senator Johanns. And that is what happened with
shareholders in General Motors. They basically have a stock
certificate that is a worthless piece of paper.
Mr. Bloom. The company's plan does not provide for any
recovery for shareholders. As you know, General Motors is an
ongoing case and so I can't predict with certainty the outcome,
but yes, the plan that has been filed does not contemplate a
recovery for shareholders.
Senator Johanns. Dealers that have been notified that they
won't be dealers for General Motors any more, same deal. They
are out of luck.
Mr. Bloom. I think the dealers would be expected to have an
unsecured claim against what is called the old co-estate and
they will recover what other unsecured creditors recover.
Senator Johanns. OK. So dealers, shareholders, they come
out of this basically with nothing if the plan is adopted.
Mr. Bloom. I think they come out of it as they would in a
traditional bankruptcy, which is to say as either unsecured
creditors, or in the case of shareholders, even below that.
Senator Johanns. Now, every once in a while, an employee
would come to my office and say, you know, I am an employee of
XYZ Company. They just filed bankruptcy. They owe me 2 weeks
worth of wages. I would say, well, let us file a claim. I hope
you don't need that money to buy groceries because I don't
think you are going to see it. And I was always right.
Employees had no rights. Describe the rights of the employees
like you have described for me the rights of dealers, the
rights of shareholders in just a regular bankruptcy.
Mr. Bloom. The treatment of employees in regular bankruptcy
varies all over the lot, largely because the entity trying to
reorganize, if it is a 363 sale, which is going on in the case
of General Motors and was in Chrysler, the entity providing--
being the sponsor of the new entity is going to make
determinations about what the proper treatment is for
employees. And in the case of General Motors, the decision was
by the management that keeping both salaried and hourly workers
working and on the payroll was an important part of maintaining
the continuity of the business and having a successful
enterprise going forward.
And so the determination was made to continue to pay wages
in the ordinary course, as I indicated, as it was for
suppliers, as it was for warranty holders. These are business
judgments that are made by companies in bankruptcies all the
time, and I have been involved in many, many bankruptcies where
employees did receive continuity of wages. I have been in
bankruptcies where they didn't. And honestly, it has been all
over the lot.
Senator Johanns. What influence did the administration have
on that issue--did you have on that issue?
Mr. Bloom. I think the influence we had is to work with the
company to try to come up with, as I have described it before,
a commercial approach to this question, which is to say how do
we best maximize the value of the government's investment,
because the government is putting a huge amount of money into
these enterprises and the only way we get it back is if there
is a viable enterprise going forward.
And so the question we asked the company in each case is
what is the smallest amount you have to give--because obviously
you would like the smallest burden you can have--what is the
smallest amount you have to give consistent with building a
successful enterprise? And every single stakeholder--we
challenged the company to make that kind of determination and
that was the role we played, essentially, as I said to an
earlier question, we are not the management. We are not running
the company. But we are the provider of capital, and so I think
we had an obligation to challenge them to make sure they were
acting in a thoughtful and commercial fashion, and that is what
we tried to do.
Senator Johanns. Let me ask one last question. I am over
time here, but let me ask one last question. During any of
these discussions, as shareholder rights were being
extinguished, as dealer rights were being extinguished, as
people were sacrificing and our communities were being
affected, et cetera, et cetera, did anybody with the
administration, with the Task Force, every say, you know, it
seems like buying 60 percent of General Motors is a big enough
decision where we should go to Congress and ask them what they
think of this?
Mr. Bloom. I think the President was proceeding under the
authority that was created through the creation of the TARP and
the prior administration made loans under that and the
President determined that these investments were appropriate
and proper under that legislation.
Senator Johanns. You agree with me, I would hope, that
loans by the prior administration are a vastly different
creature than ending up with ownership of 60 percent of General
Motors.
Mr. Bloom. I would certainly say what I said, which is the
administration believes it was proceeding under statutory
authority that it was granted and doing the best it could in a
very difficult circumstance.
Senator Johanns. Last question----
Senator Brown. Thank you----
Senator Johanns. OK, I will----
Senator Brown. Go ahead and take a last question, but this
is your third last question and this is your last question, but
go ahead, Senator, if you want.
Senator Johanns. I will stick around. Thank you.
Senator Brown. Well, go ahead. Go ahead, because we may not
do a second round. Go ahead.
Senator Johanns. Just in your role, does that make your
uncomfortable?
Mr. Bloom. In my what?
Senator Johanns. In your role.
Mr. Bloom. Does it make me uncomfortable?
Senator Johanns. That we never got an opportunity to say
yes or no on this?
Mr. Bloom. Senator, I am working as hard as I can under the
direction of the President to try to save these companies and
minimize the taxpayer dollars required to do it. It is
obviously an exceedingly challenging task. We are all doing the
best we can.
Senator Johanns. Thank you, Mr. Chairman.
Senator Brown. Thank you, Senator Johanns.
I will take my 5 minutes now. I appreciate very much both
of your being here. I know the personal sacrifices you both
make in taking these very difficult jobs, the hours away from
home with small children. Mr. Bloom, I appreciate your driving
from Pittsburgh every week. Thank you for that.
I particularly appreciate that you took this commercial
approach, that both the Bush administration and the Obama
administration want GM and Chrysler to move forward, not to
liquidate those companies. There almost seems to be a
perception in this room and among some, not just in this body
but elsewhere, perhaps, that the employees took no hits but
everybody else did, the dealers, the bond holders, the
executives, the communities.
God knows when you represent a State like I do, you see
what kind of hits communities take and you see what kind of
hits workers take. There are tens of thousands of workers that
are losing their jobs, not just at Chrysler and GM, but the
tier one suppliers and the tier two suppliers and beyond, many
of them small, family owned, non-union companies that pay $12,
$15 an hour or more in many cases, but not more in many other
cases. So I see that the $7 an hour assessment you made plus
the lost jobs plus what it has meant to the communities.
So a lot of us, and I think the country, appreciates that
you have done this in a way that keeps these companies alive
and, we hope, growing in the years ahead, and I appreciate your
generally optimistic assessment for the future.
I want to talk a little bit about last year, what happened
and kind of where we are going now, and then I want to be more
specific on one question about a community that is really--
another community in Ohio that has been hit hard by all of
this.
Last year, some of our Committee members worked with the
Bush administration to provide non-TARP loans to the
automakers. Our legislation would have required the companies
to achieve concessions from various stakeholders within a
strict timeframe, as you recall, before you were on board. As
my colleagues recall, the legislation was filibustered. The
bill ultimately died in the Senate.
Today, many of the same critics calling for specific
concessions from workers and from bond holders are now saying
the government-backed plans unfairly advantage one stakeholder
over another. You have touched on that in response to questions
from Senator Corker and Senator Bayh and others, but compare,
if you would, the concessions in last year's legislation to
those in the current restructuring plans being considered in
bankruptcy court in both cases.
Mr. Bloom. I think in all cases, the stakeholders, and
certainly including the UAW, the concessions wrested from them
were in excess of those that had been contained in the
legislation that didn't pass but were largely embodied in the
loan agreements. So in fact--and I think that is appropriate,
because as it worked out from December until April, the market
got worse. The economy got worse. Car sales were even lower
than they had been projected to be. So in light of that, we did
insist that everybody give more, and that certainly includes
the UAW. It does include the bond holders. But it includes all
the key stakeholders.
Senator Brown. Understanding your response on questions on
decisions that GM makes, whether it is a plant closing, whether
it is a downsizing of a plant, whether it is an assembly plant
or a stamping plant or whatever, an engine plant, whether it is
what happened with dealers, you do have an ongoing oversight
responsibility obviously of this whole restructuring. A lot of
us are troubled by some of the decisions. I mean, you can see
the frustration on both sides here with what happened to
dealers and how badly it was handled. I mean, I personally
thought the free market could work with dealers and let them
figure out--let them succeed or fail and that would then clear
out the number of dealers that we might have gotten to anyway
that way. But that is not what Chrysler and GM decided.
But some other decisions, and I want to talk specifically
about one. GM chose to close the most productive stamping plant
they have. They have three stamping plants, Mansfield, Ohio--
full disclosure, my home town, I don't live there now--and then
one in--I am sorry, they have, I believe, four or five plants,
but one in Indiana, a couple in Michigan, other places, one in
Parma, Ohio, too. The GM stamping plant in Mansfield was
consistently ranked higher according to the competitive
operating agreement that GM, that does its own assessment, has
the lowest manufacturing cost per ton. GM chose to close that
plant.
How does the administration--I mean, they made that
decision. I know it wasn't a political decision. The local
Congressman said President Obama should go and explain to the
workers why he closed the plant. That was a political
statement, to be sure. How does the administration oversee the
operations of these companies to make sure they are making
objective and transparent decisions? I mean, there were some
arguments to close it, I assume, although they didn't make them
very well. There were many more arguments to keep it open. It
is some 1,100 people work there. It is devastating to a
community that size. We all know what these plant closings do
to a community.
Talk to me about your oversight and the demands for
transparency in these companies that Federal taxpayers have
major investments in.
Mr. Bloom. Senator, certainly any particular plant closing
is devastating to a community and certainly General Motors is
closing a number of facilities. As I indicated before, we have
made a pretty determined--not a pretty, an absolute
determination that we are not going to get into micromanaging
their decisions. We certainly have encouraged, however, the
companies to be forthcoming. So if a particular community or a
local union wants an explanation of how a judgment was made, we
would expect the company to talk to them, as we would expect
them to talk to dealers.
But we are not going to go in on top of them and say, why
Mansfield and why not X? It just----
Senator Brown. Will you insist to them that they be more
forthright to answer some of Senator Johanns' questions, his
concerns about the dealers? Will you insist to them that they
disclose to their dealers how they made these decisions, why
they made the decisions, that they disclose to communities why
and how they made these decisions? Is that your role?
Mr. Bloom. Recognizing that there is a competitive issue
where public disclosure of certain kinds of information can put
the company at a competitive disadvantage, and so not being
able to make a blanket comment like that. But I would say, yes,
that we would be asking GM and insisting that GM have and open
and transparent dialog with all of its stakeholders, and to the
extent it is not, we are more than happy to facilitate that and
insist that it occur. Again, I want to be cautious because
there can be competitive issues where the public airing of
information can be harmful to the company. But certainly as a
general matter, we would expect the company to be open,
transparent, and responsive to communities, to stakeholders in
these sorts of matters, yes.
Senator Brown. One last question. There was discussion
earlier on Senator Johanns' questions about stockholders,
creditors, others getting in line but the dollars never get to
them, I guess, in line. What is going to happen with people
that have product liability claims, that somebody drove a
Chrysler and that Chrysler malfunctioned and someone was
paralyzed as a result of a defective product? What happens to
their claims?
Mr. Bloom. Again, just to be direct with you, that is
obviously a very emotional and difficult issue for those people
who are victims, and nobody takes delight in not seeing them
get all that they would like to get. But unfortunately, again,
if one looks at the way bankruptcies are conducted,
bankruptcies are about taking liabilities the companies can no
longer afford and finding a way to discharge them in an orderly
way.
We would expect the company will act in accordance with
traditional bankruptcy practice and law on how product
liability claims are handled, which is to say that largely,
they would be a matter for the old estate to be dealt with and
therefore will not receive the full recompense they would hope.
That is clearly a terrible thing for those individuals, but
again, there are a lot of people that General Motors made
promises to that it can't honor and we really don't have an
alternative, as I said, other than to essentially write an
endless check to deal with that situation.
Senator Brown. There was no money set aside by the two big
auto companies for claims like that that would have been
untouched in bankruptcy proceedings, I assume?
Mr. Bloom. There is not a separate trust or an insurance
policy or anything like that. The companies are largely self-
insured, both of them, on this matter. And in the Chrysler
bankruptcy, there was objection on that and the judge found it
to be, again, an ordinary course treatment.
Senator Brown. Thank you again, Mr. Bloom. Thank you, Dr.
Montgomery.
Senator Bunning?
Senator Bunning. Thank you, Mr. Chairman.
Last month, Secretary Geithner told this Committee the
government was going to, and I use his word, ``try''--that is
his word--not to interfere in choosing which plants to close or
dealers to close or other specifics of bankruptcy plans. I
should also note that he said he would come directly back to
this Committee once GM filed for bankruptcy, but I don't see
him here today. So I will ask you the question instead. Did the
government in any way influence the selection of plant or
dealerships to close?
Mr. Bloom. I can answer that question very directly,
Senator. The answer is no.
Senator Bunning. OK. Thank you. For the taxpayers' sake, in
GM, just to break even, the new General Motors will have to get
up to a market capitalization of about $70 billion. That is
roughly 15 percent higher than GM's all-time high, when as a
much larger company it was selling high margin SUVs as fast as
they could make them.
