[JPRT, 111th Congress]
[From the U.S. Government Publishing Office]


 
                     CONGRESSIONAL OVERSIGHT PANEL 
                      SEPTEMBER OVERSIGHT REPORT* 

THE USE OF TARP FUNDS IN THE SUPPORT AND REORGANIZATION OF THE DOMESTIC 
                          AUTOMOTIVE INDUSTRY

              [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


               September 9, 2009.--Ordered to be printed

*Submitted under Section 125(b)(1) of Title 1 of the Emergency Economic 
               Stabilization Act of 2008, Pub. L. 110-343























        CONGRESSIONAL OVERSIGHT PANEL SEPTEMBER OVERSIGHT REPORT






















                     CONGRESSIONAL OVERSIGHT PANEL

                      SEPTEMBER OVERSIGHT REPORT*

THE USE OF TARP FUNDS IN THE SUPPORT AND REORGANIZATION OF THE DOMESTIC 
                          AUTOMOTIVE INDUSTRY

              [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


               September 9, 2009.--Ordered to be printed

*Submitted under Section 125(b)(1) of Title 1 of the Emergency Economic 
               Stabilization Act of 2008, Pub. L. 110-343
                     CONGRESSIONAL OVERSIGHT PANEL
                             Panel Members
                        Elizabeth Warren, Chair
                              Paul Atkins
                          Rep. Jeb Hensarling
                           Richard H. Neiman
                             Damon Silvers

                               ----------
                         U.S. GOVERNMENT PRINTING OFFICE 

51-964 PDF                       WASHINGTON : 2009 

For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; 
DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, 
Washington, DC 20402-0001 










                            C O N T E N T S

                              ----------                              
                                                                   Page
Executive Summary................................................     1
Section One: The Use of TARP Funds in the Support and 
  Reorganization of the Domestic Automotive Industry.............     4
    A. Introduction..............................................     4
    B. What Happened? The Sequence of Events.....................     4
    C. The Impact of the Reorganizations: Who Got What?..........    19
    D. Treasury's Objectives: What was Treasury Trying to 
      Achieve?...................................................    24
    E. Bankruptcy Law Aspects of the Automotive Company Rescues..    32
    F. Following the Money.......................................    44
    G. Issues Raised.............................................    55
    H. Conclusion and Recommendations............................    91
Annexes:
    A. Professor Adler...........................................    98
    B. Professor Lubben..........................................   108
Section Two: Additional Views....................................   120
    A. Congressman Jeb Hensarling................................   120
    Annex to Congressman Jeb Hensarling's Additional Views.......   147
Section Three: Correspondence with Treasury Update...............   156
Section Four: TARP Updates since Last Report.....................   157
Section Five: Oversight Activities...............................   169
Section Six: About the Congressional Oversight Panel.............   170
Appendices:
    APPENDIX I: LETTER FROM CHAIR ELIZABETH WARREN TO SECRETARY 
      TIMOTHY GEITHNER AND CHAIRMAN BEN BERNANKE, RE: 
      CONFIDENTIAL MEMORANDA, DATED JULY 20, 2009................   173
    APPENDIX II: LETTER FROM CHAIR ELIZABETH WARREN TO SECRETARY 
      TIMOTHY GEITHNER, RE: TEMPORARY GUARANTEE PROGRAM FOR MONEY 
      MARKET FUNDS, DATED AUGUST 12, 2009........................   176
======================================================================




                       SEPTEMBER OVERSIGHT REPORT

                                _______
                                

               September 9, 2009.--Ordered to be printed

                                _______
                                

                     EXECUTIVE SUMMARY*

---------------------------------------------------------------------------
    \*\ The Panel adopted this report with a 2-1 vote on September 8, 
2009. Rep. Jeb Hensarling voted against the report. Additional views 
are available in Section Two of this report.
---------------------------------------------------------------------------
    Even before last year's financial crisis, the American 
automotive industry was facing severe strains. Foreign 
competitors had steadily eroded its market share. Rising fuel 
prices had softened demand for its products. Legacy costs had 
constrained its flexibility. And a series of poor strategic 
decisions by its executives had compounded these problems. In 
2008, U.S. automotive sales fell to a 26-year low.
    The financial crisis weakened American automakers even 
further, constricting credit and reducing demand, turning their 
long-term slump into an acute crisis. By early December, 
Chrysler and General Motors (GM) could no longer secure the 
credit they needed to conduct their day-to-day operations. 
Unless they could raise billions of dollars in new financing, 
they faced collapse--a potentially crippling blow to the 
American economy that Treasury estimated would eliminate nearly 
1.1 million jobs.
    Facing this prospect, the administration of former 
President George W. Bush stepped in and provided short-term 
financing to the automotive companies, using funds from the 
Troubled Asset Relief Program (TARP). The policy was later 
continued by the Obama Administration, which supplied 
additional loans that were used to finance the bankruptcy 
reorganizations of Chrysler and GM.
    Treasury's financial assistance to the automotive industry 
differed significantly from its assistance to the banking 
industry. Assistance given to the banks has carried less 
stringent conditions, and money was made readily available 
without a review of business plans or without any demands that 
shareholders forfeit their stake in the company or top 
management forfeit their jobs. By contrast, Treasury was a 
tough negotiator as it invested taxpayer funds in the 
automotive industry. The bulk of the funds were available only 
after the companies had filed for bankruptcy, wiping out their 
old shareholders, cutting their labor costs, reducing their 
debt obligations and replacing some top management. The 
decision to provide financing for the automotive industry 
raises a number of questions about TARP and its use, including 
the decision to fund the automotive industry, the government as 
tough negotiator, the conflicts of interest that arise when the 
government owns a substantial stake in a private company, and 
the exit strategy. This report addresses each of these issues.
    The decision to intervene also raises critical questions 
about Treasury's objectives. Was the primary purpose of this 
intervention to provide bridge funding to the automakers, with 
the expectation that these were viable companies that could 
eventually repay taxpayers in full? Was it to prevent an 
uncontrolled liquidation because such a prospect posed a 
systemic risk to the financial markets and the overall economy? 
Was it to advance broader policy goals, such as improving fuel 
efficiency or sustaining American manufacturing and jobs? Or 
was it some combination of these? To date, Treasury's public 
statements provide little clarity, as each of these objectives 
has been cited at various times.
    Whether Treasury had the legal authority to use TARP funds 
to bail out Chrysler and GM is the subject of considerable 
debate. There was, however, enough ambiguity in the TARP 
legislation, and there continues to be ambiguity about 
congressional intent, so that Treasury has faced no effective 
challenge to its decision to use TARP funds for this purpose.
    Given the size of the automotive companies, the historical 
importance of the industry, and the government's extensive 
engagement in this process, the bankruptcy proceedings were 
highly visible and invited much public scrutiny. Those 
creditors who saw their investments in the company sharply 
reduced in bankruptcy raised vigorous objections to the role of 
the government as tough negotiator. The Panel asked two experts 
on bankruptcy law, Professor Barry Adler of New York University 
and Professor Stephen Lubben of Seton Hall University, to 
provide the Panel with an analysis of the bankruptcy process.
    When all had settled, substantial changes had been made in 
the businesses, shareholders had been wiped out, many creditors 
had taken substantial losses, and the American taxpayers 
emerged as the owners of 10 percent and 61 percent of post-
bankruptcy Chrysler and GM, respectively.
    Although taxpayers may recover some portion of their 
investment in Chrysler and GM, it is unlikely they will recover 
the entire amount. The estimates of loss vary. Treasury 
estimates that approximately $23 billion of the initial loans 
made will be subject to ``much lower recoveries.'' 
Approximately $5.4 billion of the loans extended to the old 
Chrysler company are highly unlikely to be recovered. The 
Congressional Budget Office earlier calculated a subsidy rate 
of 73 percent for all automotive industry support under TARP 
and recently raised its estimate of the cost of that assistance 
by approximately $40 billion over the previous estimate. 
Because Treasury has not clearly articulated its objectives, it 
is impossible to know if this prospect, indeed, represents a 
failure of Treasury's strategy.
    The government's emergence as the part-owner of a large, 
private company raises critical oversight questions. At times, 
in the ordinary course of business, natural tensions arise 
between the interests of a corporation's management team, its 
shareholders and the directors who represent them, its 
creditors, its workers, its regulators, and, and its customers. 
The government's investment in the American automotive industry 
has added a new complication, as the American public now 
directly or indirectly participates in many of these roles. 
This report explores the conflict between possibly competing 
objectives, including preventing significant job losses across 
the nation in the midst of an economic crisis against 
maximizing shareholder profits; changing the culture of these 
automotive companies against not interfering with day-to-day 
management; and public accountability against normal commercial 
operations. The Panel assesses how effectively Treasury has 
navigated these and other concerns, including its role in the 
bankruptcy process.
    The Panel recommends that, to mitigate the potential 
conflicts of interest inherent in owning Chrysler and GM 
shares, Treasury should take exceptional care to explain its 
decision-making and provide a full, transparent picture of its 
actions. The Panel recommends that Treasury use its role as a 
significant shareholder in Chrysler and GM to ensure that these 
companies fully disclose their financial status and that the 
compensation of their executives is aligned to clear measures 
of long-term success. To limit the impact of conflicts of 
interest and to facilitate an effective exit strategy, Treasury 
should also consider placing its Chrysler and GM shares in an 
independent trust that would be insulated from political 
pressure and government interference.
    Finally, because of the unprecedented nature of the 
assistance provided to the automotive industry, the Panel also 
recommends that Treasury provide its legal analysis justifying 
the use of TARP funds for this purpose. This analysis will 
inform policymakers' and taxpayers' understanding of the 
potential for Treasury to use its authority to assist other 
struggling industries.
    Treasury must be clearer, more transparent, and more 
accountable in its TARP dealings, providing the American public 
with the information needed to determine the effectiveness of 
Treasury's efforts.
SECTION ONE: THE USE OF TARP FUNDS IN THE SUPPORT AND REORGANIZATION OF 
                    THE DOMESTIC AUTOMOTIVE INDUSTRY


                            A. Introduction

    Beginning in December 2008, Treasury broadened its 
allocation of funding under the Troubled Asset Relief Program 
(TARP) by using $85 billion in TARP funds to support the 
domestic automotive industry.\1\ In this report, the Panel 
examines several key considerations relating to these 
disbursements, including: Treasury's justification for 
extending TARP funds to the automotive sector, how exactly this 
money has been used, and whether Treasury has properly and 
publicly articulated its objectives and taken action in 
furtherance of those objectives. This report also examines 
Treasury's role in the bankruptcy of Chrysler Holding LLC 
(Chrysler) and General Motors Corporation (GM), how Treasury 
plans to protect taxpayers' interests while the government 
controls these companies, and how Treasury intends to maximize 
taxpayers' returns when the government divests itself of 
ownership.
---------------------------------------------------------------------------
    \1\ U.S. Department of Treasury, TARP Transaction Report (Aug. 18, 
2009) (online at www.financialstability.gov/ docs/ transaction-reports/ 
transactions- report_08182009.pdf) (hereinafter ``August 18 
Transactions Report'').
---------------------------------------------------------------------------
    The Emergency Economic Stabilization Act of 2008 (EESA),\2\ 
which governs Treasury's administration of TARP, specifically 
authorizes the Secretary of the Treasury ``to establish the 
Troubled Asset Relief Program . . . to purchase, and to make 
and fund commitments to purchase, troubled assets from any 
financial institution.'' \3\ EESA also established the Panel to 
oversee Treasury's administration of the program. According to 
its mandate, the Panel is obliged to review and oversee the 
Secretary of the Treasury's use of his authority under TARP, 
the impact of TARP on the financial markets and financial 
institutions, the extent to which information made available on 
TARP transactions has contributed to market transparency, and 
TARP's effectiveness in minimizing long-term costs and 
maximizing benefits to the taxpayers.
---------------------------------------------------------------------------
    \2\ Emergency Economic Stabilization Act of 2008 (EESA), Pub. L. 
No. 110-343 (hereinafter ``EESA'').
    \3\ EESA Sec. 101(a)(1).
---------------------------------------------------------------------------
    While these oversight objectives do not fit as neatly into 
an examination of Treasury's involvement in the automotive 
industry as they do with respect to its involvement in the 
financial industry, if Treasury is of the understanding that it 
has the authority to use TARP funds to assist the automotive 
industry, then the Panel has the obligation to ``follow the 
money'' and determine whether Treasury used that money in 
furtherance of the stated objectives of TARP.

                B. What Happened? The Sequence of Events

    Despite increasing competition from abroad, the U.S. 
automotive industry continues to account for a significant 
portion of America's economic output. As recently as early 
2004, the industry produced almost four percent of this 
nation's gross domestic product.\4\ Even though the industry 
lost approximately 435,000 jobs between 2000 and 2008, 
approximately 880,000 people continued to be employed in the 
industry in 2008.\5\ This represents more than 6.5 percent of 
the total manufacturing jobs in the United States.\6\ Notably, 
the American steel industry shipped almost 13 percent of its 
output to automotive manufacturers in 2008.\7\
---------------------------------------------------------------------------
    \4\ Bureau of Economic Analysis, National Income and Product 
Accounts Table: Table 1.5.5--Gross Domestic Product, Expanded Detail 
(Aug. 27, 2009) (online at www.bea.gov/natinal/nipaweb/ TableView.asp? 
SelectedTable= 35&ViewSeries= NO&Java=no&Request3Place= 
N&3Place=N&FromView= YES&Freq=Year&FirstYear= 1990&LastYear= 
2008&3Place=N&Update= Update&JavaBox=no) (hereinafter ``National Income 
Table'').
    \5\ Bureau of Labor Statistics, Automotive Industry: Employment, 
Earnings, and Hours (accessed on Aug. 21, 2009) (online at www.bls.gov/
iag/tgs/iagauto.htm) (hereinafter ``Employment, Earnings, and Hours 
Report'').
    \6\ Id.
    \7\ Center for Automotive Research, Sean McAlinden, Kim Hill, and 
Bernard Swiecki, Economic Contribution of the Automotive Industry to 
the U.S. Economy--An Update, at 21-25 (Fall 2003) (online at 
www.cargroup.org/ pdfs/ Alliance-Final.pdf).
---------------------------------------------------------------------------
    However, in the fall of 2008, the combination of rising 
gasoline prices, tightening credit markets, eroding consumer 
confidence, high unemployment, and discretionary spending 
concerns prompted a significant downturn in automobile sales in 
the United States and abroad, with 2008 sales 18 percent lower 
than the previous year's.\8\ U.S. automobile sales fell to a 
26-year low, from a high point of 17.3 million cars and light 
trucks in 2000 to 13.2 million in 2008. Sales fell much further 
in the first half of 2009 as a result of deteriorating economic 
conditions and are projected to be roughly 10.3 million units 
for 2009 and 11.1 million in 2010.\9\ The tightened credit 
market was especially significant because 90 percent of 
consumers finance automobile purchases through loans, either 
directly from the manufacturers' financing arms or through 
third-party financial institutions, all of which experienced 
increased difficulty in raising capital to finance the 
loans.\10\ The particularly weak condition of the financing 
arms of Chrysler and GM--Chrysler Financial and GMAC, 
respectively--exacerbated the manufacturers' plummeting sales 
as the credit markets seized up.\11\
---------------------------------------------------------------------------
    \8\ IHS Global Insights, U.S. Executive Summary at 9 (Aug. 2009) 
(hereinafter ``U.S. Executive Summary'').
    \9\ Id. at 2.
    \10\ House Committee on the Judiciary, Administrative Law 
Subcommittee, Testimony of Ron Bloom, Senior Advisor at the U.S. 
Department of Treasury, Ramifications of Automotive Industry 
Bankruptcies, Part II, 111th Cong., at 1 (July 21, 2009) (online at 
judiciary.house.gov/ hearings/pdf/ Bloom090721.pdf) (hereinafter 
``Ramifications of Automotive Industry Bankruptcies Part II'').
    \11\ Id. at 19. The decline arose in no small part due to a history 
of actual and consumer-perceived inferior product quality relative to 
foreign competitors. U.S. Department of Treasury, Chrysler February 17 
Plan: Determination of Viability, at 3 (Mar. 30, 2009) (online at 
www.financialstability.gov/ docs/AIFP/ Chrysler-Viability- 
Assessment.pdf) (hereinafter Chrysler February 17 Viability Plan'').
---------------------------------------------------------------------------
    In December 2008, Chrysler and GM faced a crippling lack of 
access to credit due to the global financial crisis.\12\ Their 
CEOs appeared before Congress and appealed for government 
assistance to help them stay afloat.\13\ The House of 
Representatives responded on December 10 by passing legislation 
to provide a total of $14 billion in loans to the two 
companies, allocating the funds from a previously enacted 
Department of Energy program for advanced vehicle 
technology.\14\ The bill was blocked in the Senate on December 
11, which effectively prevented the legislation from being 
signed into law.\15\ The Bush Administration then announced 
that it would consider making TARP funds available to the 
automotive industry--a reversal of its previous stance that 
automakers were ineligible to receive TARP assistance--and on 
December 19 announced that Chrysler and GM would both receive 
TARP funds.\16\ The White House Fact Sheet accompanying the 
announcement estimated that ``the direct costs of American 
automakers failing and laying off their workers in the near 
term would result in a more than one percent reduction in real 
GDP growth and about 1.1 million workers losing their jobs, 
including workers for automotive suppliers and dealers.'' \17\
---------------------------------------------------------------------------
    \12\ Senate Committee on Banking, Housing, and Urban Affairs, 
Testimony of Chrysler Chairman and CEO Richard Nardelli, State of the 
Domestic Automobile Industry: Part II, 110th Cong., at 2 (Dec. 4, 2008) 
(online at banking.senate.gov/public/ index.cfm?FuseAction= 
Hearings.Testimony &Hearing_ID= 299be20f-5e40-4c5f-89ee- 
2ade064d4226&Witness_ID= 45d1bc44-ac76- 4539-be69- 32e09c50b3b8) 
(hereinafter ``Nardelli Senate Testimony'').
    \13\ Id. The President and Chief Executive Officer of Ford Motor 
Company also testified at this hearing.
    \14\ H.R. 7321, Auto Industry Financing and Restructuring Act, 
110th Cong (hereinafter ``H.R. 7321'').
    \15\ The failure to invoke cloture on the proposed legislation by a 
vote of 52 to 35. U.S. Senate, Roll Call Vote on the Motion to Invoke 
Cloture on the Motion to Proceed to Consider H.R. 7005 (online at 
www.senate.gov/ legislative/LIS/ roll_call_lists/ roll_call_ 
vote_cfm.cfm?congress= 110&session= 2&vote=00215).
    \16\ White House Office of the Press Secretary, President Bush 
Discusses Administration's Plan to Assist Automakers (Dec. 19, 2008) 
(online at georgewbush whitehouse.archives.gov/ news/releases/ 2008/12/
20081219.html) (hereinafter ``Bush Plan to Assist Automakers'').
    \17\ White House Office of the Press Secretary, Fact Sheet: 
Financing Assistance to Facilitate the Restructuring of Auto 
Manufacturers to Attain Financial Viability (Dec. 19, 2008) (online at 
georgewbush-whitehouse.archives.gov/ news/releases/ 2008/12/20081219-
6.html) (hereinafter
``Auto Viability Financing Fact-Sheet'').
---------------------------------------------------------------------------
    Under the Automobile Industry Financing Program (AIFP) that 
was announced on December 19, Chrysler and GM received bridge 
loans of $4 billion and $13.4 billion, respectively, under 
separate loan and security agreements.\18\ The GM loan and 
security agreement was signed on December 31, 2008 and GM drew 
the first $4 billion total loan amount on that date. The 
Chrysler loan and security agreement was signed on January 2, 
2009, and Chrysler drew the entire $4 billion loan amount on 
that date. On January 16, 2009, GM drew an additional $5.4 
billion installment.\19\ These three loan installments used the 
last of the $350 billion first ``tranche'' of TARP under EESA. 
Beyond that, the President had to transmit to Congress a 
written report of the plan to exercise the authority to use the 
remaining half of the funding, after which Congress had 15 
calendar days to enact a joint resolution of disapproval. 
Congress failed to pass the disapproval resolution for the 
second tranche of TARP funds on January 15, and GM then drew a 
third installment of $4 billion on February 17, 2009.\20\ The 
term sheets for both companies established a loan interest rate 
of LIBOR plus three percent, with an additional five percent 
penalty on any amount in default.\21\
---------------------------------------------------------------------------
    \18\ The loans were documented in two separate documents released 
by Treasury, both entitled Loan and Security Agreement, on December 31, 
2008. In total, up to $13.4 billion was made incrementally available to 
GM (with $4 billion available upon the effective date of December 31, 
2008) in the first TARP financing. In total, $4 billion was made 
available to Chrysler on the same effective date. Each agreement was 
for a secured term loan facility with a first lien on all unencumbered 
assets of each company. Treasury accepted junior liens on encumbered 
assets. The loans expire December 30, 2011. U.S. Department of the 
Treasury, Loan and Security Agreement [GM] (Dec. 31, 2008) (online at 
www.financialstability.gov/ docs/agreements/ GM%20Agreement%20 
Dated%2031%20 December%202008.pdf) (hereinafter ``GM Loan and Security 
Agreement''); U.S. Department of the Treasury, Loan and Security 
Agreement [Chrysler] (Dec. 31, 2008) (online at 
www.financialstability.gov/docs/agreements/Chysler_12312008.pdf) 
(hereinafter ``Chrysler Loan and Security Agreement'').
    \19\ U.S. Department of Treasury, Fourth Tranche Report to Congress 
(Jan. 7, 2009) (online at www.financialstability.gov/ docs/
TrancheReports/ Fourth-Tranche-Report.pdf).
    \20\ U.S. Department of Treasury, Section 105(a) Troubled Asset 
Relief Program Report to Congress for the period February 1, 2009 to 
February 28, 2009 (Mar. 6, 2009) (online at www.financialstability.gov/ 
docs/105CongressionalReports/ 105aReport_ 03062009.pdf) (hereinafter 
``Fourth Tranche Report'').
    \21\ GM Loan and Security Agreement, supra note 18; Chrysler Loan 
and Security Agreement, supra note 18.
---------------------------------------------------------------------------
    The AIFP loans were extended to Chrysler and GM under terms 
and conditions specified in the loan agreements.\22\ The most 
important condition required each company to demonstrate that 
the assistance would allow it to achieve ``financial 
viability,'' which was defined as ``positive net value, taking 
into account all current and future costs, and [the ability to] 
fully repay the government loan.'' \23\ Both companies were 
required to submit viability plans designed ``to achieve and 
sustain [their] long-term viability, international 
competitiveness and energy efficiency.'' \24\ Key to such 
viability would be ``meaningful concessions from all involved 
in the automotive industry.'' \25\ The loans also imposed 
conditions and covenants related to their operations, 
expenditures, and reporting thereof to the President's 
designee, including divestiture of interests in all private 
passenger aircraft and nonpayment of unapproved bonuses to 
certain executives.\26\
---------------------------------------------------------------------------
    \22\ Auto Viability Financing Fact-Sheet, supra note 17.
    \23\ Auto Viability Financing Fact-Sheet, supra note 17.
    \24\ U.S. Department of the Treasury, Indicative Summary of Terms 
for Secured Term Loan Facility [GM], at 5 (Dec. 19, 2008) (online at 
www.ustreas.gov/ press/releases/ reports/gm%20final%20 
term%20&%20appendix.pdf) (hereinafter ``GM Secured Term Loan Facility 
Summary''); U.S. Department of the Treasury, Indicative Summary of 
Terms for Secured Term Loan Facility [Chrysler], at 5 (Dec. 19, 2008) 
(online at www.ustreas.gov/ press/releases/ reports/chrysler%20 
final%20term%20&%20 appendix.pdf) (hereinafter ``Chrysler Secured Term 
Loan Facility Summary'').
    \25\ Bush Plan to Assist Automakers, supra note 16.
    \26\ GM Secured Term Loan Facility Summary, supra note 24 at 3-4; 
Chrysler Secured Term Loan Facility Summary, supra note 24 at 3-4.
---------------------------------------------------------------------------
    Both companies submitted plans demonstrating their 
financial viability in February 2009. GM's plan called for 
reductions in plants, dealers, employees, and nameplates 
(Saturn, Saab and Hummer would be eliminated).\27\ Chrysler's 
plan presented three scenarios:
---------------------------------------------------------------------------
    \27\ General Motors Corporation, 2009-2014 Restructuring Plan (Feb. 
17, 2009) (online at media.gm.com/ us/gm/en/news/ govt/docs/ plan.pdf) 
(hereinafter ``GM Restructuring Plan'').
---------------------------------------------------------------------------
          1. Chrysler could continue as a stand-alone company 
        with the help of $11 billion in loans from the 
        government;
          2. Chrysler could pursue a non-binding agreement 
        already signed with the Italian automaker Fiat S.p.A. 
        (Fiat) and, with additional government assistance, aim 
        to sell more fuel efficient cars to a wider range of 
        markets; or
          3. Chrysler could file for bankruptcy and embark on 
        an orderly wind down of the company.\28\
---------------------------------------------------------------------------
    \28\ Chrysler Group LLC, Chrysler Restructuring Plan for Long-Term 
Viability (Feb. 17, 2009) (online at www.media.chrysler.com/ dcxms/
assets/attachments/ Restructuring_Plan_for_ LongTerm_Viability.pdf) 
(hereinafter ``Chrysler Restructuring Plan'').
---------------------------------------------------------------------------
    On February 15, 2009, President Obama announced the 
creation of an interagency Presidential Task Force on the Auto 
Industry (Task Force), that would assume responsibility for 
reviewing the Chrysler and GM viability plans. The Task Force 
is co-chaired by Treasury Secretary Timothy Geithner and 
Director of the National Economic Council Lawrence Summers and 
includes a number of ex-officio designees\29\ and government 
staffers.\30\ In addition, the President named two advisors to 
lead the Treasury auto team,\31\ which had responsibility for 
evaluating the companies' viability plans and negotiating the 
terms of any further assistance: Ron Bloom, a former investment 
banker and advisor to the president of the United Steelworkers 
union, and Steven Rattner, the co-founder of the Quadrangle 
Group, a private equity firm. (Mr. Rattner subsequently left 
the Treasury auto team on July 13, 2009, leaving Mr. Bloom as 
the auto team's head.) The auto team reports to the Task Force 
and its co-chairs, who then report up to the President.
---------------------------------------------------------------------------
    \29\ Secretary of Transportation, Secretary of Commerce, Secretary 
of Labor, Secretary of Energy, Chair of President's Council of Economic 
Advisors, Director of the Office of Management and Budget, 
Environmental Protection Agency Administrator, Director of the White 
House Office of Energy and Climate Change.
    \30\ Diana Farrell, Deputy Director, National Economic Council; 
Gene Sperling, Counselor to the Secretary of the Treasury; Jared 
Bernstein, Chief Economist to Vice President Biden; Edward Montgomery, 
then Senior Advisor, Department of Labor, Lisa Heinzerling, Senior 
Climate Counsel to the EPA Administrator; Austan Goolsbee, Staff 
Director and Chief Economist of the Economic Recovery Advisory Board; 
Dan Utech, Senior Advisor to the Secretary of Energy; Heather Zichal, 
Deputy Director, White House Office of Energy and Climate Change; Joan 
DeBoer, Chief of Staff, Department of Transportation; Rick Wade, Senior 
Advisor, Department of Commerce.
    \31\ The missions and personnel of the Task Force and Treasury auto 
team--a joint Treasury-National Economic Council team which staffs the 
Task Force--overlap considerably, therefore these entities are often 
cited interchangeably. The auto team's analysis of the viability plans 
is discussed in more detail in Sections D and G below.
---------------------------------------------------------------------------
    President Obama announced the results of the Treasury auto 
team's review on March 30. According to the auto team, the most 
important indicator of the companies' viability was their 
ability to ``generate positive cash flow and earn an adequate 
return on capital over the course of a normal business cycle.'' 
\32\ In making the individual determinations, the auto team 
generally assumed no significant changes in the operations of 
the companies' competitors, although they ran various scenarios 
to take into account changes in the competitive environment.
---------------------------------------------------------------------------
    \32\ Chrysler February 17 Viability Plan, supra note 11.
---------------------------------------------------------------------------
    The auto team found GM's plan ``not viable as it's 
currently structured,'' \33\ chiefly because it relied on 
overly optimistic assumptions about the company and the 
economy's recovery. The auto team focused on:
---------------------------------------------------------------------------
    \33\ Chrysler February 17 Viability Plan, supra note 11.
---------------------------------------------------------------------------
           GM's consistently decreasing market share 
        over the past 30 years, which the auto team calculated 
        at a 0.7 percent annual decrease--much greater than 
        GM's assumption of 0.3 percent annual decrease going 
        forward to 2014;
           consumer perception of GM's poor product 
        quality compared to competitors;
           GM's large network of underperforming 
        dealers;
           GM's costly and unprofitable European 
        operations;
           GM's vulnerability to higher energy costs 
        due to its disproportionate profit share from SUVs; and
           increasing legacy liabilities that would 
        require GM to sell almost a million more cars in both 
        2013 and 2014.
    In short, GM had too much catching-up to do, even without 
accounting for the sunk costs of restructuring, to generate 
positive cash flow over the projection period. GM was therefore 
asked to submit a ``subsantially more aggressive plan'' and was 
provided an additional 60 days.
    In short, GM had too much catching-up to do, even without 
accounting for the sunk costs of restructuring, to generate 
positive cash flow over the projection period. GM was therefore 
asked to submit a ``substantially more aggressive plan'' and 
was provided an additional 60 days of working capital.\34\ 
Between March 30 and May 30, GM received another $6.36 billion 
in loans (including $361 million for the warranty program).\35\
---------------------------------------------------------------------------
    \34\ U.S. Department of Treasury, GM February 17 Plan: 
Determination of Viability (Mar. 30, 2009) (online at 
www.whitehouse.gov/ assets/documents/ GM_Viability_ Assessment.pdf) 
(hereinafter ``GM February 17 Viability Plan'').
    \35\ Aug. 18 Transactions Report, supra note 1 at 16.
---------------------------------------------------------------------------
    In its analysis, the auto team found that Chrysler had an 
even poorer outlook than GM because of problems with scale, 
quality, product mix, lack of manufacturing flexibility, and 
geographic over-concentration. The auto team concluded Chrysler 
could succeed only if it developed a partnership with another 
automotive company.\36\ Chrysler was offered working capital 
for 30 more days while it sought an agreement with Fiat.\37\ 
Between March 30 and April 30, Treasury agreed to commit up to 
$280 million in loans to Chrysler for the warranty program (no 
working capital loans were advanced).\38\
---------------------------------------------------------------------------
    \36\ In fact, both Chrysler and GM had been contemplating mergers 
with other automotive companies for over a year. The contraction in 
domestic auto manufacturing that foreshadowed the economic crisis led 
Chrysler and GM to pursue possible strategic changes including mergers, 
the creation of partnerships, and sales. Chrysler, concerned with its 
viability, reached out to Nissan-Renault in the spring of 2007 and 
continued discussion on a wide range of possible scenarios until term 
sheets were exchanged in July 2008. Declaration of Thomas W. LaSorda, 
11-12 (Apr. 30, 2009), In Re Chrysler LLC, S.D.N.Y. (No.09 B 50002 
(AJG)) (online at chap11.epiqsystems.com/ docket/docketlist.aspx?pk= 
1c8f7215-f675- 41bf-a79b-e1b2cb9c18f0&l=1) (hereinafter ``Thomas 
LaSorda Declaration''). Ultimately, only joint production agreements 
were signed and negotiations for a union between Chrysler and Nissan 
collapsed. Davis Welch, Behind the Chrysler-Nissan Deal, Business Week 
(April 14, 2008) (online at www.businessweek.com/ bwdaily/dnflash/ 
content/apr2008/ db20080414_ 164988.htm?campaign_ id=rss_daily) 
(hereinafter ``Behind the Chrysler-Nissan Deal''). Chrysler executives 
then approached General Motors in August 2008. Some industry insiders 
believed that by folding Chrysler into GM, the proposed company would 
have easier access to the capital markets and would benefit from the 
increased market share. Declaration of J. Stephen Worth, 85-86 (May 31, 
2009), In Re General Motors Corp., S.D.N.Y. (No. 09-50026 (REG)) 
(online at docs.motorsliquidationdocket.com/ pdflib/ 425_50026.pdf) 
(hereinafter ``Stephen Worth Declaration''). GM suspended the 
negotiations in November 2008 due to the lack of funding for the 
proposed arrangement and the company's impending liquidity crisis. 
After accepting the initial assistance from the Treasury, Chrysler 
contacted Nissan and GM in hopes of reviving negotiations, but both 
carmakers refused. These unsuccessful attempts, coupled with the lack 
of adequate funding in the capital markets and the rapidly 
deteriorating condition of the domestic automotive industry, led 
Chrysler and GM to seek assistance from the United States government. 
After receiving the initial bridge loans from the Bush Administration, 
Chrysler again reached out to GM in early January, but GM remained 
uninterested in further merger discussions. Thomas LaSorda Declaration 
at 13-14. The auto team has told the Panel that it did not discourage a 
merger between GM and Chrysler, that ``[e]ach company made its own 
determination to pursue a future independent of the other.'' 
Congressional Oversight Panel, Questions for the Record from the 
Congressional Oversight Panel at the Congressional Oversight Panel 
Hearing on July 27, 2009, Questions for Ron Bloom, Senior Advisor, U.S. 
Department of the Treasury, at 8 (July 27, 2009) and Congressional 
Oversight Panel, Ron Bloom Responses, Congressional Oversight Panel 
Hearing Transcript on July 27, 2009 (collectively, hereinafter ``Ron 
Bloom COP Testimony'').
    \37\ Chrysler had begun discussions with Fiat a year earlier, in 
March 2008, as part of its talks with other car companies about a 
partnership. By January 2009, ``no party except Fiat emerged as a 
viable and willing partner.'' Declaration of Thomas LaSorda, supra note 
36. Chrysler and Fiat agreed to an initial term sheet that became one 
of the options in the restructuring plan that Chrysler submitted to 
Treasury in February 2009. Chrysler's plan also included an option in 
which, with concessions and additional government support, it could 
have been viable as a stand-alone company. Declaration of Robert Manzo, 
30 (Apr. 30, 2009) In Re Chrysler LLC, S.D.N.Y. (No. 09 B 50002 (AJG)) 
(online at chap11.epiqsystems.com/ docket/ docketlist.aspx?pk= 
1c8f7215-f675-41bf- a79b-e1b2cb9c18f0&l=1) (hereinafter ``Robert Manzo 
Declaration''); Chrysler Restructring Plan, supra note 28. The auto 
team disagreed with the latter option, and informed Chrysler that it 
would only provide financing if Chrysler formed an alliance with Fiat--
the only potential partner willing to form an alliance. It stated that: 
[Treasury] will provide Chrysler with working capital for 30 days to 
conclude a definitive agreement with Fiat and secure the support of 
necessary stakeholders. If successful, the government will consider 
investing up to the additional $6 billion requested by Chrysler to help 
this partnership succeed. If an agreement is not reached, the 
government will not invest any additional taxpayer funds in Chrysler. 
White House, Obama Administration New Path to Viability for GM & 
Chrysler (Mar. 30, 2009) (online at www.whitehouse.gov/ assets/
documents/ Fact_ Sheet_GM_ Chrysler_.FIN.pdf) (hereinafter ``New Path 
to Viability for GM & Chrysler'').
    \38\ Aug. 18 Transactions Report, supra note 1.
---------------------------------------------------------------------------
    The auto team emphasized that, while Chrysler and GM 
presented different issues and problems, in each case, ``their 
best chance of success may well require utilizing the 
bankruptcy code in a quick and surgical way.'' \39\ In the 
Administration's vision, this would not entail liquidation or a 
``traditional,'' long, drawn-out bankruptcy, but rather a 
``structured'' bankruptcy as a tool to ``make it easier for 
Chrysler and General Motors to clear away old liabilities.'' 
\40\
---------------------------------------------------------------------------
    \39\ New Path to Viability for GM & Chrysler, supra note 37.
    \40\ New Path to Viability for GM & Chrysler, supra note 37.
---------------------------------------------------------------------------