It seems pretty clear to me that the taxpayers will never
get back their money. So please explain to me how we are going
to get our money back if, in fact, General Motors' new entity
has to get up 15 percent higher than the highest General Motors
was in the history of the old General Motors.
Mr. Bloom. Let me try to answer that question.
I hope I was clear, Senator, that there is no guarantee
that we would get our money back. But I did say there were
scenarios where I thought it was reasonable that we could.
I think the only way I would disagree with your logic is
that when GM was worth 15 percent less than that, in its all-
time high, piled on top of that equity was a huge amount of
debt. So that the total value of the enterprise was, in fact,
close to a multiple of that number.
One of the things we have done by deleveraging the company
is we have given the equity more space in the total capital
structure. So I think if, in fact, General Motors returned to
the total enterprise value that it had in that period, in fact
we would get all our money back.
But I understand those days were reliant on high-margin
SUVs, et cetera. I do not think we would expect that those kind
of times would be occurring anytime soon. So our analysis is
not based on that.
I think what it is really based on, though, is a much more
conservative capital structure so the total enterprise value,
before the shareholders get the ownership, there are fewer
deductions for the debt and other liabilities.
Senator Bunning. We all know that the original projections
of auto sales was approximately 18 million units at the all-
time high. And we know that we are now sitting at about 9
million units, and that's why we are having such major
problems.
Could you give us an estimate on where we would have to get
to in sales to at least break even?
Mr. Bloom. Unfortunately, it is not just one number because
obviously sales matter a lot. So does market share, so does
margin, so does fixed costs. So you've got four or five
different variables that have an interplay.
What I can say is if you look at the company's projections,
they do not project--their publicly filed projections--they do
not project a return to the 18 million level, nor to the market
share that they enjoyed when they had that 18 million overall
industry level. So I think the company has taken a more
conservative approach versus that hypothesis.
And again, as I said, it would be factoring all of those
things into the other. Clearly, it will require some recovery
in the economy. But I think most of us feel that at least some
amount of recovery is pretty likely.
Senator Bunning. Well, I think you're absolutely right
about the economy recovering. It's a question of timing.
Mr. Bloom. Yes, sir.
Senator Bunning. Just like when will General Motors come
out of bankruptcy. That's a question of timing. But the fact of
the matter is that's very important if, in fact, we're going to
have an exit strategy for us to reduce our 60 percent stakehold
in General Motors.
Mr. Bloom. It is certainly important and we're moving
quickly as we can, recognizing that this is a court-driven
process. As the Senator indicated earlier, we got Chrysler done
in 41 days. I think, candidly, GM could be a little slower
because it is a more complicated matter. But we intend to
proceed as quickly as we can, recognizing that all the affected
stakeholders have rights and they're going to be heard by the
judge. And that's a judicial process that we certainly respect.
But you're absolutely right, the sooner we get out, the
sooner we can get to organizing an IPO, the sooner we can begin
to dispose of our stake. And clearly we intend to do that in as
orderly a way as we can.
Senator Bunning. Mr. Montgomery, I apologize for not asking
you any questions but my time is limited. I am sorry. Thank
you.
Senator Brown. Thank you, Senator Bunning.
Senator Kohl.
Senator Kohl. Thank you very much.
Mr. Rattner--I am sorry. Mr. Bloom, a month ago, Mr.
Rattner appeared before our Committee in a closed-door meeting,
and he said that it would cost more to retool the Chrysler
engine plant in Kenosha, Wisconsin, and he felt that in light
of that, they are better off just moving those jobs to Mexico.
With all of the taxpayer money that Chrysler has received, I do
not understand, in spite of his statement, why we would move
these jobs to Mexico. Doesn't it make better sense to utilize
the retooling fund that is available for something just such as
this to retool that factory in Kenosha so that we can keep the
jobs here in the United States?
Mr. Bloom. Let me try to respond to that, Senator. First, I
want to deal with a process point. I think clearly the company
did a poor job of communicating with local elected officials
and community folks about the Kenosha decision, and I believe
the CEO has apologized for that. It was not proper, and I hope
we will not have a repeat of that in terms of the
communication.
In terms of the substance of the decision, again, what I
hope Mr. Rattner said, because I believe these are the facts,
is that Chrysler made a decision a couple of years ago to build
two new engine plants, one in the U.S. and one in Mexico. And
by the time of this matter coming before us, hundreds of
millions of dollars had already been spent on the plant in
Mexico, and also hundreds of millions of dollars on a plant in
the U.S. So for us to go in and overturn that, number one, it
would violate the basic principle that I indicated the
President has insisted upon, which is we not interfere in the
day-to-day management decisions; and, number two, just as a
business matter, it would require walking away from hundreds of
millions of dollars of investor capital.
So I think the reality is for reasons of both principle and
practical business, this simply is not a decision that can be
revisited. That is certainly a terrible event for the folks in
Kenosha, and there is no way to make it a good event. The only
thing I can say is I think, in fairness, the alternative was
the liquidation of Chrysler that would have been far worse for
everybody concerned. But certainly we appreciate the difficult
situation, whether it is Mansfield or Kenosha, that these
closings bring upon communities.
Senator Kohl. Mr. Bloom, last week, it was announced that a
General Motors plant in Janesville, Wisconsin, was one of three
plants in the running to make small cars, and if that occurred
in Janesville, 1,400 workers would be put back to work. Is the
auto task force working with General Motors and the Department
of Energy to help retool that plant in Janesville?
Mr. Bloom. What we are doing, sir, is trying to ensure that
General Motors has a fair process where the three communities
have a chance to have an open dialog with it, where they make a
fair and reasoned decision and are transparent with folks about
the way they are doing it. But we are not insisting that
General Motors locate that factory in Janesville any more than
we are in the other potential locations.
As I said in reference to, I think, a question of Senator
Brown's, we are insisting that the company be forthright and
that it deal fairly with Janesville as well as the other
facilities. But we are not intervening and insisting that
Janesville or any other place get any special consideration.
Senator Kohl. Thank you. Mr. Bloom, as you know, there have
been verifications of profitable dealerships that were doing a
good job, making money, employing people, doing exactly what
General Motors or Chrysler would want them to do, being
notified that they have to close.
Now, what is the point?
Mr. Bloom. Sir, the companies had determined that their
dealer network was not over the long term maximizing value for
the company. The company had a far greater number of dealers
than their competitors per car sold, and analysts throughout
the industry, I think of every stripe, have indicated that the
companies are over-dealered. That causes over time the brand to
degrade. It causes pressure for price cutting. It causes the
dealerships to not be as attractive in terms of their physical
make-up, et cetera. And the companies determined that to be
successful, they needed to realign their dealer networks.
In that context, they persuaded us that that was generally
a sound business decision, that to do it quickly, relatively
quickly, was, in fact, appropriate and would get to the good
result as quickly as possible. From there, it was the companies
decision how to do it, which dealers to choose. And that was
the decision they made. We believe--we insisted, and I think
they did do it, using fair and objective criteria of what were
the dealers that were selling the most cards, had the best
throughput, had the best other metrics that were objective
metrics. And on that basis, the company has determined that it
cannot bring all its dealers forward and be successful.
This is obviously, again, a different sacrifice for those
dealers, but without these sorts of difficult changes, we are
not going to have a successful General Motors.
Senator Kohl. Well, I thank you. I still think your
willingness to accept in this case dealerships being forced to
close who may have been in business, for example, 20, 30, 40
years and are profitable, were running a business, and the
point of running businesses is to make money. That is why
Chrysler and General Motors are going out of business. So here
you have dealerships that have a history of profitability, and
yet they are still being told that they have to close, and you
come before us and simply say, ``Well, you know, they made
those decisions and we go along with it.'' I do not think that
is a good enough answer, sir, but perhaps it is the best you
can do.
Senator Brown. Thank you, Senator Kohl. Do you want an
answer there?
Mr. Bloom. I would be happy to, if you would like me to
take another minute. I mean, I appreciate, sir, that you are
not satisfied. A dealer's profitability is not the only measure
of whether or not that dealer network is best serving a long-
term interest of the company and all of its stakeholders. If
there are too many dealers in a particular area, while it may
be that an individual dealer is making money, you still have
the issue of whether or not he is sufficiently investing in a
showroom to get returning customers, whether or not he is
pricing the product in a way that is maximizing value for all
concerned, whether or not he is offering the kind of service
that brings people back.
Again, these are difficult, difficult individual decisions,
but if we get in there and start telling the company you can do
this and you cannot do that, then we might as well make them an
arm of the U.S. Government. And I do not think anybody thinks
that is the right thing to do. What we have to do is we have to
give General Motors the kind of discipline to come up with a
business plan that makes sense, where they can make money. We
have to put a first-class board of directors in place, and
again, I want to point you to Ed Whitacre and Bob Kidder, two-
first class businessmen who have agreed to chair the boards of
these two companies, guys who have run big, large, complicated
companies, done it well, done it effectively. And I think they
give you a good sense of how the Obama administration intends
to treat this matter.
Senator Brown. Thank you, Senator Kohl.
Before turning to Senator Hutchison, one comment about
that. I think all of us are frustrated. On the one hand, we
tell you we do not want the Government running these
businesses; on the other hand, we tell you we wish that you
would step in and make GM and Chrysler do this, this, and this.
And I understand, we all do that. I have done that. But I think
none of us has really heard--I know that a lot of the dealers
think this. I know a lot of the public thinks this. I think now
a lot of Senators and Congressmen and Congresswomen think this,
that we have never really heard the economic argument made by
Chrysler or GM to close these dealerships unilaterally the way
they have, understanding they pick off in many cases those that
might be the weakest in terms of profits and sales, although as
Senator Kohl said, many of them are making money, many of them,
he said, have been around 20, 30, 40 years. I have some in Ohio
who have been around 75 years. They are closed. And it is
tragic because all of the dealers do so much for the
communities and all that. So I just wish that the two major
companies would explain better sort of the economics of it, why
they did it.
The other point I want to make--and I apologize, Senator
Hutchison--you mentioned Janesville. Have you made public the
three communities, if there are, in fact, three--you seem to
sound like there are--that GM is looking at for the small cars?
Or would you like to make that announcement right now, Mr.
Bloom?
Mr. Bloom. You know, I know there are three. I know there
is one in Michigan, in Janesville. To be perfectly honest, I do
not recall whether it has been made public, but we will get
back to you on that.
Senator Brown. The third one in Ohio, by chance?
Mr. Bloom. No, comment, Senator.
Senator Brown. Well done, Herb.
Senator Kohl. I am not telling you.
Senator Brown. Senator Hutchison.
Senator Hutchison. Thank you, Mr. Chairman.
Mr. Bloom, I heard what you said to Mr. Kohl, Mr. Brown,
and Mr. Johanns, and it is not coming together for me either.
And I am going to refer to the March 30th White House
Determination of Viability Summary for the General Motors
Corporation in response to their viability plan on February
17th in which the document states, ``The company is currently
burdened with underperforming brands, nameplates, and an excess
of dealers. The plan does not aggressively enough act to curb
these problems.''
It goes on to say that:
GM has been successfully pruning unprofitable or
underperforming dealers for survival years; however, its
current pace will leave it with too many such dealers. These
underperforming dealers create a drag on the overall brand
equity of GM and hurt the prospects of the many stronger
dealers who could help GM drive incremental sales.
Then, on May the 15th, the Treasury Department says that:
As with the case with Chrysler dealer consolidation plans, the
task force was not involved in deciding which dealers or how
many dealers were part of GM's announcement.
So it seems to me that the task force and the Treasury is
saying you did not act aggressively enough, you have not cut
back on enough dealers, but you are saying to the public, Gee,
we are not involved in those decisions. And, in fact, now that
we know what dealers are being closed in both Chrysler and GM,
there are profitable dealers that are being closed, not just
underperforming. And I still do not understand when the dealer
buys the car, the dealer provides the real estate, the dealer
provides the showroom and the repairs and rents the signs, how
is it a drag on the company, and why is the White House saying
that an excess of dealers is a problem, even profitable
dealers? It is a disconnect for me, I think, as well as many of
my colleagues.
Mr. Bloom. Let me see if I can answer that. I think you
certainly accurately quoted the President's statement on, I
think, a fact sheet from the 30th. It is certainly an accurate
quote. I think what we said in addition, however, is we said
that overall General Motors is burdened by excess capacity in
many areas. We said that their plant footprint has excess
capacity, their dealer network has excess capacity, their
white- and blue-collar ranks, all of these things are not
commensurate with the current size and prospects of the
company.