                            1. New Chrysler

    Chrysler was unable to complete a restructuring deal by the 
April 30 deadline.\41\ A group of investors holding 30 percent 
of Chrysler's $6.9 billion in secured debt would not accept 
Treasury's $2 billion offer in exchange for the debt.\42\ 
Chrysler filed for bankruptcy on April 30 under Chapter 11 of 
the U.S. Bankruptcy Code (the Code).\43\ Forty-two days later 
the sale of the majority of its assets to a newly formed 
entity, Chrysler Group LLC (New Chrysler), under Section 363 of 
Chapter 11 of the Code, closed.
---------------------------------------------------------------------------
    \41\ White House Office of the Press Secretary, Obama 
Administration Auto Restructuring Initiative (April 30, 2009) 
(www.whitehouse.gov/ the_press_office/ Obama-Administration-Auto- 
Restructuring-Initiative) (hereinafter ``Chrysler Release'').
    \42\ Id.
    \43\ Id.
---------------------------------------------------------------------------
    The technical details of the bankruptcy process and the 
precise manner of disposition of assets of Chrysler (often 
referred to as Old Chrysler, for clarity) and ownership of New 
Chrysler are discussed in more detail below.\44\ In essence, 
however, the arrangements, set out in a master transaction 
agreement,\45\ were as follows. The secured creditors had to 
accept the original offer of $2 billion. At the time of filing, 
Chrysler was privately owned by the private equity firm 
Cerberus Capital Management L.P. (Cerberus) and the automobile 
company Daimler AG (Daimler). Daimler, the minority 
shareholder, agreed to waive its share of Chrysler's $2 billion 
second lien debt, give up its 19 percent equity interest in 
Chrysler, and settle its pension guaranty obligation by 
agreeing to pay $600 million to Chrysler's pension funds. 
Cerberus agreed to waive its share of second lien debt and 
forfeit its equity stake in Chrysler. Cerberus also agreed to 
transfer its ownership of the Chrysler headquarters in Auburn 
Hills, Michigan to New Chrysler. Finally, Cerberus pledged to 
contribute a claim it had against Daimler to assist in the 
Daimler pension guaranty settlement.
---------------------------------------------------------------------------
    \44\ See Section C for a discussion of the precise disposition of 
assets, and Section E for a discussion of the Section 363 sale process.
    \45\ Master Transaction Agreement among Fiat SpA, NewCarCo. 
Acquisition LLC, Chrysler LLC, and the Other Sellers identified 
therein, Dated April 30, 2009 (May 12, 2009), In Re Chrysler LLC, 
S.D.N.Y. (No. 09 B 50002 (AJG) (online at chap11.epiqsystems.com/ 
docket/docketlist.aspx?pk= 1c8f7215-f675-41bf- a79b-e1b2cb9c18f0&l=1) 
(hereinafter ``Chrysler Master Transaction Agreement'').
---------------------------------------------------------------------------
    Treasury provided a total of $8.5 billion in working 
capital and exit financing to facilitate the deal.\46\ The U.S. 
government received approximately an eight percent equity stake 
in New Chrysler and the right to select the initial group of 
four independent directors. The governments of Canada and 
Ontario \47\ together received two percent of the equity of New 
Chrysler, and Canada received the right to select one 
independent director. Fiat received a 20 percent equity stake 
and the right to select three directors of New Chrysler. In 
addition, Fiat has the right to earn up to 15 percent in 
additional equity, in three tranches of five percent each, if 
it meets certain performance metrics.\48\
---------------------------------------------------------------------------
    \46\ U.S. Treasury Department, AIFP Outlays for COP (Aug. 18, 2009) 
(hereinafter ``AIFP Outlays'').
    \47\ During a meeting with Panel staff on July 11, 2009, Ron Bloom 
explained that the Canadian governments approached the U.S. government 
with an offer to provide assistance to the American automotive 
industry. Mr. Bloom stated his belief that the Canadian governments 
were concerned about the impact of the troubled American auto makers on 
the Canadian economy and therefore had an interest in providing such 
support.
    \48\ Chrysler Release, supra note 41.
---------------------------------------------------------------------------
    As part of New Chrysler's purchase of Old Chrysler's 
assets, New Chrysler entered into an agreement with the United 
Auto Workers (UAW) regarding the funding of the UAW Retiree 
Medical Benefit Trust (the UAW Trust).\49\ New Chrysler agreed 
to fund the UAW Trust with a $4.6 billion unsecured note and a 
55 percent ownership stake in New Chrysler.\50\ The UAW Trust, 
subject to approval of the UAW, has the right to select one 
independent director and no other governance rights.\51\
---------------------------------------------------------------------------
    \49\ By the end of the last century, Ford, Chrysler and GM found 
themselves faced with tens of billions of dollars in employee health 
obligations. In 2007 and 2008, after it became clear to both the 
companies and their unions that the state of the American automotive 
industry made these healthcare obligations unsustainable, the UAW and 
each of the three companies ultimately entered into an agreement 
whereby, in exchange for significant upfront payments principally in 
the form of cash and notes, healthcare obligations for retired union 
employees would be transferred off the books of the companies and into 
a trust (an independent entity totally separate from either the union 
or the automotive companies), the UAW Retiree Medical Benefits Trust, 
also known as a Voluntary Employees' Beneficiary Association (VEBA). 
VEBAs are tax free entities that pay health, life, or similar benefits. 
Although subject to the fiduciary requirements of the Employee 
Retirement Income Security Act of 1974 (ERISA), they are not subject to 
ERISA funding rules as are qualified retirement plans--a company's 
funding obligation is solely contractual. The threat of a Chapter 11 
bankruptcy filing by Chrysler and GM made it clear that these companies 
would not be able to meet the cash commitments they had made to the UAW 
Trust. As part of a new agreement reached with representatives from 
both the old and new Chrysler and GM entities to enable them to emerge 
from bankruptcy, the UAW agreed to significant changes to the funding 
structure of the UAW Trust. While the UAW was able to get these 
companies to transfer cash amounts already set aside by the old 
Chrysler and GM entities (about $10 billion from GM and about $1.5 
billion from Chrysler), the balance of the commitments these companies 
had made will no longer be paid up front in cash. Instead, New GM and 
New Chrysler have agreed to contribute large portions of equity, as 
well as notes that will allow cash commitments to be deferred and paid 
over time, into the UAW Trust. In order to help it remain competitive 
and avert bankruptcy, Ford negotiated similar alterations to its 
settlement with the UAW. Starting January 1, 2010, UAW retirees' 
healthcare benefits will be funded solely by the assets in the UAW 
Trust, and will receive no further commitments from Old Chrysler, Old 
GM or Ford. New GM and New Chrysler--as with Ford--will no longer have 
the healthcare obligations that have been weighing down their 
predecessor companies' books for decades, while the healthcare benefits 
of the UAW's retired members will still be linked to the fortunes of 
all three companies through the tens of billions in stock and notes.
    \50\ Chrysler Release, supra note 41.
    \51\ Form of Amended and Restated Operating Agreement of New Carco 
Acquisition LLC, 17 (May 12, 2009) In re Chrysler LLC, S.D.N.Y. (No. 09 
B 50002 (AJG) (online at chap11.epiqsystems.com/ docket/
docketlist.aspx?pk= 1c8f7215-f675-41bf-a79b- e1b2cb9c18f0&l=1) 
(hereinafter ``New Carco Operating Agreement'').
---------------------------------------------------------------------------
    During the bankruptcy proceedings, three Indiana state 
pension funds, which were secured first lien debt holders of 
Chrysler, objected to the Section 363 sale to New Chrysler. The 
funds argued that the sale would violate the Code by 
impermissibly subordinating their interests as secured lenders 
and allowing assets on which they had a lien to pass free of 
liens to other creditors and parties.\52\ Moreover, they 
claimed that the sale would violate bankruptcy priority rules 
by paying unsecured creditors, even though secured creditors 
were receiving only 29 cents on the dollar. The funds stated 
that they believed that Chrysler could sell the assets for more 
money if they did not rush the sale, or that first lien debt 
holders could recover more in liquidation. The bankruptcy court 
denied the funds' motion.\53\ Of the other first lien debt 
holders, 92 percent had not opposed the sale.
---------------------------------------------------------------------------
    \52\ Emergency Motion of the Indiana Pensioners For Stay of 
Proceedings Pending Determination of Motion to Withdraw the Reference, 
2-3 (May 20, 2009) In re Chrysler LLC, S.D.N.Y. (No. 09 B 50002 (AJG) 
(online at chap11.epiqsystems.com/ docket/ docketlist.aspx?pk= 
1c8f7215-f675-41bf- a79b-e1b2cb9c18f0&l=1) (hereinafter ``Indiana 
Pensioners' Emergency Stay Motion'').
    \53\ Order Denying Emergency Motion of the Indiana Pensioners for 
Stay of Proceedings Pending Determination of Motion to Withdraw the 
Reference (May 20, 2009), In Re Chrysler LLC, S.D.N.Y. (No. 09 B 50002 
(AJG)) (online at chap11.epiqsystems.com/ docket/docketlist.aspx?pk= 
1c8f7215-f675-41bf-a79b- e1b2cb9c18f0&l=1) (hereinafter ``Order Denying 
Indiana Pensioners' Emergency Stay Motion'').
---------------------------------------------------------------------------
    The funds immediately began the appellate process. The 
Second Circuit issued a short order ratifying the bankruptcy 
court's decision and issuing a stay to allow for the U.S. 
Supreme Court's review. The Supreme Court denied a request for 
a stay of the bankruptcy reorganization.\54\ Upon remand, the 
Second Circuit affirmed \55\ the bankruptcy court's 
decision.\56\
---------------------------------------------------------------------------
    \54\ 556 U.S._(2009) (Per Curiam) (online at 
www.supremecourtus.gov/ opinions/08pdf/ 08A1096.pdf).
    \55\ In re Chrysler LLC, 2009 WL 2382766 (2d Cir. 2009). The funds 
then filed a petition for writ of certiorari to the Supreme Court in 
which the sole question presented is ``is whether Section 363 may 
freely be used as a `side door' to reorganize a debtor's financial 
affairs without adherence to the creditor protections provided by the 
chapter 11 plan confirmation process.'' Petition for Writ of Certiorari 
for Petitioners Indiana State Police Pension Trust, et al., at 2 
No._(Sept. 3, 2009) (hereinafter ``Indiana Pensioners' Appeal''). It 
did, however, allude to Treasury's broad definition of ``financial 
institution.'' Id. at 29.
    \56\ In re Chrysler LLC, 405 B.R. 79, 83 (Bankr. S.D.N.Y. 2009).
---------------------------------------------------------------------------
    Treasury appointed four directors to New Chrysler's nine-
member board of directors: C. Robert Kidder, chairman and CEO 
of 3Stone Advisors LLC; Douglas Steenland, former CEO of 
Northwest Airlines; Scott Stuart, a partner at Sageview Capital 
LP, and Ronald L. Thompson, chairman of the board of trustees 
for the nonprofit Teachers Insurance and Annuity Association 
and College Retirement Equities Fund (TIAA/CREF).\57\ Mr. 
Kidder is chairman of the new board.\58\ The Trustees of the 
UAW Trust appointed James J. Blanchard, a former Michigan 
governor, to the board.\59\ As New Chrysler began operations, 
it was announced that Robert Nardelli would be departing as 
CEO.\60\ Fiat CEO Sergio Marchionne subsequently replaced 
him.\61\ The Obama Administration announced that Fiat would 
shake up other management in an effort to reorganize the 
company.\62\
---------------------------------------------------------------------------
    \57\ U.S. Department of the Treasury, Treasury Department Statement 
on Chrysler's Board of Directors Appointments (July 5, 2009) (online at 
www.financialstability.gov/latest/tg197.html) (hereinafter ``Statements 
on Chrysler Directors Appointments'').
    \58\ Chrysler Group LLC, Formation of Chrysler Group LLC Board is 
Completed (July 5, 2009) (online at www.chryslergroupllc.com/ en/news/
article/?lid= formation_board&year= 2009&month=7) (hereinafter 
``Formation of New Chrysler Board Completed'').
    \59\ United Auto Workers, Chrysler Update: VEBA Trust Names James 
Blanchard to Board of Chrysler Holding, LLC (June 10, 2009) (online at 
www.uaw.org/chrysler/chry12.cfm) (``VEBA Trust Director 
Announcement'').
    \60\ Letter from Robert Nardelli to Chrysler employees (Apr. 30, 
2009) (online at images.businessweek.com/ extras/09/nardelli_ 
email.pdf?chan= top+news_ special+report+-+auto+bailout+ 2009_ 
special+report+-+auto +bailout+2009) (hereinafter ``Richard Nardelli 
Letter to Chrysler Employees'').
    \61\ Chrysler Group LLC, Chrysler Group LLC Announces 
Organizational Structure Focused on Chrysler, Jeep, Dodge and Mopar 
Brands (Jun. 10, 2009) (online at www.chryslergroupllc.com/ en/news/
article/ ?lid=new_ organizational_ structure&year= 2009&month=60) 
(hereinafter Chrysler Org Structure Announcement'').
    \62\ Chrysler and Fiat facing a long road, Pittsburgh Post Gazette 
(June 11, 2009) (online at www.post-gazette.com/ pg/09162/976675- 
185.stm) (hereinafter ``Chrysler/Fiat Face Long Road'').
---------------------------------------------------------------------------
    Chrysler announced that it would retain an ``overwhelming 
majority'' of its suppliers \63\ and would close 789 of its 
nearly 3,200 U.S. dealerships.\64\ These dealerships employed 
more than 40,000 people.\65\ State governments heavily regulate 
the relationship between dealerships and automotive companies, 
usually claiming that close oversight is necessary to equalize 
the bargaining power of dealerships and automakers.\66\ 
Generally, states only allow an automotive manufacturer to 
terminate a dealer contract if it has good cause.\67\ However, 
the bankruptcy process provided the automotive manufacturers 
with greater flexibility in terminating dealership 
contracts.\68\ Congress is currently considering a number of 
bills to restore the terminated dealers' contracts.\69\
---------------------------------------------------------------------------
    \63\ Chrysler Group LLC, Chrysler LLC to Assume Supplier Agreements 
(May 15, 2009) (online at www.chryslerrestructuring.com/ chr/
Press%20Release %20May%2015%202009.pdf) (hereinafter ``Chrysler Assumes 
Supplier Agreements'').
    \64\ Chrysler Vice President Peter Grady, The Real Story on 
Chrysler's Dealer Network, Chrysler Corporate Blog (July 16, 2009) 
(online at blog.chryslerllc.com/blog.do?id=717&p=entry) (hereinafter 
``Real Story on Chrysler's Dealer Network'').
    \65\ National Automobile Dealers Association, Statement on 
Chrysler's Dealership Reduction Announcement (May 14, 2009) (online at 
www.nada.org/ MediaCenter/ News+Releases/ NADA+Statement+on 
+Chrysler%E2%80%99s +Dealership+Reduction +Announcement.htm) 
(hereinafter ``NADA Chrysler Statement'').
    \66\ New Motor Vehicle Board of Cal.v. Fox, 439 U.S. 96, 100-01 
(1978).
    \67\ National Automobile Dealers Association, The Benefits of the 
Franchised Dealer Network: The Economic and Statutory Framework, at 5 
(Nov. 24, 2008) (online at www.magnetmail.net/ images/clients/ NADA/
attach/ BenefitsDealerNetwork.doc) (hereinafter ``Benefits of the 
Franchised Dealer Network'').
    \68\ In light of the recent news that Chrysler plans to open new 
dealerships, often nearby the ones that were closed, some assert that 
Chrysler used the bankruptcy to get rid of dealerships that it had 
wanted to close otherwise. See Greg Gardner, Chrysler Plans New 
Dealerships, Detroit Free Press (Aug. 13, 2009) (online at freep.com/
article/ 20090813/BUSINESS01/ 908130448/1333/Chrysler- plans-new-
dealerships) (hereinafter ``Chrysler Plans New Dealerships''); see also 
Chrysler Green Lights New Dealerships, American Public Media (accessed 
Aug. 31, 2009) (online at marketplace.publicradio.org/ display/ web/
2009/08/14/ am-chrysler/) (hereinafter ``Chrysler Green Lights New 
Dealerships'').
    \69\ The Financial Services and General Government Appropriations 
Act of 2010, passed by the House on July 16, 2009, includes an 
amendment that would require Chrysler and GM to reinstate contracts 
with dealers that had agreements prior to the Chapter 11 filings. H.R. 
3170, Sec. 745(b), Financial Services and General Government 
Appropriations Act of 2010, 111th Cong. (hereinafter ``H.R. 3170'').
---------------------------------------------------------------------------
    Both Chrysler and GM maintain that their dealer networks 
were oversized and that downsizing was necessary to regain 
viability.\70\ Domestic brands in 2008 accounted for about two 
thirds of U.S. dealerships,\71\ but only 48 percent of new 
vehicle sales.\72\ Chrysler, for example, has less domestic 
market share than Toyota,\73\ but even after its intended 
closings will have many more dealers.\74\ In 2008, Chrysler's 
dealers lost on average $3,431.\75\ By consolidating 
dealerships, the companies argue, they can drive more sales 
through more profitable businesses that can afford to invest in 
their businesses.\76\ The remaining dealers may also be able to 
negotiate more favorable terms with their floor-plan 
financers.\77\ This may in turn help dealers acquire more stock 
and sell it to consumers at lower prices, thereby increasing 
sales and profits for the dealers and for Chrysler and GM.
---------------------------------------------------------------------------
    \70\ House Committee on Energy and Commerce, Subcommittee for 
Investigations and Oversight, Testimony of General Motors President and 
Chief Executive Officer Frederick A. Henderson, Auto Dealership 
Closures, 111th Cong., at 2-3 (June 12, 2009) (online at 
energycommerce.house.gov/ Press_111/ 20090612/ testimony_ 
henderson.pdf) (hereinafter ``Fritz Henderson House Testimony''); House 
Committee on Energy and Commerce, Subcommittee for Investigations and 
Oversight, Testimony of Chrysler Vice Chairman and President James 
Press, Auto Dealership Closures, 111th, Cong., at 3-5 (June 12, 2009) 
(online at energycommerce.house.gov/ Press_111/20090612/ testimony_ 
press.pdf) (hereinafter ``James Press House Testimony'').
    \71\ General Motors has stated that it had 6,450 U.S. dealerships 
in 2008. Ford has said that it had 4,106 U.S. dealerships the same 
year. And Chrysler has reported that it had more than 3,330 U.S. 
dealerships in 2008. Summing those numbers, the ``Big Three'' had 
roughly 13,856 U.S. dealerships out of a total of 20,700 U.S. auto 
dealerships in 2008, or about 67 percent. See General Motors Corp., 
Restructuring Plan for Long-Term Viability, at 19 (Dec. 2, 2008) 
(online at online.wsj.com/ public/resources/ documents/gm_ 
restructuring_ plan120208.pdf) (hereinafter ``GM December 2008 
Viability Plan''). See also Ford Sustainability Report 2008/9 Dealers 
(accessed Aug. 30, 2009) (online at www.ford.com/ microsites/
sustainability- report-2008-09/ society-dealers) (hereinafter ``Ford 
Sustainability Report''); Patti Georgevich, Chrysler's Economic Impact, 
Chrysler Corporate Blog (Dec. 5, 2008) (online at blog.chryslerllc.com/ 
blog.do?id=552&p=entry) (hereinafter ``Chrysler's Economic Impact''); 
Casesa Shapiro Group, The Franchised Automobile Dealer: The Automaker's 
Lifeline, report prepared for the National Automobile Dealers 
Association, at 2 (Nov. 26, 2008) (online at www.nada.org/ nr/
rdonlyres/ 5c36b316-e765-4876-8d69- 3bf3a57e7789/0/ benefitsoffranchise 
dealers.pdf).
    \72\ Autodata Corp.'s Motor Intelligence Web site (accessed Aug. 
30, 2009) (online at www.motorintelligence.com/ fileopen.asp?File= 
SR_Sales-4.xls).
    \73\ In 2008, Toyota had 1,649,045 light-vehicle retail sales, 
compared with 1,076,170 for Chrysler. Id.
    \74\ Toyota, United States Operations 2009, at 5 (accessed Aug. 30, 
2009) (online at pressroom.toyota.com/ pr/tms/document/ TNA_OPS_ 
MAP_2009.pdf) (hereinafter ``Toyota US Operations 2009'').
    \75\ Senate Commerce, Science, and Transportation Committee, 
Testimony of Vice Chairman and President Chrysler LLC James Press, 
Chrysler's Dealership Network, 111th Cong., at 3 (June 3, 2009) (online 
at commerce.senate.gov/ public/_files/ PressTestimony Dealerships.pdf) 
(hereinafter ``James Press Senate Testimony'').
    \76\ Senate Commerce, Science, and Transportation Committee, 
Testimony of General Motors President and CEO Fritz Henderson, GM and 
Chrysler Dealership Closures: Protecting Dealers and Consumers, 111th 
Cong., at 3, 5 (June 3, 2009) (online at commerce.senate.gov/ public/
_files/ HendersonTestimony Dealerships.pdf) (hereinafter ``Fritz 
Henderson Senate Testimony''); James Press Senate Testimony, supra note 
75 at 5-6.
    \77\ Comptroller of the Currency, Comptroller's Handbook on Floor 
Plan Loans, at 3 (accessed Aug. 30, 2009) (online at www.occ.treas.gov/ 
handbook/ floorplan1.pdf) (hereinafter ``Comptroller Floor Plan 
Handbook'') (``Dealers selling in large volume are usually granted a 
three-day leeway before proceeds from inventory sold are required to be 
received by the bank.''); Lynn M. LoPucki & Elizabeth Warren, Secured 
Credit: A Systems Approach, at 252-53, 263 (hereinafter ``Secured 
Credit: A Systems Approach'').
---------------------------------------------------------------------------
    UAW Chrysler workers agreed to make concessions on 
compensation and retiree health benefits. These changes include 
the adjustments to the funding of the UAW Trust (as discussed 
above), cancellation of cost-of-living adjustments for the 
current workforce, and a restructuring of skilled trade 
classifications, among other concessions.\78\ As Mr. Bloom told 
the Panel at its hearing in Detroit on July 27, ``these 
concessions brought New Chrysler's compensation in line with 
that of Toyota and other foreign automotive manufacturers at 
their U.S. operations.'' \79\
---------------------------------------------------------------------------
    \78\ UAW Chrysler, Modifications to 2007 Agreement and Addendum to 
VEBA Agreement (Apr. 2009) (online at download.gannett. edgesuite.net/ 
detnews/2009/ pdf/UAWChrysler.pdf); Congressional Oversight Panel, 
Testimony of Ron Bloom before the Congressional Oversight Panel: 
Regarding the Treasury's Automotive Industry Financing Program (July 
27, 2009) (online at cop.senate.gov/documents/testimony-072709-
bloom.pdf) (hereinafter ``UAW Statements on VEBA Modifications'') 
(``The UAW made important concessions on wages, benefits, and retiree 
health care. These concessions brought New Chrysler's compensation in 
line with that of Toyota and other foreign automotive manufacturers at 
their US operations. In addition, the UAW retirees exchanged an almost 
$8 billion fixed obligation to the Voluntary Employees' Beneficiary 
Association (VEBA) retiree health trust for a $4.6 billion unsecured 
note and stock in New Chrysler. This arrangement shifts substantial 
risk onto the retiree health care trust and will likely result in 
meaningful reductions in health care benefits for New Chrysler's 
150,000 retirees. The Trust, which is managed by an independent 
committee of legally bound fiduciaries, will, other than a single seat 
on the Company's Board of directors, will [sic] have no role in the 
governance of the Company. However, the ability of the Trust to provide 
decent benefits over the long-term will require that the Company's 
stock become valuable, thus significantly aligning the interests of the 
Company and the VEBA as a key stakeholder.'') (hereinafter ``Ron Bloom 
Prepared COP Testimony'').
    \79\ Id.
---------------------------------------------------------------------------
    New Chrysler is not a public company and is not required to 
file reports with the Securities and Exchange Commission (SEC). 
However, Mr. Bloom has stated that both New Chrysler and the 
New GM will file quarterly reports with the SEC.\80\
---------------------------------------------------------------------------
    \80\ Nick Bunkley, U.S. Likely to Sell G.M. Stake Before Chrysler, 
New York Times (Aug. 5, 2009) (online at www.nytimes.com/ 2009/08/06/ 
business/06auto.html).
---------------------------------------------------------------------------

                         2. New General Motors

    A month after Chrysler entered bankruptcy, GM followed on 
June 1, 2009.\81\ On July 5, GM sold its ``good'' assets under 
Section 363 of the Code to a new, government-owned entity, 
General Motors Company (New GM).\82\ The new company purchased 
substantially all of the assets of Old GM needed to implement 
its new, leaner viability plan, which will focus on four core 
brands: Chevrolet, Cadillac, Buick, and GMC. New GM plans to 
close 11 facilities and idle another three facilities.
---------------------------------------------------------------------------
    \81\ Voluntary Chapter 11 Petition, at 1 (June 1, 2009), In Re 
General Motors Corp., S.D.N.Y (No.09-50026 (REG)) (online at 
docs.motorsliquidationdocket.com/ pdflib/01_50026.pdf) (hereinafter 
``GM Bankruptcy Petition'').
    \82\ Order (I) Authorizing Sale of Assets Pursuant to Amended and 
Restated Master Sale and Purchase Agreement with NGMCO, Inc., a 
Treasury-Sponsored Purchaser; (II) Authorizing Assumption and 
Assignment of Certain Executory Contracts and Unexpired Leases in 
Connection with the Sale; and (III) Granting Related Relief, (July 5, 
2009), In Re General Motors Corp., S.D.N.Y. (No. 09-50026 (REG)) 
(online at docs.motorsliquidationdocket.com/ pdflib/ 2968_order.pdf) 
(hereinafter ``Order Authorizing GM 363 Sale'').
---------------------------------------------------------------------------
    Again, the technical details of the disposition of assets 
are discussed in more detail below. Under the terms of a Master 
Purchase and Sale Agreement, Old GM unsecured creditors will 
receive a pro-rata share of 10 percent of the equity of New GM, 
plus warrants for an additional 15 percent of New GM.\83\ At 
least 54 percent of Old GM bondholders voted to approve the 
transaction.\84\ New GM issued 17.5 percent equity to the UAW 
Trust, as well as warrants to purchase an additional two and a 
half percent of the company. The UAW Trust will also be funded 
by a $2.5 billion note maturing in 2017, and $6.5 billion in 
nine percent perpetual preferred stock.\85\ The UAW Trust has 
the right to select one independent director, but no right to 
vote its shares nor any other governance rights.
---------------------------------------------------------------------------
    \83\ First Amendment to Amended and Restated Master Sale & Purchase 
Agreement (June 26, 2009) In Re General Motors Corp., S.D.N.Y. (No. 09-
50026 (REG)) (online at docs.motorsliquidationdocket.com/ pdflib/ 
amendment_630.pdf) (hereinafter ``First Amendment to GM Master Sale 
Agreement'').
    \84\ Rod Lache, Industry Update: Implication of GM's Bankruptcy 
Filing Today, Deutsche Bank (May 31, 2009) (hereinafter ``Deutsche Bank 
Report on Implications of GM Bankruptcy'').
    \85\ White House, Fact Sheet: Obama Administration Auto 
Restructuring Initiative General Motors Restructuring (June 30, 2009) 
(online at financialstability.gov/ latest/ 05312009_gm- factsheet.html) 
(hereinafter ``White House GM Restructuring Fact Sheet'').
---------------------------------------------------------------------------
    Treasury received 61 percent of the equity of New GM and 
$9.2 billion in debt and preferred stock.\86\ It also received 
the right to select 10 initial members of the GM board of 
directors. The governments of Canada and Ontario received 
approximately 12 percent of the equity in New GM, approximately 
$1.7 billion in debt and preferred stock, and the right to 
select one director for as long as they hold their current 
share of New GM equity.\87\
---------------------------------------------------------------------------
    \86\ General Motors Corp., Form 8-K (July 16, 2009) (online at 
www.sec.gov/Archives/ edgar/data/ 1467858/000119312509150199/ 
0001193125-09-150199- index.htm) (hereinafter ``GM July 16, 2009 8-
K'').
    \87\ Stockholder Agreement by and Among General Motors Company, 
United States Department of the Treasury, 7176384 Canada Inc., and UAW 
Retiree Medical Benefits Trust, 8 (July 10, 2009) (online at 
www.sec.gov/ Archives/ edgar/data/ 1467858/ 000119312509150199/ 
dex101.htm) (hereinafter ``New GM Stockholder Agreement'').
---------------------------------------------------------------------------
    Treasury provided approximately $30.1 billion of financing 
to support GM through an expedited Chapter 11 proceeding and 
restructuring.\88\ Treasury has no plans to provide any 
additional assistance to GM beyond this commitment.\89\
---------------------------------------------------------------------------
    \88\ Declaration of J. Stephen Worth, supra note 36 at appx. 18.
    \89\ White House Office of the Press Secretary, Remarks by the 
President on General Motors Restructuring (June 1, 2009) (online at 
www.whitehouse.gov/ the_press_office/ Remarks-by-the-President-on-
General- Motors-Restructuring/) (hereinafter ``White House June 1 
Remarks on GM Restructuring'').
---------------------------------------------------------------------------
    By the end of July, New GM had filled all of the positions 
on its board of directors.\90\ The 13 members bring experience 
from a wide range of industries and backgrounds. Ten of these 
directors were appointed or reinstated by Treasury: Daniel 
Akerson, managing director and head of global buyout at private 
equity firm The Carlyle Group; David Bonderman, co-founder of 
private equity firm Texas Pacific Group; Erroll B. Davis, Jr., 
chancellor of the University System of Georgia; E. Neville 
Isdell, retired chairman and CEO of Coca-Cola; Robert D. Krebs, 
retired chairman and CEO of Burlington Northern Santa Fe 
Corporation; Kent Kresa, chairman emeritus of Northrop Grumman 
Corporation; Philip A. Laskawy, retired chairman and CEO of 
Ernst & Young LLP; Kathryn V. Marinello, chairman and CEO of 
Ceridian Corporation; Patricia F. Russo former chief executive 
officer of Alcatel-Lucent; and Edward E. Whitacre, Jr. former 
chairman of the board of AT&T, who was chosen to be chairman of 
the board. Carol M. Stephenson, dean of the Richard Ivey School 
of Business at the University of Western Ontario, was appointed 
by the Canadian government.
---------------------------------------------------------------------------
    \90\ General Motors, Board of Directors (accessed on Aug. 11, 2009) 
(online at www.gm.com/ corporate/about/ board.jsp) (hereinafter ``GM 
Description of Board of Directors'').
---------------------------------------------------------------------------
    In late March 2009, as Treasury sought to invest additional 
funds in GM, President Obama announced the departure of CEO 
Rick Wagoner, who was replaced by COO Fritz Henderson.\91\ As 
part of the restructuring, the Motors Liquidation Company (MLC) 
board of directors and former CEO Wagoner reduced their 2009 
compensation to one dollar, and several other executive 
officers took salary cuts between 10 and 30 percent.\92\
---------------------------------------------------------------------------
    \91\ White House, Remarks by the President on the American 
Automotive Industry (Mar. 30, 2009) (online at www.whitehouse.gov/ 
the_press_ office/ Remarks-by-the-President- on-the-American-
Automotive-Industry-3/30/09/) (hereinafter ``March 30 Presidential 
Remarks'').
    \92\ General Motors Corp., Form 8-K, at 39 (Aug. 7, 2009) (online 
at www.sec.gov/ Archives/edgar/data/ 1467858/000119312509169233/
d8k.htm) (hereinafter ``GM August 7 8-K'').
---------------------------------------------------------------------------
    GM subsequently notified 1,300 of its approximate 6,000 
U.S. dealers that they would be closing by year end 2010, 
aiming eventually to trim its total to about 4,000.\93\ GM 
provided approximately $600 million in financial assistance in 
return for the dealers' selling down their existing inventory 
over the subsequent twelve months.\94\ These payments could 
vary widely based on each dealer's situation.
---------------------------------------------------------------------------
    \93\ House Committee on the Judiciary, Subcommittee on Commercial 
and Administrative Law, Testimony of Vice President and General Counsel 
of North America General Motors Company Michael J. Robinson, 
Ramifications of Auto Industry Bankruptcies, Part III 111th Cong., at 5 
(July 22, 2009) (online at judiciary.house.gov/ hearings/pdf/ 
Robinson090722.pdf) (hereinafter ``Michael Robinson House Testimony'').
    \94\ Id.
---------------------------------------------------------------------------
    GM's UAW workers agreed to make concessions on compensation 
and health benefits. These concessions were similar to those of 
Chrysler workers. GM workers gave up cost-of-living 
adjustments, performance bonuses, one paid holiday in each of 
2010 and 2011, tuition assistance, and some health 
benefits.\95\ The UAW estimated that these cuts would save GM 
between $1.2 and $1.3 billion per year.\96\
---------------------------------------------------------------------------
    \95\ Id.
    \96\ Kimberly S. Johnson and Tim Trisher, UAW Workers Approve 
General Motors Concessions, USA Today (May 29, 2009) (online at 
www.usatoday.com/ money/autos/ 2009-05-29-gm-uaw_N.htm) (hereinafter 
``Kim Johnson and Tim Trisher May 29 USA Today Report'').
---------------------------------------------------------------------------
    New GM is not a public company and is not required to file 
reports with the SEC, although as discussed above it is 
intended that GM will file financial statements with the SEC by 
2010.

                             3. WARRANTIES

    The automotive companies' widely publicized vulnerability 
in late 2008 and early 2009 raised concerns that consumers 
might not purchase Chrysler and GM automobiles for fear that 
these companies could not back their warranties. When Treasury 
announced the results of the auto team's work on March 30, 
Treasury also created a new program to backstop the two 
companies' new vehicle warranties. This program applied to any 
new GM or Chrysler car bought during the restructuring 
period.\97\ The program was sized at 125 percent of the costs 
projected by the manufacturer to satisfy anticipated claims. 
Each of Chrysler and GM provided 15 percent of the projected 
funds necessary with Treasury providing the remaining 110 
percent of the projected costs via loans.\98\
---------------------------------------------------------------------------
    \97\ U.S. Department of Treasury, Obama Administration's New 
Warranty Commitment Program (Mar. 30, 2009) (online at 
www.financialstability.gov/ docs/WarranteeCommitment Program.pdf) 
(hereinafter ``White House Statement on New Warranty Commitment 
Program'').
    \98\ Id.
---------------------------------------------------------------------------
    Prior to entering bankruptcy proceedings, Chrysler and GM 
created special purpose vehicles (SPVs) to hold those funds. 
Treasury lent Chrysler and GM $280 million \99\ and $361 
million,\100\ respectively. Both Chrysler and GM have since 
repaid these loans.\101\ To date, GM's repayment of its SPV 
facility has been its only repayment of TARP funds.\102\
---------------------------------------------------------------------------
    \99\ White House Office of the Press Secretary, Obama 
Administration Auto Restructuring Initiative: Chrysler-Fiat Alliance 
(hereinafter ``Chrysler-Fiat Alliance'') (Apr. 30, 2009) (online at 
www.whitehouse.gov/ the_press_office/ Obama-Administration-Auto- 
Restructuring-initiative/) (hereinafter ``Chrysler-Fiat Alliance'').
    \100\ U.S. Department of Treasury, Obama Administration Auto 
Restructuring Initiative: General Motors Restructuring (Mar. 31, 2009) 
(online at www.financialstability.gov/ latest/ 05312009_gm- 
factsheet.html) (hereinafter ``White House March 31 Remarks on GM 
Restructuring'').
    \101\ U.S. Department of Treasury, TARP Transactions Report, at 15 
(Aug. 4, 2009) (online at www.financialstability.gov/ docs/ 
transaction-reports/ transactions- report_08042009.pdf) (hereinafter 
``August 4 Transactions Report'').
    \102\ U.S. Department of Treasury, Transactions Report, at 16 (Aug. 
28, 2009) (online at financialstability.gov/ docs/transaction-reports/ 
transactions- report_08282009.pdf) (hereinafter ``August 28 
Transactions Report'').
---------------------------------------------------------------------------

                      4. SUPPLIER SUPPORT PROGRAM

    As a result of the downturn in the economy, automotive 
suppliers, upon whose functioning Chrysler and GM depend, had 
great difficulty accessing credit.\103\ The viability plans of 
Chrysler and GM both pointed to the vulnerability of their 
suppliers.\104\ Consequently, on March 19, Treasury announced 
the Auto Supplier Support Program (ASSP) to make available up 
to $5 billion in financing.\105\ The government guaranteed the 
payment of products suppliers shipped, even if the automotive 
companies went under. In order to further unlock credit, 
participating suppliers could also sell their receivables into 
the program at a discount before maturity. The program would be 
run through American automotive companies that agreed to 
participate in the program. The supplier would pay a small fee 
for the right to participate in the program. Although all 
domestic automotive companies were eligible, only Chrysler and 
GM chose to participate. By April 9, $1.5 billion was made 
available to Chrysler and $3.5 billion to GM under the 
program.\106\ The total commitment was reduced on July 8 to $1 
billion for Chrysler and $2.5 billion for GM.\107\
---------------------------------------------------------------------------
    \103\ U.S. Department of Treasury, Auto Supplier Support Program: 
Stabilizing the Automotive Industry at a Time of Crisis (Mar. 18, 2009) 
(online at www.treas.gov/ press/releases/ docs/ supplier_ support_ 
program_3_18.pdf) (hereinafter ``Stabilizing the Automotive Industry at 
a Time of Crisis'').
    \104\ Chrysler Restructuring Plan, supra note 28; GM Restructuring 
Plan, supra note 27.
    \105\ U.S. Department of the Treasury, Treasury Announces Auto 
Supplier Support Program (Mar. 19, 2009) (online at 
www.financialstability.gov/ latest/ auto3_18.html) (hereinafter 
``Treasury Auto Supplier Support Program Announcement'').
    \106\ August 18 Transactions Report, supra note 1.
    \107\ August 18 Transactions Report, supra note 1.
---------------------------------------------------------------------------

      5. WHITE HOUSE COUNCIL ON AUTOMOTIVE COMMUNITIES AND WORKERS

    One aspect of TARP assistance to the automotive industry is 
the fallout created by the restructurings. In aiming to make 
Chrysler and GM more competitive and sustainable, President 
Obama has recognized the difficult sacrifices that many 
stakeholders and communities have made across the nation.\108\ 
The government-backed restructurings have resulted in 
substantial sacrifices for many, including further job 
reductions and dealership and parts supplier closings that 
impact the welfare and livelihood of dealers, retirees, workers 
and the greater communities \109\ surrounding automotive plants 
and dealerships. The Obama Administration has created a White 
House Council on Automotive Communities and Workers, co-chaired 
by Mr. Summers and Secretary of Labor Hilda L. Solis. Edward 
Montgomery, a former deputy secretary of labor, was appointed 
as the new director of recovery for auto communities and 
workers to work with autoworkers and auto communities to help 
offset the impact of these changes and assist communities as 
they reorient their local economies.\110\ President Obama 
stated that the hardships currently being faced are necessary 
in order for the American automotive industry to reemerge as 
the ``best automotive industry in the world'' \111\ and for the 
future of this nation to continue to be premised on the 
ingenuity and entrepreneurship of current generations and 
generations past.\112\
---------------------------------------------------------------------------
    \108\ White House June 1 Remarks on GM Restructuring, supra note 
89.
    \109\ According to data from the Center for Automotive Research, 
more than 50 U.S. towns and cities have had a major automotive plant 
closure in the past five years.
    \110\ White House, Executive Order Establishing a White House 
Council on Automotive Communities and Workers (June 23, 2009) (online 
at www.whitehouse.gov/ the_press_ office/ Establishing-a- White-House-
Council-on- automotive-communities- and-workers/) (hereinafter 
``Executive Order Establishing White House Council on Automotive 
Communities and Workers'').
    \111\ White House Office of Press Secretary, Remarks by the 
President on the Auto Industry (Apr. 30, 2009) (online at 
www.whitehouse.gov/ the_press_office/ Remarks-by-the-President-on-the- 
Auto-Industry/) (hereinafter ``White House April 30 Remarks on Auto 
Industry'').
    \112\ Id.
---------------------------------------------------------------------------

          C. The Impact of the Reorganizations: Who Got What?


                              1. CHRYSLER

    At the time of the Chapter 11 filing, Chrysler was owned 
80.1 percent by Cerberus and its affiliates and 19.9 percent by 
Daimler and its affiliates.\113\ Chrysler owed money to several 
groups of creditors. Under a first lien credit agreement, 
Chrysler had borrowed $10 billion from a group of lenders \114\ 
on a secured basis, meaning that if Chrysler defaulted, 
specific assets, known as collateral, could be seized by those 
lenders.\115\ The collateral for this loan was nearly all Ch 
rysler's assets.\116\ At the time of filing, Chrysler owed $6.9 
billion to the ``first lien lenders'' under this agreement.
---------------------------------------------------------------------------
    \113\ Affidavit of Ronald E. Kolka In Support of First Day 
Pleadings, at 5 (April 30, 2009), In Re Chrysler LLC, S.D.N.Y. (No. 09 
B 50002 (AJG)) (online at chap11.epiqsystems.com/ docket/ 
docketlist.aspx?pk= 1c8f7215-f675-41bf- a79b-e1b2cb9c18f0&l=1) 
(hereinafter ``Ronald Kolka Declaration'').
    \114\ About 70 percent of this debt is held by four banks that 
received TARP funding: JP Morgan Chase ($25 billion in TARP funding), 
Citigroup ($45 billion in TARP funding), Morgan Stanley ($10 billion in 
TARP funding), Goldman Sachs ($10 billion in TARP funding). Ronald 
Kolka Declaration, supra note 113 at 5. Some creditors have claimed 
that Treasury used its status as a creditor to these institutions as 
leverage in negotiating over this secured debt. See, for example, 
Indiana State Police Pension Trust et al. v. Chrysler LLC, No. 09-2311-
bk, 2009 WL 2382766 (2d Cir. Aug. 5, 2009); Neil King Jr. and Jeffrey 
Mccracken, U.S. Forced Chrysler's Creditors to Blink, Wall Street 
Journal (May 11, 2009) (online at online.wsj.com/ article/ 
SB124199948894005017.html) (hereinafter ``Neil King and Jeffery 
McCracken May 11 Wall Street Journal Report'').
    \115\ When the value of the collateral is less than the amount of 
the secured claim, the secured creditors become unsecured creditors 
with respect to the shortfall.
    \116\ Ronald Kolka Declaration, supra note 113 at 5.
---------------------------------------------------------------------------
    Under a second lien credit agreement, Chrysler received a 
further loan from affiliates of its shareholders.\117\ This 
loan was secured by a ``second lien'' over the assets that 
formed the collateral for the first lien credit agreement, 
meaning the second lien lenders had access to collateral 
securing their loan only after the first lien lenders were paid 
off. At the time of filing, Chrysler owed $2 billion to the 
second lien lenders. Under the TARP funding discussed above, 
Chrysler borrowed a total of $4 billion from Treasury.\118\ As 
security for this loan, Treasury received a third lien over the 
assets securing the first and second lien credit agreements, 
and a first lien on all unencumbered assets. (The warranty 
advance discussed above was secured by the funds in the 
warranty SPV.) The amount owed to Treasury at the time of 
filing was $4.28 billion.
---------------------------------------------------------------------------
    \117\ The lenders included Daimler Financial, an affiliate of 
Daimler, with $1.5 billion in commitments and Madeleine LLC, an 
affiliate of Cerberus, with $500 million in commitments. Ronald Kolka 
Declaration, supra note 113 at 5.
    \118\ The $4.8 billion total includes three separate loans to 
Chrysler Holding LLC. Treasury made a $4 billion loan on Jan. 2, 2009. 
It made additional loans of $500 million and $280,130,642 on April 29, 
2009. August 28 TARP Transactions Report, supra note 102.
---------------------------------------------------------------------------
    In 2008, Chrysler (like GM and Ford) had entered into a 
settlement agreement pursuant to litigation between the UAW, 
individual workers and the automotive companies.\119\ Under 
this agreement, a trust was created to provide medical benefits 
to UAW retirees. Chrysler was supposed to fund this trust with 
cash. At the time of the filing, Chrysler owed the UAW Trust 
$10.6 billion.\120\
---------------------------------------------------------------------------
    \119\ See discussion of the UAW Trust, supra note 49.
    \120\ Chrysler Restructuring Plan, supra note 28.
---------------------------------------------------------------------------
    Chrysler also had significant unsecured debt owing to trade 
creditors such as suppliers. At the time of filing, this 
amounted to approximately $5.3 billion.\121\
---------------------------------------------------------------------------
    \121\ Ronald Kolka Declaration, supra note 113 at 5.
---------------------------------------------------------------------------
    When, as discussed above, the government indicated that it 
would support Chrysler's viability plan,\122\ Fiat established 
New CarCo. Acquisition LLC (New Chrysler) under Delaware law. 
Chrysler, Fiat and New Chrysler tentatively entered into a 
master transaction agreement (MTA).\123\ Under the MTA, with 
the approval of the bankruptcy court \124\ and in accordance 
with Section 363, Old Chrysler sold substantially all its 
operating assets to New Chrysler, and in exchange for those 
assets New Chrysler assumed some of the liabilities of Old 
Chrysler \125\ (most importantly the obligations to the UAW 
Trust) and paid Old Chrysler $2 billion in cash.\126\
---------------------------------------------------------------------------
    \122\ See supra Section B.
    \123\ Master Transaction Agreement, supra note 45. The agreement 
was conditioned on the approval of various other agreements or 
settlements with other parties, including Treasury and the UAW, as well 
as overall acceptance of the transaction by the bankruptcy court.
    \124\ Master Transaction Agreement, supra note 45.
    \125\ U.S. Treasury Office of Public Affairs, Obama Administration 
Auto Restructuring Initiative (April 30, 2009) (online at 
www.financialstability.gov/ latest/ tg_043009.html) (hereinafter 
``White House April 30 Remarks on Auto Restructuring Initiative'').
    \126\ Id.
---------------------------------------------------------------------------
    That $2 billion in cash, together with any remaining assets 
of Old Chrysler not transferred to New Chrysler, becomes the 
``bankruptcy estate'' of Old Chrysler and will be distributed 
to the first lien lenders in accordance with bankruptcy 
law.\127\ As also discussed above, certain of those lenders 
objected to the Section 363 sale. Notwithstanding the objection 
of the dissenting creditors, they will receive the same 
payout--about 29 cents on the dollar--that the assenting 
creditors do.\128\ Since the first lien lenders were owed $6.9 
billion, there was no money left over for secured lenders with 
second or lower liens, or for any unsecured creditors.\129\
---------------------------------------------------------------------------
    \127\ The secured creditors committee sued J.P. Morgan, the 
administrative agent for the deal, demanding that $1.4 billion paid to 
Chrysler secured debt holders be returned because liens on the debt 
were not perfected. See generally, In re Chrysler LLC, 405 B.R. 84 
(Bankr. S.D.N.Y. 2009); Alan Zimmerman, GM Creditor Panel Seeks to 
Recoup $1.4 billion from Secured Lenders, Standard & Poor's: Leveraged 
Commentary & Data (Aug. 3, 2009) (hereinafter ``Alan Zimmerman S&P 
Commentary'').
    \128\ This outcome stands in contrast with press release issued by 
the White House on April 30, 2009. This release stated: ``In order to 
effectuate this alliance without rewarding those who refused to 
sacrifice, the U.S. government will stand behind Chrysler's efforts to 
use our bankruptcy code to clear away remaining obligations and emerge 
stronger and more competitive.'' White House April 30 Remarks on Auto 
Restructuring Initiative, supra note 125.
    \129\ Some of these entities, such as the UAW Trust, did receive 
interests in New Chrysler, as discussed in more depth below. From a 
technical point of view, they received these interests in their 
capacity as independent contracting entities offering consideration 
(such as revised employment contracts with the UAW) to New Chrysler in 
exchange for New Chrysler equity. Section 363 sales are discussed in 
more depth in Section E of this report.
---------------------------------------------------------------------------
    New Chrysler's operations are not constrained by bankruptcy 
law, and it is able to make whatever commercial arrangements it 
chooses regarding (a) to whom it sells ownership interests in 
New Chrysler, (b) which assets and contracts of Old Chrysler it 
will acquire, and (c) ongoing commercial relationships with 
persons (such as dealers, suppliers and unions) who may have 
had relationships with Old Chrysler.\130\
---------------------------------------------------------------------------
    \130\ The significant policy implications of this are discussed in 
Section G below.
---------------------------------------------------------------------------
    Thus, in exchange for a new collective bargaining agreement 
with the UAW, New Chrysler will fund the UAW Trust with a 
combination of a $4.6 billion note and 67.7 percent of the 
equity in New Chrysler.\131\ Fiat will contribute technology 
and other capabilities, and receive about 20 percent equity in 
New Chrysler.\132\ Treasury received a 10 percent stake in the 
company, as well as notes that equal about $7.1 billion. If 
Fiat is able to achieve certain performance goals with New 
Chrysler, its stake will increase to a 35 percent equity share, 
while the UAW Trust's and Treasury's stakes will decrease to 55 
percent and 8 percent, respectively.\133\
---------------------------------------------------------------------------
    \131\ White House April 30 Remarks on Auto Restructuring 
Initiative, supra note 125.
    \132\ White House April 30 Remarks on Auto Restructuring 
Initiative, supra note 125.
    \133\ White House April 30 Remarks on Auto Restructuring 
Initiative, supra note 125.
---------------------------------------------------------------------------
    The status of the principal stakeholders in Chrysler and 
New Chrysler at the time of filing \134\ and after 
reorganization is thus:
---------------------------------------------------------------------------
    \134\ This report analyzes information at several different points 
in the restructuring process. Dollar amounts in this section are given 
as at the time of filing for bankruptcy. They may therefore differ from 
dollar amounts in Section F, which shows amounts initially expended and 
amounts outstanding at the time of this report.