And so what we told General Motors when we rejected their
February 17th submission is you need to go back and you need to
take a more aggressive approach. And, yes, that included
dealers, but it included plants and it included white-collar
head count and it included blue-collar head count, and it
included every aspect of the company from the top to the
bottom. And the company came back with a more aggressive plan
to rationalize its dealer network.
I think what we said on the 15th was also true, which is we
did not give them a numerical target, but we certainly did say,
regarding plants, regarding dealers, regarding white- and blue-
collar head count, regarding all these matters, that you need
to be more aggressive, because our judgment was on the February
17th plan that they were not going to achieve the kind of
profitability that would make them long-term viable.
It was their determination that this level of consolidation
of the dealers was consistent with a path to long-term
viability, and we did not say why not five more or ten more or
five or ten less. We scrutinized the analysis in all areas and
concluded that overall it was a proper plan and reflected a
good business judgment and, therefore, was worth investing
taxpayer resources into it.
Again, I know you find this answer not satisfactory, but
the simple fact that a dealer is making money does not indicate
that the dealer network in that community is maximizing revenue
and repeat customers and satisfied customers and the things you
need to be a successful car company.
The company's large competitors are selling cars that--
excuse me, are using dealers that have more than twice as many
cars per dealer sold than GM or Chrysler do. Now, some of that
is due to the geographic make-up of where the sales take place,
where GM and Chrysler are selling in more rural areas, but even
when you compare urban area to urban area, which would be an
apples-to-apples comparison, the throughput of these other
companies is far higher, and our judgment and the judgment of
many, many outside experts we have consulted is this is one,
certainly not the only, but this is one of the reasons why the
companies have not been successful.
Senator Hutchison. I think what makes it so hard is because
there are other points where there are competing explanations.
For instance, in one case, every dealer--four dealers in one
town of over 100,000 people are being closed. And it is clear
that a new dealer is going to be brought in. One new dealer,
not one of the four that is being closed. And yet all of those
dealers were doing fine.
So rather than giving the nod to one of the four that had
been with you for years and years and years--I do not mean you;
I mean General Motors or Chrysler. But there just seems to be a
loyalty disconnect here, and also what you have just said is,
OK, you want bigger dealerships that can do more volume sales,
and yet you are doing bigger dealerships that--you are doing
bigger dealerships, more volume, and yet in the contract that
is being put forward by GM, if they sign it, they take away
their right to protest now any dealer that would come in within
4 or 6 miles. So there is just so much disconnection, which is
why I think the dealers are feeling so wronged about this.
And let me give you one other example of where I would like
to ask if the task force is going to take a position. One of
the dealers that is being closed, Chrysler in this instance,
Chrysler Financial is asking for 3 percent of their loan
balance to cover potential chargebacks. Now, Chrysler, of
course, has now closed, but these dealers are going to be able
to sell used cars, but not under the Chrysler name. So for one
dealer, who has been in business for 90 years in Texas, it is a
$90,000 requirement for a $1,500-a-year annual risk.
Now, is the task force going to look into that kind of
requirement and say there should be some protection here with
our taxpayer dollars?
Mr. Bloom. Let me try to answer two or three of the points
you raised, Senator.
Regarding the new participation agreement, I do not know if
you are aware of this or not, but General Motors has been in
active dialog over the recent period with both the NADA, the
National Association, as well as their own Dealer Council, and
I believe that NADA has put out a statement indicating that
they find the modifications that have been made to the go-
forward agreement, participation agreement to meet the majority
of the dealer concerns. So I think concerns were raised. I
think you and others brought them to the attention of GM. And I
think good dialog was had, and I think a good result.
So certainly when Members of Congress bring to our
attention situations, we absolutely will do everything we can
to facilitate dialog between the affected stakeholder and the
company. Now, we are not going to intervene and become the
arbitrator of a dispute, but we certainly are going to ask and
insist that the companies listen carefully to the concerns of
any stakeholder, and if it is the particular situation you
mentioned regarding the Chrysler dealer or the participation
agreement, which is a broader issue, we are going to insist
that they be listened to.
But, again, I do not want to mislead you. We are not going
to substitute our judgment on every particular case. I do know
in the case of the Chrysler dealers that are not being brought
forward that every single car on their lots is going to be
moved to another dealer with financing provided by either GMAC
or other entities. And so all the dealers are going to be able
to sell their cars at dealer cost.
Again, this was a matter that was raised. Members like you
brought it to attention, and I think a good solution was made.
We certainly see our role as monitoring and staying on top of
these things, and whether it is a Senator or a mayor or anybody
who identifies a stakeholder who is not being dealt with, we
are going to insist on everybody getting a hearing.
But as I said earlier--I do not want to mislead you--we are
not going to get in and kind of arbitrate disputes between the
company and its stakeholders. We are going to insist these
companies manage themselves in a commercial fashion.
Senator Hutchison. Thank you, Mr. Chairman. Of course, my
time is up, but I would just say that unfortunately it is the
taxpayers' money that you are largely managing, and I just
think we have a requirement not only to help the people where
plants have closed, which I think is huge and important, but
also the many communities and the dealers that are getting
shafted in many ways. And I do not think we as taxpayers would
want to have that result, and I would hope you would be a very
strong watchdog on all of their behalfs.
Thank you.
Senator Brown. Thank you, Senator Hutchison.
Senator Bennett, thank you for your patience.
Senator Bennett. Thank you very much, Mr. Chairman.
Gentlemen, I do not envy you your task. Let me just make it
clear I recognize how difficult all of these issues are, and
thank you for your diligence and your attempt to get them
solved. You have probably been around Washington long enough to
know that is a set-up for what is coming.
[Laughter.]
Mr. Bloom. First 24 hours.
Senator Bennett. Yes, OK. Just picking up a little quickly
on what Senator Hutchison had to say, we will now in Utah have
no Chrysler dealers from Las Vegas to Provo. And a lot of
people live between Las Vegas and Provo. Now, all right, it is
a rural area. There are a lot of rural areas and there are a
lot of miles, but by virtue of that decision, that guarantees
that there will be no possible way for Chrysler to come back in
that very large stretch of population.
I have talked to some of the dealers there, and they are
making the same point that Senator Hutchison is making, that if
the market says, OK, there needs to be a dealer there, the
dealers that have been serving Chrysler diligently for all of
these decades, who have been shut out now, will not be allowed
to set up the new dealership that comes along and some new kid
will show up--new kid not necessarily by age, but come along
and say, OK, I have this very large market now exclusively
myself.
I do not know what you can do about it, but I am working
with Senator Hutchison and the NADA to see what we can think
about doing about it, and we are going to be talking to you
about that. I just warn you that that may be coming.
Mr. Bloom. Forewarned.
Senator Bennett. OK. Let us talk for just a minute about
the whole question now of the viability of General Motors. I
take your point that the market cap can be achieved with a much
better, cleaner balance sheet so that we do not have to compare
the new GM to the old GM. But I would point out to you that in
terms of a true vulture capitalist--a lot of people do not like
that term, but that is basically what you are here as the
Government. As a true vulture capitalist, you have gone exactly
the wrong way.
General Motors, if a true vulture capitalist--I am quoting
from Homer Jenkins, but I like what he says, and he just
happens to put it better than I can.
Mr. Bloom. I admit to reading it.
Senator Bennett. You admit to reading it, OK. He says:
The bailout has deeply politicized the company's business model
by privileging its money-losing domestic operations, saddled
with the UAW----
you may not like that term----
over its money-making foreign ones. A truly commercial vulture
investor would have done exactly the opposite, dumped North
America and kept the promising businesses in China, Russia,
Europe, and Latin America.
And I have talked to General Motors people in these other
countries, and they are profitable in these other countries,
have been profitable. It is the North American activities that
have hurt them. And if indeed you were to take General Motors'
production out of North America, out of the $9 million car
market that Senator Bunning was talking about, it would
increase the market share and thereby the profitability of all
of the others.
Now, the outrage politically would have been enormous for
that, but if you are going to talk in straight market terms,
that would have been the thing to do.
I remember--I will just say this and then get your comment
on it--reading--I cannot tell you the date now, but it is 4 or
5 years ago--a cover story in Fortune Magazine called ``The
Demise of General Motors.'' And they outlined at that time,
when the economy was doing very well, that General Motors was
doomed for a variety of reasons. And one of the interesting
things they said was about the quality of General Motors' cars
and how everybody said General Motors' cars were terrible
quality, that at that time General Motors' quality had gotten
back to the point where it was as good as Toyota or Honda or
any of the rest of it, and they quoted an expert who said the
quality is very, very good, and no one will buy them because
the reputation had come along.
And we are now facing a situation where that legacy of the
market is still there, and I read columnists who say, well, now
the Government will insist that General Motors make good cars.
I think General Motors has been making good cars for the last 4
or 5 years, but they are running into that problem.
Now, as you deal with all that, do you have a reaction?
Mr. Bloom. Yes, I do, and let me start by trying to agree
with you. I may not end there, but I think you are right. I
think General Motors has been kicking problems down the road
for a long time. I think that is an accurate description. I
think very intelligent, thoughtful people have been talking
about General Motors deep in systemic problems for a long time,
and they have not been listened to. And I think the President
was clear, these problems have been kicked down the road for a
long time.
I also agree with you that as little as 3 or 4 or 5 years
ago, GM's quality by a lot of measures was up at Toyota's, up
at anybody's. The problem is, as you know, consumer sentiment
lags reality because for a long time, when their transplant
cars were better, GM was living on reputation, and then it
flips. So these are problems that are not addressed overnight.
And I think that--and so you are right, this is going to take
some time to evolve.
The Government is not going to insist that General Motors
make good cars. That is not something a government can insist.
What we can do, and I believe what we have done, is help the
company to rethink its business model and to restructure its
balance sheet. So I think what----
Senator Bennett. Let me just quickly, because I do not want
to take too much more time, but isn't the Government going to
focus on North America and castrate General Motors overseas?
Mr. Bloom. Let me answer that question. I do not think it
is accurate to say that we are castrating General Motors
overseas. I would just observe to you, for instance, that their
European operation, in fact, is also deeply troubled. And
provisions are being made without United States taxpayer
dollars to deal with their European operations. They do have
profitable operations other parts of the world. We are
encouraging them to grow those, but not with U.S. taxpayer
dollars.
The decision to make an investment in GM and its North
American operations is obviously because these are United
States taxpayer dollars. And so while we are a vulture
capitalist, we are an American vulture capitalist, and the
determination was to get them competitive in North America so
they can make money in North America. And that is the focus of
the activity. That is the only justification for taxpayer
dollars because we are trying to preserve American jobs in
American communities and American suppliers and American
dealers, because it is American taxpayers.
But the insistence, as any good vulture capitalist would do
before he put money in, was to insist that there was a path to
profitability, and to get competitive whether it be dealers or
be employees or be debt level or be suppliers or be white-
collar, whatever it was, to insist that General Motors get
competitive so their good cars can find space in the
marketplace and can be successful. And that has been the
effort, and that is what we have tried to do.
Senator Bennett. Thank you, Mr. Chairman.
Senator Brown. Thank you, Senator Bennett.
Before adjourning, Senator Shelby has one question and I
have one question. My question will be for Dr. Montgomery.
Mr. Montgomery. Excellent.
Senator Brown. We feel like you are sitting there alone,
Dr. Montgomery, with little to do.
Mr. Montgomery. OK.
Senator Shelby. Do you want me to go ahead, Mr. Chairman?
Senator Brown. Yes. Go ahead, Senator Shelby.
Senator Shelby. Thank you. I would like to get back quickly
on how we get out. We are in. We, the taxpayer, the government,
is in big time. We know this. How much thought went in, just
roughly, from your judgment, went into getting into GM and
Chrysler and how much thought went in how do we exit? How do we
get out? I think the term was used earlier, could this be an
economic Vietnam?
Mr. Bloom. Yes, sir.
Senator Shelby. In other words, easy to get in, hard to get
out.
Mr. Bloom. I think that is a very fair question, Senator,
and again, I want to try to talk about our process. There was a
tremendous amount of thought and debate about whether or not an
equity stake was the proper vehicle. But again, I think when
you walk down our decision tree, if you decide that you are
going to invest in the company because today's capital markets
are not going to provide capital to this company, the need of
the company for capital is not determined by us. It is
determined by an analysis of the business.
But at the end of the day, the company has a forecast. You
beat it up all you can, but eventually you have got to decide
there is a certain amount of money that is needed. Once you
decide the money is the X, then you have either got to do it as
debt or equity. I mean, you could do it as a gift, but that
seems crazy.
So it is going to be debt or it is going to be equity, and
the problem is, when you look at Toyota, when you look at
Volkswagen, when you look at Daimler, when you look at Honda,
you find companies that are not levered. So I think you are
driven to equity by the decision to try to maximize the return
and have a successful company.
As far as the exit, it is going to be orderly. It is going
to take advantage of a profitable company in our private
capital markets.
Senator Shelby. What is it going to take? I know you don't
know how many years the government will be in. You don't know
exactly whether or not there will be more money. In other
words, GM and Chrysler, things don't work out quite as you
maybe thought they would and they need more money and you go
back to the well. What will it take to get them on their feet
and the money back? It will have to be a pretty rosy scenario,
wouldn't it?
Mr. Bloom. No, sir, I really don't think it is. I mean--and
I want to emphasize that.
Senator Shelby. Describe the scenario you would think----
Mr. Bloom. We believe that using a conservative set of
assumptions about market share, about overall market, about
margins, about costs, about all the things that would go in, we
strongly believe that this is the last money that GM will
require. Now, I can't make a promise about the future----
Senator Shelby. No----
Mr. Bloom.----but I can assure you that it has been a
vigorously debated and thought about question and it is our
best judgment that that is the case, that this is it.
Senator Shelby. You say that you believe--it is your
judgment, you don't believe they will need more money. Now,
what is your best judgment--I know you don't know, but your
best judgment on when the exit will come on behalf of the
taxpayer, and will the taxpayer ever be made whole?
Mr. Bloom. Senator, I don't have a point estimate best
judgment about when we will be able to exit. I do believe that
there is a reasonable probability that we can get most, if not
all, of our money back. That is the way I would say it to the
President and that is the way I said it to him and the way I
say it to you here today.
Senator Shelby. Do you believe it is very important for the
government not to be owner of a huge industrial company?
Mr. Bloom. I believe it is profoundly important that we
exit this investment as soon as is practicable.
Senator Shelby. Thank you.
Senator Brown. Thank you, Senator Shelby, and I will ask my
one question and I will call on Senator Johanns and Senator
Corker if they would keep it under 3 minutes, if possible.
Dr. Montgomery, I want to talk about for a moment the issue
of suppliers, some of their concerns. I chaired a hearing last
month with the Economic Policy Subcommittee of the Banking
Committee on manufacturers and access to credit. One of the
witnesses was an auto supplier and the message he and his
members get regularly is if you supply for autos, you are on a
black list and banks won't loan to you.
The administration stated that the updated SBA loan program
is a source of credit for them. That is not what we found
typically, because loan eligibility is determined by banks and
banks are not making those decisions affirmatively for them. So
I want to know what the administration's plans are for SBA
specifically for loans for them.
Are there other things we can do beyond promoting
diversifying into new clean energy areas through MEP, through
the Manufacturing Extension Partnership? What is the plan to
provide financing? Are there National Emergency Grants for non-
traditional auto-related workers, like dealers and suppliers?
Are there new authorities from Congress, like the Defense
Production Act? I just want to pick your brain for a moment on
how do we get this. How do we get suppliers financed when
credit is still pretty frozen if you are an auto supplier?
Mr. Montgomery. My impression, Senator, is that obviously
the issue that you raised about suppliers and having access to
credit is one that we hear a lot, I heard a lot as I have
traveled through the Midwest States. The administration
obviously has tried to move on a variety of fronts from the
supplier program under the TALF, TARP, to the SBA 7(a)
expansion to the floorplan for using collateral, all three of
which are trying to provide various different participants in
the industry credit.
There are additional mechanisms to support dealers or to
support workers. You had mentioned NEG grants, National
Emergency Grants. Those are typically available for retraining,
not as a matter of collateral, but there are ways that you can
support the workforce at dealers through the provision of
National Emergency Grants. And, in fact, the States of Ohio,
Indiana, and Michigan--Ohio and Michigan have come in for
National Emergency Grants and have used those. Minnesota came
in for a National Emergency Grant to support a pooling of
dealers, all of whom were relatively small in size but in
aggregate the total effect was fairly significant in terms of
dealer layoffs. So they did come in for a National Emergency
Grant.
So there are a variety of different mechanisms. The SBA is
one. Agriculture has ways to support rural facilities and
getting credit out to them. So there are a variety of different
mechanisms we are already looking at and obviously we are
trying to monitor going forward. I am told from the Small
Business Administration that volume has picked up in the last
couple of months and I think there are some positive signs, but
clearly not out of the woods yet.
Senator Brown. Thank you.
Senator Corker?
Senator Corker. Thank you, Mr. Chairman, and thank you both
again for being here. My temperature got a little up with some
of the revisionist statements about some of the past, and I
didn't get to the point of I do want to thank you guys for your
service. Even though I know that your political biases are
showing in many ways throughout this bankruptcy and I feel like
some of the decisions should have been made in different ways,
that doesn't take away from the fact that you are away from
your families and you are doing things that certainly are not
as productive for you financially as in other ways.
That sort of takes me down the path. I know we have
talked--I have a bill, look, if you guys decide to close every
dealer, I guess, in the country, that is certainly your
decision. I have a bill that just states--and I hope I don't
have to offer it--that states that you will at least make whole
dealers that you close for their inventories and parts, and we
actually have talked some with GM. I think they plan on doing
that with all of their dealers and I know they are going
through a transition period.
I do think that when you look at the history of Chrysler
and the fact that the executives there, Jim Press and others,
were actually pressing dealers to take inventory, and in some
ways even kind of threatening them. We have seen evidence of
some pretty heavy-handed stuff. If you are going to be part of
our dealer network--this was 6 months ago--then you have to
take delivery of these cars so we can show them as sales.
And I think that the way, again, a political decision that
you made, because the amount of money could not have been that
large, but the decision that you made in this bankruptcy to
take these people all across the country that are small
business people, that borrowed money, that have signage and may
have borrowed $400,000 or $500,000, a couple million in some
cases to revamp their dealerships, and to basically say, you
are terminated, you are toast and we are not even going to take
you out of your automobiles and parts which we forced you to
take during our time of need, that was a decision that you and
this Task Force made.
You decided--when I say God-like, I mean, a 363 bankruptcy
is pretty much a God-like kind of thing. I mean, you decide the
winners and losers and it marches on. The Supreme Court, by the
way, just said they wouldn't take the case. They didn't say
grace over the decisions.
But back to the Chrysler issue. Is there no ill feelings on
behalf of the Task Force with those decisions about just saying
to all these small owners across the country that have borrowed
money, that have taken inventory to try to keep the company
alive and basically you all are saying, you are toast because
we don't need you anymore?
Mr. Bloom. Well, again, Senator, I think that, as I said,
the list of victims of a failed corporation is very wide and it
certainly includes dealers. I think----
Senator Corker. And we are not trying to get you to
reinstate dealers you don't need----
Mr. Bloom. I understand----
Senator Corker.----but just taking care of their
liabilities.
Mr. Bloom. I do believe that Chrysler has agreed to buy
back all of the cars from the dealers whose franchise agreement
is not being renewed and I believe that is being effectuated.
My understanding is there is continuing dialog between Chrysler
and the dealer and others like you about what to do about the
parts. I can assure you, we will stay on top of it. We will
continue to monitor it. These are not our decisions, but we are
certainly in favor of the company working, whether it be
Senators or dealer representatives or anybody, to try to
achieve fair and equitable resolutions.
I do think, in fairness, that the intervention of you and
others has produced a better result for the participation
agreement going forward on GM. It has produced a better result
for the cars for the Chrysler dealers who are not being taken
forward. And we would expect that dialog to continue.
And the role we are going to play is to continue to
encourage the companies to work with affected constituents to
try in a commercial way to deal fair and equitably. But we are
not going to insist that they do X or Y because we are not
running these companies.
Senator Corker. Right, and I know my time----
Senator Brown. I am sorry. Time is up.
Senator Johanns? I apologize, Bob. Senator Johanns?
Senator Johanns. Thank you very much.
You know, I have to tell you at the end of this hearing,
and it has been a long afternoon and we appreciate your
patience, it is our government that comes across as heartless
and indifferent, indifferent because you keep saying, well,
even though we own 60 percent, we don't want to be in the
middle of this. We don't want to run it. But you own it. I
don't know how you sustain that position over time.
And then Senator Brown asked a really good question about
product liability claims. It reminded me of a very poignant
letter I got from a lady back home in Nebraska, a quadriplegic,
injured in an auto accident with a Chrysler product, battles
Chrysler for years and years and years, finally right on the
edge of getting into court and the bankruptcy is filed. And of
course she is not going to get anything from Chrysler. You know
that, and yet you said in your testimony, well, she probably
won't get as much as she wished. Come on. She is not going to
get anything. You file a stay of bankruptcy, then you file a
discharge and the case is over.
We put billions of dollars into this company and then jobs
go to Mexico while people here in the United States are losing
their jobs, and yet we say, well, we are not going to touch
that. We don't want to run this company. How many years can
this go on?
Mr. Bloom. Well, I guess I would say this, sir. I am sorry
that you feel like we have been heartless. I think we have
worked to save hundreds and hundreds of thousands of jobs and
thousands and thousands of dealers. The alternatives for this
company--both of these companies--was nothing for anybody, and
the alternative that we have managed to craft here, while it is
very painful for many--very painful for many--preserves
businesses that can be successful going forward, can provide
tens and tens of thousands of Americans with jobs, thousands of
successful dealers, hundreds of thousands of supplier jobs, and
strong communities.
So I think while it has been exceedingly painful and I
would not debate a word you say about the particular
circumstance or dozens of others that I am sure exist, I think
when you balance it out, what has happened here, while very,
very difficult, has been a remarkable act of trying to save two
great American companies at great sacrifice to many, but in the
aggregate, I believe it is far, far better than the
alternatives that we faced. But that is our judgment and I
certainly respect people's right to disagree with it.
Senator Johanns. I will wrap up with this with the 20
seconds I have. Hard decisions are best made in a transparent
sort of way. For Congress to wake up like the rest of the
American public on Monday and find out that over the weekend we
had bought General Motors with all of the problems associated
with it is really outrageous--really outrageous.
Thank you, Mr. Chairman.
Senator Brown. Thank you, Senator Johanns. Thank you,
Senator Corker. Thanks to both of you for remaining. If you
have further questions, either of you or anyone else, the
record will remain open for seven more days.
Dr. Montgomery, thank you for being here and thank you for
your service. Mr. Bloom, thank you for being here and thank you
for your service.
The Committee is adjourned.
[Whereupon, at 4:52 p.m., the hearing was adjourned.]
[Prepared statements and responses to written questions
follow:]
PREPARED STATEMENT OF SENATOR SHERROD BROWN
Thank you, Mr. Chairman.
I want to thank our witnesses, Mr. Bloom and Dr. Montgomery, for
joining us. I appreciate your service.
Over the past few months, I have had several conversations with
each of you because the auto industry crisis is a crisis for my State.
This crisis hit home in Mansfield, Ohio, where GM has one of its
best stamping plants. Workers at this plant were asked to make
concessions over the past 2 years, and they did. They were asked to
produce in an exceptionally efficient manner, and they now rank at or
near the top across a range of performance standards. Mansfield played
by the rules, did all that was expected of them, and made it to the top
ranks of GM stamping plants. Yet GM has decided to close this facility.
This crisis hit home in Twinsburg, where Dr. Montgomery recently
visited. Twinsburg is home to the most modern stamping plant in
Chrysler's network. It ranks among the highest in safety and
productivity. Yet Twinsburg workers and their families got the rug
pulled out from under them last month.
The crisis is playing itself out every single day as auto suppliers
struggle to find credit. If a manufacturer has auto customers, banks
seem to put them on a ``black list'' and do not want to extend any
loans, even those backed by the Small Business Administration (SBA).
The crisis is playing itself out in Warren and Dayton where Delphi
salaried retirees played by the rules are left without the pensions
they deserve.
These stories from Mansfield and Twinsburg are unfortunately not
unique.
There are more stories . . . stories from small Ohio towns like
Trotwood, Van Wert, and Greenwood, and from other areas across Ohio and
throughout the Midwest.
That is why it angers me when I hear these restructuring proposals
for Chrysler and GM portrayed as giveaways to the United Auto Workers.
They are far from giveaways; American autoworkers, their families, and
their communities are taking it on the chin.
Just 3 years ago, there were 250,000 members of the UAW. After
these GM and Chrysler restructurings, the number of members will be
below 100,000.
Those are men and women like you and me. They work hard, they
support their families, and they are watching as their chance at the
American dream goes up in smoke.
It's an American tragedy. And anyone who dismisses it should be
ashamed.
Wages have decreased, and for entry level workers wages have
frozen. Key health care benefits were eliminated for both active and
retired workers.
These concessions, combined with swapping GM's contributions owed
to the VEBA with stock, a step that will increase risks for retirees,
will save GM billions.