                   FIGURE 1: STATUS OF THE PRINCIPAL STAKEHOLDERS IN CHRYSLER AND NEW CHRYSLER
----------------------------------------------------------------------------------------------------------------
                                                      What they get from       What they
           Stakeholder             What Old Chrysler    Old Chrysler in   contributed to New  What they got from
                                       owed them          liquidation          Chrysler          New Chrysler
----------------------------------------------------------------------------------------------------------------
First lien secured lenders \135\  $6.9 billion in     $2 billion cash...  N/A...............  N/A.
                                   secured claims
                                   \136\.
Daimler.........................  $2 billion in       Wiped out.........  $600 million to
                                   second lien debt;                       settle claim with
                                   19.9% equity for                        PBGC \137\.
                                   Daimler and 80.1%
                                   equity for
                                   Cerberus.
Cerberus........................                                          Contribution of
                                                                           claim against
                                                                           Daimler to
                                                                           indirectly assist
                                                                           settlement with
                                                                           PBGC.
Treasury........................  First TARP          Bankruptcy estate   TARP financing (6/  8% equity (9.85%
                                   financing (1/2/     will not cover      10/09): up to       currently),\138\
                                   09): $4 billion;    TARP or DIP         $6.6 billion        as well as a $6.6
                                   first lien on all   financing except    senior secured      billion note and
                                   unencumbered        the portion         debt.               the assumption of
                                   property, third     assumed by New                          $500 million of
                                   lien on             Chrysler.                               the first TARP
                                   previously         (Note: With                              financing.
                                   encumbered assets.  respect to the
                                  Second TARP          first TARP
                                   financing (4/29/    financing,
                                   09): $1.89          Treasury has a
                                   billion for DIP     claim on the
                                   (debtor-in-         value of Chrysler
                                   possession)         Financial equity
                                   financing (of       at the greater of
                                   $3.8 billion        $1.375 billion or
                                   commitment).        40% of total
                                                       equity value).
UAW Trust.......................  $8 billion in       Nothing from Old    UAW gave            55% equity (67.69%
                                   unsecured claims.   Chrysler.           concessions on      currently); $4.6
                                                                           wages, benefits,    billion note.
                                                                           retiree health
                                                                           care to New
                                                                           Chrysler.
Fiat............................  N/A...............  N/A...............  Technology, IP,     20% equity with an
                                                                           access to           additional 15%
                                                                           distribution        available if
                                                                           network \139\.      certain
                                                                                               performance
                                                                                               metrics are met.
Governments of Ontario and        $600 million loan.  Nothing from Old    $600 million        2% equity (2.46%
 Canada.                          $1.125 billion for   Chrysler.           original loan       currently) and a
                                   DIP financing.                          assumed by New      note for up to
                                                                           Chrysler.           $1.9 billion.
                                                                          $1.3 billion loan
                                                                           \140\.
----------------------------------------------------------------------------------------------------------------
\135\ These lenders include JP Morgan Chase & Co., Citigroup Inc., Goldman Sachs Group Inc., & Morgan Stanley &
  Co. Inc., all recipients of TARP money, as discussed in note 155. infra. Ronald Kolka Declaration, supra note
  113 at 5. These lenders include the Indiana Pension Funds.
\136\ Chrysler Restructuring Plan, supra note 28.
\137\ When Chrysler filed for bankruptcy, its pension liabilities were significantly underfunded. As part of the
  bankruptcy process, Chrysler received court approval of a settlement among the company, the Pension Benefit
  Guaranty Corporation, Daimler and Cerberus. As noted in the PBGC's press release (online at www.pbgc.gov/
  media/news-archive/ news-releases/ 2009/pr-0921.html), the settlement frees Daimler of its $1 billion guaranty
  of the Chrysler pension plans. In exchange, Daimler will pay $200 million into the pension plans immediately
  upon final execution of the agreement, and will also pay $200 million into the plans in 2010 and 2011. If the
  Chrysler pensions terminate before August 2012 and are trusteed by the PBGC, Daimler will pay $200 million to
  the PBGC insurance program. In addition, Cerberus and Daimler have agreed to waive various loans they made to
  Chrysler as part of the Cerberus' 2007 acquisition of the company. Order Authorizing Debtor Chrysler LLC to
  Enter Into a Settlement on the Terms Set Forth in the Binding Term Sheet Among Daimler, the DC Contributors,
  Cerberus, Chrysler Holding, Chrysler and PBGC Pursuant to Rule 9019 Federal Rules of Bankruptcy Procedure
  (June 5, 2009), In Re Chrysler LLC, S.D.N.Y. (No. 09 B 50002 (AJG)) (online at chap11.epiqsystems.com/ docket/
  docketlist.aspx?pk= 1c8f7215-f675-41bf- a79b-e1b2cb9c18f0&l=1) (hereinafter ``Order Allowing Chrysler Pension
  Settlement'').
\138\ The ``current'' figures, which are indicated for Treasury, UAW Trust, and the Governments of Canada and
  Ontario, represent the equity breakdown before Fiat increases its equity holding after meeting specified
  performance metrics. If Fiat secures its potential 35 percent equity holding, the other equity holdings will
  decrease as indicated.
\139\ Chrysler-Fiat Alliance, supra note 99.
\140\ $1.3 billion of financing commitments were provided by the Canadian and Ontario governments in the form of
  working capital and exit financing loans that will continue to be the obligations of New Chrysler.

                           2. GENERAL MOTORS

    At the time of the Chapter 11 filing, GM was a publicly 
owned company traded on the New York Stock Exchange.\141\
---------------------------------------------------------------------------
    \141\ General Motors Corp., Form 10-K (March 5, 2009) (online at 
www.sec.gov/ Archives/edgar/ data/40730/ 000119312509045144/ d10k.htm) 
(hereinafter ``GM Fiscal Year 2008 10-K'').
---------------------------------------------------------------------------
    As with Chrysler, GM owed money to various groups of 
creditors.
    At the time of the GM bankruptcy filing on June 1, 2009, 
GM's largest secured debt was to Treasury (in the amount of 
$19.4 billion) backed by collateral including, in part, 
intellectual property, real property, cash, and equity. After 
GM filed for bankruptcy, Treasury provided GM with $30.1 
billion of debtor in possession (DIP) financing \142\ that was 
used to facilitate GM's restructuring process. As will be 
discussed below, this DIP financing constituted an 
administrative priority claim and gave Treasury priority over 
the claims of unsecured creditors.
---------------------------------------------------------------------------
    \142\ See Section G(4) of this report.
---------------------------------------------------------------------------
    GM's largest secured claims outside the U.S. government 
were: bank lenders represented by Citicorp US, Inc. ($3.865 
billion); bank lenders represented by JP Morgan Chase Bank 
($1.488 billion); Export Development Canada ($400 million); and 
Gelco Corporation ($125 million).\143\ These totaled 
approximately $6 billion and were backed by collateral that 
included, in part, inventory, equipment, and equity interest.
---------------------------------------------------------------------------
    \143\ GM Bankruptcy Petition, supra note 81 at 94.
---------------------------------------------------------------------------
    Old GM had unsecured claims that totaled $116.5 billion. Of 
those claims, $27.1 billion were attributable to unsecured 
bonds.\144\
---------------------------------------------------------------------------
    \144\ GM Bankruptcy Petition, supra note 81 at 6.
---------------------------------------------------------------------------
    At the time of filing, the largest unsecured claims were: 
Wilmington Trust Company ($22.760 billion, bond debt); UAW 
($20.560 billion, owed to the UAW Trust); Deutsche Bank AG 
($4.444 billion, bond debt); IUE-CWA ($3.669 billion, employee 
obligations); and Bank of New York Mellon ($176 million, bond 
debt). The remaining 45 unsecured claims were all trade debt, 
and totaled $894 million.\145\
---------------------------------------------------------------------------
    \145\ GM Bankruptcy Petition, supra note 81 at 81.
---------------------------------------------------------------------------
    On June 1, President Obama outlined the Treasury auto 
team's plan to restructure GM.\146\ New GM was created. 
Pursuant to the Master Sale and Purchase Agreement (MPA),\147\ 
New GM purchased most of Old GM's assets and assumed certain 
liabilities.\148\ In exchange, New GM paid Old GM consideration 
of 10 percent of the equity in New GM and warrants for a 
further 15 percent of New GM's equity, totaling approximately 
$7.4 to $9.8 billion in value.\149\ In addition, Treasury and 
the Canadian government credit bid their loans to Old GM, which 
totaled approximately $45 billion.\150\ This amount included 
the $19.4 billion in pre-bankruptcy indebtedness and the 
portion of the $33.3 billion DIP facility that was not assumed 
by New GM or left behind for the wind-down of Old GM. That 
consideration became part of Old GM's bankruptcy estate. Where 
cash is bid in a Section 363 sale (as was the case in 
Chrysler), that cash becomes part of the bankruptcy estate to 
be distributed to the debtor's creditors. In a credit bid, the 
debt owed to the bidder by the bankruptcy estate is offset by 
the amount of the credit bid, reducing the amount of claims 
that will share in the distribution of the remaining assets, 
and thereby increasing the value of the bankruptcy estate that 
will be distributed to the non-bidding creditors.
---------------------------------------------------------------------------
    \146\ White House June 1 Remarks on GM Restructuring, supra note 
85.
    \147\ Master Purchase and Sale Agreement by and Among General 
Motors Corporation, Saturn LLC, Saturn Distribution Corporation, and 
Vehicle Acquisition Holdings LLC (June 1, 2009), In Re General Motors 
Corp., S.D.N.Y. (No. 09-50026 (REG)) (online at docs.motors 
liquidationdocket.com/ pdflib/ pleading_5.pdf) (hereinafter ``GM Master 
Purchase Agreement'').
    \148\ New GM did not assume the following liabilities: (i) products 
liability claims arising out of products delivered prior to the 363 
sale transaction closing (to the extent they were not assumed by reason 
of the change in the MPA after the filing of objections); (ii) 
liabilities for claims arising out of exposure to asbestos; (iii) 
liabilities to third parties for claims based upon contract, tort or 
any other basis; (iv) liabilities related to any implied warranty or 
other implied obligation arising under statutory or common law; and (v) 
employment-related obligations not otherwise assumed, including, among 
other obligations, those arising out of the employment, potential 
employment, or termination of any individual (other than an employee 
covered by the UAW collective bargaining agreement) prior to or at the 
closing of the 363 sales transaction. In re GMC, 407 B.R. 463, 482 
(Bankr. S.D.N.Y. 2009).
    \149\ Stephen Worth Declaration, supra note 36 at appx. 18.
    \150\ Amended and Restated Master Sale and Purchase Agreement by 
and Among General Motors Corporation, Saturn LLC, Saturn Distribution 
Corporation, and Vehicle Acquisition Holdings LLC (June 26, 2009) 
(hereinafter ``Amended and Restated GM Master Purchase Agreement'').
---------------------------------------------------------------------------
    Old GM's secured lenders were repaid, leaving the unsecured 
lenders with their pro rata share of the 10 percent equity in 
New GM.
    As with New Chrysler, New GM was able to dispose of 
ownership interests in New GM as it saw fit. Treasury received 
$6.7 billion in New GM debt (of which $361 million related to 
the warranty program has been repaid) and $2.1 billion in New 
GM preferred stock \151\ and approximately 61 percent of the 
equity in New GM. The governments of Canada and Ontario 
received $1.7 billion in debt and preferred stock and 
approximately 12 percent of the equity in New GM. \152\
---------------------------------------------------------------------------
    \151\ White House March 31 Remarks on GM Restructuring, supra note 
100.
    \152\ Prime Minister of Canada, PM and Premier Dalton McGuinty 
Announce Loans to Support the Restructuring of Chrysler (June 1, 2009) 
(online at pm.gc.ca/ eng/media.asp?id=2547) (hereinafter ``Canadian 
Prime Minister's Chrysler Announcement'').
---------------------------------------------------------------------------
    Old GM owed a $20 billion obligation to the UAW Trust. 
Pursuant to the UAW Retiree Settlement Agreement,\153\ New GM 
will transfer to the UAW Trust 17.5 percent of the equity in 
New GM, warrants to purchase an additional 2.5 percent, a $2.5 
billion note, and $6.5 billion in preferred stock.
---------------------------------------------------------------------------
    \153\ Form of UAW Retiree Settlement Agreement (June 1, 2009) In Re 
General Motors Corp., S.D.N.Y. (No. 09-50026 (REG)) (online at 
docs.motorsliquidationdocket.com/ pdflib/uaw_7.pdf) (hereinafter ``UAW 
Retiree Settlement Agreement'').
---------------------------------------------------------------------------
    The status of the principal stakeholders in Old GM and New 
GM at the time of filing and after reorganization is thus as 
follows:

                         FIGURE 2: STATUS OF THE PRINCIPAL STAKEHOLDERS IN GM AND NEW GM
----------------------------------------------------------------------------------------------------------------
                                                      What they get from       What they
           Stakeholder             What Old GM owed        Old GM in      contributed to New  What they get from
                                         them             liquidation             GM                New GM
----------------------------------------------------------------------------------------------------------------
Old GM shareholders.............  Shareholders'       Wiped out.........  N/A...............  N/A.
                                   equity.
UAW Trust.......................  $20.56 billion in   Nothing from Old    UAW gave            17.5% equity;
                                   unsecured           GM.                 concessions on      warrants to buy
                                   obligations \154\.                      wages, benefits,    an additional
                                                                           retiree health      2.5% in equity,
                                                                           care to New GM.     $2.5 billion
                                                                                               note, $6.5
                                                                                               billion in
                                                                                               preferred stock.
Secured lenders \155\...........  $6 billion........  Paid in full......  N/A...............
Unsecured creditors.............  $27.1 billion in    10% of New GM and   N/A...............  (Equity issued to
                                   bonds and various   warrants equal to                       Old GM in
                                   other claims.       15% of New GM.                          exchange for
                                                                                               assets).
Treasury........................  First TARP          $986 million of     Used approximately  61% equity.
                                   financing (12/29/   Treasury DIP        $42 billion in     $7.1 billion in
                                   08): $13.4          financing remains   debts to credit     notes (including
                                   billion.            with Old GM;        bid for Old GM      $361 million for
                                  Second TARP          other debts were    assets.             warranty program
                                   financing (4/22/    credit bid and                          already repaid)
                                   09): $2 billion.    thus no longer                          and $2.1 billion
                                  Third TARP           outstanding.                            in preferred
                                   financing (5/20/                                            stock.
                                   09): $4 billion.
                                  DIP financing (6/3/
                                   09): $30.1
                                   billion.
Governments of Canada and         $9.5 billion loan   $189 million of     Approximately $3    12% equity.
 Ontario.                          including $3.2      Canadian DIP        billion of DIP     $1.3 billion in
                                   billion in DIP      financing remains   financing was       notes and $0.4
                                   financing.          with Old GM;        credit bid.         billion in
                                                       other amounts                           preferred stock.
                                                       credit bid.
----------------------------------------------------------------------------------------------------------------
\154\ $10 billion in cash scheduled to be transferred to the UAW Trust on January 1, 2009 had already been set
  aside by Old GM in an internal account. This cash is still scheduled to be transferred to the UAW Trust on
  that date.
\155\ As discussed above, these creditors include J.P. Morgan, Citigroup Inc., Goldman Sachs Group Inc., &
  Morgan Stanley, all recipients of TARP money. GM Bankruptcy Petition, supra note 81.

     D. Treasury's Objectives: What was Treasury Trying to Achieve?


               1. WHAT WERE TREASURY'S STATED OBJECTIVES?

    In this section, the Panel examines the publicly 
articulated statements of the Bush and Obama Administrations at 
the various points their decisions were announced in order to 
determine under which circumstances and upon which conditions 
the government might intervene in failing industries. As 
discussed above, Detroit automotive executives warned Congress 
in late 2008 that the collapse of one or more of the Big Three 
automotive companies would have national consequences, putting 
as many as 1.1 million jobs at risk.\156\ Allocating TARP 
assistance under EESA came to be perceived by many as the 
fastest means to provide funding to the sector, since it could 
be done without further action by Congress.
---------------------------------------------------------------------------
    \156\ For further discussions of the economic ramifications of 
liquidations of Chrysler and General Motors, see Section B, supra.
---------------------------------------------------------------------------

a. December 2008: Rescue Funding--The Bush Administration's decision to 
        allocate TARP funds

    The Bush Administration's initial December 2008 
determination to allocate TARP funds to stabilize the 
automotive industry through short-term loans was made with the 
primary goals of preventing a substantial disruption to the 
national economy and allowing Chrysler and General Motors to 
undergo significant restructuring in order to achieve future 
profitability and long-term viability.\157\ In a press release, 
then-Treasury Secretary Henry Paulson noted that Treasury 
``acted to support Chrysler and General Motors, with the 
requirement that they move quickly to develop and adopt 
acceptable plans for long term viability.'' \158\ The Bush 
Administration stated that short-term funding would allow the 
companies to work with their creditors, the unions, and 
Congress to formulate a plan to reduce their debt, some of the 
residual healthcare costs, and to achieve additional 
concessions, in order to attain financial viability.\159\
---------------------------------------------------------------------------
    \157\ U.S. Department of the Treasury, Secretary Paulson Statement 
on Stabilizing the Automotive Industry (Dec. 19, 2008) (online at 
www.treas.gov/press/releases/hp1332.htm) (``Today we have acted to 
support Chrysler and General Motors, with the requirement that they 
move quickly to develop and adopt acceptable plans for long term 
viability. This step will prevent significant disruption to our 
economy, while putting the companies on a path to the significant 
restructuring necessary to achieve long term viability. At the same 
time, we are including loan provisions to protect the taxpayers to the 
maximum extent possible.'').
    \158\ Id.
    \159\ Bush Plan to Assist Automakers, supra note 16.
---------------------------------------------------------------------------
    Furthermore, as part of the initial decision to allocate 
TARP funding to the automotive sector, the Bush Administration 
made clear the importance of several policy targets as a 
critical component of the taxpayers' investment.\160\ These 
targets included the reduction of outstanding unsecured debt by 
two-thirds through a debt for equity exchange, certain labor 
modifications (such as cuts in compensation), and modifications 
to UAW Trust account contributions, among others.\161\ The 
companies were also required to conclude new agreements with 
their other major stakeholders, including dealers and 
suppliers, by March 31, 2009.\162\ Many of these targets were 
included as part of the proposals for bridge loans that the 
Bush Administration negotiated with congressional leadership 
towards the end of 2008, but which were eventually blocked in 
the Senate before the congressional recess.\163\
---------------------------------------------------------------------------
    \160\ Chrysler Secured Term Loan Facility Summary, supra note 24; 
GM Secured Term Loan Facility Summary, supra note 24.
    \161\ Chrysler Secured Term Loan Facility Summary, supra note 24; 
GM Secured Term Loan Facility Summary, supra note 24.
    \162\ Chrysler Secured Term Loan Facility Summary, supra note 24; 
GM Secured Term Loan Facility Summary, supra note 24.
    \163\ Bush Plan to Assist Automakers, supra note 16. President Bush 
noted that his administration worked with Congress on legislation to 
provide automotive companies with bridge loans while they developed 
plans for viability. ``Unfortunately, despite extensive debate and 
agreement that we should prevent disorderly bankruptcies in the 
American Automotive Industry, Congress was unable to get a bill to my 
desk before adjourning this year.'' Noting that ``Congress failed to 
make funds available for these loans,'' President Bush highlighted that 
``the federal government will grant loans to automotive companies under 
conditions similar to those Congress considered'' in late fall 2008.
---------------------------------------------------------------------------

b. February-March 2009: Formation of the task force and release of the 
        Obama Administration's viability determinations

    President Obama noted the gravity of the situation facing 
the American automotive industry and made the commitment to 
work with and support these companies as they underwent 
restructuring. Upon taking office, the President ``inherited an 
automotive industry that had lost 50 percent of its sales 
volume and over 400,000 jobs in the year before he took 
office.'' \164\ By early 2009, despite having already received 
substantial loans from the Bush Administration through TARP 
funding, Chrysler and GM were requesting additional assistance. 
President Obama stated that he considered ``the hundreds of 
thousands of Americans whose livelihoods are still connected to 
the American automotive industry, and the impact on an already 
struggling economy'' and determined that ``if Chrysler and GM 
were willing to fundamentally restructure their businesses, and 
make the hard choices necessary to become competitive now and 
in the future, it was a process worth supporting.'' \165\ In 
particular, President Obama noted that among those Americans 
who ``have suffered most during this recession have been those 
in the auto industry and those working for companies that 
support it,'' and cited the historic rise in unemployment 
across the Midwest.\166\ The current Administration has cited 
the ``centrality of the automobile industry to the broader 
economy'' \167\ as justification for this substantial 
intervention and stated that inaction would have caused a 
``spiraling liquidation of Chrysler and GM leading to massive 
job losses and long-term damage to the U.S. manufacturing 
base.'' \168\
---------------------------------------------------------------------------
    \164\ Ron Bloom Prepared COP Testimony, supra note 78 at 1.
    \165\ White House, Remarks by the President on the American 
Graduation Initiative, Macomb Community College, Warren, MI (July 14, 
2009) (online at www.whitehouse.gov/ the_ press_ office/ Remarks-by-
the-President-on-the- American-Graduation- Initiative-in-Warren-MI/) 
(hereinafter ``White House July 14 Remarks'').
    \166\ During his June 1 remarks on the General Motors 
restructuring, President Obama again referenced the importance of a 
viable auto industry to the welfare of families and communities across 
the Midwest and throughout the United States. ``In the midst of a deep 
recession and financial crisis, the collapse of these companies would 
have been devastating for countless Americans, and done enormous damage 
to our economy--beyond the auto industry.'' March 30 Presidential 
Remarks, supra note 91.
    \167\ Interview with National Economic Council Director Lawrence H. 
Summers, Wall Street Journal (June 15, 2009) (online at online.wsj.com/ 
article/ SB124388671265573443.html) (hereinafter ``Lawrence Summers' 
WSJ Interview'').
    \168\ Questions for the Record for Ron Bloom, supra note 36 at 4-5. 
(``Outright failure of GM and Chrysler would likely have led to 
uncontrolled liquidations in the automotive industry, with widespread 
devastating effects. Importantly, the repercussions of such 
liquidations could have included immediate and long-term damage to the 
U.S. manufacturing/industrial base, a significant increase in 
unemployment with direct harm to those both directly and indirectly 
related to the automotive sector (e.g. dealerships being shuttered, 
plant closings, supplier failures, service centers closing, etc.), and 
further damaged our financial system, as automobile financing accounts 
for a material portion of our overall financial activity.'').
---------------------------------------------------------------------------
    From early on in his administration, President Obama gave 
the Task Force two directives regarding its approach to the 
automotive restructurings. First, the Task Force was to avoid 
intervening in day-to-day corporate management and refrain from 
becoming involved in specific business decisions, since its 
role was not to manage but, rather, serve as a ``potential 
investor of taxpayer resources'' with the goal of promoting 
``strong and viable companies.'' \169\ Second, the Task Force 
was to ``behave in a commercial manner.'' \170\ These dual 
roles, and their continued impact throughout the varying stages 
of bankruptcy and restructuring, are discussed in detail later 
in this report.
---------------------------------------------------------------------------
    \169\ Ron Bloom Prepared COP Testimony, supra note 78 at 1.
    \170\ Senate Committee on Banking, Housing, and Urban Affairs, 
Testimony of Senior Advisor at the U.S. Department of Treasury Ron 
Bloom, The State of the Domestic Automobile Industry: Impact of Federal 
Assistance, 111th Cong., at 5-6 (June 10, 2009) (hereinafter ``Ron 
Bloom Senate Testimony'').
---------------------------------------------------------------------------
    In evaluating the viability plans submitted by Chrysler and 
GM on February 17, 2009, the Treasury auto team acted with the 
stated goals of achieving the efficient, fair and commercial 
restructuring of these two companies, along with helping them 
rethink their business models and restructure their balance 
sheets.\171\ As required by the original loan agreements 
executed with the Bush Administration, the viability plans were 
evaluated to determine whether the companies and their 
subsidiaries ``have taken all steps necessary to achieve and 
sustain the long-term viability, international competitiveness, 
and energy efficiency'' \172\ of these companies. As discussed 
above, both companies have steadily lost market share, 
primarily to foreign automotive companies, over the past thirty 
years. A major challenge both companies face is therefore 
addressing this slippage and designing products that meet 
consumer demands. As part of this review process, the Treasury 
auto team's financial advisors performed ``sensitivity analyses 
by varying the assumptions underlying the [viability] plans.'' 
\173\ Mr. Bloom stated that these viability plans were ``very 
rigorously reviewed and challenged.'' \174\ The review and 
evaluation of these viability plans was conducted through the 
eyes of a ``provider of capital'' \175\ and potential 
investor--meaning that the Treasury auto team ``had an 
obligation to challenge [Chrysler and GM] to make sure they 
were acting in a thoughtful and commercial fashion.'' \176\
---------------------------------------------------------------------------
    \171\ Ramifications of Automotive Industry Bankruptcies, Part II, 
supra note 10 at 1.
    \172\ Chrysler February 17 Viability Plan, supra note 11; GM 
February 17 Viability Plan, supra note 34.
    \173\ Ron Bloom COP Testimony, supra note 36, at 2-3.
    \174\ Ron Bloom Senate Testimony, supra note 170, at 8.
    \175\ Ron Bloom Senate Testimony, supra note 170, at 21.
    \176\ Ron Bloom Senate Testimony, supra note 170, at 8.
---------------------------------------------------------------------------

c. April-May 2009: Decisions to File for Bankruptcy

    The decisions by both Chrysler and General Motors to file 
for bankruptcy were prompted by the Treasury auto team's 
viability determinations issued on March 30, 2009, as discussed 
above. President Obama noted that the word ``bankruptcy'' was 
being used loosely to refer to the use of the Code, with the 
backing of the federal government, to help Chrysler and GM 
restructure and continue operating in an ordinary course, not a 
liquidation (where a company is broken up, sold off, and 
disappears), or where a company is in litigation for years with 
no immediate headway.\177\
---------------------------------------------------------------------------
    \177\ March 30 Presidential Remarks, supra note 91.
---------------------------------------------------------------------------
    The Treasury auto team's articulated objectives with 
respect to the Chrysler and GM bankruptcies were to save 
hundreds of thousands of jobs and to place the companies on a 
solid footing to succeed in the future and generate jobs ``well 
into the 21st century.'' \178\ In his testimony before the 
Panel at the Detroit field hearing on July 27, 2009, Mr. Bloom 
stated that the government-backed bankruptcy reorganizations of 
Chrysler and GM gave ``every affected stakeholder a full 
opportunity to have his or her claim heard,'' adding that 
``every creditor will almost certainly receive more than they 
would have had the government not stepped in.'' \179\ In 
addition, he stated that the Treasury auto team interacted with 
the various creditors of Chrysler and GM as a commercial actor 
would, given the commercial approach it has taken to the 
restructuring of these two companies.\180\
---------------------------------------------------------------------------
    \178\ Ron Bloom Senate Testimony, supra note 170, at 3-4.
    \179\ Ron Bloom Prepared COP Testimony, supra note 78, at 3.
    \180\ Ron Bloom COP Testimony, supra note 36 at 4.
---------------------------------------------------------------------------

d. June and July 2009 Through the Future: Post-Bankruptcy and Looking 
        Forward

    New Chrysler and New GM completed their Section 363 
purchases of assets through the bankruptcy process in June and 
July, respectively. As the two companies commence operations as 
independent companies, Treasury has entered a new phase in the 
federal government's temporary involvement in the automotive 
industry. Since the companies are now being run as commercial 
enterprises by their management teams and report to new, 
independent boards of directors,\181\ the roles of the Task 
Force and the Treasury auto team from now on will be 
characterized by moving toward a more passive role with a focus 
on monitoring the automotive industry and safeguarding the 
taxpayers' substantial investments. The Task Force and Treasury 
auto team's goal ``is to promote strong and viable companies, 
which can be profitable and contribute to economic growth and 
jobs without government support as quickly as possible.'' \182\
---------------------------------------------------------------------------
    \181\ Ron Bloom Prepared COP Testimony, supra note 78 at 9.
    \182\ Ron Bloom Prepared COP Testimony, supra note 78 at 9.
---------------------------------------------------------------------------
    Mr. Bloom has stated that President Obama's articulated 
view of the government's limited role in these companies has 
two main elements.\183\
---------------------------------------------------------------------------
    \183\ The Administration has articulated a set of four guidelines 
that will govern its approach to managing ownership interests in 
financial and automotive companies. These guidelines will determine the 
government's approach to New Chrysler and New GM and its actions as a 
shareholder. These guidelines are as follows:
    1. 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. The goal is to establish strong and 
viable companies that can quickly be profitable and contribute to 
economic growth and jobs without government involvement.
    2. 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 new viability plans similar to those now underway at New 
Chrysler and New 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.
    3. After any upfront 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.
    4. 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.
    Ron Bloom Prepared COP Testimony, supra note 78, at 9; White House 
GM Restructuring Fact Sheet, supra note 85.
---------------------------------------------------------------------------
    First, while the government has a partial ownership stake 
in these companies, Treasury only plans to hold these equity 
stakes for a limited period of time and plans to dispose of 
them ``as soon as practicable.'' \184\ Treasury's primary goal 
is to establish viable companies capable of achieving future 
profitability.\185\
---------------------------------------------------------------------------
    \184\ Ron Bloom Prepared COP Testimony, supra note 78 at 9.
    \185\ Chrysler February 17 Viability Plan, supra note 11; GM 
February 17 Viability Plan, supra note 34.
---------------------------------------------------------------------------
    Second, Treasury expects to manage its stake in a ``hands-
off'' manner, voting only on core governance issues, including 
the selection of directors and other major corporate actions 
and transactions.\186\ Having appointed its directors, Treasury 
will now step back until the next time that the directors are 
up for election, at which time it will decide whether to retain 
or replace these directors.\187\ In reference to its ``hands 
off'' stance, Mr. Bloom has acknowledged that using GM or 
Chrysler as an instrument of broader government policy (for 
example, mandating the production of certain vehicles, 
requiring that the automotive companies build more vehicles in 
the United States or purchase more parts from U.S. 
manufacturers) ``is inconsistent with these goals.'' \188\ This 
also signifies that no government employees will serve on the 
boards or be on the payroll of these automotive companies. The 
Treasury auto team has repeatedly reaffirmed President Obama's 
commitment to this policy approach,\189\ and additionally noted 
the Administration's strong opposition to the amendment to the 
House Financial Services Committee appropriations bill that 
attempts to restore prior Chrysler and GM franchise 
agreements.\190\
---------------------------------------------------------------------------
    \186\ Chrysler February 17 Viability Plan, supra note 11; GM 
February 17 Viability Plan, supra note 34.
    \187\ At the Panel's Detroit field hearing, Mr. Bloom agreed that 
this is an adequate description of the government's approach. Ron Bloom 
COP Testimony, supra note 36.
    \188\ Ron Bloom Prepared COP Testimony, supra note 78, at 9. Some 
environmental activists have raised the question of whether the 
automotive companies, having received TARP assistance, should be 
required to build ``greener'' automobiles, in keeping with President 
Obama's focus on climate change. Brian Deese, Special Assistant to the 
President for Economic Policy and a member of the Task Force staff, has 
said that these broader issues are not the Administration's objective. 
``The question we were focused on was not what larger policy objectives 
we should be trying to achieve, but what is a commercially viable 
restructuring that will allow them to succeed in a way that they have 
not in the past.'' Michelle Maynard and Michael J. de la Merced, A 
Cliffhanger to See if a G.M. Turnaround Succeeds, New York Times (July 
26, 2009) (online at www.nytimes.com/ 2009/07/26/ business/26gm.html).
    \189\ Treasury meeting with COP Staff, July 29, 2009; White House 
June 1 Remarks on GM Restructuring, supra note 89. ``What we are not 
doing--what I have no interest in doing--is running GM. GM will be run 
by a private board of directors and management team with a track record 
in American manufacturing that reflects a commitment to innovation and 
quality. They--and not the government--will call the shots and make the 
decisions about how to turn this company around. The federal government 
will refrain from exercising its rights as a shareholder in all but the 
most fundamental corporate decisions. When a difficult decision has to 
be made on matters like where to open a new plant or what type of new 
car to make, the new GM, not the United States government, will make 
that decision.'').
    \190\ Treasury meeting with COP Staff, July 29, 2009; Mr. Bloom 
also stated that:
    [t]he decision to invest taxpayer dollars into these companies 
required all stakeholders to make difficult sacrifices, and at this 
point, it would set a dangerous precedent, potentially raising enormous 
legal concerns, to say nothing of the substantial financial burden it 
would place on the companies, to intervene into a completed portion of 
a judicial bankruptcy proceeding on behalf of one particular group. 
Political intervention of this nature could also jeopardize taxpayer 
returns by making it far more difficult for the companies to access 
private capital markets if there is ongoing uncertainty about whether 
Congress will intervene to overturn judicially approved business 
decisions anytime that it disagrees with the judgments of the 
companies.
    Ramifications of Automotive Industry Bankruptcies, Part II, supra 
note 10, at 6. H.R. 3170, supra note 10, at sec. 745.
---------------------------------------------------------------------------
    The Task Force and Treasury auto team are currently 
focusing on achieving three objectives with respect to New 
Chrysler and New GM: (1) financial restructuring; (2) 
operational restructuring; and (3) cultural changes (i.e., 
establishment of new boards of directors).\191\ President Obama 
has stated that it is the responsibility of each company's 
board of directors and management team to deliver these 
results, but that the Treasury auto team, in its role as lender 
and investor, will closely monitor the loans and investments 
made in both companies on an ongoing basis and work to ensure 
that the companies are in compliance with commitments they have 
made.\192\
---------------------------------------------------------------------------
    \191\ Ron Bloom Prepared COP Testimony, supra note 78.
    \192\ Ramifications of Automotive Industry Bankruptcies Part II, 
supra note 10, at 2.
---------------------------------------------------------------------------
    While President Obama's stated policy is for the government 
to dispose of its stakes in the automotive companies ``as soon 
as practicable,'' \193\ as noted above, the Task Force and 
Treasury auto team have declined to provide a more specific 
timeframe, given their desires to avoid market disruptions and 
prevent the dilution or degradation of the value of Treasury's 
ownership stakes. Treasury ``plans to be a responsible steward 
of taxpayer money,'' and will regularly assess both the public 
and private options to dispose of its investments.\194\ The 
financial performances of the companies and their return to 
profitability will play a key role in Treasury's determination 
as to when to dispose of its ownership stakes. The Treasury 
auto team expects that the New GM will undertake an initial 
public offering (IPO) sometime in 2010 (within the next twelve 
months), and Treasury will then seek to gradually sell off its 
shares at an appropriate time thereafter.\195\ On the other 
hand, the Treasury auto team's ``most likely exit strategy'' 
for New Chrysler involves either a private sale or a gradual 
sell-off of shares following an IPO.\196\ Mr. Bloom has stated, 
however, that Treasury will likely begin disposing of its 
ownership stake in GM before it does so for its Chrysler stake, 
but the final decision to proceed with an IPO is left 
ultimately in the hands of each company's board of directors 
and will be heavily dependent on conditions in the general 
economy and public securities markets.\197\
---------------------------------------------------------------------------
    \193\ White House GM Restructuring Fact Sheet, supra note 85.
    \194\ Ron Bloom COP Testimony, supra note 36, at 3.
    \195\ Ron Bloom COP Testimony, supra note 36, at 3. For further 
discussion describing ways in which Treasury might divest its ownership 
stakes in New Chrysler and New GM, see Section G2, infra.
    \196\ Ron Bloom COP Testimony, supra note 36, at 3.
    \197\ Ron Bloom COP Testimony, supra note 36, at 3.
---------------------------------------------------------------------------
    When asked to identify the primary metric that the public 
and policymakers could use to assess the TARP investments in 
Chrysler and GM, Mr. Bloom noted that success is best measured 
by whether taxpayers see a return of their money.\198\
---------------------------------------------------------------------------
    \198\ Ron Bloom COP Testimony, supra note 36, at 56-57.
---------------------------------------------------------------------------
    As discussed above, President Obama, the Task Force and the 
Treasury auto team have articulated at least several different 
objectives for the government's intervention in the automotive 
industry. These include preventing the liquidations of the 
automotive companies and the impact these occurrences would 
likely have on the greater economy, achieving particular policy 
goals (such as preventing mass layoffs and fostering energy-
efficient automobiles), and retaining the domestic automotive 
industry. Given that each of these objectives has been cited at 
various times, there is little clarity with respect to what has 
ultimately driven the decision-making behind these 
interventions.

           2. THE INTENDED IMPACT ON THE INDUSTRY AND ECONOMY

    As discussed above, the Treasury auto team has focused on 
fulfilling President Obama's substantial commitment to 
stabilize the domestic automotive industry. This policy 
approach is intended to give Chrysler and General Motors a 
second chance, help these companies emerge stronger and more 
competitive in a changing automotive market, and end the 
practice of ``kicking the can down the road'' \199\ by refusing 
to confront the tough problems and decisions facing the 
American automotive industry. As President Obama noted in his 
March 30, 2009 speech on the automotive industry, ``we, as a 
nation, cannot afford to shirk responsibility any longer. Now 
is the time to confront our problems head-on and do what's 
necessary to solve them.'' \200\ The Obama Administration has 
acted with the assumption that its actions would create a ``new 
beginning for a great American industry'' that would out-
compete the world and be marked by important innovations in 
fuel efficiency and energy independence.\201\ This commitment 
to assist the companies with the restructuring processes and 
procedures necessary to help them achieve long-term viability 
has been a central underlying component of every aspect of the 
Treasury auto team's decision-making.
---------------------------------------------------------------------------
    \199\ White House June 1 Remarks on GM Restructuring, supra note 
89.
    \200\ March 30 Presidential Remarks, supra note 91.
    \201\ March 30 Presidential Remarks, supra note 91.
---------------------------------------------------------------------------
    With respect to the broader economy, the Treasury auto team 
has aimed to avoid the devastating impact that the collapse of 
these companies would have had on countless Americans and the 
greater economy beyond the automotive industry in times of 
severe recession and financial crisis. As part of this 
approach, the President and the Treasury auto team have acted 
to avoid the prospect of both Chrysler and General Motors 
entering liquidation, which, they argue, would have caused 
``substantial job loss with a ripple effect throughout our 
entire economy.'' \202\ For example, as a result of both 
companies achieving a quick restructuring during recent months, 
Secretary Geithner has noted that the ``economy avoided the 
devastation that would have accompanied their liquidation.'' 
\203\ President Obama has essentially viewed the restructuring 
of Chrysler and General Motors as key elements of the 
strengthening of American manufacturing and the stabilization 
of the national economy.\204\
---------------------------------------------------------------------------
    \202\ Ron Bloom Senate Testimony, supra note 170.
    \203\ U.S. Department of the Treasury, Statement from Treasury 
Secretary Geithner on the Presidential Task Force on the Automotive 
Industry (July 13, 2009) (online at www.treas.gov/ press/releases/ 
tg207.htm) (hereinafter ``Treasury Statement on Automotive Task 
Force'').
    \204\ White House June 1 Remarks on GM Restructuring, supra note 
89.
---------------------------------------------------------------------------
    Since both Chrysler and GM came to the federal government 
``in a state of complete insolvency, facing almost certain 
liquidation'' without further government assistance,\205\ the 
Treasury auto team's actions and decision-making need to be 
considered and evaluated in the context of existing bankruptcy 
precedent, process and procedures.
---------------------------------------------------------------------------
    \205\ Ron Bloom COP Testimony, supra note 36 at 23-24.
---------------------------------------------------------------------------

      E. Bankruptcy Law Aspects of the Automotive Company Rescues

    This section provides a brief introduction to business 
reorganization in bankruptcy and summarizes the Chrysler and GM 
bankruptcy proceedings.
    These reorganizations have triggered substantial debate in 
academic circles. As with previous reports, the Panel has 
engaged the assistance of prominent professors to discuss the 
technical and legal aspects of this debate in more detail. 
Papers by Professor Stephen Lubben of Seton Hall University 
School of Law \206\ and Professor Barry Adler of NYU School of 
Law \207\ appear as Annexes A and B to this report, and the 
report has also benefitted from the scholarship of Professor 
Mark Roe \208\ of Harvard Law School and Professor David Skeel 
\209\ of the University of Pennsylvania Law School. Their 
positions are discussed in Section G of this report.
---------------------------------------------------------------------------
    \206\ Professor Stephen Lubben is the Daniel J. Moore Professor of 
Law at Seton Hall. He specializes in corporate finance, particularly 
issues concerning corporate debt and financial distress.
    \207\ Professor Barry E. Adler is the Bernard Petrie Professor of 
Law and Business and Associate Dean for Information Systems and 
Technology at New York University School of Law. His areas of research 
include bankruptcy, contracts, corporate finance, and corporations.
    \208\ Professor Mark J. Roe is the David Berg Professor of Law at 
Harvard Law School. His scholarship includes issues in corporate law, 
corporate finance and corporate bankruptcy and reorganization.
    \209\ Professor David A. Skeel is the Samuel Arsht Professor of 
Corporate Law at the University of Pennsylvania Law School. His areas 
of expertise are bankruptcy and corporate labor law.
---------------------------------------------------------------------------

            1. THE OPTIONS AVAILABLE TO INSOLVENT BUSINESSES

    Until the 1930s, bankruptcy generally meant the liquidation 
of a firm's assets for the benefit of its creditors. The stock 
market crash of 1929 caused widespread liquidations and spurred 
efforts to reform the bankruptcy laws. Forced liquidations and 
foreclosures were harmful to both creditors and debtors. 
Debtors were not given an opportunity to pay their debts, the 
going-concern value of the business was destroyed, and 
employees lost their jobs. During this time, creditors 
recovered only a fraction of the amount they were owed. From 
1933-1934, the laws were changed so that corporations could 
obtain bankruptcy court protection and modify their debts.\210\ 
Although the reform was designed to address the market crisis 
during the Great Depression, it remained in place after the 
Depression was over and became the precursor for business 
reorganization under Chapter 11 today.\211\
---------------------------------------------------------------------------
    \210\ For a discussion of the history of bankruptcy legislation in 
the United States, see David A. Skeel, Debt's Dominion: A History of 
Bankruptcy Law in America (Princeton University Press 2003).
    \211\ 11 U.S.C. 101 et seq. (2009). For an explanation of the basic 
bankruptcy concepts referenced in this report, please see David G. 
Epstein & Steve H. Nickles, Principles of Bankruptcy Law (Thomson/West 
2007).
---------------------------------------------------------------------------

a. Liquidation

    In some countries, the only option when a business is 
unable to meet its obligations is to dissolve the business, 
liquidate its assets and distribute the proceeds of that 
liquidation to the business's creditors. The Code attempts to 
preserve economic value by permitting a viable business to 
attempt to reorganize and operate as a going concern. If that 
is not possible, the Code allows the estate to sell the 
business as a going concern, to break it up into viable parts, 
or to create an orderly liquidation. Some businesses that 
attempt to reorganize under Chapter 11 ultimately fail. Some 
businesses that are in serious enough trouble do not even 
attempt Chapter 11 reorganization, and instead liquidate in 
Chapter 7 under the supervision of a court-appointed 
trustee.\212\ Others will wind up their business operations 
without any bankruptcy proceeding, simply disappearing from the 
economy.
---------------------------------------------------------------------------
    \212\ Chapter 7 of the Code addresses the liquidation of a 
business. 11 U.S.C. Sec. Sec. 701-784 (2009). In cases where efforts to 
reorganize under Chapter 11 fail, such cases may be converted into 
Chapter 7 liquidation cases. Although liquidation of the debtor is 
primarily the function of Chapter 7, liquidation may also occur under 
other chapters. For instance, a Chapter 11 plan could provide for the 
partial or complete liquidation of a business.
---------------------------------------------------------------------------

b. ``Traditional'' Chapter 11 Reorganization

    Chapter 11 permits a troubled company to continue its 
business as a going concern while it restructures its debts. 
The purpose of Chapter 11 is to preserve economic value, 
minimizing the impact of a business's failure on both its 
creditors and those who depend on the business, such as the 
employees and suppliers. Considering the intangible value of 
the business, such as business relationships, name recognition, 
and synergy created by the productive use of resources, there 
may be more value in a business as a going concern than in 
liquidation. This value is destroyed in liquidation, and the 
price the business's assets would realize in liquidation is 
often very low compared to the value they would have as a part 
of a productive whole. Liquidation value for a troubled 
business is generally less than the total amount of the 
business's outstanding debt. Creditors may receive more value 
from reorganization than from liquidation. Additionally, 
parties other than creditors, such as employees, gain more from 
the business' continuance. Consequently, when a business has 
any chance of continuing as a going concern, public policy 
\213\ and the best interests of the creditors \214\ dictate 
that it should be given a chance to recover while being 
protected from its creditors' actions to collect.
---------------------------------------------------------------------------
    \213\ Considering that keeping a business in operation is often 
much more desirable than liquidating it, the fundamental premise of 
Chapter 11 of the Code is that reorganization is desirable. Mark S. 
Scarberry, Kenneth N. Klee, Grant W. Newton & Steve H. Nickles, 
Business Reorganization in Bankruptcy (2006).
    \214\ Upon filing the bankruptcy petition, the Code requires the 
business to be run for the benefit of the creditors. The shareholders 
will recover their investment only in the unlikely event that all the 
valid claims of all creditors are paid in full and value remains in the 
business.
---------------------------------------------------------------------------
    In Chapter 11 reorganization, the business's debts are 
restructured. Each creditor is entitled to receive the present 
value of the amount that creditor would have received in 
liquidation. The bankruptcy court is required to protect the 
best interest of each individual creditor during 
reorganization. This requirement is known as the ``best 
interest'' test. The consideration the creditors receive under 
this standard may be paid over time with interest from the time 
that the plan of reorganization is confirmed. Any debt that 
exceeds the amount the creditor is entitled to in liquidation 
may be discharged in bankruptcy. In fact, however, many Chapter 
11 plans offer to pay the creditors more than they are 
specifically entitled to, in part to attract the support of the 
creditors as they vote, by class, for or against the plan of 
reorganization, as described in more detail below.
    In addition to (or in substitution for) repayment of debt, 
creditors may also be issued shares of stock or other ownership 
interests in the reorganized debtor to satisfy their claims. As 
a consequence, the capital structure of the pre-bankruptcy 
business may look very different after undergoing restructuring 
under Chapter 11.
    In a traditional corporate reorganization, the 
restructuring process begins when the debtor files a bankruptcy 
petition \215\ with the bankruptcy court. The petition asks for 
bankruptcy relief, and includes detailed schedules of the 
business' income, assets, and liabilities. Upon filing the 
petition, all the business' legal and equitable interests in 
any property are transferred to a new entity, which is known as 
the bankruptcy estate.\216\ All the assets of the newly created 
bankruptcy estate instantly come under the full protection of 
the Code.\217\ Most importantly, the rights of creditors, and 
the order of priority by which they will be paid, are locked 
into place.
---------------------------------------------------------------------------
    \215\ In theory, creditors could file an involuntary petition to 
force a business into bankruptcy, but this is extremely rare. 11 U.S.C. 
Sec. 303.
    \216\ 11 U.S.C. Sec. 541.
    \217\ 11 U.S.C. Sec. 362(a).
---------------------------------------------------------------------------
    Also at the time of filing, bankruptcy law imposes an 
automatic stay against all attempts by creditors to collect 
from the debtor. This allows the debtor to continue its 
ordinary business operations and the Chapter 11 reorganization 
to proceed in an orderly manner. The Code sets out rules for a 
collective system to coordinate the actions of the various 
creditors. In doing so, the Code permits the overall value of 
the business to be maximized by lowering both the business's 
losses and the costs of addressing the creditors' collection 
actions.
    At the moment of the bankruptcy filing, creditors' claims 
against the debtor become claims against the bankruptcy estate. 
Claims against the estate are entitled to different levels of 
statutory priority, with some claims having seniority over 
others.\218\ The order of priority is significant because 
priority determines the order in which claims against the 
bankruptcy estate will be satisfied. Shareholder interests, 
following behind secured and unsecured claims, have the lowest 
level of priority in a bankruptcy estate. Under the absolute 
priority rule,\219\ shareholders are often wiped out and 
receive nothing in a Chapter 11 reorganization or a Chapter 7 
liquidation.
---------------------------------------------------------------------------
    \218\ The seniority of claims may also be determined by contractual 
agreement between creditors, when, for example, two creditors agree 
that one will subordinate its claim to the other.
    \219\ The absolute priority rule, simply stated, refers to the 
requirement that unless a dissenting class of creditors receives or 
retains property of a value equal to the allowed amount of its claims, 
no creditor of lesser priority, or shareholder, may receive any 
distribution under the plan. 11 U.S.C. Sec. 1129(b)(1).
---------------------------------------------------------------------------
    The Code treats secured and unsecured creditors very 
differently. Secured creditors--those whose debts are secured 
by collateral in advance of the bankruptcy--hold a secured 
claim. The value of the secured claim is limited by the value 
of the collateral. If the secured claim is less than or equal 
to the value of the collateral that relates to that debt, the 
claim is fully secured and the secured creditor will recover 
its money entirely. If, however, the debt is greater than the 
value of the collateral, the creditor will receive the value of 
the collateral, and the balance of the debt becomes a general 
unsecured claim to be paid pro rata way with the other general 
unsecured claims against the debtor.
    Generally, the business does not have enough value to pay 
unsecured claims in full. Instead, unsecured creditors often 
receive a pro rata distribution on account of their claims. 
However, not all unsecured creditors are treated exactly the 
same. Some unsecured claims, such as certain taxes and unpaid 
employee wages,\220\ will be paid ahead of the general class of 
unsecured creditors.
---------------------------------------------------------------------------
    \220\ 11 U.S.C. Sec. 507.
---------------------------------------------------------------------------
    The general unsecured creditors form a creditors' 
committee. The creditors' committee monitors the activities of 
the individual or entity managing the debtor's business, which 
may be a trustee, but is more likely to be the debtor-in-
possession (DIP). When a business files for bankruptcy, the 
management team automatically becomes the management of the 
DIP, and continues to run the business. Old management, 
however, may not remain in place for long. Studies show that 
management is frequently replaced just before or after 
filing.\221\ A party that is willing to provide financing after 
the business files bankruptcy will often have a substantial say 
in many aspects of the business, including appointing new 
management.\222\
---------------------------------------------------------------------------
    \221\ Elizabeth Warren, Chapter 11: Reorganizing American Business, 
61 (Aspen Publishers 2008).
    \222\ Id.
---------------------------------------------------------------------------
    After the petition is filed, any new monies coming into the 
bankruptcy estate are not bound by the rules constraining the 
assets of the pre-bankruptcy debtor. There are two basic 
reasons for the disparate treatment of incoming funds of the 
pre-bankruptcy and the post-bankruptcy debtor: (1) to attract 
new investment into the business (investors are unlikely to 
invest if they believe their funds would only be used to pay 
off old debt); and (2) to permit the business to find funding 
for a new business plan.
    While undergoing Chapter 11 reorganization, the DIP must 
continue to operate the business as a going concern and protect 
it from disruptive interference. To do so, the DIP may use cash 
generated by the business and it may also seek DIP financing, 
new financing that is generally secured by assets of the post-
bankruptcy debtor. Considering the risk that a business already 
in bankruptcy may eventually fail, it is often difficult, if 
not impossible, to find a lender willing to provide substantial 
post-petition financing to a distressed company on an unsecured 
basis. To encourage lenders to provide DIP financing, the Code 
provides that post-petition loans will be given seniority and 
preferential treatment over other claims.\223\
---------------------------------------------------------------------------
    \223\ 11 U.S.C. Sec. 364(a)-(b). For example, DIP financing is 
often considered an administrative expense, which is entitled to 
payment in full in cash under 11 U.S.C. 1129(a)(9)(A) on the effective 
date of a Chapter 11 plan of reorganization unless agreed otherwise.
---------------------------------------------------------------------------
    Unlike the prepetition creditors who have already invested 
in the business, the post-petition lenders bring fresh capital 
to the struggling enterprise. Because no post-petition lender 
is required to lend to the business and because dealing with 
bankrupt businesses is often regarded as quite risky, the 
leverage of the DIP lender is extremely high.\224\ Some refer 
to DIP lenders as following the Golden Rule: Those with the 
gold make the rules.\225\ There are no statutory limits on the 
conditions that DIP lenders may impose on the business. 
Instead, DIP lending can be undertaken only if the other 
creditors are given an opportunity to object and the court, 
after hearing those objections, approves of the financing and 
the terms on which the financing is proposed. If the court 
approves the terms of a DIP loan, then the loan, with all its 
contractual conditions, binds the bankruptcy estate.
---------------------------------------------------------------------------
    \224\ Sarah Woo, an SJD candidate at Stanford Law School, writes, 
``A concern often raised in relation to the U.S. bankruptcy regime is 
the high level of control over proceedings enjoyed by secured lenders. 
In particular, through the use of the arsenal of provisions in debtor-
in-possession (DIP) financing, secured lenders can quickly effectuate 
asset sales. While this strategy minimizes the time taken to realize 
cash recoveries for the secured lenders, it may not maximize the value 
of the estate for all creditors.'' Sarah P. Woo, Debtor-in-Possession 
Financing: Looking Beyond the Debtor (Aug. 1, 2009) (abstract available 
online at papers.ssrn.com/ sol3/papers.cfm? abstract_id= 1442854).
    \225\ A liquid market for DIP loans would temper the DIP lender's 
leverage in the reorganization process by providing the debtor with 
alternative offers for DIP financing. While this may be the case in 
more traditional reorganizations, at the time Chrysler and GM filed 
bankruptcy the capital markets were experiencing a credit freeze and 
the amount of money needed to reorganize the auto companies was very 
large. This allowed any DIP financer that stepped forward more leverage 
than it may have had under ordinary circumstances.
---------------------------------------------------------------------------
    Because of its leverage, a DIP lender may have the power to 
decide which contracts--with suppliers, vendors, dealers, 
etc.--it wishes the estate to assume and which contracts it 
wishes the estate to reject.\226\ This is particularly true 
where the DIP lender is also the expected buyer at the 363 
sale. The DIP also has the power to shape the proposed plan of 
reorganization and to condition its funding on the court's 
approval of such plan or another plan the DIP endorses.
---------------------------------------------------------------------------
    \226\ If repudiation or cancellation of the contract results in a 
breach of contract, claims for that breach become unsecured debt of the 
estate. 11 U.S.C. Sec. 365(g)(1). Debts of the estate, as contrasted 
with debts of the prepetition debtor, must be paid in full ahead of 
other unsecured claims.
---------------------------------------------------------------------------
    The Code sets out the process by which creditors vote on 
Chapter 11 plans, and it provides some protection to dissenting 
creditors. Plans deal with creditors by classes.\227\ Each 
unsecured creditor is placed into a class with other creditors 
that have legally-similar claims. As discussed above, claims 
are treated differently depending on statutory and contractual 
priority. Within each class, all creditors must receive the 
same treatment. The creditors vote on the plan by class. A 
class is deemed to have accepted a plan if creditors 
constituting a majority of the claims in the class by number 
and representing at least two-thirds of the dollar amount of 
debt owed to that class vote in favor of the plan.\228\ Because 
of the need to have each class vote in favor of a plan, the 
allocation of creditors into classes can become the subject of 
extensive debate.\229\ Within a class, dissenting creditors are 
bound by the majority vote of their class. Under certain 
circumstances, a class of dissenting creditors may nonetheless 
be required to accept confirmation of the proposed plan.\230\
---------------------------------------------------------------------------
    \227\ 11 U.S.C. Sec. 1122.
    \228\ 11 U.S.C. Sec. 1126(c).
    \229\ See infra Section (G)(4) of this report.
    \230\ 11 U.S.C. Sec. 1129(b).
---------------------------------------------------------------------------
    If all classes of creditors have consented to the plan, the 
bankruptcy court inquires into the feasibility of the plan and 
whether the plan is proposed in good faith, and then typically 
confirms the plan. Section 1129 of the Code provides that the 
court may confirm the plan only if it meets with the many 
procedural requirements and safeguards of the Code, including, 
among many other things, adherence to the priority of classes 
of creditors.\231\
---------------------------------------------------------------------------
    \231\ 11 U.S.C. Sec. 1129(a)(1).
---------------------------------------------------------------------------
    The absolute priority rule, the best interests test and the 
opportunity to vote constitute the major protections for 
creditors in a Chapter 11. These protections, however, are 
tempered by the impact of majority vote that binds dissenters 
and the sharp distinction between prepetition creditors and 
post-petition DIP financers.

c. Sales under Section 363

    As part of the reorganization effort, a debtor may propose 
to sell some or all of its assets during the course of the 
Chapter 11. This sale, conducted under Section 363(b) of the 
Code and known as a ``363 sale,'' authorizes a DIP to sell 
property of the estate \232\ outside the ordinary course of 
business.\233\ The proceeds from a 363 sale may be used to fund 
the continuing operation of the debtor or to raise capital to 
pay creditors as part of a plan of reorganization. The use of 
363 sales has evolved in recent years. Today, 363 sales often 
dominate the resolution of a Chapter 11 case by selling all or 
substantially all of the assets of the business and leaving 
only the remainder of the assets for distribution in the 
Chapter 11 plan.
---------------------------------------------------------------------------
    \232\ 11 U.S.C. Sec. 1107(a).
    \233\ 11 U.S.C. Sec. 363.
---------------------------------------------------------------------------
    In bankruptcy, the sale of assets under Section 363 offers 
substantial advantages over the sale of assets under state law. 
Under Section 363, the assets are sold ``free and clear'' of 
all liens if the sale satisfies one of the section's enumerated 
conditions.\234\ This means a buyer gets clear title to the 
assets, whereas under state law, creditors' claims may cloud 
the title of the sold assets. Creditors' claims to assets sold 
by failing businesses are particularly worrisome to buyers, 
thus making bankruptcy protection and 363 sales particularly 
valuable tools. 363 sales permit the estate to transfer assets 
for their best and maximizing use, for the ultimate benefit of 
the creditors.
---------------------------------------------------------------------------
    \234\ 11 U.S.C. Sec. 363(f). (``The trustee may sell property . . . 
free and clear of any interest in such property of an entity other than 
the estate, only if (1) applicable nonbankruptcy law permits sale of 
such property free and clear of such interest; (2) such entity 
consents; (3) such interest is a lien and the price at which such 
property is to be sold is greater than the aggregate value of all liens 
on such property; (4) such interest is in bona fide dispute; or (5) 
such entity could be compelled, in a legal or equitable proceeding, to 
accept a money satisfaction of such interest.'')
---------------------------------------------------------------------------
    A 363 sale can be held in a relatively short time. Because 
the sale separates any disputes over the distribution of assets 
(arguments among creditors) from the process of realizing the 
maximum value of the estate (sale of the assets), the 363 sale 
often maximizes the total value of the assets. Once a business 
has filed for bankruptcy protection, both debtors and creditors 
often prefer the speed of 363 sales to the potentially long and 
drawn out traditional Chapter 11 plan confirmation process. 
Thus, 363 sales have been frequently used to resolve large 
bankruptcies since the mid 1990s.\235\
---------------------------------------------------------------------------
    \235\ Stephen J. Lubben, No Big Deal: The Chrysler and GM Cases in 
Context, (Sept. 1, 2009) (hereinafter ``No Big Deal: The Chrysler and 
GM Cases in Context'') (``[I]n the past ten to fifteen years, secured 
lenders have used [Section 363], plus the control inherent in being a 
secured lender--particularly control over the debtor's cash, to take 
charge of chapter 11 cases. . . . The lenders are willing to fund a 
quick sale because Section 363 provides a better mechanism for selling 
assets than state foreclosure law . . . The basic structure used to 
reorganize both GM and Chrysler was not unprecedented. Indeed, it was 
entirely ordinary. . . . The notion that the speed of the sale was 
unique, or that the use of Section 363 to effectuate a quick sale was 
novel, is therefore without merit.'').
---------------------------------------------------------------------------
    Section 363 does not limit the type or amount of the assets 
that may be sold. The courts, however, have developed rules 
against sub rosa plans, that is, reorganization plans disguised 
as sales. These courts reason that such uses of 363 would 
undermine the Chapter 11 rules.\236\
---------------------------------------------------------------------------
    \236\ Section 363 has been used to accomplish a sale of all or a 
substantial part of the debtor's assets in a single transaction. Such 
sales can effectively reorganize the debtor without complying with the 
normal process of preparing a disclosure statement and giving creditors 
the opportunity to vote on the plan. However, the courts generally 
permit such sales if there is a sound business purpose for the 
transaction, unless aspects of the sale restructure the priority and 
other rights of creditors. Committee of Equity Sec. Holders v. Lionel 
Corp. (In re Lionel Corp.), 722 F.2d 1063 (2d Cir. 1983); Pension 
Benefit Guar. Corp. v. Braniff Airways, Inc. (In re Braniff Airways, 
Inc.), 700 F.2d 935 (5th Cir. 1983).
---------------------------------------------------------------------------
    In 363 sales, designated assets of the debtor are sold to a 
purchaser. That sale is subject to approval by the bankruptcy 
court, which examines whether the sale is a sub rosa 
reorganization plan.\237\ If the court grants approval, the 
sale will be executed and the purchaser will typically receive 
the assets free and clear of any liens.
---------------------------------------------------------------------------
    \237\ A sale is considered a sub rosa plan if it is essentially a 
de facto plan that disposes of assets and pays creditors without a 
formal disclosure statement, written plan, or a meaningful opportunity 
for creditors to participate in the negotiation and voting processes. 
See Section (H)(4) of this report, discussing factors courts use to 
determine whether a 363 sale is in fact a sub rosa plan.
---------------------------------------------------------------------------
    Once the purchaser pays the purchase price, typically 
either in cash or in the form of a credit bid,\238\ the 
purchase price becomes part of the bankruptcy estate to be 
distributed to creditors in accordance with the Code's priority 
rules. Thus, a 363 sale comprises two parts: (1) a sale of 
assets to a new company, and (2) a distribution of the purchase 
price to the creditors of the old debtor.
---------------------------------------------------------------------------
    \238\ Credit bidding is a mechanism used in bankruptcy by which a 
creditor with a valid security interest in the assets being sold may 
bid for such assets by proposing to offset its claim against the 
purchase price of the assets. The ability to credit bid gives the lien 
holder protection against an attempt to sell its collateral too 
cheaply. 11 U.S.C. Sec. 363(k).
---------------------------------------------------------------------------
    Some media reports have conflated these two stages, causing 
confusion regarding the distribution rights under Chapter 11 by 
referring to an ``exchange'' of assets. In the case of GM, as a 
matter of law, there was no ``exchange'' of equity in New GM 
for claims against Old GM. Rather, there was a 363 sale of the 
assets of Old GM (the bankruptcy automotive company) that were 
purchased by New GM (the company formed to buy the assets and 
financed by the Treasury). As a part of this transaction, New 
GM also assumed certain liabilities of Old GM. The assets 
purchased and liabilities assumed from Old GM were used to form 
New GM, an entirely new entity that is legally unrelated to Old 
GM.
    In the case of Chrysler, the 363 sale was structured in a 
similar manner and had substantially similar effects. The 
bankruptcy court in its Chrysler opinion noted,

        [T]he UAW, VEBA, and Treasury are not receiving 
        distributions on account of their prepetition claims 
        [against Old Chrysler]. Rather, consideration to these 
        entities is being provided under separately-negotiated 
        agreements with New Chrysler.\239\
---------------------------------------------------------------------------
    \239\ In re Chrysler LLC, et al., 405 B.R. 84, 99 (Bankr. S.D.N.Y. 
2009).

    The aggregate result of reorganizations involving 363 sales 
may well be that an unsecured creditor of the bankrupt debtor 
becomes a large shareholder of the entity purchasing the assets 
in the sale.\240\ This undoubtedly has major policy 
implications, to be discussed in further detail below.\241\ 
However, understanding that these transactions are two separate 
commercial transactions and that legally there is no exchange 
of old claims for interests in the purchasing company is 
crucial to understanding the policy debate that ensues.
---------------------------------------------------------------------------
    \240\ Professors Roe and Skeel question whether Chrysler was in 
fact sold or whether the transaction constituted sub rosa plans of 
reorganization. In particular, they argue that because many of Old 
Chrysler's creditors are now creditors of New Chrysler, Chrysler's 363 
sale is more accurately portrayed as a reorganization. Mark J. Roe & 
David A. Skeel, Assessing the Chrysler Bankruptcy, 21-24 (Aug. 12, 
2009) (online at ssrn.com/abstract=1426530) (hereinafter ``Assessing 
the Chrysler Bankruptcy''). The bankruptcy court and Second Circuit 
Court of Appeals specifically found that the 363 sale was not a sub 
rosa plan. Discussed in more detail in Section (G)(4) of this report 
below.
    \241\ See Section (G)(4) of this report.
---------------------------------------------------------------------------
    Proceeds resulting from a 363 sale are distributed to 
creditors of the bankruptcy estate in strict accordance with 
the Code's priority laws. By contrast, the purchaser of the 
assets may deal with those assets in any way it chooses. 
Typically, the purchaser of a bankrupt business's assets--
whether structured under Section 363 or under a confirmed plan 
of reorganization--allocates its resources in a manner it 
believes will make its business profitable. If, for example, 
the purchaser needs to continue ordering from the bankrupt 
business' trade creditors, then the prepetition trade creditors 
may be paid in full by the purchaser, even though the trade 
creditors' pro rata distribution in the debtor's Chapter 11 is 
very small. Similarly, if the purchaser needs to retain the 
debtor's employees, the purchaser may negotiate a deal that 
gives the employees substantial interests in the new 
businesses, in excess of what the employees may have recovered 
under the debtor's Chapter 11 distribution.
    Neither bankruptcy laws nor the courts are empowered to 
control the manner in which assets purchased in a 363 sale are 
subsequently used by the purchaser in its business. To the 
extent employees, suppliers, and others with relationships that 
have carried over from the debtor to the purchaser received 
more favorable treatment than those whose relationships 
terminated with the bankruptcy estate, this perceived disparity 
has a clear business reason; i.e., the purchaser needs to 
maintain these relationships to make its business viable.\242\
---------------------------------------------------------------------------
    \242\ With respect to the Chrysler bankrtupcy, Professors Roe and 
Skeel question whether the decision to pay Old Chrysler's debts with 
the assets of New Chrysler was made after the conclusion of the 363 
sale or whether such payment was a de facto condition to the conclusion 
of 363 sale. They argue that while the former situation is justifiable, 
the latter may violate the principles underlying the Code. Assessing 
the Chrysler Bankrtupcy, supra note 240 at 21-24. This argument is 
discussed in more detail in Section (G)(4) of this report below.
---------------------------------------------------------------------------

  2. HOW THE CHRYSLER AND GM REORGANIZATIONS COMPARE WITH OTHER LARGE 
                            REORGANIZATIONS

    The Chrysler and GM reorganizations involve huge 
companies.\243\ When such massive entities are involved, there 
inevitably will be a number of issues that must be handled on a 
case-by-case basis. Because there is no one-size-fits-all 
bankruptcy for multi-billion dollar companies, it is difficult 
to categorize the Chrysler and GM bankruptcies as being either 
typical or atypical.
---------------------------------------------------------------------------
    \243\ GM was ranked ninth in Fortune Magazine's Global 500 in 2007, 
with annual revenues topping $182 billion and more than 250,000 
employees. Global 500: Nine--General Motors, Fortune (accessed Sept. 2, 
2009) (online at money.cnn.com/magazines/fortune/global500/2008/snap
shots/175.html). At the end of 2007, Fortune magazine listed Chrysler 
as the fourth largest private company in the U.S. with $49 billion in 
annual revenue and 72,000 employees. The 35 Largest U.S. Private 
Companies, Fortune (accessed Sept. 2, 2009) (online at money.cnn.com/ 
gal
leries/2008/ fortune/0805/ gallery.private_ companies.fortune/4.html).
---------------------------------------------------------------------------
    A few aspects of the Chrysler and GM bankruptcies 
distinguish them from comparable restructurings. First, the 
involvement of the U.S. government was unique. While legally 
irrelevant because the law is applied to the government in the 
same way it is applied to a private party, the government's 
involvement invites higher scrutiny and closer analysis to 
ensure that it is treated no better--and no worse--than an 
ordinary investor. As the automotive companies' condition 
deteriorated, the government provided both pre- and post-
petition financing. On account of the government's prepetition 
claim, it had the rights of a prepetition creditor entitled 
only to distributions from the bankruptcy estate in accordance 
with priority rules under Chapter 11. On account of its post-
petition claim, the government had the power and leverage as a 
DIP financer, as previously discussed,\244\ and its claims were 
given such preferential treatment.\245\ Because Treasury played 
an important role in negotiating the restructuring of the 
automotive companies,\246\ it appears to have exercised some of 
its bargaining power as a DIP lender. Second, the automotive 
bankruptcies proceeded with greater speed than was expected. 
Creditors nearly always push for speed in Chapter 11 
reorganization. In fact, debtors will often file pre-packaged 
bankruptcies \247\ in order to shorten the traditional process 
of confirming a reorganization plan. The expediency of the 
Chrysler and GM 363 sales may be attributed to the care with 
which the bankruptcy package was assembled, leaving little need 
for additional procedures and negotiation. Nevertheless, 
Professors Roe and Skeel comment:

    \244\ See Section (E)(1)(b) of this report.
    \245\ Id.
    \246\ Documents that Treasury provided to the Panel showed that 
Task Force members were involved in a variety of decisions with respect 
to the planning of the bankruptcy process, the structure of the asset 
sales, and the formation of the New Chrysler and New GM entities.
    \247\ A pre-packaged bankruptcy (pre-pack) is a plan for 
reorganization prepared in advance in cooperation with creditors that 
will be filed soon after the petition for relief under Chapter 11. 
Debtors do this to shorten and simplify the bankruptcy process and save 
the company money for professional fees and other costs associated with 
bankruptcy. The sooner the restructuring under Chapter 11 is completed, 
the sooner the company can return focus to its core operations. Some of 
these pre-pack reorganizations are extremely large, but can 
nevertheless be accomplished in less than two months.

          The Chrysler chapter 11 proceeding went blindingly 
        fast. One of the larger American industrial companies 
        entered chapter 11 and exited 42 days later. Clearly 
        speed was achieved because of the governments' cash 
        infusion of $15 billion on noncommercial terms into a 
        company whose assets were valued at only $2 billion. As 
        a matter of bankruptcy technique, the rapidity of the 
        Chrysler chapter 11 was a tour de force.\248\
---------------------------------------------------------------------------
    \248\ Assessing the Chrysler Bankruptcy, supra note 240 at 1.

    While the speed was noteworthy, it was not unprecedented. 
The use of prepacks grew with astonishing speed among large 
companies in the early 1990s, with bankruptcies wrapped up in a 
matter of weeks. In 1993 about 21 percent of the bankruptcies 
of publicly traded companies were prepacks, with 1994 not far 
behind at 17 percent.\249\ The numbers have leveled off since 
then, now down to an estimated 4 percent of all filings.\250\
---------------------------------------------------------------------------
    \249\ 2004 Bankruptcy Yearbook 162.
    \250\ Elizabeth Warren & Jay Lawrence Westbrook, Law of Debtors and 
Creditors (2009).
---------------------------------------------------------------------------
    To date, however, neither the GM nor Chrysler bankruptcy 
cases have closed. Both debtors, Old GM and Old Chrysler, 
remain to be wound up, and the proceeds of the 363 sales and 
any remaining assets will be distributed to each company's 
remaining creditors. In any statistical analysis of Chapter 11 
cases, both bankruptcies would be listed in the ``pending'' 
category, with the days in bankruptcy continuing to mount. 
Professors Roe and Skeel use the term ``exit'' to loosely refer 
to the 363 sale, which arguably constitutes the key transaction 
of the reorganization and the bulk of the restructuring process 
for these two businesses. Some have argued that the use of 
Section 363 of the Code makes these bankruptcies unusual. 
Nevertheless, as discussed above, sales for substantially all a 
debtor's assets are an increasingly popular use of this Section 
363.\251\ The significance of the use of Section 363 of the 
Code is a subject of debate, even among bankruptcy scholars, as 
discussed in greater detail below.\252\
---------------------------------------------------------------------------
    \251\ Id. at 8.
    \252\ See Section (G)(4) of this report.
---------------------------------------------------------------------------

     3. THE CHOICES AVAILABLE TO CREDITORS OF AN INSOLVENT BUSINESS

    Creditors of a troubled business must make decisions at 
several points during the company's decline. When the business 
first runs into trouble, there are usually negotiations between 
the debtor and individual creditors. As conditions deteriorate, 
creditors may join forces or the debtor may bring them 
together. At some point, the focus of creditors shifts, from 
trying to make sure that their debt is repaid in full or in 
part, to calculating what they would get if the debtor filed 
for bankruptcy, and then to establishing what particular type 
of bankruptcy arrangements would best suit the creditor.
    Because the purpose of Chapter 11 protection is to try to 
preserve economic value, it seems logical that most creditors 
would prefer that the debtor try to reorganize and operate as a 
going concern, rather than proceeding to liquidation. Other 
factors may be at work. For example, some years ago Professor 
Henry Hu noted unusual behavior patterns on the part of some 
creditors in bankruptcy proceedings.\253\ Those creditors 
seemed to favor liquidation, in which they would receive less 
money, over reorganization. Professor Hu and others have 
theorized that these creditors may have entered into credit 
default swaps, in essence buying insurance against the debtor's 
failure, and thus causing them to favor liquidation and distort 
more typical creditor expectations.\254\ Credit default swaps 
do not appear to have played a significant role in the 
automotive company reorganizations, but they serve as a 
reminder that the interests of particular creditors can be far 
more complex than those assumed by any simple model.
---------------------------------------------------------------------------
    \253\ Henry T. C. Hu, Abolition of the Corporate Duty to Creditors, 
107 Colum. L. Rev. 1321, 1402 (2007). Hu's article introduces the 
concept of the ``empty creditors,'' who reduce or eliminate their 
economic exposure through coupled assets such as credit derivatives and 
thus behave differently from more traditional creditors). See also 
Stephen J. Lubben, Credit Derivatives & The Future of Chapter 11, 81 
Am. Bankr. L.J. 405 (2007) who notes ``[t]he operation of chapter 11 is 
premised on a perception of ownership that may no longer exist or is at 
the very least threatened by the expansion of credit derivatives.''
    \254\ Special Comment: Analyzing the Potential Impact of Credit 
Default Swaps in Workout Situations, Moody's Global Banking (June 2009) 
(online at www.moodys.com).
---------------------------------------------------------------------------
    As discussed above, in bankruptcy, secured creditors look 
to their collateral, and unsecured creditors are organized into 
groups of similarly situated creditors, who vote by class with 
respect to proposed plans of reorganization. When substantially 
all the debtor's assets are sold in a 363 sale, creditors may 
object to the sale and the court will hold a hearing before 
ruling on whether the sale may go through. There is no creditor 
vote in a 363 sale, although the courts carefully weigh the 
objections and the support of the creditors in deciding whether 
to approve a sale. Following the sale, the remainder of the 
Chapter 11 case involves the allocation of the proceeds of sale 
to the creditors.
    Many creditors supported--or failed to object--to the 
proposed 363 sales in both Chrysler and GM. There has been some 
discussion as to whether certain creditors, especially the 
secured creditors in Chrysler who were recipients of TARP 
funds, may have felt obligated to acquiesce in the government's 
restructuring plans, either tacitly or owing to direct 
government pressure. Because creditors are not given the right 
to vote on sales,\255\ any such acquiescence would be in the 
form of refraining from challenging the sales, and it is 
difficult to attribute motive to inaction. The Treasury auto 
team has denied applying any such pressure.\256\ In other 
contexts, many TARP recipients have been quite vocal in their 
criticism of government actions that they disapprove of, 
suggesting that if they objected to the 363 sales, they would 
have made their views known.\257\ It is possible that the 
creditors did not object because they believed it was in their 
own economic best interests. They may have believed that the 
363 sales would give them the best deal possible, and that the 
likely alternative would be a liquidation of the companies that 
would result in far smaller payouts.
---------------------------------------------------------------------------
    \255\ There was, however, an informal vote of the unsecured 
creditors in GM. GM Press Release, GM Announcement on Bondholder 
Support (May 31, 2009) (online at media.gm.com/ servlet/
GatewayServlet?target= image.emerald.gm.com/ gmnews/viewmonthly 
releasedetail.do? domain= 74&docid=54613).
    \256\ Ron Bloom COP Testimony, supra note 36.
    \257\ For instance, New York Times notes Jamie Dimon is ``quick to 
criticize the administration.'' In Washington, One Bank's Chief Still 
Holds Sway, New York Times (July 20, 2009) (online at 
dealbook.blogs.nytimes.com/2009/07/20/in-washington-one-bank-chief-
still-holds-sway/#more-90287).
---------------------------------------------------------------------------
    Academics have argued that the bidding process in both the 
Chrysler and GM bankruptcies was flawed because the court 
approved of a bidding structure that required that any bidder 
must assume certain designated liabilities of the debtors.\258\ 
They argue that this may have prevented a true valuation of 
both companies, thereby obscuring the amount of potential 
return for the creditors in the event of liquidation.\259\ 
These arguments are more thoroughly discussed in Section E4 
below.
---------------------------------------------------------------------------
    \258\ See generally Barry E. Adler, What's Good For General Motors 
(Sept. 1, 2009) (hereinafter ``What's Good for General Motors''); 
Assessing the Chrysler Bankruptcy, supra note 240.
    \259\ An illustration of how the bidding process may have obscured 
the underlying mechanics of the transaction is as follows. If a bidder 
determines that the gross assets of Company X have a fair market value 
of $100, the bidder may reasonably enter a bid of up to $100 for the 
assets, representing $100 fair market value of the assets, with no 
assumed liabilities. If the bidding process, however, requires the 
bidder to assume $20 of the liabilities of the seller, the bidder may 
reasonably enter a bid of up to $80 for the assets, that is, $100 fair 
market value of the assets, less $20 of assumed liabilities. In the 
latter case the seller has $80 to distribute to its creditors, while in 
the former it would have $100. If the $20 liability was owed to a 
junior creditor, it would be possible that a creditor of the seller may 
not recover its full claim, assuming the $80 would be insufficient, 
even though the $20 owed to the junior creditor was paid in full.
---------------------------------------------------------------------------

      4. THE IMPACT OF THESE TRANSACTIONS ON THE FINANCIAL MARKETS

    Some would view the Chrysler reorganization as a government 
intervention that resulted in the transfer of value from one 
group to another based on political considerations. Or, to 
borrow the description of one participant, the assets of 
retired Indiana policemen were given to retired Michigan 
autoworkers.\260\ They argue that not only is Chrysler a bad 
result, but that the Code was undermined in terms of the 
treatment of secured creditors under bankruptcy, and, as a 
result, the case could have adverse effects on the capital 
markets.\261\ Similarly, financial experts such as Warren 
Buffett have stated that the federal government's actions in 
the bankruptcies can have ``a whole lot of consequences'' for 
deal making.\262\ According to Buffett, if priorities are 
tossed aside, ``that's going to disrupt lending practices in 
the future. If we want to encourage lending in this country, we 
don't want to say to somebody who lends and gets a secured 
position that the secured positioning doesn't mean anything.'' 
\263\
---------------------------------------------------------------------------
    \260\ Congressional Oversight Panel, Testimony of Indiana State 
Treasurer the Honorable Richard E. Mourdock, Financial Assistance Given 
to the Domestic Automobile Industry Via Treasury's Automotive Industry 
Financing Program (July 27, 2009) (online at cop.senate.gov/ documents/
testimony-072709- mourdock.pdf).
    \261\ What's Good For General Motors, supra note 258.
    \262\ Assessing the Chrysler Bankruptcy, supra note 240.
    \263\ Assessing the Chrysler Bankruptcy, supra note 240.
---------------------------------------------------------------------------
    The Panel's mandate includes looking at the impact of 
Treasury decisions on the financial markets, and thus the staff 
of the Panel consulted with academics and market participants 
to determine whether predictions that the Chrysler decision 
would result in changes in market behavior or the cost of 
capital that were (1) accurate and (2) measurable. The worry is 
that if the markets perceive that government intervention 
might, in some cases, interfere with the absolute priority rule 
of bankruptcy, investors will demand a higher return on their 
capital to compensate for the added uncertainty. The 
consequence would be higher borrowing costs for business and a 
corresponding decline in capital investment for businesses 
facing a possible bankruptcy. On the other hand, the infusion 
of cash into a business that otherwise seemed destined for 
liquidation may make government involvement more attractive for 
investors and may reduce the capital in otherwise high-risk 
transactions. Unfortunately, apart from academic opinion, there 
is little evidence, empirical or anecdotal, to prove or 
disprove the claim that the Chrysler bankruptcy had any effect 
on the market.
    Academics and practitioners with whom the Panel's staff 
have spoken seem to believe that it is both too early and, 
given the number of variables, perhaps not possible to conclude 
one way or another as to what effect the government's 
involvement in the Chrysler bankruptcy will have on credit 
markets going forward. Given the currently impaired state of 
the credit markets generally, they argue, it would be difficult 
to attribute any anomalies to the outcome of a specific 
bankruptcy transaction. On the other hand, Treasury's 
involvement in the Chrysler bankruptcy, as well as the General 
Motors bankruptcy, where the Chrysler approach was mirrored, is 
likely to cause investors to reevaluate their risk assessment 
regarding certain companies with similar characteristics. 
Large, industrial, heavily unionized companies, especially 
those with significant liabilities in the form of pension or 
healthcare obligations, might be considered to be of special 
interest to the government. The cost of capital going forward 
for companies with similar characteristics might go up or down 
depending on how future creditors view the outcome of the 
Chrysler bankruptcy--whether government intervention left 
creditors with more, the same, or less than they would have 
received without such intervention.\264\
---------------------------------------------------------------------------
    \264\ Assessments of how government action will affect the outcome 
of a particular investment are often described as political risk 
assessments. Generally, political risk refers to the kinds of issues 
that political decisions in government create for business planners.
---------------------------------------------------------------------------

                         F. Following the Money


  1. WHAT HAS TARP SPENT SO FAR AND WHAT CAN TAXPAYERS EXPECT TO GET 
                                 BACK?

    Earlier in this report the Panel describes the financial 
transactions and the outcomes of the bankruptcy proceedings for 
Chrysler and GM including all ``parties in interest''--the 
United States and Canadian governments, the UAW, the UAW Trust, 
equity holders, and creditors. This section focuses solely on 
the financial stake of U.S. taxpayers. As shown in Figure 3 
below, U.S. taxpayers have expended $49.9 billion of TARP funds 
in conjunction with GM's bankruptcy and the subsequent creation 
of New GM. The Chrysler transactions have expended $14.3 
billion of TARP funding, of which $10.5 billion remains 
outstanding. These stakes were originally in the form of debt, 
although now Treasury holds both debt and equity in both 
companies. Assistance to automotive suppliers and investments 
in GMAC, a financial institution substantially dedicated to 
automotive lending, account for another $16.9 billion of TARP 
resources, bringing TARP net support for the U.S. domestic 
automotive industry to slightly over $81 billion as of 
September 9, 2009. Total TARP funding commitments to the 
automotive industry reached an estimated $85 billion at one 
point, but that figure has been reduced by decreased usage for 
the auto supplier program, repayments of warranty program loans 
and the full repayment of the $1.5 billion loan to Chrysler 
Financial. As shown in the following table, of the federal 
government's $81 billion exposure to the automotive industry, 
$76.9 billion had actually been disbursed as of Aug. 5, 2008.

       FIGURE 3: TARP AUTOMOTIVE PROGRAM CURRENT FUNDS OUTSTANDING
                         [As of August 5, 2009]
------------------------------------------------------------------------
                                  Cumulative
                              obligations \265\      Amounts advanced
------------------------------------------------------------------------
Chrysler....................    $14,312,130,642          $10,470,000,000
General Motors..............     49,860,624,198     \266\ 49,500,000,000
GMAC........................     12,500,000,000           12,500,000,000
Loan for GMAC rights                884,024,131              884,024,131
 offering \267\.............
Auto supplier supports......      3,500,000,000      \268\ 3,500,000,000
      Total.................     81,056,778,971          76,854,024,131
------------------------------------------------------------------------
\265\ Cumulative obligation amount represents Treasury's total
  obligation to the automotive industry under the AIFP. The figure does
  not reflect repayments, de-obligations or committed funds that are
  unused. For example, Treasury originally allocated $3.8 billion for
  Chrysler's DIP financing. However, only $1.89 billion of this portion
  was used. Since Treasury has indicated in discussions with the Panel
  that the remaining $1.91 billion was de-obligated, it is not reflected
  in this metric. The Amounts Advanced are decreased by commitments that
  were not funded but includes amounts that are no longer owing such as
  the amounts credit bid in the GM bankruptcy.
\266\ This number reflects the $8.8 billion in loans and preferreds
  outstanding as well as the original loan amounts that are now in the
  form of equity.
\267\ Loans to GM that have been converted to shares of GMAC and are
  currently not obligations of GM or GMAC. The GM loan was terminated.
\268\ This figure does not reflect the amount outstanding under the
  program, but instead is the total amount available under the cap.