Every facet of this restructuring has an impact on hard-working
Americans, on their communities, their states, and the Nation as a
whole.
It is absolutely critical that there are no missteps that victimize
Americans, jeopardize the industry's recovery, or shortchange our
economy.
I look forward to hearing Mr. Bloom's thoughts on the Treasury
Department's strategy for using TARP funds to aid the auto industry.
I also look forward to Dr. Montgomery's vision for the auto
communities he is dedicated to assisting.
In moving forward today, I'd like to pose a couple of thoughts and
questions for Mr. Bloom and Dr. Montgomery's consideration.
Is the government doing everything it can to protect and create
American jobs?
Is the government ensuring that top-performing segments of Chrysler
and GM aren't sacrificed because of information gaps, expediency, or
politics?
I held a conference call with mayors from auto communities. Nearly
all of them raised the fact that they may need to eliminate police and
fire personnel because of the shortfall in tax revenue from plant
closings. Some mayors already have.
The worry from these mayors reminds us we are talking about more
than jobs and bottom lines. In short, what kind of return do the
American people deserve on this investment?
Thank you again for your service, and I look forward to your
testimonies.
______
PREPARED STATEMENT OF SENATOR MICHAEL F. BENNET
I'd like to thank Mr. Bloom and Mr. Montgomery for appearing here
today. Both of these witnesses have an extremely difficult and delicate
task of confronting the severe financial condition of our domestic
automobile industry, and assisting the communities that are grappling
with staggering job losses.
A liquidation of our domestic auto industry would have devastated
our already struggling economy, caused painful job losses and impacted
countless other business sectors, which depend on the continuing
vibrancy of the Big Three.
All of this being said, however, I'm extremely concerned about the
rapid increase in our budget deficit. Our fiscal trajectory is
unacceptable in the long run. The CBO recently concluded that the debt
held by the public could reach 62 percent of the GDP in 2011 and that's
assuming that our economy continues to recover. I look at my three
daughters and worry that our inability to control our deficits today
will affect their opportunities and their children's opportunities.
There is enough blame to go around. Washington in recent years simply
did not act to secure the nation's fiscal health. And now, with this
economic emergency leading to unexpected spending, we need to be
thinking beyond the near term. As our economy turns around, we'd better
have a plan for restoring the fiscal health of this country.
Given this backdrop, we must think very carefully about the
government's future involvement in the domestic auto industry. The Auto
Task Force must begin planning now for how to remove the government
from the auto business. `Exit strategy', a term that has rightly been
applied in other contexts, is an appropriate topic here today also. I
think an exit strategy from the auto industry ought to encompass three
basic goals:
(1) seek to reform and repair the auto industry so it can compete in
the long run,
(2) get out as soon as is practicable, and
(3) retrieve as much of the taxpayer investment as is practicable.
I'd like to elaborate for a moment on this third goal of protecting
the taxpayer investment. Our exit strategy from GM and Chrysler should
seek also to minimize any further financial exposure to the American
taxpayers. This will not be an easy task given the government's
substantial stake in GM and the weakened condition of the company.
I look forward to hearing from our witnesses about how to make this
work. Also, I will be listening for testimony about the specific
components of the restructuring. It is extremely important that we get
this right-both from the perspective of the American taxpayer and the
tens of thousands of people whose livelihoods depend upon a functioning
domestic auto industry. If we don't do this correctly, we will only
have increased the national debt and invited even more taxpayer
subsidies.
Thank you Mr. Chairman.
______
PREPARED STATEMENT OF RON BLOOM
Senior Advisor, Treasury Department
June 10, 2009
Good morning.
Chairman Dodd, Ranking Member Shelby, members of the Senate Banking
Committee, thank you for the opportunity to testify before you today.
Introduction
Over the past several months, the Obama Administration has been
working to manage an historic crisis in the American auto industry.
President Obama inherited an auto industry that had lost 50 percent of
its sales volume and over 400,000 jobs in the year before he took
office. Two companies--GM and Chrysler--had received substantial loans
from the prior Administration and were requesting substantial
additional assistance that only a government could provide.
Without additional assistance, both of these companies faced
uncontrolled bankruptcies and almost certain liquidation, which would
have caused substantial job loss with a ripple effect throughout our
entire economy. However, President Obama was unwilling to put
additional tax dollars on the line unless these companies and their
stakeholders were willing to fundamentally restructure, address prior
bad business decisions, and chart a path toward long-term financial
viability without ongoing government assistance.
Therefore, the President decided to give both GM and Chrysler a
chance to work with their stakeholders and secure the sacrifices
necessary to make them stronger, leaner, and more competitive in a way
that would justify an investment of additional taxpayer dollars. In
only a few months, both GM and Chrysler--working with their
stakeholders and the President's Auto Task Force--have achieved a level
of restructuring that many thought impossible. In virtually every
respect, the concessions these companies have secured exceed the
restructuring conditions included in the December 2008 loan agreements
to GM and Chrysler. While difficult, these actions position both
companies for future viability. As a result, the President has decided
to stand behind these restructurings with additional financial
assistance. Consistent with the prior Administration's loan agreements,
this assistance is being provided from the U.S. Treasury out of the
TARP program.
After proceeding through a fair and open bankruptcy process, the
new Chrysler-Fiat alliance has now been approved and is scheduled to
close its sale agreement on Wednesday June 10, 2009. While General
Motors is likely to take somewhat longer to move through the bankruptcy
process, we are confident that it too will emerge quickly as a stronger
more viable global company.
This restructuring process has required deep and painful sacrifices
from all stakeholders--including workers, retirees, suppliers, dealers,
creditors, and the countless communities that rely on a vibrant
American auto industry. But the steps that the President has taken have
not only helped to stabilize the auto industry and saved hundreds of
thousands of jobs--but for the first time in decades--they have also
given GM and Chrysler a chance to become viable, competitive American
businesses with bright futures.
President Obama's Auto Task Force
In recognition of the unique role of the American auto industry to
our economy and the multifaceted challenges that industry was facing,
on February 15, 2009 the President appointed an Auto Task Force to
oversee his Administration's efforts to help support and restructure
the industry. The Task Force is co-chaired by Treasury Secretary
Timothy Geithner and National Economic Council Director Lawrence
Summers, and includes representatives from a broad range of agencies
and offices throughout the executive branch.\1\ The Task Force is
staffed by a joint Treasury-NEC team, of which I am a senior member.
This team reports to the Task Force and its co-chairs, who report up to
the President.
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\1\ The other members of the Task Force are the secretaries of
Transportation, Commerce, Labor, and Energy, along with the Chair of
the President's Council of Economic Advisers, the Director of the
Office of Management and Budget, the EPA Administrator, and the
Director of the White House Office of Energy and Climate Change.
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From the beginning of this process, the President gave the Auto
Task Force two clear directions regarding its approach to the auto
restructurings. The first was to refrain from intervening in the day-
to-day management of these companies. Our role has been to act as a
potential investor of taxpayer resources, and as such we have not
become involved in specific business decisions like where to open a new
plant or which dealers to close. This is the job of management and
while we have been engaged in dialog and discussion about their
approach, we have not substituted our judgment about specific decisions
for theirs.
Second, the President was clear that he wanted us to behave in a
commercial manner--that is to be sure that all stakeholders were
treated fairly and received neither more nor less than they would have,
simply because the government was involved.
Because the investments made by both the prior and current
Administrations to support the auto companies have come from the TARP,
the Task Force and its staff's activities have been subject to the full
range of disclosure and reporting requirements under the EESA statute.
This includes oversight by the GAO, EESA's Financial Stability
Oversight Board, and the Special Inspector General for TARP or
``SIGTARP,'' and the Congressional Oversight Panel established under
EESA, as well as required reporting to multiple House and Senate
committees.
Chrysler
On February 17, 2009, Chrysler submitted a detailed business and
operating plan for assessment by the Auto Task Force. While this plan
took several steps to restructure the struggling Company, it did not go
far enough to address Chrysler's issues with scale, quality,
technology, and product portfolio. For these and other reasons, on
March 30 the President announced that he had determined that as a
stand-alone company, Chrysler was not viable. However, The President
also determined that Chrysler could achieve viability through a
partnership that addressed the shortcomings of its viability plan. The
partner most likely to fill this role was the international automobile
manufacturer, Fiat.
Over the next month, Chrysler worked closely with Fiat and its
other stakeholders to secure the necessary concessions to reach
agreement around a viable partnership. On April 30, the President
determined that Chrysler had made sufficient progress in its commercial
viability to justify an additional investment of U.S. taxpayer
resources. In order to effectuate these agreements, on April 30
Chrysler filed for bankruptcy. One month later, after a court process
that gave all creditors a chance to raise their concerns, the
bankruptcy court approved the sale of substantially all of Chrysler's
assets to the new Chrysler-Fiat Alliance. On June 5, this judgment was
affirmed unanimously by a three-judge panel of the Second Circuit Court
of Appeals. On Tuesday, June 9 the U.S. Supreme Court denied an
application to stay the closing of the Chrysler-Fiat Alliance.
As a result, the new Chrysler-Fiat Alliance is scheduled to close
its sale agreement on Wednesday, June 10, 2009 and successfully emerge
from the bankruptcy process. When that occurs, Chrysler's future
success will be in the hands of its executives, managers, and workers--
as it would be for any private company. But the President's commitment
to completing this alliance in this short period of time helped ensure
that tens of thousands of jobs that would have been lost if Chrysler
had liquidated will now be saved.
Reaching this point with this historic alliance was only possible
because of an unprecedented degree of sacrifice from Chrysler, Fiat,
and all their key stakeholders:
The UAW has made important concessions on wages, benefits,
and retiree health care. These concessions have brought
Chrysler's compensation in line with Toyota and other
transplants. In addition, the UAW retirees exchanged a $10
billion fixed obligation to the VEBA retiree health trust for a
$4.6 billion unsecured note and stock in the new Chrysler. This
arrangement shifts substantial risk onto the retiree health
care trust and will likely result in meaningful reductions in
retiree health care benefits for Chrysler's 150,000 retirees.
While the Trust, beyond a single seat on the Company's Board of
Directors, will have no role in the governance of the Company,
the ability of the Trust to provide decent benefits over the
long-term will require that the Company's stock become
valuable, thus importantly aligning the interests of the
Company and a key stakeholder.
Chrysler's largest secured creditors agreed to an exchange
of $2 billion in cash for their $6.9 billion in outstanding
secured debt. The Court determined that the $2 billion was well
in excess of the liquidation value of Chrysler \2\ and thus
found this to be a very normal and conventional treatment of
secured creditors in the bankruptcy process. In addition, it
was always made clear to the secured lenders that no one
contested their right and they were therefore free, to take
their collateral and do with it as they pleased, including
either liquidating the company or operating it Instead, they
made a commercial choice to take their recovery in cash.
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\2\ $800 million on the high end of the range, as cited in the
Opinion Granting Debtor's Motion Seeking Authority to Sell, Judge
Gonzalez, filed 5/31/09, page 19.
Chrysler and Fiat determined that meaningful actions were
required to reduce the overcapacity in both the Company's plant
footprint and dealer network. Therefore the restructuring
included reductions in plants and dealers across the United
States. These decisions, while difficult, will help make
Chrysler more competitive and help ensure the success of the
Company in the future. Importantly, as part of its dealer
rationalization effort, Chrysler has made clear that every
dealer that is not receiving a franchise agreement going
forward has a guarantee that they ``will be made whole, less
inspection and shipment costs, for all remaining
inventory.''\3\
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\3\ Memo from Steve Landry, Chrysler, to All Chrysler, Dodge, and
Jeep Dealers, Dated June 5, 2009.
The U.S. and Canadian governments have provided working
capital and exit financing to support the Chrysler-Fiat
Alliance. The total funding provided by the U.S. Treasury for
this effort is $8.1 billion, with the governments of Canada and
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Ontario providing just over $2 billion.
The Company's successful emergence from bankruptcy, in conjunction
with financial support from the U.S. and Canada, would put the new
Chrysler-Fiat Alliance on solid footing to succeed and generate jobs
well into the 21st century.
General Motors
On March 30, 2009, President Obama laid out a framework for General
Motors to achieve financial viability. This framework required the
company to rework its business plan, accelerate its operational
restructuring and make far greater reductions in its outstanding
liabilities. After 2 months of significant work by the company's
management and engagement with its stakeholders, GM developed such a
plan. As a result, the President deemed GM's plan viable and on June 1,
2009 committed approximately $30.1 billion of additional Federal
assistance from the TARP to support the company's restructuring. To
effectuate its plan, General Motors filed for bankruptcy protection and
will utilize Section 363 of the bankruptcy code to clear away the
remaining impediments to its successful re-launch.
As with Chrysler, every one of the company's stakeholder has made
substantial sacrifices as part of this process. These sacrifices
include:
The UAW made significant concessions on compensation that
will result in wage rates comparable to foreign competitors. In
addition, The GM VEBA retiree health trust exchanged a $20
billion fixed obligation for a $2.5 billion note and stock in
the new GM (in the form of $6.5 billion in preferred stock,
17.5 percent in common equity of the new GM and warrants to
purchase an additional 2.5 percent in common equity at a $75
billion strike price).
Unsecured bondholders agreed to exchange $27.1 billion of
their claims for 10 percent of the equity of new GM, plus
warrants for an additional 15 percent of the new Company. This
outcome allows the bondholders to recover more than what was
implied by the market price of their bonds, and substantially
more than they would have recovered if the government had not
intervened and GM had liquidated. Prior to the bankruptcy
filing The Steering Committee of a group of GM bondholders
confirmed that a majority of GM's bondholders supported the
deal, and the percentage of individual and institutional
bondholder in supporters is now over 55 percent. The bankruptcy
court process will be used to confirm this treatment for those
bondholders and other unsecured creditors that failed to accept
or did not participate in the offer.\4\
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\4\ While some unsecured creditors--including trade creditors and
warrantee holders--will receive substantially greater recoveries than
the unsecured bondholders, this reflects conventional and well-settled
bankruptcy practice. As Judge Gonzalez explained in the Opinion
Granting Debtor's Motion Seeking Authority to Sell, filed 5/31/09, page
1: ``The sale transaction for which authorization is sought (the ``Sale
Transaction'' or ``Fiat Transaction'') is similar to that presented in
other cases in which exigent circumstances warrant an expeditious sale
of assets prior to confirmation of a plan. The fact that the U.S.
Government is the primary source of funding does not alter the analysis
under bankruptcy law.''
GM has designed and announced a reduction in its dealer
network and reduction in its plant footprint. These steps are
part of the company's broad effort to right-size the business
to reflect current and expected levels of demand. The resulting
GM will operate with a dramatically improved cost structure
that lowers its breakeven point to a 10 million annual unit
environment compared to a prior breakeven point of more than 16
million. Because of the reduced debt and other post-retirement
benefit obligations, New GM will have credit statistics
consistent with well capitalized peers. This provides the
---------------------------------------------------------------------------
company with a path to a sustainable future.
The U.S. and Canadian governments will provide substantial
financial assistance to support this restructuring. GM will
receive $30.1 billion in new assistance from the U.S. Treasury
under the TARP program.\5\ In return, the U.S. Treasury will
receive $8.8 billion in debt and preferred securities as well
as a 60 percent equity stake in the restructured company. (The
U.S. Treasury's equity stake is about 50 percent on a fully
diluted basis). The Governments of Canada and Ontario will
invest $9.5 billion and receive a proportional share of each of
these securities.
---------------------------------------------------------------------------
\5\ Total UST commitment for GM is $49.5bn, of which $19.4bn was
funded prior to bankruptcy filing on June 1st. UST commitment to
debtor-in-possession funding is $30.1bn.
While GM's restructuring plan will result in substantial short-term
sacrifices including further job reductions and dealer closings, the
long term result will be a more competitive American automobile
industry that will continue the long history of American growth and
innovation.
Understanding the U.S. Government's Ownership Stake in General Motors
As the President has made clear, The Obama Administration is a
reluctant shareholder in General Motors. We inherited a situation in
which GM needed substantial capital that only the government could
provide. At the same time, GM had been hobbled for years by an
unsustainable debt burden. In this context, piling on irresponsible
amounts of new debt on top of the new GM would have simply repeated the
mistakes of the past. Likewise, giving away the equity stake to which
taxpayers were rightly entitled would have been irresponsible.
Therefore, the Administration made the decision to take the equity
that taxpayers are entitled to, alongside a firm conviction to manage
that investment commercially and exit our position as quickly as is
practicable. The Administration has articulated a set of four
principles that will govern its approach to managing ownership
interests in financial and automotive companies that will apply
directly to the government's approach to GM:
The government has no desire to own equity stakes in
companies any longer than necessary, and will seek to dispose
of its ownership interests as soon as practicable. Our goal is
to establish strong and viable companies that can quickly be
profitable and contribute to economic growth and jobs without
government involvement.
In exceptional cases where the U.S. Government feels it is
necessary to respond to a company's request for substantial
assistance, the government will reserve the right to set
upfront conditions to protect taxpayers, promote financial
stability and establish the foundation for future growth. When
necessary, these conditions may include restructurings similar
to that now underway at GM as well as changes to ensure a
strong board of directors that selects management with a sound
long-term vision to restore their companies to profitability
and to end the need for government support as quickly as
possible.
After any up-front conditions are in place, the government
will protect the taxpayers' investment by managing its
ownership stake in a hands-off, commercial manner. The
government will not interfere with or exert control over day-
to-day company operations. No government employees will serve
on the boards or be employed by these companies.
As a common shareholder, the government will only vote on
core governance issues, including the selection of a company's
board of directors and major corporate events or transactions.
While protecting taxpayer resources, the government intends to
be extremely disciplined as to how it intends to use even these
limited rights.
Steps to Stabilize Auto Finance Market
A viable auto industry requires automotive financing for dealers
and consumers. The vast majority of automobile purchases in the U.S.
are financed, including an estimated 80-90 percent of consumer
purchases and substantially all dealer inventory purchases. As Chrysler
wrote in their viability plan, ``[t]he availability of credit for
automotive customers and dealers is the single most important element
of Chrysler's viability.''
Following the collapse of Lehman Brothers, credit availability to
auto dealers and consumers was severely impaired. The impact of the
contraction of credit was dramatic: loan approval rates dropped,
interest rates increased, and financing terms tightened. This was
particularly true for domestic manufacturers, most acutely for Chrysler
and General Motors products as uncertainty about the future of the
companies impaired the ability of GMAC and Chrysler Financial to access
the capital markets.
With Chrysler posed for a successful reorganization through a sale
to the New Chrysler entity, the brighter prospects for General Motors
in the context of the U.S. Treasury's support of GM's reorganization,
the stabilization of the value of domestic automobiles, and the
creation of healthy dealer networks, credit spreads in auto asset-
backed securities markets have tightened considerably in recent weeks.
For example, the spread against comparable 3-year Swap rates of prime
automotive retail AAA ABS have tightened by roughly 100 basis points
since March and 400 basis points from their peak of more than 600 bps
in November 2008. However, the current spread of 200 basis points is
still above historical averages of less than 25 bps.\6\
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\6\ Source: Deutsche Bank Auto Industry Outlook, May 28, 2009, and
FRBNY TALF June Subscription Report.
---------------------------------------------------------------------------
Having the capital markets recognize the stability of the value of
domestic automobiles as collateral will be the most effective mechanism
for improving the provision of credit to automotive dealers and
consumers. Until that time, as with many lending markets in the current
financial crisis, some government support of the U.S. automotive
financing marketplace has been and will continue to be required to
ensure that U.S. dealers and consumers have access to the necessary
financing to buy cars. To date, the U.S. Government has provided
support to the automotive finance sources through a number of notable
programs:
TALF, the joint U.S. Treasury and Federal Reserve program,
in which automotive finance companies have raised over $16.8
billion for retail and lease lending through June 2009. Issuers
participating in this program include Ford, Nissan, BMW,
CarMax, and Honda, among others (Ford issued $3.0 billion of
TALF-supported retail financing in March, and an additional
$1.9 billion of retail and $0.8 billion of lease TALF-supported
financing in June). While dealer floorplan loans are eligible
under TALF, the rating agencies must make their own independent
determinations, and the rating agencies have not rated floor
plan securities AAA, regardless of the credit enhancement
offered. The Federal Reserve and Treasury continue to review
and study the eligibility requirements across asset classes.
U.S. Treasury support for automotive finance companies. In
January, the Bush Administration loaned $1.5 billion to a
subsidiary of Chrysler Financial to enable Chrysler Financial
to continue making retail auto loans to creditworthy Chrysler
customers during the first quarter of 2009. More recently, the
U.S. Treasury invested an additional $7.5 billion of capital in
GMAC to fulfill two goals: (1) to enable the company to take on
financing for Chrysler dealers and customers, and (2) to
increase the company's capital by addressing a portion of its
capital needs as identified through the stress test process
GMAC completed with the Federal Reserve. As a result, GMAC,
which has been a leader in providing automotive credit since
1919, is healthier and more diverse, and therefore well
positioned to continue to finance creditworthy GM and Chrysler
dealers and customers. As of Tuesday, June 9, 2009 GMAC has
made significant progress on-boarding Chrysler dealers for both
retail and wholesale floor plan financing. Retail on-boarding
is nearly complete, with 2,288 Chrysler dealers (96 percent of
all go-forward Chrysler dealerships) activated and ready to
submit retail applications to GMAC. Wholesale floor plan on-
boarding continues as planned, with 1,491 dealers activated and
ready to finance new units (representing 90 percent of all go-
forward dealerships that were previously financed by Chrysler
Financial or GMAC). Finally, GMAC is prepared to fund the
redistributed vehicles from rejected dealers to the go-forward
dealers it finances (estimated 15,000 units).
Stabilizing the Auto Supply Base
Because of the credit crisis and the rapid decline in auto sales,
many of the nation's auto parts suppliers have been unable to access
credit and have been facing growing uncertainty about the prospects for
their businesses and for the auto companies that rely on them.
Suppliers that ship parts to auto companies generally receive payment
about 45-60 days after shipment. In a normal credit environment,
suppliers can either sell or borrow against those commitments-so-called
``receivables''--in the interim period to pay their workers and fund
their ongoing operations. However, due to the current uncertainty about
the ability of the auto companies to honor their obligations, banks
have been unwilling to extend credit against these receivables.
On March 19, 2009 the U.S. Treasury announced a $5 billion
Automotive Supplier Support Program to help address this problem.\7\
Any eligible domestic auto company may participate. This program has
provided the necessary stability to suppliers and the OEMs at a
critical time. Nonetheless, the Task Force is mindful of the continuing
challenges facing auto suppliers and is continuing to actively monitor
the health and state of the supply base during this period of industry
restructuring.
---------------------------------------------------------------------------
\7\ The Program is implemented through a special purpose vehicle
(``SPV'') and functions as follows: The OEMs initially identify
critical suppliers to participate in the Program. Once included, the
OEM submits receivables of the Suppliers eligible for the Program. For
those receivables, a participating supplier is entitled to be paid
directly from the SPV. Suppliers have the option of receiving payment
immediately, in which case they pay a 3 percent discount, or receiving
payment under the supply contract's normal payment terms (usually 45-60
days), in which case the supplier pays a 2 percent discount. In either
scenario, since the supplier receives payment from a government-funded
SPV, the payment is certain. When the OEM's payment is due to the
supplier under the terms of their contract, the OEM makes the payment
to the SPV. The SPV thus bears the risk of the OEM's non-payment, and
the supplier is secure.
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Conclusion
In a better world, the choice to intervene in the companies would
not have had to be made. But amid the worst economic crisis in three-
quarters of a century, the Administration's decisions avoided a
devastating liquidation and put a stop to the long practice in the auto
industry of kicking hard problems down the road. While difficult for
all stakeholders involved, these restructurings provide GM and Chrysler
with a new lease on life and a chance to fundamentally restructure and
succeed.
______
PREPARED STATEMENT OF DR. EDWARD MONTGOMERY
DIRECTOR FOR RECOVERY FOR AUTO COMMUNITIES AND WORKERS
June 10, 2009
State of Domestic Autombile Industry
Chairman Dodd, Ranking Member Shelby and members of the Committee,
thank you for the invitation to testify today. As the recently
appointed Director for Recovery of Auto Communities and Workers, I
appreciate this opportunity to discuss assistance being provided to or
being sought by communities and workers affected by auto job losses.
As you are well aware, the current recession is arguably the most
severe since the Great Depression and has had a profound impact upon
our businesses, workers and homeowners throughout the country. Whether
measured by housing prices or stock prices, the overall impact on
consumer wealth has been substantial. But the consequences of the
recession have not just been felt in our savings accounts and in the
value of our assets; they have rippled through corporate and small
business profitability and in layoffs and job loss.
According to the Bureau of Labor Statistics (BLS), our nation has
lost 6 million jobs since the recession began in December 2007. The
unemployment rate has surged to 9.4 percent--the highest level in 26
years. Those who lose their jobs are stuck in unemployment for longer
periods of time as the number of long-term unemployed (those jobless
for 27 weeks or more) rose to 3.9 million in May or an increase of
about 2.6 million since the start of the recession. Among those lucky
enough to keep or find a job, the number of people working part-time
because they can't get a full-time job has increased by over 4.4
million over the same period, to 9.1 million workers.