    In Section 123 of EESA, Congress required that both the 
Office of Management and Budget (OMB) and the Congressional 
Budget Office (CBO) calculate the budget costs of the TARP 
transactions under the procedures of the Federal Credit Reform 
Act of 1990,\269\ while using discount rates reflecting market 
risk rather than simply the government's cost of funds. In 
publishing their calculations of TARP budget outlays for 2009 
using this ``credit reform'' methodology, the OMB and CBO 
offered their estimates of the subsidy rate which taxpayers are 
providing.\270\ OMB calculates separate subsidy rates for TARP 
automotive investment debt and equity transactions at 49 
percent and 65 percent, respectively, while CBO estimates an 
aggregate credit subsidy rate for all TARP automotive industry 
support programs of 73 percent. These subsidy rates, which 
represent an estimate of the investment that will not be 
recouped by the federal government, incorporate assumptions 
concerning the timing of cash flows (mainly principal and 
interest or dividend payments) as well as defaults on, or 
(partial) losses of, the amounts invested. However, both sets 
of estimates that were completed after the initial Chrysler and 
GM viability plans were rejected by the Obama Administration 
but before the companies' respective bankruptcy proceedings had 
been completed. Nevertheless, these credit subsidy estimates 
reflect analysis by the two budget agencies that imply--at 
least as of the time they performed their analyses--there was a 
high likelihood that a substantial portion of the initial TARP 
financing provided to Chrysler and GM in December and January 
would not be recovered.\271\ Similarly, the latest SIGTARP 
report notes that with respect to DIP financing provided to 
Chrysler, ``Treasury does not expect to receive repayment.'' 
\272\ As more federal dollars have been devoted to the 
automotive investment in Chrysler and GM, including funds 
committed to aid both companies throughout their bankruptcy 
proceedings, CBO has increased its estimates as to the dollar 
amount of the automotive assistance subsidy. In its August 
report, ``CBO raised its estimate of the costs of that 
assistance by nearly $40 billion relative to the March 
baseline.'' \273\
---------------------------------------------------------------------------
    \269\ EESA Sec. 123(a).
    \270\ Office of Management and Budget, The President's Budget for 
Fiscal Year 2010, 983 (May 2009) (online at www.whitehouse.gov/ omb/
budget/ fy2010/assets/ tre.pdf) (hereinafter ``President's Fiscal Year 
2010 Budget''); See generally Congressional Budget Office, The Troubled 
Asset Relief Program: Report on Transactions Through June 17, 2009 
(June 2009) (online at www.cbo.gov/ ftpdocs/ 100xx/doc10056/ 06-29-
TARP.pdf) (hereinafter ``CBO June TARP Transactions Report'').
    \271\ The CBO analysis (see CBO June TARP Transactions Report, 
supra note 270) is based primarily on the yield of GM-issued preferred 
stock as observed in financial markets over the months prior to the GM 
bankruptcy filing. OMB's analysis (see President's Fiscal Year 2010 
Budget, supra note 270 at 982-985) was developed by separating the AIFP 
into categories for debt and equity, encompassing working capital 
financing for Chrysler and GM, GMAC debt and equity, Chrysler Financial 
debt and the two companies' respective supplier programs. Subsidy 
estimates were calculated for each category using comparable data from 
both the industry and other government programs, where available; 
otherwise the category was assigned a 100 percent subsidy rate as a 
placeholder until refined estimates are prepared later this year, 
representing a worst case scenario that assumes no projected recovery 
of TARP funds. These individual calculations were then aggregated with 
weights reflecting relative funding levels.
    \272\ SIGTARP, Quarterly Report to Congress (July 21, 2009) (online 
at www.sigtarp.gov/ 
reports/congress/ 2009/July2009_ Quarterly_ Report_to_ Congress.pdf).
    \273\ The Budget and Economic Outlook: An Update, supra note 271.
---------------------------------------------------------------------------
    Treasury officials have acknowledged to Panel staff that at 
least some portion of the initial TARP funds disbursed in 
conjunction with the Chrysler and GM bankruptcies may not be 
recouped.\274\ They stress, however, that recovery of TARP 
investments in the automotive industry will be highly dependent 
upon the value of the stock that Treasury holds (or 
subsequently receives) in the two companies when they are able 
to go public. Hence, the prospects for recovery of the TARP 
investments depend on the forecast for Chrysler and GM stock 
appreciation, which is something they cannot predict. In 
discussions, Treasury agreed with the Panel's assessment that 
the new companies' stock prices will have to appreciate sharply 
in order for Treasury, i.e. taxpayers, to be fully repaid on 
all of the TARP funds that have been invested.\275\
---------------------------------------------------------------------------
    \274\ During a meeting with Panel staff on August 11, 2009, Mr. 
Bloom explained that it was possible but unlikely that taxpayers would 
recover all of the money they had invested in Chrysler and General 
Motors. Mr. Bloom has acknowledged that ``likely scenarios involve a 
reasonable probability of repayment of substantially all of the 
government funding for new GM and new Chrysler, and much lower 
recoveries for the initial loans.'' Ron Bloom COP Testimony, supra note 
36. The Task Force has indicated to the Panel that the ``initial 
loans'' refer to the $4 billion lent to Old Chrysler ($500 million of 
which was assumed by New Chrysler) and the $19.4 billion lent to Old GM 
(which was part of the loans that were credit bid for the assets of New 
GM).
    Over $7.3 billion was originally committed in TARP and DIP 
financing to Old Chrysler (only $1.9 billion of the original $3.8 
billion DIP financing is outstanding); it is highly unlikely that these 
funds will be returned to Treasury by Old Chrysler and any recovery on 
these amounts will depend on New Chrysler's stock price. Deducting $3.5 
billion in ``initial loans'' from the total amount expended, the 8 
percent Treasury stake in New Chrysler stock would have to be worth 
$1.1 billion (a total capitalization of $13.75 billion) for the 
taxpayer to recover the amount that the auto team believes is 
reasonably likely to be recovered.
    With respect to GM, there is $49.5 billion in government assistance 
that was initially extended to Old GM and then credit bid for the 
assets of New GM. Deducting $19.4 billion in ``initial loans'' from the 
total amount expended, the Treasury stake in New GM stock would have to 
be worth $21.29 billion (a total capitalization of $35.01 billion) for 
the taxpayer to recover the amount that the auto team believes is 
reasonably likely to be recovered.
    \275\ Id.
---------------------------------------------------------------------------
    With respect to Chrysler, Treasury has invested a combined 
$14.3 billion in the new and old entities, including $1.5 
billion for Chrysler Financial and $280 million for the 
Chrysler warranty program. The bankrupt Chrysler estate (Old 
Chrysler) is liable for $3.5 billion of TARP financing, and 
given the competing claims on that estate, payment is 
unlikely.\276\ Treasury's interest in the new Chrysler includes 
a note for $6.6 billion that includes up to $533 million of 
payment-in-kind interest and a issuance fee of $288 million, 
and a $500 million loan assumed from Old Chrysler and an equity 
ownership share. While the Panel did not have access to equity 
valuations for New Chrysler, it is clear that--with $12.5 
billion invested ($14.3 billion less Chrysler Financial and the 
Chrysler warranty program, which have been repaid) and assuming 
repayment of both the $7.1 billion of this investment in the 
form of notes as well as the fees and payment-in-kind interest 
of $821 million--the Chrysler equity interest \277\ would need 
to achieve the remaining investment value of approximately $4.6 
billion \278\ (implying total capitalization of New Chrysler of 
$57.5 billion) in order for taxpayers to recoup their 
investment.
---------------------------------------------------------------------------
    \276\ See supra Figure 1.
    \277\ Assuming that Fiat meets its performance targets and the 
Treasury interest is decreased to 8 percent.
    \278\ This does not account for the warrants Treasury owns in 
Chrysler Financial.
---------------------------------------------------------------------------
    With respect to New GM, the sizeable amount of debt for 
which the company is responsible means that repayment of the 
TARP financing will require New GM stock to appreciate to a 
level that is highly optimistic.
    The valuation of New GM used by the bankruptcy court 
estimated that the market capitalization (the price of all 
outstanding shares) of the new entity would be worth between 
$59 and $77 billion in 2012.\279\ Treasury has invested a 
combined $49.5 billion in the New and Old GM and approximately 
61 percent of equity in New GM.\280\ Assuming full repayment of 
the $8.8 billion note and preferred stock issued by New GM to 
Treasury, the shares in New GM will have to be worth $40.7 
billion (the difference between $49.5 billion and $8.8 billion) 
for Treasury's investment to be repaid when Treasury sells its 
shares, meaning the market capitalization of the entire company 
needs to be worth $67.7 billion. In April 2000, when Old GM 
shares were at the height of their value (not adjusted for 
inflation), the company's total value was only $57.2 
billion.\281\ In other words, New GM will have to achieve a 
capitalization that is higher than was ever achieved by Old GM 
if taxpayers are to break even.\282\
---------------------------------------------------------------------------
    \279\ Declaration of J. Stephen Worth, supra note 36.
    \280\ White House March 31 Remarks on GM Restructuring, supra note 
100; GM July 16, 2009 8-K, supra note 86.
    \281\ Id.
    \282\ Id.
---------------------------------------------------------------------------
    Of course, preserving portions of Chrysler and GM might 
have resulted in savings for the government in other ways. As 
discussed in more detail below, Treasury has not clearly 
explained how the various competing policy and financial 
objectives involved in the rescue of the automotive companies 
influenced its decisions. Without Treasury clearly articulating 
these objectives and providing its analysis, the Panel is 
unable to discern whether other financial considerations should 
be taken into account when analyzing whether taxpayers will be 
repaid.
    The following figures show TARP automotive program funding 
to Chrysler, Chrysler Financial, GM, and GMAC; and the funds 
committed to Chrysler and GM.

                                      FIGURE 4: TARP AUTOMOTIVE PROGRAM FUNDING TO CHRYSLER AND CHRYSLER FINANCIAL
                                                                 [as of August 28, 2009]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                        Initial       Initial security     Repayment/                                   Current security
             Date                Assisted entity   assistance amount        type          exchange/note   Cumulative assistance amount        type
--------------------------------------------------------------------------------------------------------------------------------------------------------
1/2/2009......................  Chrysler Holding      $4,000,000,000  Loan............  $500,000,000 of                 $3,500,000,000  Loan \283\
                                 LLC.                                                    1/2/09 facility
                                                                                         assumed by New
                                                                                         Chrysler on 5/
                                                                                         27/09.
1/16/2009.....................  Chrysler               1,500,000,000  Loan............  Repaid
                                 Financial                                               ($1,500,000,000
                                 Services                                                ).
                                 Americas LLC
4/29/2009.....................  Chrysler Holding         500,000,000  Loan............  Unused and de-    ............................  Loan
                                 LLC.                                                    obligated.
4/29/2009.....................  Chrysler Holding         280,130,642  Loan (Chrysler    Repaid Chrysler
                                 LLC.                                  warranty).        warranty loan
                                                                                         ($280,130,642).
5/1/2009......................  Chrysler LLC.....      3,043,143,000  Loan............  Adjusted by                      1,890,000,000  Loan
                                                                                         Treasury \284\.
5/20/2009.....................  Chrysler LLC.....        756,857,000  Loan............  Adjusted by                                  0  Loan
                                                                                         Treasury \285\.
5/27/2009.....................  New Chrysler.....  \286\ 6,642,000,0  Loan............  500,000,000 of 1/                7,142,000,000  Loan
                                                                  00                     2/09 facility
                                                                                         assumed by New
                                                                                         Chrysler on 5/
                                                                                         27/09.
                                                  -------------------                                    ------------------------------
      Total...................                        16,722,130,642                                              \287\ 12,532,000,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
\283\ Although the original assistance was in the form of the loan, the remaining $3.5 billion can no longer be classified as a loan since it was made
  to an entity that is now bankrupt. Treasury has indicated that the likelihood of recoupment of this amount is low, but possible if the equity value of
  Treasury's holding increases to a certain level. The $500 million assumed by New Chrysler remains a loan. Overall recovery may also be potentially
  increazsed by Treasury's interest in the equity of Chrysler Financial amounting to the greater of $1.375 billion or 40% of Chrysler Financial's
  equity.
\284\ This information was provided to the Panel by Treasury staff. The amount committed was ultimately unnecessary and adjusted accordingly.
\285\ Id.
\286\ Treasury also received equity consideration in New Chrysler. An April 30, 2009 press release by the Administration states that upon the closing of
  the Chrysler-Fiat alliance, the U.S. government owned an 8 percent equity interest. U.S. Department of the Treasury, Troubled Asset Relief Program
  Transactions Report for Period Ending August 5, 2009 (Aug. 5, 2009) (online at www.financialstability.gov/docs/transaction-reports/transactions-
  report_08052009.pdf); U.S. Department of the Treasury, Obama Administration Auto Restructuring Initiative (April 30, 2009) online at
  www.financialstability.gov/latest/tg_043009.html). See Section (C) of this report for discussion of Treasury's equity ownership in New Chrysler. Only
  $4.58 billion of the committed $6.64 billion has been drawn as of August 18, 2009. Treasury provided de-obligation information in response to specific
  inquiries relating to the Panel's oversight of the AIFP. Treasury provided the Panel with information regarding specific investments made under the
  AIFP on August 18, 2009. Specifically, this information denoted allocated funds that had since been de-obligated (hereinafter ``Treasury De-obligation
  Document'').
\287\ This figure relfects the de-obligation of $1.91 billion of the allocated $3.8 billion in DIP financing and the de-obligation of an unused $500
  million loan facility.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
  

                                             Figure 6: AUTOMOTIVE PROGRAM FUNDING TO GENERAL MOTORS AND GMAC
                                                                 [as of august 28, 2009]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                            Initial         Initial security   Repayment/exchange/     Cumulative      Current security
              Date                  Assisted entity    assistance amount          type                note         assistance amount         type
--------------------------------------------------------------------------------------------------------------------------------------------------------
12/29/2008......................  General Motors            $884,024,131  Loan...............  Exchange for GMAC   .................  GMAC, common
                                   Corporation.                                                 equity.                                equity
12/31/2008......................  General Motors          13,400,000,000  Loan...............  Old GM debt credit    13,400,000,000*  New GM common
                                   Corporation.                                                 bid; New GM                            equity, GM
                                                                                                equity received.                       preferred
                                                                                               (*Original loan
                                                                                                amount is thus
                                                                                                now in the form
                                                                                                of equity).
4/22/2009.......................  General Motors           2,000,000,000  Loan...............  Old GM debt credit     2,000,000,000*  New GM common
                                   Corporation.                                                 bid; New GM                            equity, GM
                                                                                                equity received*.                      preferred
5/20/2009.......................  General Motors           4,000,000,000  Loan...............  Old GM debt credit     4,000,000,000*  New GM common
                                   Corporation.                                                 bid; New GM                            equity, GM
                                                                                                equity received*.                      preferred
5/27/2009.......................  General Motors             360,624,198  Loan (GM warranty).  Old GM debt credit       360,624,198*  New GM common
                                   Corporation.                                                 bid; New GM                            equity, GM
                                                                                                equity received*.                      preferred
6/3/2009........................  General Motors          30,100,000,000  Loan (DIP).........  Old GM debt credit     30,100,000,000  New GM common
                                   Corporation.                                                 bid; New GM                            equity, GM
                                                                                                equity and                             preferred, GM
                                                                                                preferreds                             loans
                                                                                                received.
                                  ...................  .................  ...................  Old GM debt credit    19,941,511,395*  New GM common
                                                                                                bid; New GM                            equity
                                                                                                equity*.
                                  ...................  .................  ...................  Old GM debt credit      2,100,000,000  New GM preferred
                                                                                                bid; New GM
                                                                                                preferreds
                                                                                                received.
                                  ...................  .................  ...................  Became a New GM     7,072,488,605 \28  New GM, loan
                                                                                                loan.                             8\
                                  ...................  .................  ...................  Remained Old GM           986,000,000  Old GM, loan
                                                                                                loan.
                                                      -------------------                                         -------------------
      Total.....................                          50,744,648,329                                              49,860,624,198
--------------------------------------------------------------------------------------------------------------------------------------------------------
\288\ $360,624,198 of this loan was repaid on June 10, 2009. August 28 TARP Transactions Report, supra note 102.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

  2. PERFORMANCE AND FINANCING CHALLENGES FOR THE AUTOMOTIVE COMPANIES

    In order for the taxpayers to recoup their investments in 
the automotive companies, the companies need to make enough 
money to cover their operating expenses and repay their debt, 
and then become profitable enough to be able to sell their 
shares in initial public offerings (IPOs). They face several 
challenges in achieving these objectives.

a. Cash flow challenges

    At the time the automotive companies filed for bankruptcy, 
they were ``burning'' through a substantial amount of money. 
These are the amounts by which their operating expenditures (to 
pay workers and keep their factories running) exceeded the 
revenues they were generating from sales and other sources. 
More revealing is that this structural imbalance stemmed 
primarily from normal operations, and was not attributable to 
the type of major new capital spending that both companies will 
require to become competitive in the future. Admittedly, as 
discussed above, this burn rate reflected extraordinary market 
conditions.
    The Panel reviewed elements of the viability plans approved 
by the Treasury auto team. The projected cashflow in those 
plans, which drove the determination of viability made by the 
Treasury auto team, assumes an increase in overall market size 
consistent with independent market analysts' projections and a 
market share that has a rational if optimistic basis.

                                      FIGURE 8: ESTIMATED NEW CHRYSLER DEBT
                                             [U.S., Canada, and UAW]
----------------------------------------------------------------------------------------------------------------
                                                                  Annual interest rate
                Lender                          Amount                   \289\                   Maturity
----------------------------------------------------------------------------------------------------------------
U.S. government \290\................  $2 billion.............  LIBOR + 5..............  Dec. 2011.
                                       5.142 billion \291\....  LIBOR + 7.91...........  June 2017.
Canadian government \292\............  500 million............  CDOR + 5...............  Dec. 2011.
                                       1.4 billion \293\......  CDOR + 5...............  June 2017.
UAW Trust \294\......................  4.587 billion..........  9......................  July 2023.
----------------------------------------------------------------------------------------------------------------
\289\ For all of New Chrysler's loans with the U.S. and Canada, interest is accrued and paid on a quarterly
  basis. Interest accrued through the first two quarters is considered ``paid in kind,'' and is added to the
  principal. Essentially, interest accrues, but is not paid in cash through the end of 2009. It is paid,
  however, at maturity.
\290\ First Lien Credit Agreement between New Carco Acquisitions, LLC (to be named Chrysler Group LLC) and the
  U.S. Department of the Treasury (June 10, 2009).
\291\ Of the $5.142 billion, all but $2.05 billion has been drawn by New Chrysler to date, according to
  information provided to the Panel by Treasury.
\292\ First Lien Working Capital Credit Facility, Summary of Terms and Conditions, In re Chrysler LLC, 405 B.R.
  79 (Bankr. S.D.N.Y. 2009) (online at chap11.epiqsystems.com/ docket/ docketlist.aspx?pk= 1c8f7215-f675-41bf-
  a79b-e1b2cb9c18f0&l=1).
\293\ The $500 million and $1.4 billion loan amounts presented here are in U.S. dollars based on the exchange
  rate at the time of issuance. Amounts owed to the Canadian government are paid in Canadian dollars.
\294\ Draft Loan Agreement between New Carco Acquisition LLC (to be named Chrysler Holding LLC) and the bank of
  New York Trust Company (Trustee for VEBA, presented as UAW Trust Note) (Apr. 29, 2009).


                                         FIGURE 9: ESTIMATED NEW GM DEBT
                                          [U.S., Canada, and UAW] \295\
----------------------------------------------------------------------------------------------------------------
                Lender                          Amount               Interest rate               Maturity
----------------------------------------------------------------------------------------------------------------
U.S. government......................  $7.1 billion \296\.....  LIBOR + 5 \297\........  July 2015.
Canadian government..................  1.3 billion............  CDOR + 5 \298\.........  July 2015.
UAW Trust............................  2.5 billion............  9 \299\................  July 2017.
----------------------------------------------------------------------------------------------------------------
\295\ GM July 16, 2009 8-K, supra note 86.
\296\ $361 million of this amount related to warranty loans repaid on July 10, 2009.
\297\ According to GM's August 7, 2009 8-K filing, ``each UST Loan accrues interest at a rate per annum equal to
  the 3 month LIBOR rate, which will be no less than 2.0%, plus 5.0% per annum, unless the UST determines that
  reasonable means do not exist to ascertain the LIBOR rate or that the LIBOR rate will not adequately reflect
  the UST's cost to maintain the loan. In such a circumstance, the interest rate to be applied shall be the
  greatest of (1) the prime rate plus 4%, (2) the federal funds rate plus 4.5% or (3) the 3 month LIBOR (which
  will not be less than 2%) plus 5%.'' Supra note 92.
\298\ According to GM's August 7, 2009 8-K filing, loans outstanding to the Canadian government ``accrue
  interest at a rate per annum equal to the greater of the three-month CDOR rate and 2.0%, plus 5.0%. Accrued
  interest is payable quarterly.'' Supra note 92.
\299\ According to GM's August 7, 2009 8-K filing, ``the notes under the VEBA Note Agreement (VEBA Notes) are
  scheduled to be repaid in three equal installments of $1.4 billion on July 15 of 2013, 2015, and 2017.'' Supra
  note 92.

    The amount of money to service this debt, even before the 
companies start to pay for normal operations, such as steel and 
wages, is significant. The following tables set out the amounts 
necessary to service existing debt obligations:

                FIGURE 10: ESTIMATED CONTRACTUAL OBLIGATIONS OF NEW CHRYSLER (IN BILLIONS) \300\
----------------------------------------------------------------------------------------------------------------
                                '09     '10     '11     '12     '13     '14     '15     '16    '17-'23    Total
----------------------------------------------------------------------------------------------------------------
U.S. government long-term         $0   $.505   $2.56   $.373   $.379   $.386   $.393   $2.87      $1.6      $9.1
 debt maturities including
 interest payments \301\....
Canadian government long-      $.053   $.094   $.594   $.059   $.059   $.059   $.059   $.464     $.435    $1.877
 term debt maturities
 including interest \302\...
UAW Trust note \303\........      $0   $.315     $.3     $.4     $.6    $.65    $.65    $.65      $5.6     $9.16
                             -----------------------------------------------------------------------------------
    Total...................   $.053   $.914   $3.45   $.832   $1.04   $1. 1    $1.1   $3.98     $7.64   $20.14
----------------------------------------------------------------------------------------------------------------
\300\ The contractual obligations of New Chrysler presented in this table represent the Panel's best estimates
  based on information compiled from the available loan documents. With respect to New Chrysler's loan agreement
  with Canada, the interest rate of the loan is CDOR (or a minimum of 2 percent) plus 5 percent per annum. The
  Panel assumes a CDOR rate of 2 percent for the life of the loan.
\301\ Estimates compiled from the First Lien Credit Agreement between New Carco Acquisitions, LLC (to be named
  Chrysler Group LLC) and the U.S. Department of the Treasury (June 10, 2009). Also reflected in these tables
  are two types of fees that New Chrysler owes the U.S. First, a ``payment in kind'' of $17 million every
  quarter in new notes is added to the principal of $5.142 billion until maturity in 2017. Second, a one-time
  payment of $288 million is added to the principle of $5.142 billion at issuance. Since both payments are added
  to the principal, they accrue interest over the length of the loan. New Chrysler pays these fees with interest
  at maturity in 2017.
\302\ Estimates compiled from the Summary of Terms and Conditions of Canadian Loan Agreement with Chrysler
  Holding LLC (Apr. 29, 2009). Not reflected in these estimates is an additional fee that New Chrysler is
  expected to owe the Canadian government. According to Panel discussions with Treasury, terms of this fee are
  still being reviewed.
\303\ Estimates compiled from Draft Loan Agreement between New Carco Acquisition LLC (to be named Chrysler
  Holding LLC) and the bank of New York Trust Company (Trustee for VEBA, presented in the table as UAW Trust
  note) (Apr. 29, 2009).


                   FIGURE 11: ESTIMATED CONTRACTUAL OBLIGATIONS OF NEW GM (IN BILLIONS) \304\
----------------------------------------------------------------------------------------------------------------
                                               2010     '11     '12     '13     '14     '15    '16-'17    Total
----------------------------------------------------------------------------------------------------------------
U.S. government long-term debt maturities       $.47    $.47    $.47    $.47    $.47   $7.18        $0     $9.53
 including interest payments................
Canadian government long-term debt              $.09    $.09    $.09    $.09    $.09   $1.38        $0     $1.83
 maturities including interest..............
UAW Trust note..............................      $0      $0      $0    $1.4      $0    $1.4      $1.4      $4.2
                                             -------------------------------------------------------------------
    Total...................................    $.56    $.56    $.56   $1.96    $.56   $9.96      $1.4   $15.56
----------------------------------------------------------------------------------------------------------------
\304\ The contractual obligations of New GM presented in this table represent the Panel's best estimates based
  on information compiled from GM's 8-K filed on August 7, 2009. GM August 7 8-K, supra note 92. With respect to
  New GM's loan with the U.S. government, the Panel assumes the U.S. will bear an interest of LIBOR plus five
  percent throughout the life of the loan. LIBOR is assumed to be two percent, therefore the total interest is
  assumed to be seven percent for the life of the loan. With respect to New GM's loan with the Canadian
  government, the interest rate of the loan is CDOR (or a minimum of two percent) plus five percent per annum.
  The Panel assumes a CDOR rate of two percent for the life of the loan, and therefore assumes a total interest
  rate of seven percent per annum. $361 million of the initial $7.1 billion loan amount was repaid on July 10,
  2009.

    The viability plans assume positive cashflow in the 
relatively short term. To the extent cash from the sale of 
automobiles cannot cover the costs of production and other 
corporate costs, Chrysler and GM will have to borrow money from 
banks, or access the debt or equity capital markets.

b. Access to the debt and equity markets; Initial public offerings

    As discussed above, the Treasury auto team intends that 
both companies will eventually access the equity capital 
markets in the form of IPOs,\305\ and as a result, successful 
IPOs form the basis for both repaying taxpayers and Treasury's 
exit strategy. This strategy hinges directly on the ability of 
the two companies to restructure and become profitable. At the 
moment, in a still-constrained credit market, and with the 
pressures associated with these two companies (not least the 
risk of political interference),\306\ it is unclear whether 
either company in its current form could access the banks or 
the debt capital markets in the amounts and on the terms that 
they would require.
---------------------------------------------------------------------------
    \305\ See supra section B.1 and infra section G.2.
    \306\ See supra section E.4.
---------------------------------------------------------------------------
    Following the completion of a successful IPO, the Treasury 
auto team has made clear it intends to dispose of Treasury's 
ownership stakes in New Chrysler and New GM ``as soon as is 
practicable,'' as discussed above. At least with respect to New 
GM, where Treasury holds 60.8 percent of the company, Treasury 
does not expect to sell its entire stake in the IPO.\307\ The 
Stockholders Agreement \308\ calls for Treasury to use 
``reasonable best efforts to exercise [its] demand registration 
rights under the Equity Registration Rights Agreement and cause 
an IPO to occur within one year of the date of this Agreement, 
unless the Corporation is already taking steps and proceeding 
with reasonable diligence to effect an IPO.'' \309\ Thus, it is 
unclear when Treasury will completely exit its TARP investments 
in the automotive industry, but it is unlikely to be at any 
point in the near future.
---------------------------------------------------------------------------
    \307\ Ron Bloom COP, supra note 36. For further discussion of Task 
Force statements concerning its intent to eventually dispose of its 
ownership stakes, see Sections supra B.1 and infra G.2.
    \308\ New GM Stockholder Agreement, supra note 87.
    \309\ General Motors Company, Form 8-K (July 10, 2009) (online at 
www.sec.gov/ Archives/edgar/ data/1467858/ 000119312509150199/ 
dex101.htm).
    Under the terms of the New Chrysler Shareholders Agreement, 
Treasury can require New Chrysler to file a registration statement 
under the Securities Act of 1933 (a ``demand registration''); in the 
case of an IPO, such demand notice can only be delivered by either (a) 
one or more holders holding 10 percent or more of the equity 
securities, or (b) both Treasury and Canada. Shareholders Agreement 
Among Fiat Newco, United States Department of the Treasury, UAW Retiree 
Medical Benefits Trust, Canada Development Invesment Corporation, and 
the other Members Party Hereto, section 3.2(a)(i) (filed May 12, 2009) 
In Re Chrysler LLC, S.D.N.Y. (No. 09 B 50002 (AJG)) (hereinafter ``New 
Chrysler Shareholders Agreement''). Treasury cannot seek more than one 
demand registration in any 12-month period, and cannot request more 
than five. Id. at Section 3.2(a)(ii).
    The New GM Stockholders Agreement directs Treasury to use its 
reasonable best efforts to exercise ``[its] demand registration rights 
under the Equity Registration Rights Agreement and require an IPO to 
occur'' by July 10, 2010 (one year from the date of the Stockholders 
Agreement). Additionally, pursuant to the terms of the New Chrysler 
Shareholders Agreement and the New GM Equity Registration Rights 
Agreement, each time New Chrysler or New GM proposes to offer any 
equity securities in a registered underwritten offering under the 
Securities Act, they must provide each holder (including Treasury) with 
the opportunity to include any or all of their registrable securities 
in such offering (``piggyback offering''). Id. at section 3.3(a); New 
GM Stockholder Agreement, supra note 87 at section 2.2.1.
---------------------------------------------------------------------------
    The Treasury auto team has not ruled out other ways of 
exiting ownership of these companies and returning them to 
private hands, but options such as selling Treasury's stake to 
private equity investors seem unlikely at present.\310\
---------------------------------------------------------------------------
    \310\ At a July 29, 2009 briefing with Panel staff, Treasury and 
Task Force staff indicated that, at least at that point, no private 
equity investor has come along with demonstrated interest in investing 
in these companies.
    However, there are several pre-IPO contractual limitations on the 
public sale of Treasury's ownership stakes in New GM that are set out 
in the Stockholders Agreement.
---------------------------------------------------------------------------
    In making the decision--or decisions--to sell the equity 
stakes that it holds in the automotive companies, Treasury will 
have to balance the desire to exit as soon as practicable (as 
articulated by the President and the head of the Treasury auto 
team) with the need to maximize the return (or minimize the 
loss) to taxpayers. It is not easy to time the markets, and 
Treasury cannot force the companies' boards of directors to 
engage in an IPO. Until the companies go public through the IPO 
process, Treasury's only option is to sell its stake privately 
(which, as discussed above, remains an unlikely event). Once 
the companies become public companies subject to SEC reporting 
requirements, Treasury's options would be somewhat broader. If 
the company concerned agreed, Treasury could sell large stakes 
in SEC-registered secondary offerings.\311\ With or without the 
company's approval, Treasury could also sell smaller amounts of 
shares into the public markets.\312\
---------------------------------------------------------------------------
    \311\ GM August 7 8-K, supra note 293.
    \312\ Shareholders that are ``affiliates'' of a company (in 
general, those with a significant stake in the voting equity of the 
company, or the right to a board seat) may sell their shares in the 
public markets without registration of the transaction with the SEC. 
SEC rules impose volume, timing and other restrictions on such sales. 
Commodity and Securities Exchanges, 17 C.F.R. Sec. 230.144. Any such 
sales by the government are likely to have a significant impact on the 
securities market, which may suspect a signal to the market with 
respect to the specific companies, the auto industries, or the economy 
in general. For this reason (and the general difficulty in timing the 
market discussed above), holding these equity stakes in a trust, 
discussed in more detail below, might help to manage the taxpayers' 
stake more efficiently and maximize returns.
---------------------------------------------------------------------------

                            G. Issues Raised


    1. AUTHORITY TO USE TARP FOR SUPPORT OF THE AUTOMOTIVE COMPANIES

    The funds used by the Treasury auto team in the various 
transactions associated with the Chrysler and GM 
reorganizations were from the $700 billion appropriated for 
TARP. Treasury, as an executive agency, and the Task Force both 
acted under presidential direction. Their actions are therefore 
properly scrutinized as executive actions. Under this scrutiny, 
the use of TARP funds for the automotive industry raises 
questions regarding both presidents' authority to use these 
funds under EESA legislation and, more broadly, under the U.S. 
Constitution. The statutory language is ambiguous and, in light 
of the language and history of EESA, the question is a close 
one.

a. The scope of executive authority

    Unlike the first article of the Constitution, which clearly 
enumerates the powers vested in the legislative branch, the 
second article says only that ``the executive power shall be 
vested in a President of the United States'' and that it is the 
president's duty to ``ensure that the laws be faithfully 
executed.'' \313\ With a handful of exceptions, the president's 
authority to act will most often derive from a statute.\314\ In 
this case, the relevant statute is EESA.
---------------------------------------------------------------------------
    \313\ U.S. Constitution, art. II, Sec. 1 and 3.
    \314\ The leading authority on how the president's power should be 
interpreted is Justice Robert Jackson's concurring opinion in the 1952 
U.S. Supreme Court case, Youngstown Sheet & Tube v. Sawyer. Youngstown 
Sheet & Tube Co. et al. v. Sawyer, 343 U.S. 579, 634 (1952) (Jackson, 
J., concurring). Youngstown presents three scenarios illustrating the 
varying scope of executive power. In the first scenario,when a 
president acts pursuant to Congressional mandate, the president's 
authority ``is at its maximum, for it includes all that he possesses in 
his own right plus all that Congress can delegate.'' Id. at 635. At the 
other extreme is the scenario in which the president's power is ``at 
its lowest ebb,'' that is, when the president takes action that has 
been specifically proscribed by Congress ``for then he can rely only 
upon his own constitutional powers minus any constitutional powers of 
Congress over the matter.'' Id. at 637. In the middle is the case in 
which the president may act in certain situations when Congress has 
been silent on an issue--neither passing legislation to authorize 
presidential action nor passing legislation proscribing such action. 
Id. Despite its lack of one clear rule delineating the outer bounds of 
executive authority, Youngstown has remained the premier authority on 
the issue for the last 57 years. Lee Epstein & Tonja Jacobi, Super 
Medians, 61 Stan. L. Rev. 37, 60 n.85 (2008) (internal citations 
omitted). The Youngstown categories are not particularly relevant in 
this case, however, because there is no inherent executive authority on 
which the president could plausibly rely. The president's authority 
must therefore derive from statute.
---------------------------------------------------------------------------

b. The Emergency Economic Stabilization Act

    EESA does not explicitly state that the TARP is available 
to provide assistance to the automotive industry (or to any 
specific industry except arguably the financial and banking 
industry) but there may be an interpretation under which such 
assistance is nonetheless authorized.
    EESA states that:

          The Secretary [of Treasury] is authorized to . . . 
        purchase, and to make and fund commitments to purchase, 
        troubled assets from any financial institution, on such 
        terms and conditions as are determined by the 
        Secretary, and in accordance with this Act and the 
        policies and procedures developed and published by the 
        Secretary.\315\
---------------------------------------------------------------------------
    \315\ EESA Sec. 101(a)(1).

    It defines a ``troubled asset'' as ``residential or 
commercial mortgages and any securities, obligations, or other 
instruments that are based on or related to such mortgages that 
in each case originated or issued on or before March 14, 2008, 
the purchase of which the Secretary determines promotes 
financial market stability'' \316\ and ``any other financial 
instrument that the Secretary, after consultation with the 
Chairman of the Board of Governors of the Federal Reserve 
System, determines the purchase of which is necessary to 
promote financial market stability, but only upon transmittal 
of such determination, in writing, to the appropriate 
committees of Congress.'' \317\ A ``financial institution'' is 
defined as:
---------------------------------------------------------------------------
    \316\ EESA Sec. 3(9)(A).
    \317\ EESA Sec. 3(9)(B); see also Congressional Oversight Panel, 
August Oversight Report: The Continued Risk of Troubled Assets, at 10-
22 (August 11, 2009) (discussion of what constitutes a ``troubled 
asset'') (online at cop.senate.gov/documents/cop-081109-report.pdf) 
(hereinafter ``August COP Report'').

          [a]ny institution, including, but not limited to, any 
        bank, savings association, credit union, security 
        broker or dealer, or insurance company, established and 
        regulated under the laws of the United States or any 
        State, territory, or possession of the United States . 
        . . and having significant operations in the United 
        States, but excluding any central bank of, or 
        institution owned by, a foreign government.\318\
---------------------------------------------------------------------------
    \318\ EESA Sec. 3(5).

    The first question is therefore whether the transactions at 
issue constituted the purchase of ``troubled assets'' under 
EESA. While the majority of transactions associated with the 
Chrysler and GM deals did not involve residential or commercial 
mortgages or real estate-related securities, and therefore do 
not qualify under EESA Sec. 3(9)(A), it appears that the assets 
purchased by Treasury do meet the qualifications under EESA 
Sec. 3(9)(B). Before purchasing any assets from either GM or 
Chrysler, then-Secretary of the Treasury Henry Paulson 
submitted a determination to Congress stating that he had 
conferred with Chairman of the Federal Reserve Board Ben 
Bernanke and had determined that ``the purchase of obligations 
of certain thrift and other holding companies which are engaged 
in the manufacturing of automotive vehicles and the provision 
of credit and financing in connection with the manufacturing 
and purchase of such vehicles is necessary to promote financial 
market stability.'' \319\ To the extent that the transactions 
involved the purchase of assets, these assets appear to qualify 
as ``troubled assets'' under the definition provided in the 
statute.
---------------------------------------------------------------------------
    \319\ Letter from Henry Paulson to Representative Charles Rangel 
(Dec. 23, 2008).
---------------------------------------------------------------------------
    The next question is whether GM or Chrysler can be called a 
``financial institution'' under EESA. The language of the 
statute itself does not provide a clear answer. Although the 
statute provides a list of entities that may be considered 
``financial institutions,'' including such patently 
``financial'' institutions as banks, savings associations, and 
credit unions, it states that the universe of what may be 
considered a ``financial institution'' includes but is ``not 
limited to'' those on the list. The ambiguity of this list 
presents a challenge in determining what types of institutions 
absent from the list may still be considered within the 
statute's purview.

c. The executive's interpretation

    Both the executive branch and Treasury have spoken on this 
issue through various court documents, public statements, and 
congressional testimony. In the view of the executive branch, 
the use of TARP funds for the automotive industry is entirely 
appropriate. This was not President Bush's initial view, 
however.
    At a press conference on November 7, 2008, Tony Fratto, 
Deputy White House Press Secretary in the Bush Administration, 
stated that:

          What we have to deal with here in the federal 
        government, though, are the rules that--or the 
        authorities that Congress gave us to deal with how we 
        can assist the automakers and other automotive 
        component makers. And that is the section 136 auto loan 
        program that is being administered by the Department of 
        Energy . . . If Congress has any interest in going 
        beyond that, that's a decision that they're going to 
        have to make.\320\
---------------------------------------------------------------------------
    \320\ White House Office of Press Secretary, Press Briefing by 
Deputy Press Secretary Tony Fratto (Nov. 7, 2008) (online at 
georgewbush-whitehouse.archives.gov/ news/releases/ 2008/11/20081107-
1.html).

    On November 18, 2008, Secretary Paulson reiterated that 
position during his testimony before the House Financial 
---------------------------------------------------------------------------
Services Committee:

          [a]gain, you haven't seen any lack of consistency on 
        my part with regard to the autos. The TARP was aimed at 
        the financial system. That is what the purpose is. That 
        is what we talked about with the TARP. . . I don't see 
        [preventing the failure of one or more automotive 
        companies] as the purpose of the TARP. Congress passed 
        legislation that dealt with the financial system's 
        stability.\321\
---------------------------------------------------------------------------
    \321\ House Financial Services Committee, Statement of Secretary of 
the Treasury Henry Paulson, Oversight of Implementation of the 
Emergency Economic Stabilization Act of 2008 and of Government Lending 
and Insurance Facilities: Impact on the Economy and Credit 
Availability, 110th Congress, at 18-19 (Nov. 18, 2008).

    On December 19, President Bush announced that he would 
reverse his earlier position and use TARP funds for the 
automotive companies. During a press conference, President Bush 
---------------------------------------------------------------------------
explained that his administration had:

          [W]orked with Congress on a bill to provide 
        automakers with loans to stave off bankruptcy while 
        they develop plans for viability. This legislation 
        earned bipartisan support from majorities in both 
        houses of Congress. Unfortunately, despite extensive 
        debate and agreement that we should prevent disorderly 
        bankruptcies in the American automotive industry, 
        Congress was unable to get a bill to my desk before 
        adjourning this year. This means the only way to avoid 
        a collapse of the U.S. automotive industry is for the 
        executive branch to step in . . . So today, I'm 
        announcing that the federal government will grant loans 
        to automotive companies under conditions similar to 
        those Congress considered last week.\322\
---------------------------------------------------------------------------
    \322\ President George W. Bush, Statement on Financial Assistance 
to Automakers, (Dec. 19, 2008) (online at www.washingtonpost.com/ wp-
dyn/content/ article/2007/03/19/ AR2007031900867_pf.html).

    The Bush Administration reasoned that that EESA's 
definition of ``financial institution'' was broad enough to 
include the automotive companies, whose failures ``would pose a 
systemic risk to financial market stability and have a negative 
effect on the economy of the United States.'' \323\
---------------------------------------------------------------------------
    \323\ U.S. Department of the Treasury, Section 105(a) Troubled 
Asset Relief Program Report to Congress for the Period December 1, 2008 
to December 31, 2008, at 3 (Jan. 6, 2009) (online at 
www.financialstability.gov/ docs/105CongressionalReports/ 
105Report_010609.pdf). Critics argue that the executive's use of money 
authorized under EESA to assist the automotive industry is a violation 
of ``the non-delegation doctrine,'' which stipulates that the 
separation of powers laid out in the Constitution implies limits on the 
size and kind of discretion that Congress may confer on the executive 
branch. They contend that Congress did not intend for EESA to cover 
automobile manufacturers, citing as evidence proposed legislation that 
would have explicitly provided rescue funds to the automakers. If 
Congress intended EESA to cover automotive companies, then the 
deliberation over additional legislation would have been unnecessary.
---------------------------------------------------------------------------
    Treasury provided additional elaboration on its authority 
in Mr. Bloom's response to questions for the record posed 
during the Panel's hearing on the automotive industry in July 
2009. In response to one question, Mr. Bloom wrote:

          Each program has guidelines that specify eligibility 
        criteria. These criteria are posted on the financial 
        stability website, www.financialstability.gov.
          For example, in determining whether an institution is 
        eligible for funding under the Automotive Industry 
        Financing Program, Treasury has identified the 
        following factors for consideration, among other 
        things:
          1. The importance of the institution to production 
        by, or financing of, the American automotive industry;
          2. Whether a major disruption of the institution's 
        operations would likely have a materially adverse 
        effect on employment and thereby produce negative 
        effects on overall economic performance;
          3. Whether the institution is sufficiently important 
        to the nation's financial and economic system that a 
        major disruption of its operations would, with a high 
        probability, cause major disruptions to credit markets 
        and significantly increase uncertainty or losses of 
        confidence, thereby materially weakening overall 
        economic performance; and
          4. The extent and probability of the institution's 
        ability to access alternative sources of capital and 
        liquidity, whether from the private sector or other 
        sources of U.S. government funds.\324\
---------------------------------------------------------------------------
    \324\ Ron Bloom COP Testimony, supra note 36.