As striking as this decline is for the country as a whole, the
situation is even more severe in much of the auto manufacturing
heartland. Over 300,000 jobs have been lost in motor vehicle and parts
manufacturing since December 2007 and some states such as Wisconsin and
Delaware face the prospect of the closure of all of their automobile
production facilities. In April, the unemployment rate in the three
largest automobile states was 12.9 percent in Michigan, which has the
highest rate in the nation, 10.2 percent in Ohio and 9.9 percent in
Indiana. While employment among the traditional Detroit 3--Chrysler, GM
and Ford--is concentrated in these three states in the upper Midwest,
the auto industry, including the operations of foreign-based
manufacturers and their suppliers, has spread out down the center of
the country through Kentucky and Tennessee to Alabama, Mississippi, and
Texas. In Kentucky and Alabama, which are the home of the fourth and
fifth greatest number of reported motor vehicle manufacturing jobs, the
unemployment rates are also near double-digit level.
It is hard to overstate the significance of this industry for the
economic life of millions of Americans. The Center for Automotive
Research (CAR) lists 281 counties in 27 states where substantial income
or earnings comes from the automotive industry. The BLS estimates that
nearly 650,000 workers are employed in motor vehicle and parts
manufacturing. Adding auto or motor vehicle dealers to the mix, the
reach of the automotive industry is expanded by over another million
workers in nearly every community in the country. Besides those
directly employed in the production of vehicles and suppliers of parts,
it has been estimated that as many as 7.5 additional jobs are created
for every assembly plant job in industries ranging from steel to glass,
from aluminum producers to construction companies or health care
providers.\1\ While there is often a tendency to focus on the Original
Equipment Manufacturers (OEMSs) and their suppliers when discussing the
auto industry, auto dealers also represent a significant source of
employment and business activity in nearly every community. This
industry has been the source of R&D investment and countless
innovations that have helped make our economy a technological leader,
as well as created millions of well-paying jobs that help build our
middle class.
---------------------------------------------------------------------------
\1\ McAlinden, Sean P. and George A. Fulton. Contribution of the
Automotive Industry to the U.S. Economy in 1998: The Nation and Its
Fifty States. A Study Prepared for the Alliance of Automobile
Manufacturers, Inc. and the Association of International Automobile
Manufacturers, Inc. by the Center for Automotive Research,
Environmental Research Institute of Michigan and the Institute of Labor
and Industrial Relations, The University of Michigan, Ann Arbor, March
2001.
---------------------------------------------------------------------------
While the recession has had a profound impact on the auto industry
and the communities where it resides, it is important to recognize that
contraction in the American auto industry did not begin in 2008. In
February 2000, the BLS reported that 1.3 million workers were employed
in motor vehicle and parts manufacturing. With one exception, in every
year since 2000 total employment has declined so that today only a
little more than half of that workforce remains. What happened in this
recession is that a slow but steady decline has turned into a flood,
with employment dropping nearly 28 percent in the past 12 months.\2\
While multiple factors, including rising productivity, no doubt account
for some of this longer-term trend, 18 months of steadily declining
auto sales to the current near 30-year lows have played a major role in
the current strains facing the industry, workers and the communities in
which they reside and work.
---------------------------------------------------------------------------
\2\ BLS data for motor vehicle and parts has employment at
1,330,300 in February 2000, declining to 676,600 in April 2009. In
April 2008 it stood at 898,000.
---------------------------------------------------------------------------
The President has recognized that we cannot stand by and watch the
auto industry disappear. But at the same time the President has been
clear that we cannot just kick the can down the road and must insist
that these companies demonstrate a credible path to financial
viability. By providing additional funding within this tough but fair
framework, Chrysler is poised to successfully emerge from bankruptcy
this week and we are confident that GM will also successfully
restructure over the coming months.
The steps the President has taken have not only avoided a
liquidation of these companies--and the hundreds of thousands of jobs
that would have been lost in that scenario--but have also helped
stabilize the auto industry. He has committed to provide government
backing for warrantees of new GM and Chrysler cars. And, under the
American Recovery and Reinvestment Act (Recovery Act), the
Administration has implemented a tax credit that could lead to 100,000
new car sales and save families hundreds of dollars off their purchase
of a vehicle.
President Obama also appointed me as the new Director of Recovery
for Auto Communities and Workers to cut through red tape and ensure
that the full resources of our Federal Government are leveraged to
assist the workers, communities, and regions that rely on our auto
industry. Working with Labor Secretary Solis and National Economic
Council Director Summers, we have been developing a comprehensive
effort that will help lift up the hardest hit areas by using the
unprecedented levels of funding available in the Recovery Act and
resources available throughout our government to provide immediate
support to workers and create new manufacturing jobs and new businesses
where they are needed most. We have also been engaged in an effort, in
partnership with the business, civil and government leaders in auto
communities, to create new initiatives to help support auto communities
going forward.
My first order of business upon appointment was to get out into
auto communities to directly hear from workers and communities about
the challenges they were facing and the economic development plans they
were attempting to put in place. We have worked to establish an inter-
agency team, including representatives from DOL, DOE, DOC, SBA, DOT,
DoJ, HHS, EPA, and Treasury, that has accompanied me to town halls and
meetings to ensure that Federal agencies are hearing firsthand about
what works and what doesn't for successfully deploying services to
these communities.
To date, we have held town halls and meetings in Michigan, Ohio and
Indiana with hundreds of workers, employers, State and local officials,
and members of affected auto communities to identify ways in which the
Federal Government can help and start building strong ties between
local communities and Federal agencies. Cabinet members and
representatives from their agencies have actively engaged in partnering
to these communities and have been figuring out how to cut red tape and
support these hard hit areas. We plan to continue these sessions in a
broader range of communities in the months ahead.
In conjunction with our effort to get out into communities to hear
from your constituents, we have also been working on initial steps to
get assistance out to auto communities as workers. As part of this
effort:
The General Services Administration accelerated the
purchase of some 17,205 new fuel efficient vehicles, adding
$287 million in demand for new vehicles.
The Department of Labor has also been working with the
Department of Education to make sure unemployed workers know
how to apply for Pell Grants and other Federal financial aid,
so they can develop new skills while the economy recovers. The
Department is also undertaking an effort to encourage states to
review their definitions of ``approved training'' for
unemployment insurance purposes so that workers can, if they
want, use the time while unemployed to get the skills they
need. The President announced these efforts last month.
Last week, Secretary Duncan announced a $7 million special
competitive grant to establish innovative and sustainable
community college programs that prepare displaced workers for
second careers. This first-of-its-kind grant program will be
used to develop national models that can be replicated across
the country, especially in communities where autoworkers have
lost their jobs.
Secretary Solis has announced a $50 million Green Jobs
training initiative targeted on auto communities. This will be
part of the Department of Labor's (DOL) $500 million
competitive grant program to support job training projects that
prepare workers for careers in energy efficiency and renewable
energy industries.
The Small Business Administration announced an extension of
its 7(a) lending program to floor plan financing for auto, RV
and boat dealers.
The President's Auto Task Force has also recognized that one of the
most pressing challenges is to ensure that auto communities have access
to existing Federal programs and new funding under the Recovery Act.
Where we have identified potential challenges to accessing these funds
or programs, we have taken steps to ensure that auto communities have
an equal chance at accessing Federal funds. For example:
Recognizing the emphasis Michigan has placed on green jobs
in planning its recovery, the Department of Energy (DOE) held a
workshop for county and local municipalities in Michigan to
train local leaders on how to apply for Energy Efficiency and
Conservation Block Grants, which are being given out both by
formula and competitively.
In order to make sure the new DOE grant program truly
served the needs of communities in Michigan, DOE also held a
roundtable discussion in Michigan to get input on how the
program could best be structured.
Recognizing the tremendous challenges auto communities face
in converting shuttered plants, or brownfields, into
redeveloped spaces, the Environmental Protection Agency (EPA)
recently announced $10.3 million in brownfields grants for
Michigan to help revitalize former industrial and commercial
sites.
The Department of Commerce's Manufacturing Extension
Program (MEP)--which we have found to be one of the most highly
demanded programs by auto communities--is holding a workshop
tomorrow (June 11) in Ohio with manufacturers to help companies
diversify their customer base and pursue opportunities for
growth. This is part of a series to be offered in numerous
locations across Ohio. In addition, the MEP center in Michigan
has worked with the Michigan Economic Development Corporation
to offer market diversification services to dozens of
companies, and this is proving to be a practical approach to
helping companies envision and act on new opportunities.
Likewise, the Department of Commerce's Economic Development
Administration has supported regional workshops and provided
technical assistance to communities impacted by auto related
dislocations to help them to develop and implement strategies
to support more diversified, entrepreneurial, innovative, and
hence, globally competitive regional economies.
While these efforts represent discrete new authorities or
initiatives, the Recovery Act has provided a wide range of supports for
auto and other communities that both combat the current economic
developments and begin to build for our future economic success. In the
near term, the Recovery Act provides families with an immediate refund
in their paychecks and help for states and local areas to avoid cuts to
their education spending and maintain their schools, reduce the burden
of health care costs, and maintain their law enforcement personnel.
Looking longer term, the Recovery Act is enabling the repair and
improvement of the country's infrastructure; funding innovative
research and development initiatives in advanced battery and electric
vehicle manufacturing, smart grid development, advances in wind, solar
and other alternative energy sources, and broadband and health
information technologies; and creating job opportunities for Americans.
Together these programs represent an investment in transforming our
very economy. Rather than try to review all of the ways in which this
comprehensive effort will be affecting auto communities and their
workers, let me focus on how the Department of Labor has been playing
an active role in this effort.
For its part, the Department of Labor's Employment and Training
Administration (ETA) has already made available to the states
additional funding to extend the duration of unemployment insurance
benefits, to increase benefit checks by $25, to provide administrative
support to State employment services and to make funds available to
states that modernize their systems. In addition, the Department has
made $3.47 billion in Recovery Act funds available to support workforce
investment activities. Such activities include retraining dislocated
workers, summer employment for youth and community service employment
for seniors. For states hardest hit by auto industry layoffs, Michigan
has received $197,117,236 in Recovery Act formula funds for workforce
investment and employment activities, while Ohio has received
$153,073,770, and Indiana $67,142,603. These amounts are in addition to
the regular funding from the Fiscal Year 2009 appropriations that will
be available to these states on July 1, 2009 for these activities.
ETA is specifically addressing auto industry layoffs through its
programs. The Workforce Investment Act (WIA) authorizes National
Emergency Grants (NEGs) to target additional resources to expand
service capacity at the State and local levels in response to
significant worker dislocations. Since January 2009, ETA has awarded
NEGs, or added additional resources to existing grants, in four
automotive states--Missouri, Ohio, Minnesota, and Michigan.
On February 26, 2009, Secretary Solis awarded $2,199,132 to
the State of Missouri (of which $1,099,566 has been released so
far) to provide training and reemployment services to
approximately 574 workers dislocated from 11 auto industry
suppliers at 13 different locations.
On March 27, 2009, an $8,342,245 NEG (of which $5,074,749
has been released thus far) was awarded to Ohio to address
statewide layoffs in the automotive industry. The grant was
later amended to $10,000,000
On May 18, 2009, Minnesota was awarded $1,320,100 (of which
$660,052 was released immediately) to provide services to
approximately 307 workers affected statewide by layoffs from 27
companies in the retail, service and manufacturing sectors of
the automotive industry.
Additional resources have also been provided to existing
automotive-related NEGs.
On May 5, 2009, an additional $771,713 was provided to the
State of Missouri to serve 1,200 dislocated workers affected by
the closure of the Chrysler assembly plant in Fenton, Missouri,
as well as layoffs from Integram St. Louis Seating and Yushin
USA.
On May 7, 2009, $4,125,000 in additional resources was
added to Michigan's NEG to serve 1,500 eligible dislocated
workers separated from automotive-related companies throughout
the State.
Indiana is the only one of the three largest automotive states that
has not requested an automotive-related NEG to date.
In addition to the NEGs, ETA administers the Trade Adjustment
Assistance (TAA) program, which assists workers who have lost their
jobs as a result of foreign trade. The TAA program offers a variety of
benefits and services to eligible workers, including job training,
income support, job search and relocation allowances, a tax credit to
help pay the costs of health insurance, and a wage supplement to
certain reemployed trade-affected workers 50 years of age and older.