    Presumably these criteria also informed the initial 
decision to provide support to the automotive industry.\325\
---------------------------------------------------------------------------
    \325\ Mr. Bloom also responded to a question regarding whether 
Treasury would provide a legal opinion stating its authority to use the 
TARP funds for the automotive industry. Mr. Bloom answered by 
referencing the bankruptcy filing described above, and noted that Judge 
Gerber's final sale order in the GM bankruptcy had stated:
    The U.S. Treasury's extension of credit to, and resulting security 
interest in, the Debtors, as set forth in the DIP Facility and the 
Existing UST Loan Agreement and as authorized in the interim and final 
orders approving the DIP Facility, is a valid use of funds pursuant to 
EESA.
    This statement seems at odds with Judge Gerber's finding in the 
opinion issued the same day that found that the party raising the issue 
lacked standing, and because the question was moot and therefore not 
properly before the court. In re General Motors, 407 B.R. 463, 519 
(Bankr. S.D.N.Y. 2009). Given the inconsistency between these two 
statements, the bankruptcy court's views on the issue are at best 
ambiguous.
---------------------------------------------------------------------------
    The Chrysler and GM bankruptcy cases have provided an 
additional forum for the executive branch to express its view 
with the added benefit of in-depth legal analysis. For example, 
a filing by the United States in the GM case stated that, 
according to the statute, a ``financial institution'' is ``any 
institution . . . established and regulated under the laws of 
the United States or any State, territory, or possession of the 
United States . . . and having significant operations in the 
United States.'' \326\ On this basis, the United States 
concluded that ``GM plainly fits within the statutory language 
because it is an `institution . . . established and regulated 
under the laws of the United States or any State, territory, or 
possession of the United States . . . and having significant 
operations in the United States.'' \327\
---------------------------------------------------------------------------
    \326\ Statement of the United States of America Upon the 
Commencement of General Motors Corporation's Chapter 11 Case, at 10 
(Dec. 19, 2008). In re General Motors Corp., S.D.N.Y. (Dec. 19, 2009) 
(online at docs.motorsliquidationdocket.com/ pdflib/37_50026.pdf) 
(hereinafter ``U.S. December 2008 GM Bankruptcy Statement'').
    \327\ Id.
---------------------------------------------------------------------------
    Based on this interpretation, the term ``financial 
institution'' means any institution organized under U.S. law 
with operations in the United States. This interpretation does 
not, however, seem to account for the phrase ``including, but 
not limited to, any bank, savings association, credit union, 
security broker or dealer, or insurance company.'' It also 
would seem to lend little weight to Congress' selection of the 
term ``financial institution.'' The canons of statutory 
construction, which traditionally provide guidance on how 
statutes should be interpreted, generally frown on 
interpretations that render any part of the statute 
superfluous.\328\ The rule against superfluities assumes that 
legislatures, in general, mean what they say and that the 
inclusion of certain words or phrases is not accidental.\329\ 
Using that assumption, Congress must be presumed to have had a 
purpose in listing institutions that might typically be 
considered ``financial'' institutions--banks, credit unions, 
broker dealers, and insurance companies.
---------------------------------------------------------------------------
    \328\ Knight v. CIR, 128 S. Ct. 782, 789 (2008) (quoting Cooper 
Indus., Inc. v. Aviall Servs., Inc., 543 U.S. 157, 166 (2004)).
    \329\ Id.
---------------------------------------------------------------------------
    It appears that the United States refined its position, 
perhaps to address this issue, during oral argument before the 
Second Circuit in the Chrysler case. The United States argued 
that there is a certain connection between the automotive 
companies' financing entities and the automotive companies 
themselves that permits the use of TARP funds to support the 
automotive companies, thereby supporting the companies' 
financial divisions. During argument, the United States 
asserted that:

          [T]he Secretary of the Treasury, in determining what 
        is a financial institution, looks at the 
        interrelatedness [of the company and its financing 
        arm].
          Chrysler Financial can't survive without Chrysler. 
        Without [Chrysler], the financial institution goes down 
        . . . [Chrysler Financial] is the financial institution 
        and the relationship [with Chrysler is the one] that 
        the Secretary of the Treasury based his determination 
        on, and that determination is entitled to deference by 
        this court under administrative law principles.\330\
---------------------------------------------------------------------------
    \330\ In re Chrysler LLC, 2009 WL 2382766, * 10 n. 14, (2d Cir. 
Aug. 5, 2009) (quoting the transcript of the oral argument at 52).

    In neither the Chrysler nor the GM case was the question 
resolved because, in each case, the judge determined that the 
objectors did not have standing to raise the issue or that the 
issue was moot.\331\ In the case of Chrysler, the lower court 
found that the Indiana pension funds could not raise the issue 
for two reasons: (1) they were bound by their Administrative 
Agent's acceptance of the sale; and (2) the value of the 
collateral at issue was no greater than the value of the amount 
that the first lien senior secured lenders were to receive and 
that therefore there was no injury that could be alleged.\332\ 
The Second Circuit accepted the lower court's findings and 
confirmed its ruling.\333\ In the GM case, the court simply 
noted the transaction at issue was the use of the bidding 
procedure and did not directly involve any TARP funds, and also 
that Judge Arthur Gonzales of the Bankruptcy Court for the 
Southern District of New York had found a lack of standing when 
the same issue was raised in the Chrysler case.\334\
---------------------------------------------------------------------------
    \331\ Id. at 11-12; In re General Motors Corp., 407 B.R. 463, 518 
(Bankr. S.D.N.Y. 2009).
    \332\ In re Chrysler LLC, 405 B.R. 79, 83 (Bankr. S.D.N.Y. 2009).
    \333\ In re Chrysler LLC, 2009 WL 2382766, *11-12 (2d Cir. 2009).
    \334\ In re General Motors Corp., 407 B.R. 463, 518 (Bankr. 
S.D.N.Y. 2009).
---------------------------------------------------------------------------
    However, if a court had reached the issue in either the GM 
or Chrysler case, it may have found guidance from the U.S. 
Supreme Court case Chevron U.S.A., Inc. v. Natural Resources 
Defense Council, Inc.,\335\ or from the earlier Skidmore v. 
Swift,\336\ which together establish the framework for 
analyzing whether an agency has correctly interpreted a statute 
in the face of ambiguous language from Congress. According to 
Chevron:
---------------------------------------------------------------------------
    \335\ Chevron U.S.A. Inc. v. Natural Resources Defense Council, 
Inc., et al., 467 U.S. 837 (1984).
    \336\ Skidmore v. Swift, 323 U.S. 134 (1944).

          If . . . the court determines Congress has not 
        directly addressed the precise question at issue, the 
        court does not simply impose its own construction on 
        the statute, as would be necessary in the absence of an 
        administrative interpretation. Rather, if the statute 
        is silent or ambiguous with respect to the specific 
        issue, the question for the court is whether the 
        agency's answer is based on a permissible construction 
        of the statute.\337\
---------------------------------------------------------------------------
    \337\ Id. at 843.

    In such circumstances, the court noted it had ``long 
recognized that considerable weight should be accorded to an 
executive department's construction of a statutory scheme it is 
entrusted to administer, and the principle of deference to 
administrative interpretations.'' \338\ This deference, known 
now as ``Chevron deference,'' reflects the judiciary's respect 
for the specialized and superior skill and knowledge that an 
executive agency brings to its area of expertise. A court will 
therefore honor an agency's interpretation of such a statute as 
long as the interpretation ``represents a reasonable 
accommodation of conflicting policies that were committed to 
the agency's care by the statute,'' and will not disturb such 
interpretation ``unless it appears from the statute or its 
legislative history that the accommodation is not one that 
Congress would have sanctioned.'' \339\
---------------------------------------------------------------------------
    \338\ Id. at 844.
    \339\ Id. at 845 (quoting United States v. Shimer, 367 U.S. 374 
(1961)).
---------------------------------------------------------------------------
    Whether Treasury would be due such deference in this case 
is not clear. Later Supreme Court opinions have suggested that 
an agency must use some authority that has been, either 
explicitly or implicitly, delegated to that agency by Congress 
and that the authority has been used under ``circumstances that 
Congress would expect the agency to be able to speak with the 
force of law when it addresses ambiguity in the statute or 
fills a space in the enacted law.'' \340\ An agency speaks with 
the ``force of law'' when, for example, it engages in rule-
making under the Administrative Procedure Act.\341\ While 
Treasury (and President Bush) have made various statements 
regarding their interpretations of the statute and the 
authority to use the TARP in this way, it is not clear that any 
of these statements is sufficient to qualify as speaking with 
the force of law, especially since there has not been one 
coherent statement but a mix of court filings, oral argument, 
and statements by Treasury officials. On December 23, 2008, 
Secretary Paulson submitted to Chairman Rangel of the House 
Ways and Means Committee a determination under section 3(9)(B) 
of EESA that assets to be purchased from the automotive 
companies should be treated as ``troubled assets'' because 
their purchase was ``necessary to promote financial market 
stability.'' The December 23 letter assumes, without any 
rationale, that the automotive companies may be treated as 
``financial institutions'' under EESA, so the weight that 
letter would be accorded under Chevron is unclear.
---------------------------------------------------------------------------
    \340\ United States v. Mead Corp., 533 U.S. 218, 229 (2001).
    \341\ Id. See, by way of analogy, Christensen v. Harris County, 529 
U.S. 576, 587 (2000) (interpretation contained in agency's opinion 
letter did not merit Chevron deference when the letter did not follow a 
formal adjudication or similar procedure).
---------------------------------------------------------------------------
    In this situation, Skidmore may provide the more 
appropriate guidance. The Skidmore court, like the Chevron 
court, noted that an agency's ``policies are made in pursuance 
of official duty, based upon more specialized experience and 
broader investigations and information than is likely to come 
to a judge in a particular case.'' \342\ Furthermore, the court 
continued, ``[t]his Court has long given considerable and in 
some cases decisive weight to Treasury Decisions and to 
interpretative regulations of the Treasury and of other bodies 
that were not of adversary origin'' and that ``rulings, 
interpretations and opinions'' of an agency's administrator 
``do constitute a body of experience and informed judgment to 
which courts and litigants may properly resort for guidance.'' 
\343\
---------------------------------------------------------------------------
    \342\ Skidmore, 323 U.S. at 139.
    \343\ Id. at 140.
---------------------------------------------------------------------------

d. The Congressional Record

    While not strictly authoritative, it is often useful also 
to consider the Congressional Record when interpreting a 
statute to determine whether a particular interpretation seems 
to forward the goals articulated by Members of Congress while 
debating the statute.\344\ Of course, various Members of 
Congress may have widely divergent reasons for passing a piece 
of legislation and such divergence may result in purposely 
vague language in the final bill. Nonetheless, it is useful to 
consult the Congressional Record in such cases for any 
widespread views that might signal what the intent behind a 
statute was in the minds of its proponents.
---------------------------------------------------------------------------
    \344\ Wirtz v. Bottle Blowers Ass'n, 389 U.S. 463, 468 (1968).
---------------------------------------------------------------------------
    In this case, the record shows that the Members of Congress 
who debated this legislation in late 2008 believed they were 
debating a bill aimed at banks and the financial sector. For 
example, multiple Senators remarked on the need to unfreeze the 
credit markets and their view that EESA was intended to address 
just those markets.\345\ The understanding of EESA's purpose 
appears to have been the same in the House, as illustrated by 
the remarks of Representative Barney Frank, chairman of the 
House Financial Services Committee: ``[i]n implementing the 
powers provided for in the Emergency Economic Stabilization Act 
of 2008, it is the intent of Congress that Treasury should use 
Troubled Asset Relief Program (TARP) resources to fund capital 
infusion and asset purchase approaches alone or in conjunction 
with each other to enable financial institutions to begin 
providing credit again[.]'' \346\
---------------------------------------------------------------------------
    \345\ Congressional Record, Statement of Senator Mitch McConnell, 
S10190-S10191 (Oct. 1, 2008) (``Right now . . . the credit markets are 
frozen, so the circulatory system is not working as it should. If the 
circulatory system doesn't work, it begins to choke off the body--the 
economy. With the step we take tonight, we are confident we will be 
able to restore the circulatory system, if you will, and regain health 
for the economy . . . .''); Congressional Record, Statement of Senator 
Hillary Clinton, S10215 (Oct. 1, 2008) (``We are already seeing the 
consequences of a freezing credit market that will only worsen . . . 
Our economy runs on credit. Underlying that credit is trust. Both the 
credit and the trust is running out. Essentially, what we are doing in 
an intangible way is restoring trust and confidence, and in a very 
tangible way helping to restore credit. Banks will refuse to lend to 
businesses and even to one another; investors continue to withdraw to 
the safest investments . . . .''); Congressional Record, Statement of 
Senator Judd Gregg, S10216 (Oct. 1, 2008) (``We also know, regrettably, 
that the credit markets are basically locked up and that credit on Main 
Street is disappearing, that people are not able to get financing for 
the payrolls, financing for inventory, financing to buy a car, send 
children to school, rebuild the local hospital, rebuild the local 
school system . . . .'').
    \346\ Congressional Record, Statement of Representative Barney 
Frank, H10763 (Oct. 3, 2008).
---------------------------------------------------------------------------
    On December 4, 2008, however, Senators Dodd and Reid and 
Representatives Pelosi and Frank wrote to President Bush, 
asking him to reconsider his position on the use of TARP funds 
and allocate a portion of them to support the automotive 
industry,\347\ suggesting that at least these four members of 
Congress believed that the TARP could be used for the 
automotive industry.
---------------------------------------------------------------------------
    \347\ Letter from Sens. Christopher Dodd and Harry Reid and Reps. 
Nancy Pelosi and Barney Frank to President George W. Bush, (Dec. 4, 
2008) (online at www.democrats.senate.gov/newsroom/ 
record.cfm?id=305476&).
---------------------------------------------------------------------------
    On December 10, 2008, a bill was passed by a 237 to 170 
vote in the House to provide funds to the automotive industry 
by diverting $14 billion in loans to Chrysler and GM from a 
previously enacted program setup for the production of advanced 
vehicle technology.\348\ Although a different version of the 
same bill was subsequently brought to the Senate floor, and 
debated long into the night on December 11, 2008, there was 
never a vote and Congress left for the December recess without 
passing any legislation aimed at the automotive industry.
---------------------------------------------------------------------------
    \348\ H.R. 7321, supra note 14.
---------------------------------------------------------------------------
    Congress's explicit consideration of legislation that 
ultimately failed to pass creates a troubling question 
regarding the Bush Administration's decision to ``step in'' and 
rescue the automotive industry.\349\ Recently, however, the 
Senate rejected an attempt by Senators Lamar Alexander and Bob 
Corker to use an amendment to a spending bill to limit the 
availability of TARP funds for automakers Chrysler and GM, 
suggesting that the Senate may not disagree with the way TARP 
funds have been used.\350\ Given the various actions--and non-
actions--by Congress, it is difficult to make any sweeping 
statement about ``Congressional intent'' with regard to the use 
of TARP funds to support the automotive industry.
---------------------------------------------------------------------------
    \349\ Doe v. Chao, 540 U.S. 614, 622 (2004) (declining to interpret 
Privacy Act of 1974 as not requiring showing by plaintiffs of actual 
damages where, inter alia, ``drafting history show[s] that Congress cut 
the very language in the bill that would have authorized any presumed 
damages . . . .'').
    \350\ Congressional Record, Statements of Senators Alexander and 
Corker, S8217-S8219 (July 29, 2009).
---------------------------------------------------------------------------

f. Conclusion

    At the end of this analysis, the question that remains is 
whether the executive should get the benefit of the doubt about 
a close question of statutory interpretation when the executive 
might have thought in good faith that interpreting the statute 
in a particular way was crucial to the national interest. This 
question may never be answered with any finality as the Panel 
is not aware of any court before which the issue is currently 
pending and therefore it may never be resolved.\351\
---------------------------------------------------------------------------
    \351\ As noted previously, supra note 55, the Indiana State Police 
Pension Trust filed a motion for writ of certiorari with the Supreme 
Court on September 3, 2009. There is no question raising the issue of 
Treasury's authority to use the TARP funds among the questions 
presented to the court in the motion.
---------------------------------------------------------------------------

  2. GOVERNMENT AS OWNER OF COMMERCIAL ENTERPRISES: MANAGEMENT ISSUES

    When government intervenes in business, it creates 
uncomfortable tensions and the potential for conflicting policy 
priorities. Nowhere is this more apparent than when considering 
the government as the owner or significant shareholder of a 
corporation.

a. Issues implicated in government involvement in commercial 
        enterprises

    Few would argue with the objective of achieving the long 
term viability of Chrysler and GM in order to protect the 
government's investment. The potential for conflict may, 
however, arise should the government decide to use its position 
in these companies to promote public policy initiatives. In the 
case of GM, in which the government is a controlling 
shareholder, promoting such initiatives could raise the issue 
of fiduciary duty. To whom does the government owe a fiduciary 
duty? Most courts have found that the controlling shareholder 
in a publicly held corporation owes a fiduciary duty to the 
corporation.\352\ Others have found that a fiduciary duty is 
owed directly to the minority shareholders.\353\ The pursuit of 
public policy objectives using an investee corporation could 
violate these duties.\354\
---------------------------------------------------------------------------
    \352\ Gatz v. Ponsoldt, 925 A.2d 1265, 1281 (Del. 2007); Cede & Co. 
v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993).
    \353\ Gentile v. Rossette, 906 A.2d 91, 103 (Del. 2006); see also 
Pfeffer v. Redstone, 965 A.2d 676, 691 (Del. 2009).
    \354\ See, for comparison purposes, Dodge v. Ford Motor Co., 170 
N.W. 668, 683-84 (Mich. 1919) (rejecting as violative of fiduciary 
duties Henry Ford's ``humanitarian'' ambition to ``employ still more 
men, to spread the benefits of this industrial system to the greatest 
possible number, to help them build up their lives and their homes'' by 
reinvesting back into the company profits that otherwise would have 
been paid as dividends to other shareholders).
---------------------------------------------------------------------------
    The prospect of a government using its position of 
ownership in companies to pursue public policy matters is not 
without historical precedent. During the 1980s, the United 
Kingdom and other European countries privatized many of their 
state-controlled industries. In some cases, they retained what 
are called ``golden shares.'' Golden shares are an ``interest 
retained by a government in a company that has been privatized 
after having been in public ownership state-owned companies.'' 
\355\ While many of these shares have since expired, at the 
time, these shares provided European governments with a 
powerful voice in a company's decision-making.\356\ It has been 
argued that some governments even used their shares to block 
potential acquisitions of these companies by outside investors 
out of interest ``in maintaining inefficiently high levels of 
employment or reducing cross-border flows of capital and 
services.'' \357\ In some countries where ``mixed'' public and 
private ownership of industry is common, the potential for 
conflicts between private and public policy objectives is 
openly acknowledged and accepted.\358\
---------------------------------------------------------------------------
    \355\ BNET Business Dictionary (accessed Aug. 30, 2009) (online at 
dictionary.bnet.com/definition/golden+share.html).
    \356\ J J.W. Verret, The U.S. Government as Control Shareholder of 
the Financial and Automotive Sector: Implications and Analysis, 
Mercatus Center at George Mason University (accessed Aug. 30, 2009) 
(online at www.mercatus.org/ uploadedFiles/ Mercatus/ Events/ CHC_-
_200_FMWG_II_-_Verret_Handout.pdf) (hereinafter ``U.S. Government as 
Control Shareholder'').
    \357\ Id.
    \358\ See, for example, the following disclosure by the partly 
state-owned Brazilian company Eletrobras:
    Centrais Eletricas Brasileiras S.A.--Eletrobras, Form 20-F, at 15 
(July 1, 2009) (online at www.sec.gov/ Archives/edgar/ data/1439124/ 
000119312509142012/d20f.htm# toc51217_7) (``We are controlled by the 
Brazilian Government, the current policies and priorities of which 
directly affect our operations . . . The Brazilian Government, as our 
controlling shareholder, has pursued (and may continue to pursue) some 
of its macroeconomic and social objectives through us . . . the 
Brazilian Government has in the past and may in the future require us 
to make investments, incur costs or engage in transactions (which may 
include, for example, requiring us to make acquisitions) that may not 
be consistent with our objective of maximizing our profits. . . .'').
---------------------------------------------------------------------------
    Even under the best of intentions, the potential for 
conflict exists. Unlike other investors, the federal government 
has the ability to exert its influence in any number of ways. 
It has the authority to negotiate Free Trade Agreements (FTAs) 
with other countries, take trade cases before the World Trade 
Organization (WTO), and even impose safeguards on imports that 
it believes may threaten one of its domestic industries. It has 
the authority to enforce securities and trade laws, and can 
bring cases against individuals or companies found in violation 
of these laws, which could include the imposition of fines and 
imprisonment. In a speech before the Kennedy School of 
Government in October of 2007, then-SEC Chairman Christopher 
Cox stated: ``if the powers of government are no longer used 
solely to police the securities markets at arm's length, but 
rather are used to ensure the success of the government's 
commercial or investment activities, not only retail customers 
but every institutional investor could be put at a serious 
disadvantage.'' \359\ The longer that the government plays the 
role of regulator and regulated, the greater the opportunity a 
conflict has to occur.
---------------------------------------------------------------------------
    \359\ Chairman Christopher Cox, Speech by SEC Chairman: `The Role 
of Government in Markets' Keynote Address and Robert R. Glauber Lecture 
at the John F. Kennedy School of Government (Oct. 24, 2007) (online at 
www.sec.gov/news/speech/2007/spch102407cc.htm).
---------------------------------------------------------------------------
    There are certain things that the government can do that 
the private sector cannot. When credit is scarce, the 
government can act as a lender of last resort, providing a 
company with favorable financing through a troubled time. The 
housing Government Sponsored Enterprises (GSEs--Fannie Mae and 
Freddie Mac--over the last two decades were able to use their 
implicit government guarantees to raise debt cheaply in the 
markets, and then use that debt to finance the purchasing of 
trillions of dollars of housing loans from originators. Whereas 
private companies may find it difficult to borrow under the 
current conditions of the market, the government, if it 
chooses, can indefinitely provide financing for its investment 
and act as the lender of last resort. The ability to borrow 
cheaply from the government, however, is not without risk, and 
over the long term can potentially undermine the private market 
by allowing firms to avoid the discipline of commercial 
failure--moral hazard.
    In addition to acting as a lender of last resort, the 
government has the ability to assist Chrysler and GM 
indirectly. Unlike other investors, the government has the 
authority to enact legislation designed to incentivize certain 
types of consumer behavior. The passage of the ``Cash for 
Clunkers'' legislation, which was included in the Supplemental 
Appropriations Act of 2009,\360\ provided rebates for consumers 
who traded in their old fuel inefficient cars to purchase new 
fuel efficient cars. The $1 billion appropriated for the 
program was largely used in the first week of its availability, 
and additional funds were appropriated shortly thereafter by 
passage of the Consumer Assistance to Recycle and Save Program 
(H.R. 3435).\361\ The objective of the program aimed, in part, 
to promote higher vehicle fuel efficiency; the program, 
however, also helped with declining automotive sales. On August 
26, 2009, the Department of Transportation announced that the 
``Cash for Clunkers'' program (which ended on August 25, 2009) 
generated the purchase of ``nearly 700,000 vehicles.'' \362\ 
While the program offered the rebate to purchases of new fuel 
efficient vehicles from all automotive companies, Chrysler and 
GM were certainly among the beneficiaries of the program.
---------------------------------------------------------------------------
    \360\ Supplemental Appropriations Act, 2009, Pub. L. 111-32, 123 
Stat. 1859 (hereinafter ``Pub. L. 111-32'').
    \361\ CAR Save Program Supplemental Appropriations Act, 2009, Pub. 
L. 111-47, 123 Stat. 1972.
    \362\ Department of Transportation, Office of Public Affairs, Press 
Statement for Transportation Secretary Ray LaHood: Cash for Clunkers 
Wraps up with Nearly 700,000 Car Sales and Increased Fuel Efficiency, 
U.S. Transportation Secretary LaHood declares program ``wildly 
successful'' (August 26, 2009) (online at www.cars.gov/ files/official-
information/ August26PR.pdf).
---------------------------------------------------------------------------
    A further complicating factor is the risk of political 
interference in government-owned entities. An example is the 
pressure the German government is putting onto the U.S. 
government with respect to the sale of Opel. Thus far, Congress 
has not directly become involved in the management of Chrysler 
and GM. The possibility, however, exists.\363\ Management, 
executive compensation and bonus issues have become the subject 
of extensive public debate and have resulted in compensation 
restrictions for TARP recipients. Moreover, pressures could 
mount further given that federal assistance for the automotive 
companies is not politically popular.\364\
---------------------------------------------------------------------------
    \363\ Pub. L. 111-32, supra note 358.
    \364\ Rasmussen Survey, Just 21% Favor GM Bailout Plan, 67% Oppose 
(May 31, 2009) (online at www.rasmussenreports.com/ public_content/ 
business/ auto_industry/ may_2009/ just_21_favor_gm_ 
bailout_plan_67_oppose).
---------------------------------------------------------------------------

b. Tension Between Acting in a ``Hands-Off Manner'' and ``Changing 
        Culture''

    At the Panel's Detroit field hearing, Mr. Bloom said the 
following:

          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 . . . Our goal is to promote strong 
        and viable companies, which can be profitable and 
        contribute to economic growth and jobs without 
        government support as quickly as possible. Using GM or 
        Chrysler as an instrument of broader government policy 
        is inconsistent with these goals.\365\
---------------------------------------------------------------------------
    \365\ Ron Bloom Prepared COP Testimony, supra note 79.

    On the other hand, the Treasury auto team has stated that 
in order to create the conditions most likely to lead to 
sustained viability for Chrysler and GM, it is necessary to 
change the culture within these automotive companies.\366\
---------------------------------------------------------------------------
    \366\ In June 2009, Steven Rattner, then-head of the Task Force, 
stated: ``[a]ddressing cultural issues is just as fundamental to our 
assignment as addressing the balance sheet or financing.'' Micheline 
Maynard, U.S. Takes On the Insular Culture of G.M., New York Times 
(June 10, 2009) (online at www.nytimes.com/ 2009/06/11/ business/
11auto.html?dlbk).
---------------------------------------------------------------------------
    While the Administration's stated purpose may not be to 
involve the federal government in the day-to-day business 
decisions of Chrysler or GM, the government will not be 
entirely absent from exerting any influence. Mr. Bloom further 
testified that as a shareholder, Treasury will vote on ``core 
governance issues, including the selection of a company's board 
of directors and major corporate events or transactions.'' 
According to Mr. Bloom, the Treasury auto team was ``involved 
in recruiting'' many of the new directors who now sit on the 
new boards of Chrysler and GM.\367\ As a shareholder, Treasury 
cannot escape these fundamental duties. Voting for directors is 
a basic right of shareholders, and it establishes the balance 
of power between shareholders and management of the 
company.\368\ How Treasury manages these responsibilities 
without overstepping, however, is an area that needs careful 
and continued monitoring.
---------------------------------------------------------------------------
    \367\ Ron Bloom Prepared COP Testimony, supra note 78.
    \368\ U.S. Government as Control Shareholder, supra note 356.
---------------------------------------------------------------------------
    Moreover, the Treasury auto team's decision to dispose of 
its ownership stakes in Chrysler and GM ``as soon as 
practicable'' also raises important policy questions regarding 
the safeguarding of the taxpayers' investment, maximizing 
taxpayer return and the government's likelihood of achieving 
the operational, cultural and economic restructuring it seeks. 
The lingering issue is whether the government can really change 
the culture of these companies and help improve their 
profitability while it remains a (supposedly) disinterested 
shareholder with a ``hands-off'' approach to managing its 
investment. Merely exercising the right to vote on slates for 
boards of directors and other significant corporate governance 
issues may not provide the influence necessary to achieve the 
level of transformation sought. If the government intends to be 
a ``silent partner of sorts,'' in the words of Senator Richard 
Shelby (R-AL),\369\ then it also remains to be seen how it 
intends to protect the interests of the taxpayer as a 
shareholder.
---------------------------------------------------------------------------
    \369\ Senate Committee on Banking, Housing and Urban Affairs, 
Statement of Ranking Member Shelby, The State of the Domestic 
Automobile Industry: Impact of Federal Assistance, 111th Cong. (June 
10, 2009).
---------------------------------------------------------------------------

c. Models of Corporate Governance That Could Be Followed: Private 
        Equity?

    The private equity model could provide a useful template 
for the government in managing its investment in New Chrysler 
and New GM, and help address some of the tensions that exist 
when the government invests in commercial enterprises. A 
private equity firm will often invest in a company, put its 
people in place, set the operating rules and reporting 
practices that it believes will maximize its profits, and then 
let management run the company. A typical investment lasts 
between three to five years, but can vary anywhere from one to 
ten years depending on the investment.\370\ A private equity 
investor tends to be more involved with management in the first 
months of the investment and more hands-off once a sense of 
stability at the investee company is achieved. During the first 
few months after an acquisition, the lead private equity 
partner generally spends at least half of its time working with 
management. The strategy, mission, and purpose of the company 
are set in the beginning. Changes in management help establish 
the new tone and culture. Together, the investor and management 
will ``design and execute near-term improvements and develop a 
detailed multi-year business plan.'' \371\ Once the plan is 
established and reporting procedures are put into place, the 
investor will let management run the day-to-day operations and 
manage the company.
---------------------------------------------------------------------------
    \370\ Driving Growth: How Private Equity Investments Strengthen 
American Companies, at 11 Private Equity Council (accessed Aug. 30, 
2009) (online at: www.privateequitycouncil.org/ wordpress/wp-content/ 
uploads/ driving-growth-final.pdf).
    \371\ Id.
---------------------------------------------------------------------------
    Compensation is largely performance-based.\372\ Private 
equity firms typically compensate their senior management with 
holdings in the company ranging anywhere from two to ten 
percent.\373\ Management salaries tend to be much lower than at 
publicly traded companies. The private equity firm Texas 
Pacific Group, for example, brought in Millard Drexler in 2003 
to be the CEO of J. Crew at an annual salary of $200,000 with 
no bonuses.\374\ Instead, the bulk of his compensation was 
based on the increase in equity gains he brought to his equity 
holders. According to Scott Sperling, Co-President of Thomas H. 
Lee Partners, ``around 90 percent of the compensation the 
management teams get at our companies is driven by the 
performance of the equity value. The alignment of management's 
interests and our interests is absolute.'' \375\
---------------------------------------------------------------------------
    \372\ To the extent that there are any changes to compensation, the 
Panel recommends that those changes reflect the recommendations made in 
the its special report on regulatory reform. In that report, the Panel 
discussed the ways in which executive pay has actually become decoupled 
from performance and provided four recommendations for ensuring that 
compensation properly aligns executive and shareholder interests. These 
recommendations included: 1) creating of tax incentives to encourage 
long-term oriented pay packages; 2) encouraging financial regulators to 
guard against asymmetric pay packages in financial institutions; 3) 
recommending that regulators consider requiring executive pay contracts 
to provide for clawbacks of bonus compensation for executives of 
failing institutions, and 4) encouraging corporate governance 
structures with stronger board and long-term investor oversight of pay 
packages. Congressional Oversight Panel, Special Report on Regulatory 
Reform: Modernizing the American Financial Regulatory System: 
Recommendations for Improving Oversight, Protecting Consumers, and 
Ensuring Stability, at 37-40 (January 29, 2009) (online at 
cop.senate.gov/ documents/ cop-012909-report- regulatoryreform.pdf).
    \373\ Id.
    \374\ Id.
    \375\ Id.
---------------------------------------------------------------------------
    Three aspects of the private equity model could be useful 
to Treasury going forward. First, Treasury should clearly 
articulate the duration of its investment. While the Treasury 
auto team has said that it plans to divest its holdings in New 
Chrysler and New GM ``as soon as practicable,'' it should 
clearly articulate the conditions for divestment. Second, 
Treasury should consider structuring the compensation of 
management at New Chrysler and New GM to be more performance-
based. The compensation of the new management is currently 
under review by Treasury's Special Master. The general public 
has directed outrage at the bonus packages of executives at 
various TARP recipient institutions. Tying management's 
compensation more closely to the performance of New Chrysler 
and New GM reflects current corporate governance best practices 
and may provide a more politically palatable alternative.
    Finally, Treasury could articulate a mission and strategy 
for these companies that is transparent to management, the 
boards, and the taxpayers, set up a system for reporting and 
disclosures, and leave the business in the charge of 
management. The Treasury auto team has approved Chrysler and 
GM's viability plans. It has appointed or reinstated 10 of the 
13 board members at New GM. It has appointed four of the nine 
board members at New Chrysler. New management is firmly in 
place. The longer that Treasury lingers in the decisions of 
management, the greater the opportunity that such decisions 
could become politicized.
    Another approach that Treasury could employ to further 
separate management from politics is to hold Treasury's 
interest in a trust, not unlike the AIG trust, discussed in 
more detail below. While the government's influence would 
certainly still be evident, a trust would provide an additional 
barrier between the Administration and management that could 
serve to prevent any potential or actual politicization of 
management decisions.

d. Differences between automotive industry and financial institution 
        interventions

    In some respects, Treasury's approach to its involvement 
with the domestic automotive industry is similar to its 
approach to bank intervention since the passage of EESA in 
October 2008. Facing a financial crisis, Treasury recognized 
the need to take a series of actions necessary to prevent a 
collapse of the financial system and its resultant impact on 
the greater American economy. As part of its response, Treasury 
decided to provide capital to viable financial institutions 
throughout the nation in order to strengthen their balance 
sheets, foster the provision of business and consumer credit 
within the economy, and help stabilize the financial 
system.\376\ Its provision of TARP assistance to both banks and 
domestic automobile companies was, Treasury states, designed to 
prevent significant economic disruption.\377\
---------------------------------------------------------------------------
    \376\ U.S. Department of the Treasury, Statement by Secretary Henry 
M. Paulson, Jr. on Actions to Protect the U.S. Economy (Oct. 14, 2008) 
(online at www.treas.gov/press/releases/hp1205.htm).
    \377\ U.S. Department of the Treasury, Secretary Paulson Statement 
on Stabilizing the Automotive Industry (Dec. 19, 2008) (online at 
www.treas.gov/ press/releases/ hp1332.htm).
---------------------------------------------------------------------------
    Treasury staff indicated to the Panel that they based their 
decisions to provide TARP assistance to institutions on an 
entity-by-entity basis, rather than by industry.\378\ In other 
words, Treasury reviewed the particular circumstances of each 
institution before it decided to disburse TARP funding and was 
not seeking a uniform approach across the same industry. To 
support this assertion, Treasury pointed to the fact that 
Treasury is a significant shareholder of GM and Citigroup as 
well as a debt holder of Chrysler and the banks and other 
financial institutions participating in the Capital Purchase 
Program (CPP).
---------------------------------------------------------------------------
    \378\ Treasury staff discussed this issue, along with the overall 
status of the AIFP as well as the Administration's strategies and plans 
going forward as New Chrysler and New GM have completed their purchases 
of assets through the bankruptcy process, with Panel staff at a 
Treasury briefing held on July 29, 2009.
---------------------------------------------------------------------------
    There remains a perception, however, that banks and other 
financial institutions have been treated rather differently 
from the automotive companies with respect to their TARP 
investments.\379\ This perception remains despite both 
Treasury's assertions that it has based its decisions on a 
case-by-case basis, and the Administration's articulation of a 
set of uniform principles to govern its ownership interests in 
financial and automotive companies (one being that in 
``exceptional cases'' where the government feels it is 
necessary to respond to a company's request for substantial 
assistance, Treasury will reserve the right to establish 
upfront conditions as necessary including requirements for new 
viability plans as well as changes to boards of directors and 
management.) \380\ During Secretary Geithner's testimony before 
the Panel in April, he stated that the Obama Administration is 
prepared to oust top financial executives if their firms 
require more public aid. Secretary Geithner indicated that 
where Treasury provides capital in the future, it will be done 
so with conditions ``not just to help protect the taxpayer, but 
to try to help ensure that the system emerges stronger, not 
weaker.'' \381\ Where Treasury provides ``exceptional 
assistance,'' ``it will come with conditions to make sure there 
is restructuring, accountability, to make sure these firms 
emerge stronger in the future.'' \382\ Secretary Geithner also 
indicated that where Treasury has had to do exceptional things, 
it has replaced management and boards, and cited the 
government's interventions in AIG, Freddie Mac and Fannie Mae 
as examples.\383\ An assessment of Treasury's actions, however, 
suggests that its commitment to this ideal is doubtful except 
in those rare circumstances involving government-mandated 
restructuring efforts.
---------------------------------------------------------------------------
    \379\ Senate Finance Committee, Statement of Senator Stabenow, TARP 
Oversight: Six Month Update, 111th Cong. (Mar. 31, 2009) (online at 
www.cq.com/ display.do?dockey=/ cqonline/prod/data/docs/ html/
transcripts/ congressional/111/ congressionaltranscripts111 -
000003088824.html@committees&metapub= CQ-CONGTRANSCRIPTS). At the 
hearing, Senator Stabenow highlighted ``the difference now that we're 
seeing between the approach with the auto industry, which is much more 
modeled on a reorganization approach, and the approach that is being 
used throughout the financial services industry. And that is a 
straightforward subsidization.'' She proceeded to ask Professor 
Elizabeth Warren: ``And what lessons can we learn from the rigorous 
oversight of the--of the auto industry to learn from that and place it 
on the financial institutions that have been receiving TARP funds?'' 
Id.
    \380\ For the set of principles articulated by the Administration, 
see supra note 183.
    \381\ Congressional Oversight Panel, Testimony of Treasury 
Secretary Timothy F. Geithner, at 40 (Apr. 21, 2009).
    \382\ Id.
    \383\ Id. at 40-41.
---------------------------------------------------------------------------
    For example, in order to achieve its goals for the 
automotive industry at the outset, Treasury determined that it 
was necessary for both recipients to formulate long-term 
viability plans, which required a credible demonstration of 
future profitability and alterations to business models. In 
addition to forcing Chrysler and GM to develop new viability 
plans in the restructuring process, the Treasury auto team 
negotiated a deal that wiped out shareholders, cut debt, 
influenced decisions regarding personnel,\384\ and subjected 
creditors to losses. However, while the FDIC has placed some 
banks into receivership in the normal exercise of its powers, 
none have been forced to develop new viability plans, 
shareholders have not been wiped out, and debts have been 
guaranteed. In addition, Treasury has not forced TARP-recipient 
financial institutions to reorganize, nor has it completely 
changed their boards and managements.
---------------------------------------------------------------------------
    \384\ In the case of New Chrysler, the entire management team is 
new, and in the case of New GM, some senior managers are no longer with 
the company and the management team is smaller than it was.
---------------------------------------------------------------------------
    While Treasury has not generally exercised a significant 
management role with respect to most of the financial 
institutions that have received TARP capital investments, it 
has done so with the largest and most distressed TARP 
recipients. For example, Treasury has exercised significant 
control over AIG, which received $70 billion in TARP funds 
under the Systemically Significant Failing Institutions program 
(SSFI) (in addition to other assistance provided by the Federal 
Reserve). As with the automotive companies, some of AIG's 
management has been replaced and the company has undergone a 
restructuring that has resulted in two of its profitable 
foreign insurance divisions being spun-off and its financial 
products division significantly cut back. However, Treasury has 
not required AIG to submit a forward-looking viability plan, 
nor has AIG been forced into reorganization. Additionally, 
those with equity stakes in AIG have seen their positions 
severely diluted by the government, but they have not been 
wiped out, in contrast to the treatment of automotive company 
shareholders. Companies with contractual ties to AIG, for 
instance those that owned AIG-originated credit default swap 
(CDS) contracts, have been made whole, unlike some creditors of 
the automotive companies.
    Another significant difference between the various 
companies in which the government owns stakes is the manner of 
holding of equity. The shares that make up the government's 
77.9 percent share in AIG are held in a trust for the benefit 
of the United States Treasury.\385\ The Trust Agreement 
provides that the trustees must act ``in or not opposed to the 
best interests of Treasury.'' \386\
---------------------------------------------------------------------------
    \385\ AIG Credit Facility Trust Agreement (accessed Aug. 30, 2009) 
(online at www.newyorkfed.org/ newsevents/news/ markets/2009/ 
AIGCFTAgreement.pdf) (hereinafter ``AIG Credit Facility Trust 
Agreement''). Note also that the trust is for the benefit of the United 
States Treasury, not the U.S. Department of Treasury. The AIG Trust 
Agreement explains that ``any property distributable to Treasury as 
beneficiary hereunder shall be paid to Treasury for deposit into the 
General Fund as miscellaneous receipts.'' Id. at Sec. 1.01.
    \386\ Id. at Sec. 3.03(a). Professor J.W. Verret testified that 
usually, fiduciaries are tasked to ``manage . . . wealth to maximize 
the value for their beneficiaries.'' House Oversight and Government 
Reform Committee, Testimony of Professor J.W. Verret, Panel II, AIG: 
Where is the Taxpayer's Money Going? (May 13, 2009) (hereinafter 
``Verret Testimony''). William Dudley, president and CEO of the FRBNY, 
testified in March that the ``trustees have a legally binding 
obligation to exercise all of their rights as majority owner of AIG in 
the best interests of the U.S. taxpayer, with the proceeds of any 
ultimate sale of shares going directly to Treasury of the United 
States.'' House Committee on Financial Services, Tesimony of William 
Dudley (Mar. 24, 2009) (online at www.newyorkfed.org/ newsevents/
speeches/ 2009/dud090324.html). Representatives Issa and Bachus have 
sent letters to Treasury and SIGTARP calling for an audit of the AIG 
trust and setting out criticisms of the trust structure, including the 
``lack of standard fiduciary duties,'' the Trust's ``broad 
indemnification of the actions of the trustees,'' and lack of 
accountability on the part of the trustees. Letter from Representatives 
Spencer Bachus and Darrell Issa to Neil Barofsky (Aug. 31, 2009); see 
also Letter from Representatives Spencer Bachus and Darrell Issa to 
Secretary Timothy Geithner (Aug. 31, 2009).
---------------------------------------------------------------------------
    There are a number of reasons why the Federal Reserve Bank 
of New York (FRBNY), and Treasury might have chosen a trust 
structure. The stated reason was to avoid conflicts of 
interest: the Trust Agreement provides that ``to avoid any 
possible conflict with its supervisory and monetary policy 
functions, the FRBNY does not intend to exercise any discretion 
or control over the voting and consent rights associated with 
the Trust Stock.'' \387\
---------------------------------------------------------------------------
    \387\ AIG Credit Facility Trust Agreement, supra note 385.
---------------------------------------------------------------------------
    There is also the possibility that the shares were placed 
into a trust so as not to violate the Government Corporation 
Control Act (GCCA).\388\ The GCCA prohibits the government from 
owning a corporation without specific Congressional 
authorization.\389\ The trust structure also provides political 
insulation to shareholder-taxpayers who wear two hats--one as 
shareholders who want to maximize the return on their 
investments, and the second as taxpayers who want the financial 
system stabilized. The trustees are advised, however, in 
exercising their discretion under the Trust Agreement, that the 
FRBNY believes that AIG ``being managed in a manner that will 
not disrupt financial market conditions, [is] consistent with 
maximizing the value of the Trust Stock.'' \390\ Professor J.W. 
Verret testified before the House Oversight and Government 
Reform Committee in May 2009 that the trust is also intended to 
protect the shares from political influence, by creating ``an 
independent buffer between the short-term political interests 
of an administration and the long-term health of the nation's 
financial system.'' \391\
---------------------------------------------------------------------------
    \388\ 59 Stat. 597, as amended, 31 U.S.C. Sec. 9101 et seq.
    \389\ 31 U.S.C. Sec. 9102. It could be argued that EESA, with its 
authorization to purchase securities in financial institutions, 
provides this authorization.
    \390\ AIG Credit Facility Trust Agreement, supra note 385 at 
Sec. 2.04(d). Trustee Chester Feldberg testified that this clause ``was 
put in by the Federal Reserve to express their [its] desire that that 
issue be considered in the course . . . of the trustee's deliberations. 
It was explicitly done in a way that it does not direct the trustees to 
do anything.'' House Committee on Oversight and Government Reform, 
Testimony of Chester Feldberg, AIG: Where is the Taxpayer's Money 
Going? (May 13, 2009).
    \391\ Verret Testimony, supra note 386. He opines that political 
considerations might create pressure for a nationally controlled bank 
to subsidize lending in battleground states. He points to Italy's 
government controlled banks as an example.
---------------------------------------------------------------------------
    There are a number of differences between the government's 
holdings in AIG and the automotive companies. Unlike the 
relationship between AIG and the FRBNY, Treasury holds no 
direct supervisory position over the automotive companies, nor 
does it hold the Federal Reserve Banks' and Board's monetary 
policy function.\392\ AIG also has a more direct effect on U.S. 
financial markets than do the automotive companies.\393\ This 
may require more of a buffer to protect against conflicts of 
interest, whether such conflicts are potential, actual, or 
simply based upon appearance. In addition, Mr. Bloom has 
announced that Treasury intends to start to sell its shares in 
GM by 2010.\394\ Treasury, therefore, may not have the long-
term ownership in Chrysler and GM that it will likely have in 
AIG.\395\
---------------------------------------------------------------------------
    \392\ Like any other automotive company or TARP recipient, GM is 
still subject to an array of government regulations.
    \393\ House Committee on Financial Services, Statement of the 
Chairman of the Board of Governors of the Federal Reserve System Ben S. 
Bernanke, Oversight of the Federal Government's Intervention at 
American International Group, 111th Cong., at 3 (Mar. 24, 2009) (online 
at www.house.gov/ apps/list/ hearing/financialsvcs_dem/ statement_-
_bernanke032409.pdf) (``At best, the consequences of AIG's failure 
would have been a significant intensification of an already severe 
financial crisis and a further worsening of global economic conditions. 
Conceivably, its failure could have resulted in a 1930s-style global 
financial and economic meltdown, with catastrophic implications for 
production, income, and jobs.'').
    \394\ Ron Bloom COP Testimony, supra note 36 at 26.
    \395\ Edward Liddy has testified that he expects AIG to take three 
to five years to complete its restructuring and repay the Treasury and 
the FRBNY. House Committee on Oversight and Government Reform, 
Testimony of AIG Chief Executive Officer Edward Liddy (May 13, 2009) 
(online at www.cq.com/ display.do?dockey=/ cqonline/prod/data/docs/ 
html/transcripts/congressional/ 111/congressionaltranscripts111- 
000003116243.html@committees&metapub= CQ-CONGTRANSCRIPTS&searchIndex= 
0&seqNum=17).
---------------------------------------------------------------------------
    Treasury or Congress might choose to place the government's 
auto shares into a trust.\396\ The Panel notes that the TARP 
Recipient Ownership Trust Act of 2009, currently under 
consideration in the Senate, would require Treasury to place 
into a trust the shares of any TARP recipient of which the 
government is more than a 20 percent owner.\397\ This bill is 
designed to remove any hint of politics from Treasury's 
temporary ownership stakes. Under this proposal, the trust 
would have a responsibility to sell these assets within 18 
months, with limited exceptions.\398\ The Panel takes no view 
on the specifics of this particular bill, or the details of 
establishing any such trust, but notes that problems identified 
with the AIG trust structure should be addressed in any future 
trust. In his testimony before the House Oversight and 
Government Reform Committee in May, Professor Verret advanced 
three criticisms of the AIG trust structure. First, he stated 
that the AIG trustees are required to ``manage the trust in the 
best interests of Treasury, rather than the U.S. taxpayers 
specifically.'' Second, as discussed above, he believes that 
the trust should explicitly direct the trustees to act to 
maximize the value for the trust beneficiaries. Third, he 
stated that the Trust Agreement might allow trustees to benefit 
personally from investment opportunities that might belong to 
AIG.\399\ All of these criticisms could be addressed in the 
drafting of a trust agreement for Chrysler and GM shares.
---------------------------------------------------------------------------
    \396\ Treasury already has plans to put its shares in Citigroup 
into a trust. U.S. Department of the Treasury, Treasury Announces 
Participation in Citigroup's Exchange Offering (Feb. 27, 2009) (online 
at www.treas.gov/press/releases/tg41.htm); see also U.S. Department of 
the Treasury, Citigroup Exchange Offering Terms (accessed Aug. 30, 
2009) (online at www.treas.gov/ press/releases/ reports/
transaction_outline.pdf).
    \397\ Senators Mark Warner (D-VA) and Bob Corker (R-TN) are the 
original lead sponsors of the TARP Recipient Ownership Trust Act of 
2009. Under this legislative proposal, if the government owns more than 
20 percent of a private company, that ownership stake would be placed 
in an independent trust supervised by three presidentially appointed 
trustees (uncompensated) with a with a fiduciary obligation to U.S. 
taxpayers. The trust would have a responsibility to sell these assets 
within 18 months, while trustees could ask for an extension if they 
collectively determine that additional time might provide a way to 
maximize the return on the taxpayers' investment. Senator Warner 
believes that ``this legislation will go a long way toward providing 
additional assurances that a political agenda is not being pursued 
through government ownership in any of these companies and that these 
companies also are being dealt with fairly.'' Mark R. Warner, Exit 
Strategy Needed (op-ed), Washington Times (July 27, 2009) (online at 
www.washingtontimes.com/ news/ 2009/ jul/ 26/ exit-strategy-needed/).
    \398\ Id.
    \399\ Verret Testimony, supra note 386.
---------------------------------------------------------------------------
    Fewer inherent conflicts and a shorter timeframe make the 
need for a trust for the Chrysler and GM shares less pressing 
than for the AIG shares, but it could still provide benefits. 
Placing the shares in a trust could also avoid the appearance 
of conflict. Even if no direct conflict exists, a trust could 
prevent the use or appearance of political influence in the 
government's ownership. Finally, placing the shares in a trust 
could also prevent any potential violation of the GCCA.\400\
---------------------------------------------------------------------------
    \400\ The Panel takes no position as to whether the law is being 
violated if the shares are not placed in a trust.
---------------------------------------------------------------------------
    The differences between the current treatment of the 
automotive companies and financial institutions might be due to 
several factors. First, Treasury potentially had greater 
leverage in its investment in Chrysler and General Motors than 
it did with the banking industry, since the automotive 
companies, being extremely close to bankruptcy, came to the 
federal government for assistance, while at least most of the 
banks receiving TARP assistance through the CPP have been 
perceived as solvent. Second, some of these alleged differences 
(i.e., management changes, creditor and shareholder treatment) 
were a direct result of Chrysler and GM's Section 363 sales, 
which TARP recipient banks have not faced. However, the state 
of many banks' balance sheets (and their potential need to 
undergo substantial balance sheet restructuring or face 
insolvency) was uncertain when EESA was passed in October 2008. 
Finally, these differences underscore the unique role that 
banks play in the larger economy. To fix the economy, Treasury 
recognized the need to repair the banking system and decided to 
recapitalize and shore up the banks.\401\
---------------------------------------------------------------------------
    \401\ Henry Paulson Congressional Testimony, supra note 321. Senate 
Banking Committee, Testimony of Treasury Secretary Timothy Geithner, 
TARP Oversight, (May 20, 2009) (online at www.treas.gov/press/releases/
tg139.htm).
---------------------------------------------------------------------------

             3. GOVERNMENT AS INVESTOR: STEWARDSHIP ISSUES

    Section F above sets out the amounts of taxpayers' funds 
that are at risk. Section G6 below raises serious doubts that 
those funds will ever be recovered. While the ultimate goal, as 
the Administration recognizes, is to ensure that the companies 
are on a viable path to profitability such that they may begin 
the process for an IPO, the prudent course is obviously to hold 
the stock until an IPO presents an opportunity to at least 
recoup the government's investment, if not make some profit. 
There is no advantage, however, in rushing toward an IPO while 
the taxpayers' investment is still deeply underwater and all 
projections suggest that it will be a matter of years before 
the companies return to profitability.
    In the meantime, the government must ensure that the 
investors--i.e., the U.S. taxpayers--are provided with adequate 
information to evaluate the companies' ongoing performance. 
During the Panel's Detroit field hearing, Mr. Bloom testified 
that both companies will file reports with the government, 
which will then be disclosed to the public on a quarterly 
basis.\402\ He did not say how frequently these reports will be 
made to the government, except that they would be ``periodic.'' 
\403\ Mr. Bloom also testified that New Chrysler and New GM 
will become voluntary reporting companies and file reports with 
the SEC.\404\ These filings, he said, would begin ``shortly'' 
although ``not immediately.'' \405\ Neither during public 
testimony nor during meetings with members of the Panel or 
Panel staff has Treasury stated a date on which such filings or 
reports will begin. It is understandable that assembling the 
data and analysis that such filings require is challenging 
given that both companies--in particular New GM--are large and 
complex and that their creation through bankruptcy has rendered 
each company's financial structure even more complex. 
Chrysler's recent history as a non-filing company must also be 
acknowledged. However, companies in the private sector are 
often required to assemble such data and analysis on a very 
tight timeline. The Panel expects that New Chrysler and New GM, 
which are answerable to a much wider segment of the public than 
any other public company, will endeavor to meet the same type 
of deadline.
---------------------------------------------------------------------------
    \402\ Ron Bloom COP Testimony, supra note 36.
    \403\ Ron Bloom COP Testimony, supra note 36.
    \404\ Ron Bloom COP Testimony, supra note 36.
    \405\ Ron Bloom COP Testimony, supra note 36.
---------------------------------------------------------------------------
    It is also unclear what will be included in these reports. 
Mr. Bloom testified that the first reports from New Chrysler 
and New GM will not contain all of the information that an SEC 
filing would typically include.\406\ The reports will include 
``traditional measures of revenue and profitability that a 
normal investor would want to know about.'' \407\ Mr. Bloom did 
not provide any additional information about what might be 
included in these reports, such as information about risks, 
management, major events, or any other data that is typically 
required to be included in SEC filings.
---------------------------------------------------------------------------
    \406\ Ron Bloom COP Testimony, supra note 36.
    \407\ Ron Bloom COP Testimony, supra note 36.
---------------------------------------------------------------------------
    In addition to information about revenues and 
profitability, New Chrysler and New GM should provide the 
taxpayer investors with a set of metrics by which the 
companies' success can be measured, along with periodic updates 
regarding progress toward those goals.\408\ The companies 
should also disclose to what extent internal controls, that is, 
clearly defined processes and procedures relating to the 
communication of information, accountability for individual 
employees, etc., have been established to ensure the companies' 
plans are being properly implemented and executed. To date, 
neither Treasury nor either company has disclosed such 
information.
---------------------------------------------------------------------------
    \408\ A forthcoming GAO report, due to be made public in mid-
October, will recommend the provision of such metrics.
---------------------------------------------------------------------------
    Other corporate governance changes have begun with the 
appointment of well-qualified and independent \409\ 
directors.\410\ Given the large public investment in these 
companies, it may be appropriate to require even stricter 
guidelines than current law mandates. For example, the 
companies could require all of their directors to be 
independent, instead of only a portion of them. Board members 
could be restricted from serving on the boards of other 
companies, or could at least be restricted in the number or 
type of other board positions they could hold. The companies 
could impose term limits on board members, to ensure that no 
director becomes too entrenched in the company or too close to 
its management. As TARP recipients, the automotive companies 
are already subject to restrictions on executive compensation 
\411\ and would be covered by the SEC's recent ``say-on-pay'' 
proposals.\412\ The automotive companies could adopt their own 
more tailored compensation guidelines, however, and ensure that 
compensation for both executives and board members is based on 
clearly articulated performance criteria and aligned to long-
term performance. Board members could, for example, be required 
to hold a certain amount and type of company stock to ensure 
the best alignment of director and shareholder (i.e., taxpayer) 
interests.
---------------------------------------------------------------------------
    \409\ See supra notes 71 and accompanying text. See also the 
recommendations regarding alignment of interests through compensation 
guidelines discussed in the Panel's special report on regulatory 
reform, discussed at note 372 supra.
    \410\ See supra note 71. See also discussion of this issue supra 
Section B.
    \411\ The Stimulus Bill imposed executive compensation restrictions 
on all TARP recipients. American Recovery and Reinvestment Act of 2009 
(ARRA), Pub. L. 111-5, Sec. 7001. Treasury announced in February that 
companies receiving subsequent TARP assistance would be subject to 
certain limitations on executive compensation including, most notably, 
a $500,000 cap on executive annual salaries; any compensation above 
this amount would have to be made in the form of restricted stock. U.S. 
Department of the Treasury, Treasury Announces New Restrictions on 
Executive Compensation (Feb. 4, 2009) (online at 
www.financialstability.gov/ latest/tg15.html) (hereinafter ``Treasury 
Executive Compensation Statement''). If the new automobile companies 
are to provide SEC-style disclosures, these disclosures would 
presumably include Compensation Discussion and Analysis (CD&A), which 
provides information about and the rationale behind the process by 
which executive compensation is determined.
    \412\ The proposed ``say-on-pay'' regulations would require public 
companies to subject decisions regarding executive compensation to a 
non-binding shareholder vote. Securities Exchange Commission, 
Shareholder Approval of Executive Compensation of TARP Recipients, 
Release No. 34-60218 (July 1, 2009) (online at www.sec.gov/ rules/ 
proposed/ 2009/34-60218.pdf) (hereinafter ``SEC Release No. 34-
60218'').
---------------------------------------------------------------------------

          4. GOVERNMENT INVOLVEMENT IN BANKRUPTCY PROCEEDINGS

    Bankruptcy law is intended to provide for an orderly 
reorganization or liquidation of failing businesses. While the 
various stakeholders in a failed business may generally be 
expected to feel strongly about the treatment of their claims, 
the intensity of public debate surrounding the Chrysler and GM 
reorganizations was high. Proponents of the plan denounced 
bondholders holding out for larger equity stakes in exchange 
for retiring their debt \413\ and President Obama declared, 
``[the holdout bondholders] were hoping that everybody else 
would make sacrifices, and they would have to make none. Some 
demanded twice the return that other lenders were getting. I 
don't stand with them.'' \414\ One disclosed e-mail allegedly 
reveals a Task Force member angrily asking, ``You're telling me 
to bend over to a terrorist like Lauria [the lead attorney for 
Chrysler bondholders]?'' \415\ Representative John Carter (R-
TX) noted on the House floor that according to Thomas Lauria, 
``Perella Weinberg Partners was directly threatened by the 
White House and, in essence, compelled to withdraw its 
opposition to the Obama Chrysler restructuring deal under the 
threat that the full force of the White House press corps would 
destroy its reputation if it continued to fight.'' \416\ 
Recalcitrant bondholders and their supporters struck back, 
alleging that the ``government is penalizing people . . . for 
having funded [their] retirement with . . . bonds'' and that 
bondholders, especially small bondholders, were ``being ignored 
in negotiations and singled out to bear the greatest share of 
the cost of restructuring.'' \417\ Others noted how the 
``mauling of GM creditors tells investors not to invest in TARP 
banks because everything this Treasury touches turns to 
politics.'' \418\
---------------------------------------------------------------------------
    \413\ See, e.g., Felix Salmon, Time for Chrysler's bondholders to 
man up and move on, Reuters (May 4, 2009) (online at blogs.reuters.com/ 
felix-salmon/2009/05/04/ time-for-chryslers- bondholders-to-man-up- 
and-move-on/) (hereinafter ``Felix Salmon May 4 Reuters Report); 
Executive Office of the President, Remarks by Lawrence H. Summers at 
the 2009 National Conference of the Council on Foreign Relations, at 4 
(June 12, 2009) (online at www.cfr.org/publication/ 19618/
prepared__remarks__by__ lawrence__h__ summers__director__ of__the__ 
national__economic__ council.html? breadcrumb= %2Fbios%2F1001%2 
Flawrence__h__ summers) (hereinafter ``Lawrence Summers Council on 
Foreign Relations Remarks'') (``There is nothing at all remarkable 
about the way in which finance was provided during the Chrysler or 
General Motors transactions.''); Floyd Norris, Why Chrysler's 
Bondholders Should Stop Whining, New York Times (May 1, 2009) (online 
at www.nytimes.com/2009/05/02/business/02norris.html?dlbk) (hereinafter 
``Floyd Norris May 1 New York Times Report'').
    \414\ White House April 30 Remarks on Auto Industry, supra note 
111.
    \415\ Neil King Jr. and Jeffrey McCracken, US Pushed Fiat Deal on 
Chrysler, Wall Street Journal (June 6, 2009) (online at online.wsj.com/ 
article/ SB124424451815990495.html) (hereinafter ``Neil King Jr. and 
Jeffrey McCracken June 6 Wall Street Journal Report''). See especially 
emails between Task Force officials and Chrysler legal counsel posted 
with article.
    \416\ Congressional Record, Statement of Representative John Carter 
(R-TX), H5086 (May 4, 2009) (hereinafter ``Representative Carter May 4 
Statement'').
    \417\ Dennis Buchholtz, GM Bondholders Are People Like You and Me, 
Wall Street Journal (op-ed), (May 27, 2009) (online at online.wsj.com/ 
article/ SB124338330278956585.html) (hereinafter ``Buchholtz May 27 WSJ 
Op-Ed'') ; see also Statement from Non-TARP Lenders of Chrysler, Wall 
Street Journal (Apr. 30, 2009) (online at blogs.wsj.com/ deals/ 2009/ 
04/ 30/ statement- from-non-tarp- lenders-of-chrysler/) (hereinafter 
``Statement from Non-TARP Chrysler Lenders'').
    \418\ Gettelfinger Motors, Wall Street Journal (May 4, 2009) 
(online at online.wsj.com/ article/ SB124105303238271343.html) 
(hereinafter ``WSJ May 4 Report'').
---------------------------------------------------------------------------
    The rhetoric in the legal debate is perhaps more tempered 
but positions are just as strongly held. The Panel does not 
second guess court decisions and this report is not a law 
review article, but the extensive involvement of Treasury in 
structuring \419\ and defending the two transactions throughout 
the bankruptcy process, and the impact of the court decisions 
on the financial markets, requires that the Panel inquire into 
the legal issues involved.
---------------------------------------------------------------------------
    \419\ See Sections B and D of this report.
---------------------------------------------------------------------------
    There remains an ongoing challenge to the Chrysler 
bankruptcy. Both the Chrysler and GM 363 sales were approved by 
the respective courts,\420\ and on appeal the Second Circuit 
affirmed the Chrysler opinion.\421\ The Supreme Court did not 
\422\ intervene in the Chrysler bankruptcy. However, on 
September 3, 2009, the Indiana Pension Funds filed a petition 
for certiorari to the Supreme Court to appeal the Second 
Circuit's decision. As of the date of this Report, it is 
unknown whether the Court will grant cert.\423\
---------------------------------------------------------------------------
    \420\ In re Chrysler LLC, et al., 405 B.R. 84 (Bankr. S.D.N.Y. 
2009) and In re GMC, 407 B.R. 463 (Bankr. S.D.N.Y. 2009).
    \421\ Ind. State Police Pension Trust v. Chrysler LLC (In re 
Chrysler LLC), 2009 WL 2382766 (2d Cir. Aug. 5, 2009).
    \422\ The Supreme Court issued a temporary stay of the bankruptcy 
court's sale order pending appeal. Shortly thereafter, the Court 
removed the stay, noting that the appellants failed to meet their 
burden of showing that the delay was justified. However, the Court 
noted that the ``denial of stay is not a decision on the merits of the 
underlying legal issues.'' Indiana State Police Pension Trust, et al v. 
Chrysler LLC, et al, 129 S. Ct. 2275 (2009).
    \423\ See supra note 55.
---------------------------------------------------------------------------
    The two cases have nonetheless attracted both both 
criticism and support among leading academics. The issues 
center on the use of the 363 sale in the auto 
bankruptcies.\424\ It would be misleading to suggest that there 
are only two sides to the academic debate surrounding the 
Chrysler and GM bankruptcies, but academics generally agree on 
certain points. Scholars acknowledge that 363 sales had been 
used to resolve Chapter 11 cases long before the recent 
Chrysler and GM bankruptcies and that such sales have grown 
increasingly popular in the last few years.\425\ Scholars also 
agree that the Code does not restrict the manner in which post-
petition financing is used, including distributions made to 
certain creditors. Moreover, no academic disagrees that the 
government's additional loans of approximately $4.96 billion to 
Chrysler on April 29, 2009 and $30.1 billion to GM on June 3, 
2009 constituted post-petition financing.
---------------------------------------------------------------------------
    \424\ In both the Chrysler and GM cases, parties argued that the 
Secretary of Treasury exceeded his statutory authority and violated the 
Constitution by using TARP money to finance the transactions. In each 
case, the presiding court held that the objectors lacked standing to 
raise this issue or that the issue was moot. For more in depth 
discussion, see Section G(1)(b) of this report.
    \425\ See, generally, What's Good For General Motors, supra note 
258 at 10, where, referring to the use of Section 363, Professor Adler 
writes, ``bankruptcy courts have increasingly, and usefully conducted 
all asset sales.'' See also Assessing the Chrysler Bankruptcy, supra 
note 240, where Professors Roe and Skeel note that (``in time courts 
became more comfortable with [363 sales], partly because it makes sense 
for a failing business, partly because the general merger market 
deepened and thickened in the 1980s. Such sales became frequent in 
Chapter 11.'').
---------------------------------------------------------------------------
    Instead, the debate among academics focuses more narrowly 
on the way in which the 363 sale was structured and the impact 
of the sale on GM's and Chrysler's prepetition creditors. In 
Chrysler,\426\ the United States Bankruptcy Court for the 
Southern District of New York reviewed the 363 sale procedures. 
Relying on the Lionel case,\427\ the bankruptcy court noted 
that the Second Circuit rejected a literal interpretation of 
Section 363, which would impose no limitations on the sale of 
estate assets, reasoning that such an interpretation would 
undermine ``the congressional scheme'' established for 
corporate reorganization.\428\ The bankruptcy court also 
observed in Lionel the policy issues involved in balancing the 
debtor's ability to sell assets and a creditor's right to an 
informed vote on confirmation of a plan. Noting that the Lionel 
court held there must be some articulated business 
justification for a sale of property outside the normal course 
of business,\429\ the bankruptcy court found that the proposed 
sale of assets to an entity sponsored by Fiat was necessary to 
preserve the value of Chrysler's business and maximize the 
value of the bankruptcy estate.
---------------------------------------------------------------------------
    \426\ In re Chrysler LLC, et al., 405 B.R. 84 (Bankr. S.D.N.Y. 
2009).
    \427\ In re Lionel Corp., 722 F.2d 1063 (2d Cir. 1983) (finding 
that a bankruptcy judge must have substantial freedom to tailor his 
orders to meet differing circumstances and concluding there has to be 
some articulated business justification for the use, sale or lease of 
property outside the ordinary course of business).
    \428\ In re Chrysler LLC, et al., 405 B.R. 84, 94 (Bankr. S.D.N.Y. 
2009).
    \429\ The GM court lists seven factors the Lionel court provided to 
determine whether a good business reason exists. The GM court adds four 
more factors in its opinion that are also to be taken into 
consideration. ``In making the determination as to whether there is a 
good business reason to effect a 363 sale before confirmation, the 
Lionel court directed that a court should consider all of the `salient 
factors pertaining to the proceeding' and `act to further the diverse 
interests of the debtor, creditors and equity holders.' It then set 
forth a nonexclusive list to guide a court in its consideration of the 
issue: (1) the proportionate value of the asset to the estate as a 
whole; (2) the amount of elapsed time since the filing; (3) the 
likelihood that a plan of reorganization will be proposed and confirmed 
in the near future; (4) the effect of the proposed disposition on 
future plans of reorganization; (5) the proceeds to be obtained from 
the disposition vis-a-vis any appraisals of the property; (6) which of 
the alternatives of use, sale or lease the proposal envisions; and 
`most importantly perhaps,' (7) whether the asset is increasing or 
decreasing in value. As the Lionel court expressly stated that the list 
of salient factors was not exclusive, this Court might suggest a few 
more factors that might be considered, along with the preceding 
factors, in appropriate cases: (8) Does the estate have the liquidity 
to survive until confirmation of a plan?; (9) Will the sale opportunity 
still exist as of the time of plan confirmation?; (10) If not, how 
likely is it that there will be a satisfactory alternative sale 
opportunity, or a stand-alone plan alternative that is equally 
desirable (or better) for creditors?; and (11) Is there a material risk 
that by deferring the sale, the patient will die on the operating 
table?'' In re GMC, 407 B.R. 463, 490 (Bankr. S.D.N.Y. 2009).
---------------------------------------------------------------------------
    In examining whether the Fiat sale was a sub rosa plan of 
reorganization, or a plan that violated bankruptcy's priority 
rules, the bankruptcy court focused on the fact that the 
bankruptcy estate received fair value for the assets being 
sold. The bankruptcy court also noted that the $2 billion paid 
by New Chrysler for the assets would be distributed entirely to 
the secured creditors, thus creating a bigger payout for these 
creditors than they would receive in liquidation. The 
bankruptcy court recognized that some creditors of the 
prepetition debtor (Old Chrysler), specifically the UAW Trust 
and the UAW, entered into agreements with the buyer of the 
assets (New Chrysler), and these creditors received ownership 
interests in the buyer (New Chrysler). Nonetheless, the 
bankruptcy court concluded that this fact did not ``transform a 
sale of assets into a sub rosa plan'' \430\ because neither the 
UAW Trust nor the UAW received any distributions on account of 
their prepetition claims. Instead, these payments and ownership 
interests were the result of negotiations with the buyers (New 
Chrysler). The bankruptcy court observed:
---------------------------------------------------------------------------
    \430\ In re Chrysler LLC, et al., 405 B.R. 84, 99 (Bankr. S.D.N.Y. 
2009).

          In negotiating with those groups essential to its 
        viability, New Chrysler made certain agreements and 
        provided ownership interests in the new entity, which 
        was neither a diversion of value from the Debtors' 
        assets nor an allocation of the proceeds from the sale 
        of the Debtors' assets. The allocation of ownership 
        interests in the new enterprise is irrelevant to the 
        estates' economic interests.\431\
---------------------------------------------------------------------------
    \431\ In re Chrysler LLC, et al., 405 B.R. 84, 99 (Bankr. S.D.N.Y. 
2009).

    On appeal, the Second Circuit Court of Appeals adopted the 
bankruptcy court's reasoning and affirmed the lower court's 
ruling. The appellate court reiterated that Lionel does not 
require an ``emergency'' to justify a 363 sale, but merely 
requires that a court find there is a ``good business reason.'' 
The appellate court agreed with the bankruptcy court that the 
363 sale did not constitute a sub rosa plan. It also agreed 
that the transaction was consistent with creditor priority 
rules because all equity stakes in New Chrysler were entirely 
attributable to new value, including government loans, new 
technology contributed by Fiat, and new management--none of 
which were assets of the debtor's bankruptcy estate.\432\
---------------------------------------------------------------------------
    \432\ Ind. State Police Pension Trust v. Chrysler LLC (In re 
Chrysler LLC), 2009 WL 2382766 (2d Cir. Aug. 5, 2009).
---------------------------------------------------------------------------
    The Second Circuit rejected appellants' argument that the 
363 sale violates the Code by impermissibly subordinating 
appellants' interests as secured lenders on the ground that 
they lacked standing to make such objection. On this point, the 
Chrysler bankruptcy contains a twist that makes the bankruptcy 
ruling more complicated to follow. The appellate court noted 
that long before the Chrysler bankruptcy, the appellants and 
the other first lien-holders had agreed by contract that, in 
the event of bankruptcy, an agent could be authorized to act on 
their behalf at the request of lenders holding a majority of 
Chrysler's debt. By the terms of the agreement, any action 
taken by the agent is binding on all lenders, including those 
in disagreement.\433\ After Chrysler filed for bankruptcy, the 
majority of first lien-holders authorized the agent to 
act,\434\ and the agent subsequently consented to the sale 
under Section 363(f)(2).\435\ Because the consent was binding 
on appellants as per their credit agreement, the appellate 
court found that they lacked standing to make this objection. 
Appellants asserted that the majority of lenders were bullied 
into approving the sale, but they could produce no evidence to 
support the claim. As a result, the Second Circuit dismissed 
this allegation.
---------------------------------------------------------------------------
    \433\ Ind. State Police Pension Trust v. Chrysler LLC (In re 
Chrysler LLC), 2009 WL 2382766 (2d Cir. Aug. 5, 2009).
    \434\ Ind. State Police Pension Trust v. Chrysler LLC (In re 
Chrysler LLC), 2009 WL 2382766 (2d Cir. Aug. 5, 2009).
    \435\ ``The trustee may sell property . . . free and clear of any 
interest in such property of an entity other than the estate, only if--
such entity consents.'' 11 U.S.C. Sec. 363(f)(2).
---------------------------------------------------------------------------
    The General Motors bankruptcy court followed the Second 
Circuit appellate court in holding that a 363 sale was 
appropriate in that case.\436\ The cases were similar in many 
respects, including the assertion that a quick sale would 
maximize the amount to be received by the bankruptcy estate. A 
major practical difference between the two cases, however, is 
that the assets of the debtor (Old GM) were sufficient that its 
secured creditors could be paid in full, which eliminated many 
of the objections that had been raised in Chrysler. Again, the 
court focused on the difference between the amount that 
creditors of Old GM would receive in liquidation and the higher 
amount that the bankruptcy estate would receive by reason of 
the sale. Evercore, GM's financial advisor, issued a fairness 
opinion that concluded that the purchase price was fair to GM 
from a financial point of view and the court stated that no 
contrary evidence was submitted. The court noted that Section 
363 imposed no limits on the proportion of the debtor's estate 
that could be sold under that section. ``If . . . the 
transaction has `a proper business justification' which has the 
potential to lead toward confirmation of a plan and is not to 
evade the plan confirmation process, the transaction may be 
authorized.'' \437\ The court specifically noted that all or 
substantially all the debtor's assets may be sold in a 363 
sale. The court found that a proper business justification 
existed in the GM case. As in the Chrysler case, the court 
found that there was no sub rosa plan arising from the fact 
that contracts with certain creditors of the debtor (Old GM) 
were assumed by the buyer (New GM) or that some creditors 
received ownership interests in the buyer (New GM). Once again, 
the court found that the dealings with the buyer (New GM) were 
part of the post-bankruptcy negotiations that were designed to 
promote the survival of the business. The court observed:
---------------------------------------------------------------------------
    \436\ Ind. State Police Pension Trust v. Chrysler LLC (In re 
Chrysler LLC), 2009 WL 2382766 (2d Cir. Aug. 5, 2009).
    \437\ In re GMC, 407 B.R. 463, 491 (Bankr. S.D.N.Y. 2009).

          The Court senses a disappointment on the part of 
        dissenting bondholders that the Purchaser did not 
        choose to deliver consideration to them in any manner 
        other than by the Purchaser's delivery of consideration 
        to GM as a whole, pursuant to which bondholders would 
        share like other unsecured creditors--while many 
        supplier creditors would have their agreements assumed 
        and assigned, and new GM would enter into new 
        agreements with the UAW and the majority of dealers. 
        But that does not rise to the level of establishing a 
        sub rosa plan. The objectors' real problem is with the 
        decisions of the Purchaser, not with the Debtor, nor 
        with any violation of the Code or caselaw.\438\
---------------------------------------------------------------------------
    \438\ In re GMC, 407 B.R. 463, 496 (Bankr. S.D.N.Y. 2009).

    Professor Adler contends that the sale in Chrysler was 
irregular and inconsistent with the principles that undergird 
the Code. He notes that assets can under appropriate 
circumstances be sold ``free and clear'' in a 363 sale, but 
that in Chrysler, the buyer (``New Chrysler'') took the assets 
subject to specified obligations to the UAW Trust. He argues 
that if such obligations had not been a part of the sale, then 
the price for the assets might have been higher. Money that 
might otherwise have been available to repay secured creditors 
may thus have been withheld, in Professor Adler's view, by the 
purchaser in order to satisfy obligations to the UAW, with the 
result being that the purported sale was also a distribution of 
the sale proceeds seemingly inconsistent with contractual 
priority among the creditors. Professor Adler does not dispute 
that 363 sales are a common and effective means of resolving 
Chapter 11 reorganizations,\439\ but he does argue that the 
Chrysler sale in particular was conducted in a manner 
inconsistent with the Code.
---------------------------------------------------------------------------
    \439\ What's Good For General Motors, supra note 258 at 9-10 (Sept. 
1, 2009) (``So long as a sale of a firm's assets is subject to a true 
market test, a sale may be the best and most efficient way to dispose 
of an insolvent debtor. Indeed, bankruptcy courts have increasingly and 
usefully conducted all-asset-sales. The key is to ensure a true market 
test. . . .'').
---------------------------------------------------------------------------
    In response to the assertion that the bondholders received 
more than they would in liquidation, Professor Adler states 
that the nature of the process meant that the issue of whether 
the secured bondholders received the return that was due to 
them cannot be known: there was no market test because of the 
short amount of time permitted for the Section 363 bid and the 
unusual requirement in the bidding procedures that the 
purchaser assume the obligations to the UAW Trust.\440\ The 
bankruptcy court's approval of the 363 sale meant that the 
rules governing more traditional bankruptcies that involve the 
confirmation of a reorganization plan did not apply.\441\
---------------------------------------------------------------------------
    \440\ Professors Roe and Skeel also adopt this opinion in their 
paper. Assessing the Chrysler Bankruptcy, supra note 240.
    \441\ See, generally, Section (C)(1)(b) of this report.
---------------------------------------------------------------------------
    Professor Adler argues that the bidding process in the GM 
bankruptcy, following the blueprint of the Chrysler bankruptcy, 
also did not allow for a true market valuation. As in the 
Chrysler case, the court required that any bidders, absent 
special exemption, must assume liabilities to the UAW as a 
condition of purchase. Professor Adler differentiates the two 
cases on the grounds that in GM there was no dissent by holders 
of the senior secured debt, much of which belonged to the U.S. 
and Canadian governments. He argues that even though this made 
approval easier, the decision still set a dangerous legal 
precedent.\442\
---------------------------------------------------------------------------
    \442\ What's Good For General Motors, supra note 258, at 7-8.
---------------------------------------------------------------------------
    Professor Adler does not object to the eventual outcome of 
either transaction \443\ as much as the fact that the process 
used does not make it clear whether the creditors were 
equitably treated.\444\ He suggests a change to the Code to 
provide that Section 363 could not be used to sell all or 
substantially all of a debtor's assets on condition that the 
purchaser assume or pay some but not all of the claims of 
prepetition creditors; he would also have the bankruptcy law 
require that such a sale comply with applicable state law.\445\
---------------------------------------------------------------------------
    \443\ Professor Adler stated, ``[M]y criticism is not with the 
sale. It is with the restrictions on the sale.'' Congressional 
Oversight Panel, Testimony of Charles Seligson Professor at New York 
University School of Law Barry E. Adler, at 124 (July 27, 2009) 
(hereinafter ``Barry Adler COP Testimony'').
    \444\ Douglas Baird, the Harry A. Bigelow Distinguished Service 
Professor at the University of Chicago Law School, testified on 
Automotive Industry bankruptcies in front of the U.S. House of 
Representatives Subcommittee on Commercial and Administrative Law 
Committee on the Judiciary. Baird testified that he believed the 
bankruptcy process was flawed and that Chrysler and GM decisions set 
potentially dangerous precedents. However, he also stated that 
government intervention and an aggressive use of the bankruptcy code 
was necessary to minimize the cost to the taxpayer of keeping those 
companies alive. House Committee on the Judiciary, Subcommittee on 
Commercial and Administrative Law, Testimony of Harry A. Bigelow 
Distinguished Service Professor at University of Chicago Law School 
Douglas Baird, Ramifications of Auto Industry Bankruptcies, Part III 
(July 22, 2009) (judiciary.house.gov/ hearings/pdf/ Baird090722.pdf) 
(hereinafter ``Douglas Baird Congressional Testimony'').
    \445\ What's Good For General Motors, supra note 258 at 9-11.
---------------------------------------------------------------------------
    Professors Roe and Skeel assert that the 363 sale in 
Chrysler amounted to a sub rosa plan, in that it allocated 
billions of dollars without the checks that a plan of 
reorganization requires.\446\ They argue that the appellate 
courts have developed a strong set of standards for 363 sales, 
applying makeshift remedies to compensate for the fact that 
Section 363 does not provide for the procedural safeguards 
embodied in Section 1129.\447\ They argue that the safeguards 
are particularly important if the transaction appears to be a 
sub rosa plan, determining critical Section 1129 features; and 
if the plan does determine critical Section 1129 features, such 
as judicial valuation, creditor consent, and an auction, it can 
only do so if the court fashions a makeshift safeguard.\448\ 
There was no such safeguard in the Chrysler case, they argue, 
and Section 1129 was hardly mentioned.\449\ Similar to 
Professor Adler's views discussed above, Professors Roe and 
Skeel contend that the bidding process was flawed because it 
prevented a fair valuation of the company. They conclude that 
the Chrysler bankruptcy does not comply with good bankruptcy 
practice.
---------------------------------------------------------------------------
    \446\ Assessing the Chrysler Bankruptcy, supra note 240.
    \447\ Section (C)(1)(b) of this report.
    \448\ Professor Lubben notes that while all circuits developed 
safeguards to prevent sub rosa plans, the precise safeguards vary by 
circuit. For example, ``in the second circuit the rule seems to be a 
subpart of that jurisdiction's larger requirement that a pre-plan sale 
be supported by a good business justification.'' While the Fifth 
Circuit requires ``pre-plans to comply with the Bankruptcy Code's rules 
for plan confirmation.'' He notes that the Second Circuit has expressly 
rejected this approach. No Big Deal: The Chrysler and GM Cases in 
Context, supra note 235.
    \449\ The Second Circuit addresses some of these ``safeguards'' and 
finds them to be present in the Chrysler transaction. For instance, the 
court found that ``to preserve resources'' and because the ``business 
was hemorrhaging cash,'' was a valid business reason justifying the 
expedient sale under 363. The court also found that the plan did not 
constitute a sub rosa plan because ``all equity stakes in New Chrysler 
were entirely attributable to new value . . . '' Moreover, in 
determining that secured creditor's rights were not infringed upon 
under section 1129, the court finds that the parties lack standing to 
raise such issue because the furnished consent under an agency theory. 
Ind. State Police Pension Trust v. Chrysler LLC (In re Chrysler LLC), 
2009 WL 2382766 (2d Cir. Aug. 5, 2009).
---------------------------------------------------------------------------
    Professor Lubben, who furnished a paper titled No Big Deal: 
The Chrysler and GM Cases in Context, which appears at Annex B 
\450\ of this report, and gave testimony at the Panel's Detroit 
field hearing,\451\ takes a practical view of the 
reorganizations. Commenting on the arguments of academics 
speaking against the automotive bankruptcy cases, he asserts 
that their arguments ``are not bankruptcy arguments but rather 
rhetorical arguments.'' \452\ Professor Lubben points out that 
liquidation was the only practical alternative to the Section 
363 sales in both cases because no financer other than the 
federal government would have stepped forward. Moreover, in the 
event of liquidation, the recovery received by creditors by 
reason of the sale would clearly be less than what they 
received as a result of the sale. Professor Lubben is of the 
opinion that neither the use of Section 363 to sell 
substantially all Chrysler and GM's assets nor the speed by 
which the 363 sales were executed was unusual. He details the 
many bankruptcy proceedings that have used this structure, 
which has been employed with increasing frequency since the mid 
1990s.\453\ Professor Lubben concludes, ``Congress may well 
decide, as a matter of policy, that this should end, but until 
it does, there is little to the idea that these cases are 
`unprecedented' in their structure. The identity of the DIP 
lender is novel, but what happened is routine. And the identity 
of the lender is not a bankruptcy issue.'' \454\
---------------------------------------------------------------------------
    \450\ No Big Deal: The Chrysler and GM Cases in Context, supra note 
235.
    \451\ Congressional Oversight Panel, Testimony of Daniel J. Moore 
Professor of Law at Seton Hall University School of Law Stephen J. 
Lubben (July 27, 2009).
    \452\ No Big Deal: The Chrysler and GM Cases in Context, supra note 
235.
    \453\ Stephen Lubben COP Testimony, supra note 451 at appendix A.
    \454\ No Big Deal: The Chrysler and GM Cases in Context, supra note 
235 at 3.
---------------------------------------------------------------------------
    Two courts have reviewed the 363 sale. Although the 
objections to the sale were vigorously argued by the creditors, 
the courts specifically determined that there was no factual 
basis for concluding either that the sales were defective or 
that they constituted a sub rosa plan of reorganization that 
deprived the creditors of their Chapter 11 protections. While a 
number of bankruptcy commentators agree with Professor Adler 
that the bankruptcy laws regarding 363 sales should be amended, 
few have criticized either the factual findings of the 
bankruptcy court or the application of current law to those 
facts.
    The bankruptcy court addressed the bidding process issues 
raised by Professor Adler in its opinion. The court noted 
Chrysler's inability to find a company to merge with after an 
extensive two-year search and concluded that the Fiat 
transaction in addition to government protection was an 
``opportunity that the marketplace alone could not offer.'' 
\455\ Capstone's Executive Director provided expert valuation 
testimony, which was not rebutted, and indicated the $2 billion 
Chrysler's first lien creditors would receive following the 
sale exceeded the value they would recover in immediate 
liquidation.\456\ Moreover, the value of the company continued 
to decrease because it was burning through cash, thus further 
reducing the value creditors would collect as time went 
on.\457\ Lastly, the court states that the first lien credit 
holders \458\ could have refused to consent to the sale or 
could have credit bid instead of agreeing to take cash, without 
directly mentioning the objections of the minority first lien 
holders.\459\
---------------------------------------------------------------------------
    \455\ In re Chrysler LLC, et al., 405 B.R. 84, 96 (Bankr. S.D.N.Y. 
2009). No restrictions were placed on the sale of Chrysler's assets 
during the two year period it was marketed prior to filing for 
bankruptcy, whereas under the the 363 sale, New Chrylser assumed 
particular liaibities of Old Chrysler.
    \456\ In re Chrysler LLC, et al., 405 B.R. 84, 97 (Bankr. S.D.N.Y. 
2009).
    \457\ In re Chrysler LLC, et al., 405 B.R. 84, 97 (Bankr. S.D.N.Y. 
2009).
    \458\ These lenders included receipients of TARP money, as 
discussed in Section (C)(1) of this report.
    \459\ In re Chrysler LLC, et al., 405 B.R. 84, 98 (Bankr. S.D.N.Y. 
2009).
---------------------------------------------------------------------------
    There was a specific finding of fact in the bankruptcy 
court that, according to the court, permitted bids to be made 
without restrictions, which differs from the conclusion 
advanced by Professor Adler.\460\ In the bankruptcy court's 
Bidding Procedures Order, ``language was added to indicate that 
a `Qualified Bid' included not only bids that met the 
previously set forth requirements but, in addition, any bid 
that after consultation with the Creditor's Committee, Treasury 
and the UAW, [was] determined by the Debtors in the exercise of 
their fiduciary duties to be a Qualified Bid.' '' \461\ 
According to the bankruptcy court, the procedures adopted were 
adequate to ``encourage'' any sophisticated party to bid on the 
Chrysler assets.\462\ This means that the issue of bidding 
procedures was fully presented to the court and argued by the 
parties. The Panel has no access to information that was not 
presented to the court and no basis for concluding that the 
courts' factual findings were wrong.
---------------------------------------------------------------------------
    \460\ In re Chrysler LLC, et al., 405 B.R. 84, 108-09 (Bankr. 
S.D.N.Y. 2009).
    \461\ In re Chrysler LLC, et al., 405 B.R. 84, 109 (Bankr. S.D.N.Y. 
2009).
    \462\ In re Chrysler LLC, et al., 405 B.R. 84, 109 (Bankr. S.D.N.Y. 
2009).
---------------------------------------------------------------------------
    The Second Circuit did not discuss the bidding procedures 
in its opinion. In laying out the facts, the opinion briefly 
states that the bankruptcy court approved the bidding 
procedures and, apart from New Chrysler, no other bids were 
forthcoming.\463\ The Indiana Pensioners appealed the 
bankruptcy courts' conclusion to the Second Circuit, but that 
court, with the full record before it, did not sustain any such 
objection.
---------------------------------------------------------------------------
    \463\ Ind. State Police Pension Trust v. Chrysler LLC (In re 
Chrysler LLC), 2009 WL 2382766 (2d Cir. Aug. 5, 2009).
---------------------------------------------------------------------------
    Other commentators have moved past the legal analysis to 
the political and policy implications of the automobile 
bankruptcies, dubbing the auto bankruptcies as ``Obama's 
Orwellian interventions.'' \464\ They are particularly 
disturbed by what they see as the Administration's arm-twisting 
of Chrysler's TARP creditors and what they claim is a violation 
of the absolute priority rule to save the politically favorable 
union and its pension.\465\ In their view, the ``sham sale'' of 
Chrysler, even if not per se unconstitutional, violates at 
least the spirit of the Takings \466\ and Contracts \467\ 
Clauses of the United States Constitution. As they see it, the 
Administration's interference may be ineffectual in the long-
run; although ``Obama may have helped save the jobs of 
thousands of union workers whose dues, in part, engineered his 
election,'' the Administration has instigated an ``untold 
number of job losses in the future caused by trampling the 
sanctity of contracts today.'' \468\ The current 
Administration, however, is not alone to blame in their 
opinion; rather, ``long ago Chrysler and GM should have been 
allowed to bleed to death under ordinary bankruptcy rules, 
without government subsidy or penalty.'' \469\
---------------------------------------------------------------------------
    \464\ Richard A. Epstein, The Deadly Sins of the Chrysler 
Bankruptcy, Wall Street Journal (May 11, 2009) (online at 
www.forbes.com/ 2009/05/11/chrysler- bankruptcy-mortgage- opinions-
columnists- epstein.html) (``Richard Epstein May 11 Wall Street Journal 
Op-Ed'').
    \465\ Id.; see also Peter Morici, Treasury Prepares for Chrysler 
Bankruptcy, FinFacts (Apr. 24, 2009) (online at www.finfacts.com/ 
irishfinancenews/ article__1016519.shtml) (hereinafter ``Treasury 
Prepares for Chrysler Bankruptcy'').
    \466\ Richard Epstein May 11 Wall Street Journal Op-Ed supra note 
464.
    \467\ Todd J. Zywicki, Chrysler and the Rule of Law, Wall Street 
Journal (May 13, 2009) (online at online.wsj.com/ article/ 
SB124217356836613091.html) (hereinafter ``Chrysler and the Rule of 
Law'').
    \468\ Id.
    \469\ Richard Epstein May 11 Wall Street Journal Op-Ed supra note 
464.
---------------------------------------------------------------------------
    The Panel agrees with commentators on all sides of the 
political spectrum that whether the government should have 
moved to rescue the automotive industry is a policy question 
with wide-reaching implications. However, the Second Circuit 
Court of Appeals held that the legal issues were correctly 
decided, and the Panel has no evidence to the contrary.