Since June of 2008, ETA has issued over 200 TAA certifications for
companies linked to the auto industry involving an estimated 34,000
workers. Companies include the General Motors Corporation, the Ford
Motor Company, Chrysler LLC., Daimler Trucks North America, and
numerous part-suppliers. The top three states with auto-related
certifications since June of 2008 are:
Michigan, which had 59 certifications and received
$51,482,594 in TAA program training funds for 2009;
Indiana, which had 23 certifications with 2009 TAA program
training funds totaling $24,104,904; and
Ohio which had 20 certifications and $21,976,331 in 2009
TAA program training funds.
The Recovery Act reauthorized and substantially changed the TAA
program. One of the most significant changes was to more than double
the maximum annual amount of TAA funds which may be used for training
nationwide, from $220 million to $575 million. This increase will
ensure that states have funds available to serve an increasing number
of trade-affected workers under the reauthorized program. Since the
effective date of the reauthorized and expanded TAA program (May 18,
2009), ETA has experienced a sharp increase in petitions under the
program and expects the demand for the program to remain high. To meet
this demand, the Department's fiscal year 2010 budget requests $1.8
billion for TAA, nearly double the $959 million provided for assistance
to trade-displaced workers in fiscal year 2009.
And under the Workforce Investment Act, with funding from DOL,
every State workforce agency is required to create and maintain a Rapid
Response team. Upon notification of mass layoffs or plant closures, the
Rapid Response team works with the company to provide immediate
assistance and reemployment services for affected workers. In order to
ensure that State Rapid Response programs, which are funded by formula
resources provided to the states under the Workforce Investment Act,
are ready to respond to layoffs, on April 29, 2009, the Department of
Labor convened all of the Rapid Response Coordinators from the
industrial Midwest at a day-long conference. At the conference we
assisted the states in conducting readiness assessments of their
capabilities and shared best practices so that states could provide a
high quality level of service to impacted workers. Each State developed
a plan for how to improve its program, with a commitment to work toward
specific benchmarks.
Finally, under new funding from the Recovery Act, the Department of
Labor (DOL) will soon award $500 million in competitive grants to
support job training projects that prepare workers for careers in
energy efficiency and renewable energy industries. Secretary Solis has
already announced that $50 million of these funds will be set aside to
ensure auto communities have access to these green job training
opportunities. An additional nearly $250 million in Recovery Act funds
will be used for construction and repair of Job Corps facilities to
also incorporate green technologies. Job Corps will also develop and
implement green jobs training into the curricula of all appropriate
occupations.
Green jobs will play an important role in both our economic
recovery and ensuring U.S. competitiveness for decades to come. Through
the Recovery Act, the Departments of Energy and Housing and Urban
Development, the Environmental Protection Agency and other Federal
agencies will be making large investments in programs and projects that
will create green jobs. As states receive Recovery Act funding and
implement training and reemployment strategies, the DOL encourages
states to recognize opportunities to prepare workers for green jobs
related to these other sources of Federal funding. The Department and
other Federal agencies have already begun to coordinate the work to
strategically implement programs that ensure cooperative interactions
between investments in infrastructure and research and development on
one side and job training and worker placement on the other.
While I have focused on the DOL's role, I want to emphasize that
the Administration's approach realizes that there is no magic bullet to
transform economies and that the help for auto communities and workers
is not uni-dimensional. The challenges that they face did not appear
overnight and they will not be solved overnight. We recognize that
credit is needed for businesses to operate, to finance new product
development and to explore new markets, as well as for new businesses
to form. We know that towns confronted with abandoned facilities or
housing need help with clean-up so that these assets can be put back
into productive use. That high speed rail and other transportation
projects provide the infrastructure for growth. That without high
quality schools or access to higher education our children will not
have the skills they need to compete for the good jobs of the future.
And finally those communities that grow provide safe streets, invest in
the development of our children and give us environments where we want
to live. States and local government have and must play a central role
in these efforts. Local communities are best positioned to chart their
own course that reflects their individual assets and desires. What is
the best course for Dayton, Ohio may not be the way forward for Kokomo,
Indiana or Huntsville, Alabama.
Our comprehensive recovery strategy will not only recognize but
support these heterogeneous efforts. Whether it is through economic
development planning grants to cities or towns or support to individual
manufacturers for diversification, our efforts will support a rich
array of ways auto communities want to grow. Some may look to build new
industry clusters while others will build on regional strategies. Some
communities may want to exploit the strengths of their anchor
institutions such as their colleges and universities, while still
others may want to foster an incubator environment in which a broad
array of economic activities are fostered. Clearly, State and local
governments must take the lead in developing these strategies, but
local and national foundations have already proven that they can play a
critical role in helping communities bring the necessary parties to the
table and chart a course forward. They can provide needed seed money
and support and an array of growth strategies. At the end of the day,
however, job creation ultimately comes from the private sector. There
can be no successful strategy in which they are not at the center and
want to invest their capital in creating new markets and with them new
jobs.
While I have presented facts and figures here today we must
remember that behind the `numbers' of the economic downturn and the
auto crisis are human faces; people facing challenges unlike what many
of us have faced in our lifetimes. I share the President's commitment
to helping these workers and communities both in the near term as we
emerge from the recession, but also over the longer term to build a
base for future growth and to ensure that they share fully in our
economic prosperity. I thank you for your time and look forward to our
dialog on this matter.
RESPONSE TO WRITTEN QUESTION OF SENATOR REED
FROM RON BLOOM
Auto Supplier Support Program
Q.1. As you may know, Rhode Island has many businesses that
sell parts to direct auto suppliers. These companies are facing
tight credit and a decline in demand in response to the
economic downturn's impact on automobile sales.
While the Auto Supplier Support Program is meant to
stabilize the supplier network, it is my understanding that
because only Tier 1 manufacturers are eligible suppliers, these
Rhode Island businesses that do not sell directly to Chrysler
or General Motors are not able to request access to the credit
this program provides. On May 6th, I wrote to Secretary
Geithner urging him to consider expanding the program's
eligibility to Tier 2 and Tier 3 suppliers.
What are your thoughts on broadening the Auto Supplier
Support Program's eligibility to include manufacturers that
sell parts to direct suppliers?
Note: A copy of my letter to Secretary Geithner is
attached.
A.1. Answer not received by time of publication.
------
RESPONSE TO WRITTEN QUESTION OF SENATOR BAYH
FROM RON BLOOM
Q.1. On June 1, Delphi Corporation announced its intention to
emerge from Chapter 11 bankruptcy protection imminently. Under
the reorganization plan, General Motors (GM) will absorb the
obligations of Delphi's defined benefit pension plan for
retired hourly workers. However, according to Delphi's June 1
filing with the bankruptcy court, the residual obligations of
its pension plan will remain substantially underfunded and the
plan is thus expected to be terminated by the Pension Benefit
Guaranty Corporation (PBGC).
I have been contacted by hundreds of my constituents who
are Delphi salaried retirees and are alarmed over the fate of
their pensions, as many expect to take steep cuts in their
benefits as a result of the PBGC's termination of their plan.
Most of these retirees spent the better part of their careers
working for GM until Delphi was spun off as an independent
company in 1999. It seems reasonable that they should be able
to count on receiving the pensions they were promised.
Given the fact that GM will absorb Delphi's pension
obligations to its hourly retirees, would it not be appropriate
for GM to do the same for Delphi's salaried retirees?
A.1. Answer not received by time of publication.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR MARTINEZ
FROM RON BLOOM
Q.1. President Obama has stated clearly that the ``government
stands behind Chrysler and GM warranties.'' I understand why he
made this statement in April. However, in the interim, I
continue to read stories that highlight consumer concern about
warranties. Lately, those stories include the problems
presented by the closure of dealerships that can leave
substantial geographic areas without appointed service
providers (see attachment).
We know from experience that 3rd party firms are capable of
insuring warranties, building out service networks in areas
where dealerships disappear, and effectuating vehicle service
contracts, without any government backing. With this in mind,
my questions relating to warranties are:
1) LWhy should the federal government be involved in the
warranty business? Assuming we will be in the car
business for an extended period of time, will you
consider private sector solutions to guaranteeing
warranty commitments? If you have already considered
the possibility of 3rd party backing of warranties,
what was the nature of these considerations, and why
was the decision made to keep the government involved?
2) LAs the financial condition of General Motors has
degraded, GMAC has been downgraded from AAA to B++. Has
the Administration examined the impact of such a
downgrade relative to the ability of GMAC to attract
financing for vehicle services contracts and the
downward pressure that a loss of VSC sales could have
on surviving dealerships?
3) LAdditionally, in April, the Administration announced the
warranty commitment program which indicated that
facility would be created and administered by a 3rd
party. It appears that $360 million has been set aside
under this program to guarantee GM warranties. Will
money be set aside for Chrysler warranties? Does the
Administration still intend to have a 3rd party
Administer this program?
A.1. Answers not received by time of publication.
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RESPONSE TO WRITTEN QUESTION OF SENATOR REED
FROM EDWARD MONTGOMERY
Unemployment Insurance
Q.1. I authored legislation to extend UI benefits that was
signed into law last November. This law has provided 7 weeks of
UI to individuals who have exhausted their benefits, and 13
additional weeks of benefits to unemployed workers in states
that have been hit particularly hard by the economic downturn
and have unemployment rates above 6 percent.
In response to prolonged levels of unemployment and the job
losses resulting from the auto industry restructuring, do you
think the existing duration of unemployment insurance is
sufficient? Do you think additional weeks should be enacted?
Should Congress extend the termination dates of these benefits,
which the Recovery Act extended to December 26, 2009?
A.1. The economic crisis that the Administration inherited is
the worst since the Great Depression. The number of people
losing their jobs is too high and the number of people without
jobs is too high. While there are some hopeful signs that the
pace of job loss has slowed considerably in the second quarter
compared to the first quarter, we still have a long way to go.
The Recovery Act is starting to take hold and more money is
going into the economy each month helping to preserve jobs and
create new ones. As this process unfolds, the Administration
will look forward to working with the Senator and Members of
Congress to make sure that our unemployment insurance system is
providing unemployed Americans with the benefits they need to
help manage during these difficult economic times.
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RESPONSE TO WRITTEN QUESTION OF SENATOR BAYH
FROM EDWARD MONTGOMERY
Q.1. On June 1, Delphi Corporation announced its intention to
emerge from Chapter 11 bankruptcy protection imminently. Under
the reorganization plan, General Motors (GM) will absorb the
obligations of Delphi's defined benefit pension plan for
retired hourly workers. However, according to Delphi's June 1
filing with the bankruptcy court, the residual obligations of
its pension plan will remain substantially underfunded and the
plan is thus expected to be terminated by the Pension Benefit
Guaranty Corporation (PBGC).
I have been contacted by hundreds of my constituents who
are Delphi salaried retirees and are alarmed over the fate of
their pensions, as many expect to take steep cuts in their
benefits as a result of the PBGC's termination of their plan.
Most of these retirees spent the better part of their careers
working for GM until Delphi was spun off as an independent
company in 1999. It seems reasonable that they should be able
to count on receiving the pensions they were promised.
In the event that the PBGC does ultimately terminate
Delphi's pension plan, what level of benefits can my
constituents expect to receive? Are there any programs or
resources in place to assist these retirees with understanding
the process and its impact on their retirement security?
A.1. The PBGC recently announced that it will be terminating
Delphi's Retirement Program for both Salaried and Hourly
Employees, as well as four smaller plans sponsored by Delphi.
The level of benefits that an individual participant may expect
to receive will vary with such factors as age, employment
status, salary, and early retirement. For instance, the maximum
benefit guaranteed by the PBGC is $54,000 a year for those who
retire at age 65 or retired earlier but have reached age 65 by
the plan termination date. The maximum guarantee is higher for
those persons retiring at a later age and lower for those who
retire earlier or elect survivor benefits. There are also other
limitations on the guarantee. For example, PBGC cannot
guarantee more than a plan would pay as a straight-life annuity
for retirement at the plan's normal retirement age, so a
temporary supplement that ``bridges'' the difference between
actual retirement age and social security retirement age may
not be guaranteed or may be only partially guaranteed. PBGC may
pay more than the guaranteed amount, depending on the plan
funding level.
With respect to Delphi's Hourly Plan, on July 21, General
Motors made the following statement about an existing Hourly
Plan guarantee:
As a result of bargaining at the time of the spin-off, General
Motors Corporation did agree to top-up pension benefits for
certain limited groups of hourly employees and retirees in the
event that the Delphi hourly pension plan was terminated. As
with other union agreements that it has assumed from the old
GM, General Motors Company will honor these commitments.
The PBGC is currently reaching out to media contacts and
directing people to the PBGC's website page dedicated to the
Delphi plan and frequently asked questions. PBGC will
communicate directly with plan participants when it has assumed
responsibility for the plans and again when it has made
preliminary calculations of benefit entitlement, which
typically takes three to 6 months.