 5. THE ROLE PLAYED BY TREASURY AND TRANSPARENCY WITH RESPECT TO THAT 
                                  ROLE

    This section assesses the transparency of Treasury's 
decision-making and evaluates its performance during its 
involvement with the automotive industry, keeping in mind its 
stated objectives with respect to these TARP investments, as 
discussed above in Section D.
    In many respects, Treasury has presented its plans and 
decisions with respect to its TARP investments in Chrysler and 
General Motors on a prompt and regular basis. Mr. Bloom has 
recently testified before House and Senate congressional 
committees as well as the Panel, and various documents (e.g., 
loan agreements, program guidelines) were released concerning 
particular aspects of Treasury's investments. Given the gravity 
of the challenges and issues that Treasury has faced during the 
financial crisis, the Panel recognizes Treasury's attempts to 
keep the public informed as to the decisions it has made.
    The Panel does question, however, some aspects of 
Treasury's transparency with respect to the process. Treasury 
has failed to follow a consistent and cohesive message with 
respect to its rationale for extending TARP to the automotive 
industry and its stated objectives in doing so. Treasury's 
intervention in the automotive industry could be attributed to 
one of (or a combination of) three broad policy objectives: (1) 
the prevention of a systemic threat to the U.S. financial 
markets and broader economy; (2) the advancement of social 
policy (such as tempering the impact of unemployment, 
environmental improvement, or provision of retirement 
benefits); or (3) the maintenance of a viable American 
automotive presence in the United States. At varying times, 
Treasury's public statements have addressed the merits of each 
of these objectives and their benefits to the overall economy; 
however, it is unclear which objective, or combination thereof, 
Treasury deems most important--or if all three carry equal 
weight.\470\ As such, in the absence of a clearly articulated 
unifying strategy, it is difficult for outside observers to 
determine which metrics are the best indicators of Treasury's 
performance.
---------------------------------------------------------------------------
    \470\ See, for example, U.S. Department of Treasury, Remarks by 
Interim Assistant U.S. Secretary for Financial Stability Neel Kashkari 
at the Brookings Institution (Jan. 8, 2009) (online at 
www.financialstability.gov/ latest/ hp1347.html) (hereinafter ``Neel 
Kashkari Brookings Institute Remarks'') (``Treasury was forced to act 
to prevent a significant disruption of the automotive industry that 
would pose a systemic risk to financial markets and negatively affect 
the real economy.''); Congressional Oversight Panel, Testimony of 
Assistant U.S. Secretary of the Treasury for Financial Stability 
Herbert Allison, at 53 (June 24, 2009) (online at cop.senate.gov/ 
documents/ testimony-062409- allison.pdf) (hereinafter ``Herb Allison 
COP Testimony'') (``What we're trying to do is to allow the automobile 
industry and encourage the automobile industry to restructure so that 
it is again a highly-competitive sector of our economy and can grow and 
create more jobs over time . . .''); Ron Bloom COP Testimony, supra 
note 36 at 34 (``[T]he administration and the prior administration 
believe that the centrality of the automobile industry to the broader 
economy justified this intervention.'').
---------------------------------------------------------------------------
    The Panel recognizes that thorough diligence was conducted 
by Treasury in evaluating each company's viability plan. In his 
speech on the automotive industry on March 30, President Obama 
noted that ``after careful analysis [of the Chrysler and GM 
initial viability plans submitted on February 17], we've 
determined that neither [automotive company] goes far enough to 
warrant the substantial new investments that these companies 
are requesting.'' \471\ The Panel requested access to certain 
documents from Treasury in order to determine the scope of the 
Treasury's due diligence and evaluations of Chrysler and GM's 
viability plans. The information shared with the Panel includes 
Treasury's assessment of the viability plans submitted by 
Chrysler and GM and the evaluation of the long-term economic 
viability of both companies as prepared by Treasury and its 
financial advisors. On the basis of the information that 
Treasury provided to the Panel, it appears they conducted 
extensive and thorough due diligence on the viability plans, 
asked the companies to consider other variables, criticized the 
companies' plans, and questioned their assumptions. The 
materials shared with the Panel also support Mr. Bloom's 
statements that Treasury used its own assumptions to conduct 
stress tests on these plans, looked at a variety of scenarios 
in order to formulate cash flow capability and the likely 
earnings capacity of the companies, challenged the companies to 
look forward, and created models of ``potential enterprise 
value.'' \472\ The scope and parameters of Treasury's review of 
these initial viability plans seem appropriate for the role 
Treasury found itself in--as a potential investor of taxpayers' 
money.
---------------------------------------------------------------------------
    \471\ March 30 Presidential Remarks, supra note 91.
    \472\ Ron Bloom Senate Testimony, supra note 170 at 11-12.
---------------------------------------------------------------------------
    Nonetheless, while Treasury's diligence was detailed and 
thorough (and recognizing the difficulty posed by releasing 
sensitive corporate information), this does not mean that 
Treasury has been transparent and accountable during the 
process. Congress, and ultimately the American taxpayer, have 
been ``left in the dark'' \473\ concerning the details of 
Treasury's review process and its methodology and metrics at a 
time when Treasury committed additional TARP funds to these 
companies. Treasury failed to disclose to the public both the 
factors and criteria it used in its viability assessments, the 
scope of outside involvement in its evaluations, and its basis 
and reasoning for selecting particular benchmarks. Simply, its 
disclosures did not go far enough. This is especially 
unfortunate given Treasury's apparent commitment to ``ensure 
thorough transparency and accountability for [its] actions.'' 
\474\ Without an open process, attempts by policymakers and the 
general public to objectively assess AIFP as well as New 
Chrysler and New GM's performance and progress are 
substantially impeded. Even after the Panel's review of 
documents from Treasury, some questions remain, including:
---------------------------------------------------------------------------
    \473\ At the July 21, 2009 House Judiciary Subcommittee on 
Commercial and Administration Hearing on the Ramifications of 
Automotive Industry Bankruptcies, Part II, Representative Dan Maffei 
(D-NY) stated that ``the Congress and the American public were left in 
the dark as to how the task force, then led by Steven Rattner, reached 
its conclusion and I think that is the underlying problem. There simply 
has not been very good communication between the president's Task Force 
and Congress. The decisions were implemented without the auto 
manufacturers or the task force presenting evidence publicly or even 
privately to Congress that some aspects of this reorganization would 
actually benefit the automotive companies financially.'' At the same 
hearing, Representative Bill Delahunt (D-MA) also noted that ``[t]here 
have been significant complaints about transparency'' and that 
``everyone is entitled to a full explanation of the rationale for 
decisions that are made.'' Furthermore, as Senator Mike Johanns (R-NE) 
noted at the June 10, 2009 Senate Banking Committee Hearing on the 
State of the Domestic Automobile Industry, ``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 that, over the weekend, 
we had bought General Motors, with all of the problems associated with 
it, is really outrageous, really outrageous.'' Such concerns led the 
House Financial Services Committee to approve a resolution on July 17, 
2009 seeking information from the Task Force regarding major decisions 
made on the Chrysler and GM restructurings, including its decisions to 
extend bankruptcy financing to both companies, Treasury's assumption of 
equity stakes, and decisions on debt reduction. While the House 
Financial Services Committee voted unanimously to send its request to 
the full House of Representatives for consideration, the full House has 
not yet taken action on the measure. As Ranking Member Spencer Bachus 
(R-AL) stated, ``It's not about taking sides. It's about acquiring 
information about the process. I think the American people and Congress 
have questions.''
    \474\ Ron Bloom Prepared COP Testimony, supra note 78 at 3.
---------------------------------------------------------------------------
     What happens if New Chrysler and New GM fail to 
live up to the Treasury auto team's expectations? More 
specifically, if the companies do not begin to produce 
automobiles that will compete in the marketplace, what is 
Treasury's role at that point as the investor of taxpayers' 
money in these enterprises?
     What is the likelihood that the private sector 
will lend to, or do business with, these companies, 
particularly while Treasury retains an ownership interest in 
them? What were the predictions that the Treasury auto team 
relied on?
     What possible exit strategies did Treasury 
evaluate before making its investments?
    Just as risk is an important variable to examine when 
making an investment, so too is the establishment of a feasible 
strategy for the disposition of an ownership position. While it 
is part of this Panel's responsibility to inquire as to how and 
when Treasury plans to unwind its ownership stakes in Chrysler 
and GM and return the money to the taxpayers where it properly 
belongs, Treasury has avoided sufficient public disclosure 
regarding its exit strategy for the investment in the 
automobile industry.\475\ Officials have maintained the 
position that Treasury will dispose of its ownership stake in 
Chrysler and General Motors ``as soon as is practicable.'' 
However, the meaning of ``practicable'' has yet to be defined, 
and it remains unclear whether Treasury is unwilling or simply 
unable to define specifically the timetable and method for 
ending its ownership position in the automobile industry. The 
elusive nature of this issue is typified in a recent statement 
by Mr. Bloom: ``The definition of `practicable' is a bit like 
`pornography,' though; we'll know it when we see it.'' \476\ 
While Treasury has stated its intent to sell its ownership 
stakes ``as soon as practicable,'' Senator Lamar Alexander (R-
TN), noted that Fritz Henderson, president and chief executive 
officer of New GM, told Senators and Congressmen in a telephone 
call on June 1, 2009 that while it is Treasury's decision, 
``this is a `very large amount' of stock,'' and that ``orderly 
offering of [Treasury's] shares to establish a market may have 
to be managed over a period of years.'' \477\
---------------------------------------------------------------------------
    \475\ See Part F of Section One of this report for further 
discussion of factors involved in Treasury's exit from its investment 
in the Automotive Industry, infra.
    \476\ Nick Bunkley August 5 New York Times Report, supra note 80.
    \477\ Congressional Record, Statement of Senator Lamar Alexander, 
S6152 (June 4, 2009) (hereinafter ``Senator Alexander June 4 
Statements'').
---------------------------------------------------------------------------
    Although the issue of Treasury's strategy, or lack thereof, 
for exiting its ownership positions is still a concern, 
comments by Mr. Bloom have shed some light on the future plans 
for those investments. In a remark during a question and answer 
segment of the Panel's recent Detroit field hearing, Mr. Bloom 
highlighted a series of practical issues for Treasury to 
consider regarding the disposition of its ownership 
stakes.\478\ He maintained, however, that the disclosure of 
specific timetables and milestones regarding Treasury's exit 
strategy could ultimately negatively affect the taxpayers' 
interests.\479\ First, the company's board determines the 
timing of an IPO, not the government. Moreover, to force a 
company to have an IPO would be inconsistent with Treasury's 
``hands off'' approach. Second, in order to maximize the 
taxpayers' investments, Treasury expects to divest its 
ownership stakes at a future point when the companies become 
profitable and when Treasury can take advantage of a rise in 
markets.\480\ For Treasury to do otherwise could have a 
negative effect on its ability to sell into the market and 
obtain maximum value--the so-called ``overhang.'' Since 
Treasury's plans are hardly a secret, however, the market 
``overhang'' concern might not appear to be so troubling, but 
the timing of sale certainly remains an issue so that the value 
of the taxpayers' investment is maximized. The Panel also 
recognizes, however, that there are other critical factors 
involved in the proper formulation and timing of an exit 
strategy. Private sector interest and involvement are essential 
elements of a successful Treasury exit strategy.\481\ In order 
for this success to be achieved, the private sector must also 
be interested in doing business with these companies and 
demonstrate interest in owning these companies, even while 
Treasury retains an ownership interest. Although Mr. Bloom's 
points seem fundamentally reasonable and prudent, the Panel is 
concerned that the only viable metrics that Treasury will 
provide regarding its investments in Chrysler and GM will be 
provided in initial quarterly reports that will (at least until 
the companies become public) not be as comprehensive as filings 
required by the SEC. Without the release of additional specific 
milestones or markers on each company's path towards an IPO, 
the likelihood that taxpayers will be able to assess the 
chances of seeing the return of their money is slim, at best.
---------------------------------------------------------------------------
    \478\ See Part F of Section One of this report for further 
discussion of factors involved in Treasury's exit from its investment 
in the automotive industry, infra.
    \479\ Ron Bloom Prepared COP Testimony, supra note 79 at 3, stating 
that ``[t]he judgment was made that to put out a more specific timeline 
would create an overhang in the market that would be deleterious to 
receiving the best price.''
    \480\ Ron Bloom Prepared COP Testimony, supra note 79 at 3.
    \481\ Ron Bloom Senate Testimony, supra note 170.
---------------------------------------------------------------------------
    The Panel is also mindful of particular shortcomings in 
transparency with respect to the Administration's negotiations 
with the companies and various stakeholders in the bankruptcy 
process. Although such justification is legally 
irrelevant,\482\ at least one of the companies--Chrysler--has 
defended its decision to enter into agreement with the UAW 
Trust on the grounds that to continue as a going concern and 
return to profitability, it would need workers.\483\ Without 
the UAW's support for the sales, the belief has been, there 
would be insufficient workers for the plants. The majority of 
the industries manufacturing operations are in Michigan,\484\ a 
state whose unemployment rate stood at more than 15 percent as 
of June 2009, the highest of any state in the country.\485\ The 
Treasury auto team has explained to the Panel that maintaining 
a stable pre-existing and experienced workforce was paramount 
in light of the difficulty of individually hiring and training 
many thousands of workers.
---------------------------------------------------------------------------
    \482\ See discussion of this issue supra Section E(1)(b).
    \483\ In re Chrysler LLC, 405 B.R. 84, 99 (Bankr. S.D.N.Y. 2009).
    \484\ GM U.S. Facilities (online at www.gmdynamic.com/ company/
gmability/ environment/ plants/facility__db/ facilities/list); 
Chrysler's U.S. Parts and Assembly Plants, USA Today (Apr. 30, 2009) 
(online at www.usatoday.com/ money/autos/ 2009-04-30-chrysler-plants -
map__N.htm). At the Panel's Detroit field hearing held on July 27, 
2009, Representative Carolyn C. Kilpatrick (D-MI) noted: ``Here in 
Michigan, we are the epicenter of the manufacturing that is kind of 
eroding itself in America.'' Congressional Oversight Panel, Statement 
of Rep. Carolyn C. Kilpatrick, at 7 (July 27, 2009).
    \485\ Bureau of Labor Statistics, Local Area Unemployment 
Statistics (online at www.bls.gov/ lau/home.htm).
---------------------------------------------------------------------------
    In its assessment of government actions to deal with the 
current financial crisis, the Panel has regularly called for 
transparency, accountability, and clarity of goals. Treasury 
must commit itself to those same principles when implementing 
TARP projects and administering the AIFP. Undoubtedly, the 
guidelines for the AIFP are expansive in order to maximize 
Treasury's potential options and facilitate rapid intervention 
in the midst of economic uncertainty. Treasury, therefore, 
maintains the authority to determine its involvement in 
stabilizing companies on a case-by-case basis and ``may invest 
in any financial instrument, including debt, equity, or 
warrants, that the Secretary of the Treasury determines to be a 
troubled asset.'' \486\ In both the AIFP and the Capital 
Purchase Program (CPP), Treasury has utilized all available 
financial instruments in order to stabilize the respective 
industries as it saw necessary. With such expansive discretion, 
the Panel believes it is imperative for Treasury to disclose 
its methodology and rationale since any use of taxpayer funds 
warrants comprehensive justification.
---------------------------------------------------------------------------
    \486\ U.S. Department of the Treasury, Guidelines for Automotive 
Industry Financing Program (accessed Aug. 31, 2009) (online at 
www.financialstability.gov/ docs/AIFP/ AIFP__guidelines.pdf).
---------------------------------------------------------------------------

               6. HAS THE CAN BEEN KICKED DOWN THE ROAD?

    The day GM filed for bankruptcy protection, President Obama 
told the American people that he refused ``to let these 
companies become permanent wards of the state, kept afloat on 
an endless supply of taxpayer money.'' ``In other words,'' 
President Obama said, ``I refuse to kick the can down the 
road.'' \487\ The government-orchestrated bankruptcies of 
Chrysler and GM did not resolve the complex underlying problems 
facing the domestic automotive industry in the United States. 
It is therefore unclear whether the new entities will be able 
to overcome the historical shortcomings that led to their 
predecessors' failure. If they are unable to do so, either the 
government will need to step in again, or the companies will 
need to liquidate, with much of the attendant misery that the 
government sought to avoid in 2008 and 2009.
---------------------------------------------------------------------------
    \487\ White House June 1 Remarks on GM Restructuring, supra note 
89.
---------------------------------------------------------------------------
    The factors that led to the insolvency of Chrysler and GM 
were no secret.\488\ The overcapacity of the global automotive 
manufacturing industry and the fierce competition it creates 
has plagued American automotive manufacturers for decades.\489\ 
In addition, the healthcare and pension obligations of large 
corporations in the United States have created costs that put 
American automotive manufacturers at a disadvantage compared to 
foreign competitors.\490\ These factors, coupled with the 
drastic decline in demand for new cars and trucks in the United 
States in 2008 and 2009, made the financial condition of 
Chrysler and GM untenable.\491\
---------------------------------------------------------------------------
    \488\ Fortune magazine ran a cover story predicting the General 
Motors bankruptcy in 2006. Carol Loomis, The Tragedy of General Motors, 
Fortune (February 6, 2006) (online at money.cnn.com/ magazines/fortune/ 
fortune_archive/ 2006/02/20/ 8369111/index.htm).
    \489\ The annual reports of the major public auto manufacturers 
repeatedly reference the overcapacity in the North American market as 
one of their most significant challenges. See, for example, General 
Motors, Form 10-K, I-17 (March 28, 2006) (hereinafter ``GM Fiscal Year 
2005 10-K''); Ford Motor Company, Form 10-K, 3 (March 1, 2006) 
(hereinafter ``Ford Fiscal Year 2005 10-K'').
    \490\ Affidavit of Frederick A. Henderson Pursuant to Local 
Bankruptcy Rule 1007-2, 5-6 (June 1, 2009), In Re General Motors Corp., 
(09-50026) (hereinafter ``Frederick Henderson GM Bankruptcy 
Affidavit'').
    \491\ Id; Ronald Kolka Declaration, supra note 113 at 4-5.
---------------------------------------------------------------------------
    In deciding to rescue these firms with taxpayer money, the 
Panel would expect the Treasury auto team to analyze several 
key considerations in the normal course of performing its due 
diligence as a prospective investor:
          1. Revenue forecasts and market share. The viability 
        of these companies is still dependent on sales volume, 
        which, as a result of the global economic downturn, 
        remains at historically low levels.\492\ The 
        projections provided by GM in SEC filings assumed New 
        GM would maintain a market share ranging between 17.5 
        percent and 18.5 percent between 2009 and 2014, while 
        the number of cars sold in the United States was 
        projected to climb steadily from 10.5 million to 16.8 
        million during that period.\493\ With these numbers, 
        New GM projected that it could maintain a positive cash 
        flow, the definition of viability used by the Treasury 
        auto team.\494\ But GM has been steadily losing market 
        share for decades and it is unclear whether the 
        projections provided adequately reflect this trend. 
        Some analysts believe that New GM could see its market 
        share decline to between 15 percent and 16 percent over 
        the next several years.\495\
---------------------------------------------------------------------------
    \492\ GM July 16, 2009 8-K, at 20-21, supra note 86.
    \493\ Stephen Worth Declaration, supra note 36 at appendix. 18.
    \494\ New Path to Viability for GM & Chrysler, supra note 37.
    \495\ Merrill Lynch, Car Wars 2010-2013 (July 15, 2009).
---------------------------------------------------------------------------
          Moreover, declining confidence in Chrysler and GM 
        vehicles, as a result of their financial difficulties, 
        creates a challenge to new sales that must be overcome 
        if either new company is to survive.\496\ Market share 
        in the North American market has historically been 
        driven by the number of new products auto manufacturers 
        bring to market.\497\ While reducing capacity reduces 
        fixed costs, it also reduces the number of new cars and 
        trucks New Chrysler and New GM can bring to market in 
        the short-term, which is likely to have a negative 
        effect on the market share of these companies. As 
        market share declines, these companies will need to 
        earn more profit per vehicle to maintain projected 
        revenues.
---------------------------------------------------------------------------
    \496\ Id. at 21.
    \497\ Id.
---------------------------------------------------------------------------
          2. Cost controls. There is no question that New 
        Chrysler and New GM are better positioned companies 
        than their pre-bankruptcy counterparts. Both have shed 
        billions of dollars in debt and other liabilities, 
        improving their ability to make profits and invest in 
        new products and technology.\498\ Both companies have 
        renegotiated their agreements with the UAW, reducing 
        labor costs dramatically. The closing of manufacturing 
        plants and the shedding of unprofitable brands has 
        somewhat reduced overcapacity. In addition, both 
        companies are still hoping to achieve various post-
        bankruptcy cost reductions.\499\ Achieving these 
        reductions may prove to be critical to the ability of 
        the new companies to fully realize their viability 
        plans.\500\ The cost reductions made to date were 
        necessary for the viability of the new companies but it 
        is unclear whether they will prove to be sufficient.
---------------------------------------------------------------------------
    \498\ See Moody's Auto Navigator (July 15, 2009) (describing the 
reduction of General Motors debt from $43 billion to $26 billion).
    \499\ Id.
    \500\ Id.
---------------------------------------------------------------------------
          3. External shocks to revenue and cost projections. 
        Viability plans for auto makers should be tested for 
        the potential impact of sudden shocks to revenue and 
        cost projections. The most obvious, but by no means 
        only, sources of such shocks for the automotive 
        industry are: (1) a sharp economic downturn--or, under 
        current circumstances, another economic contraction 
        before any recovery has a chance to take hold; (2) a 
        surge in oil prices, most likely tied to a supply 
        interruption; and (3) a sharp change in regulatory 
        requirements, particularly environmental controls or 
        fuel efficiency standards. Energy price trends would 
        appear to be particularly critical for the prospects of 
        the automotive industry; if they continue to fluctuate 
        to the extent they have over the last five years, it 
        may be difficult, if not impossible, for auto 
        manufacturers to invest profitably in bringing energy 
        efficient cars to market. In the case of New Chrysler, 
        its alliance with Fiat was predicated on Fiat's 
        providing technology to produce fuel efficient vehicles 
        in the American market.\501\
---------------------------------------------------------------------------
    \501\ Chrysler Release, supra note 41.
---------------------------------------------------------------------------
    The Panel requested access to certain documents from 
Treasury in order to determine the extent to which the Treasury 
auto team conducted due diligence. The information shared with 
the Panel involves the auto team's assessment of the viability 
plans submitted by Chrysler and GM and the evaluation of the 
long-term economic viability of both companies by the Treasury 
auto team and its advisors. On the basis of the information 
that Treasury has provided to the Panel, it appears that the 
auto team conducted due diligence as a private investor would 
and were fully informed when making its investment decisions. 
The auto team seems to have had a reasonable basis to believe 
in the long-term viability of the two companies. This does not 
necessarily mean that the investment decision will prove to be 
a profitable one; the automotive sector in the United States is 
risky and these companies have a legacy of failure. 
Additionally, while Treasury followed the process that a 
private investor would follow, that does not mean its 
objectives were those of a private investor. A private investor 
seeks to establish it is receiving a reasonable rate of return 
on its investment through the due diligence process. As 
discussed above, there are significant obstacles to the two 
companies' ever achieving the level of profitability that would 
permit the return of all the taxpayer funds expended, and 
Treasury's best estimates are that some significant portion of 
those funds will never be recovered.\502\ Treasury may not, 
however, have been seeking to maximize profits.\503\
---------------------------------------------------------------------------
    \502\ See discussion of this issue supra Section F(1).
    \503\ Ron Bloom's comments to Panel staff, supra note 274.
---------------------------------------------------------------------------
    A significant portion of the American automotive industry 
had failed by December 2008. Treasury, using TARP funds, 
effectively granted a reprieve to a large part of that sector. 
Treasury has taken significant and far-reaching actions that 
are intended to permit New Chrysler and New GM to function on 
their own without any further government assistance.\504\ The 
specter of future government bailouts has gone. The possibility 
of failure (and the loss of taxpayer money), however, remains 
until these two companies can show that they are producing cars 
people want to buy.
---------------------------------------------------------------------------
    \504\ White House June 1 Remarks on GM Restructuring, supra note 
89.
---------------------------------------------------------------------------

                   H. Conclusion and Recommendations

    The Panel will continue to monitor Treasury's use of TARP 
funds in its assistance to the automotive industry. In 
particular, the Panel will focus its attention on the issues 
described below.

          1. TREASURY'S ROLE IN PROTECTING TAXPAYER INVESTMENT

    Treasury's performance in protecting the interests of the 
taxpayers in the support of the auto companies is somewhat 
mixed. On one hand, Treasury negotiated aggressively in these 
transactions, demanding significant concessions from other 
stakeholders, and protecting taxpayer interests as if it were a 
private investor. On the other hand, the decisions to enter 
into the transactions in the first place suffer from a lack of 
transparency.
    Treasury was instructed to act in a ``commercial manner'' 
by the White House,\505\ and there can be no doubt that 
Treasury robustly defended its interests (and thus those of 
taxpayers) like any other stakeholder. There is also no doubt 
that the other parties involved were sophisticated and well-
represented, and more than equal to intense negotiations. Some 
feel that the government was too tough,\506\ or too tough with 
the wrong parties. Others wish the government had been equally 
tough in negotiating the investment of TARP funds in banks. The 
assertiveness displayed by the government in the 
reorganizations reduces the ``moral hazard'' implicit in using 
public money as a funding option for failing businesses.
---------------------------------------------------------------------------
    \505\ Ron Bloom Prepared COP Testimony, supra note 78; 
Ramifications of Automotive Industry Bankruptcies, Part II, supra note 
10 at 1.
    \506\ The negotiations gave rise to allegations of threats and 
bullying. Some of the more extreme alleged threats have been impossible 
to prove, and have been vigorously denied by Treasury. Specifically, 
Thomas Lauria, a bankruptcy attorney with White & Case maintains Mr. 
Rattner threatened an official of Perella Weinberg Partners, an 
investment bank, that the White House press corps would smear Perella's 
reputation if they did not support the Administration's plan on the 
Chrysler bankruptcy. Joseph A. Giannone, Perella Denies White House 
Threat Over Chrysler, Reuters (May 4, 2009) (online at www.reuters.com/ 
article/ idUSN0441888520090504). Bloom, in his appearance before the 
Panel, denied this allegation. Ron Bloom Prepared COP Testimony, supra 
note 78. Because dealing with the U.S. government is not the same as 
dealing with other credit bidders or DIP finance providers, and when 
the government accuses a bondholder, who may be under a fiduciary 
obligation to get the best price for its bonds, and in any case has the 
right to protect its own interests the best way it can, of failing to 
assume some correct proportion of ``shared sacrifice,'' some may feel 
that a line has been crossed. It would be hypocritical for Treasury to 
have its agents act in a commercial manner, protecting their own 
interests, without expecting its counterparties to do the same. However 
``commercial'' Treasury's objectives, the U.S. government has a throw 
weight that its counterparties cannot match as there is little in the 
regular commercial arsenal that can counter a charge of ``unpatriotic'' 
behavior by the President of the United States. The Panel staff 
contacted many of the parties involved in these transactions to 
substantiate the allegations of threats and bullying, however none of 
the Panel's inquiries received a response. Zach Lowe, White & Case's 
Tom Lauria Reflects on Non-TARP Lenders Crazy Chrysler Week, The AmLaw 
Daily, (May 11, 2009) (online at amlawdaily.typepad.com/ amlawdaily/
2009/05/nontarp.html) (hereinafter ``Thomas Lauria Statements''); 
Preliminary Objection of the Chrysler Non-Tarp Lenders to Motion of 
Debtors in Possession, Pursuant to Sections 105, 363 and 365 of the 
Bankruptcy Code and Bankruptcy Rules 2002, 6004 and 6006, For (I) An 
Order (A) Approving Bidding Procedures and Bidder Protections for the 
Sale of Substantially All of the Debtors' Operating Assets (B) 
Scheduling a Final Sale Hearing and (C) Approving the Form and Manner 
of Notice Thereof; and (II) An Order (A) Authorizing the Sale of 
Substantially All of the Debtors' Operating Assets, Free and Clear of 
Liens, Claims, Interests and Encumbrances, (B) Authorizing the 
Assumption and Assignment of Certain Executory Contracts and Unexpired 
Leases in Connection Therewith and Related Procedures and (C) Granting 
Related Relief, In Re Chrysler LLC, S.D.N.Y. (No.09 B 50002 (AJG)) 
(online at chap11.epiqsystems.com/ docket/docketlist.aspx?pk= 1c8f7215-
f675-41bf-a79b- e1b2cb9c18f0&l=1).
---------------------------------------------------------------------------
    It appears that Treasury to some degree acted as a private 
investor would in making the decision to support the automotive 
companies in the first place. However, the lack of 
transparency, as discussed in detail above,\507\ also makes it 
difficult to determine the priorities of Treasury's primary 
objectives, including which competing policy considerations, if 
any, informed its actions. Based on Treasury's presentation to 
the Panel, the due diligence performed with respect to the 
ultimate viability of the automotive companies was extensive 
and thorough, and consistent with what a private investor would 
have done in the protection of its own interests. The ultimate 
decision to invest in the automotive companies, however, could 
have been made on policy grounds, regardless of their 
profitability, which would change the metrics for success. In 
the absence of a clear consensus of Treasury's objectives, it 
is difficult to assess their success.
---------------------------------------------------------------------------
    \507\ See supra Section G5.
---------------------------------------------------------------------------

    2. TREASURY'S ROLE AS OWNER OF SIGNIFICANT STAKES IN AUTOMOTIVE 
                               COMPANIES

    The tension between government intervention in the 
automotive companies and the hands-off approach that the 
government intends to take with respect to its ownership stake 
is examined above.\508\ The Panel recommends that Treasury 
acknowledge the inherent conflicts that arise from its multiple 
roles and address the following issues:
---------------------------------------------------------------------------
    \508\ See supra Section G.2.
---------------------------------------------------------------------------
           Treasury should clarify its policy 
        objectives, reasonable expectations, and the 
        implications of these policy decisions in the 
        automotive bailouts. If Treasury's objectives include 
        more than the rescue of Chrysler and GM but also other 
        aims, such as environmental improvement, support for 
        pension obligations, or continued employment, Treasury 
        should make this clear, and also provide transparency 
        on the costs of such objectives. Given the tension 
        inherent in the government's overlapping roles and the 
        fiduciary responsibility it has assumed in its 
        disbursement of TARP funds, the Panel believes it is 
        necessary for Treasury to provide more information 
        regarding its decision-making and administration of the 
        AIFP. The Panel is particularly concerned with the lack 
        of publicly disclosed information regarding Treasury's 
        evaluation of the viability of the automotive companies 
        and its exit strategy with respect to the substantial 
        investments it has made in those companies in order to 
        ensure that ``these companies--and this industry--must 
        ultimately stand on their own, not as wards of the 
        state.'' \509\
---------------------------------------------------------------------------
    \509\ March 30 Presidential Remarks, supra note 91.
---------------------------------------------------------------------------
           Treasury must provide more detail about 
        Treasury's corporate governance policies with respect 
        to the automotive companies,\510\ including how the 
        government will deal with conflicts of interest between 
        its role as an equity holder or creditor and as 
        regulator. In addition, Treasury should establish 
        policies prohibiting Treasury employees from accepting 
        employment with either company for a period of at least 
        one year following the termination of their employment 
        at Treasury.
---------------------------------------------------------------------------
    \510\ See supra Section G.2.a.
---------------------------------------------------------------------------
           Treasury should consider the unparalleled 
        opportunity it has been handed to set an example of 
        corporate governance best practices in the companies in 
        which it is now a major investor. Changes in corporate 
        governance have begun with the appointment of well-
        qualified and independent directors.\511\ Rules 
        governing matters such as independence of directors, 
        their service on other boards, term limits, stock 
        ownership requirements and retirement should all 
        reflect best efforts on corporate governance 
        excellence. As TARP recipients, the automotive 
        companies are already subject to restrictions on 
        executive compensation, but they could adopt their own 
        more tailored compensation guidelines, and ensure that 
        compensation for both executives and board members are 
        based on clearly articulated performance criteria and 
        aligned to long-term performance. Because accurate 
        financial reporting to the taxpayers is both essential 
        and likely to be challenging in light of the 
        reorganization of the two companies, special attention 
        should be paid to the audit committees, possibly having 
        all of their members being required to be ``financial 
        experts.'' \512\ Equally important, internal controls 
        that affect inputs into financial statements should 
        conform to best practices. Particular attention should 
        be paid to efforts to enhance shareholders' 
        participation in corporate governance.\513\ The Panel 
        recommends that the automotive companies' bylaws and 
        policies provide for full disclosure of all dealings 
        with its significant shareholders (including, of 
        course, the government).\514\
---------------------------------------------------------------------------
    \511\ Supra notes 181-183 and accompanying text. See discussion of 
this issue supra Section B.
    \512\ The Sarbanes-Oxley Law requires only one such expert. 15 
U.S.C. 7265(a).
    \513\ This would only be possible within the government's corporate 
governance guidelines if the shares were held in a trust, as suggested 
below.
    \514\ The Panel recommends that the CEO and chairman of each 
company certify each quarter as to the absence of government direction 
or intervention in their day-to-day business, or the nature of such 
direction or intervention.
---------------------------------------------------------------------------
           With respect to disclosure of the 
        performance of the automotive companies, Treasury has 
        indicated that the two new companies will file periodic 
        reports with the SEC.\515\ These reports will, in 
        essence, determine how the ultimate shareholders (the 
        taxpayers) will share in the success of the auto 
        bailout and the stewardship of their money. It is 
        therefore essential that these reports be provided on a 
        timely basis, and be as complete as possible. The Panel 
        recommends that the companies produce reports to the 
        standard and in compliance with the timing that applies 
        to SEC reporting companies,\516\ and that they do so as 
        soon as possible. In particular, the Panel recommends 
        that these reports include a ``management's discussion 
        and analysis,'' as SEC-reporting companies are required 
        to do, which identifies known ``trends and 
        uncertainties'' with respect to the company's financial 
        performance and outlook. In the case of the automotive 
        companies, in addition to discussing the issues 
        outlined above,\517\ these reports should include 
        measurement of the companies' progress against the 
        viability plans on the basis of which the government 
        invested taxpayers' money. The discussion should also 
        disclose any divergence of performance from the 
        assumptions on which the viability plans were based.
---------------------------------------------------------------------------
    \515\ Ron Bloom Prepared COP Testimony, supra note 78 at 33.
    \516\ Exhibits required in such filings would include material 
contracts; the Panel assumes ``material'' would involve any 
transactions with the government.
    \517\ See discussion of this issue supra section G.3.
---------------------------------------------------------------------------
           The Panel recommends that Treasury consider 
        holding its interests in the automotive companies 
        through a trust managed by an independent trustee.\518\ 
        This would have several advantages. First, it would 
        send a clear message to the markets that the government 
        was not interfering (and could not interfere) in 
        private commerce. Second, decisions as to voting, 
        holding, or the timing and volume of sales of 
        government holdings could be made by an independent 
        entity, in the best interests of the taxpayer, free of 
        interference by any branch of government and not swayed 
        by political expediency. Third, without a trust, the 
        taxpayers' interest in the companies will be silenced, 
        leaving disproportionate power in the hands of the 
        minority shareholders.\519\ Fourth, creating a trust 
        with timeframes could provide taxpayers with confidence 
        that they will not still retain large ownership stakes 
        in these companies five, ten or twenty years down the 
        road.
---------------------------------------------------------------------------
    \518\ See discussion of this issue supra text accompanying note 
212.
    \519\ This point is particularly applicable to GM because of the 
large proportion of shares held by taxpayers.
---------------------------------------------------------------------------
           As discussed above, there are serious policy 
        implications in the government ownership of commercial 
        entities. President Obama has stated that he doesn't 
        think taxpayer subsidies to the automakers should 
        continue indefinitely.\520\ The Panel urges that 
        divestment take place as soon as commercially 
        reasonable. Divestment need not mean outright sale, 
        however. The determination of what is ``commercially 
        reasonable'' might be improved if the equity in the 
        automotive companies were placed in a trust managed by 
        an independent trustee, as discussed above, thus taking 
        political considerations out of the equation, and 
        permitting independent analysis of the timing of sale.
---------------------------------------------------------------------------
    \520\ White House Office of Press Secretary, News Conference by the 
President (Apr. 29, 2009) (online at www.whitehouse.gov/ 
the_press_office/ News-Conference-by-the- President-4/29/2009/).
---------------------------------------------------------------------------

                   3. COMPLIANCE WITH BANKRUPTCY CODE

    Turning to Treasury's conduct in the bankruptcy 
proceedings, it appears that accusations of ``illegal'' 
behavior \521\ are overblown and that allegations that 
statutory bankruptcy law priorities were overturned \522\ are 
not accurate. The courts found that Section 363 sales occurred 
in accordance with the Code, and that no statutory priorities 
were overturned. Dissenting creditors may have been 
disappointed with what they received in the Chrysler 
bankruptcy, and they may feel that unsecured creditors, such as 
the UAW Trust, received more generous terms, but nothing in 
bankruptcy law takes away the leverage of those with whom the 
bankrupt company must do business going forward. The UAW agreed 
to substantial changes in its contracts that would improve the 
profitability of the automotive companies in return for the 
companies' continued support of the health benefit plans of 
their retirees and an ownership stake in New Chrysler. The 
secured creditors made no similar concessions. Thus, New 
Chrysler, a totally new entity that purchased the assets of Old 
Chrysler, was able to bargain directly with the UAW in the same 
way that any company can bargain, without any restraints 
imposed by bankruptcy laws. To mandate a different result would 
risk undermining the certainty of the bankruptcy and contract 
laws on which commerce in the United States relies.\523\
---------------------------------------------------------------------------
    \521\ Thomas Lauria Statements, supra note 506.
    \522\ Thomas Lauria Statements, supra note 506.
    \523\ The fact that a different result would likely undermine 
commercial markets is ironic in light of the criticisms that some have 
leveled that the failure to follow these well-established rules would 
upset commercial markets.
---------------------------------------------------------------------------
    To the extent that Congress objects to the use of Section 
363 in Chapter 11 reorganizations or the results that such use 
can produce, legislative fixes, including that suggested by 
Professor Adler, are available.\524\
---------------------------------------------------------------------------
    \524\ What's Good for General Motors, supra note 258.
---------------------------------------------------------------------------

                        4. TREASURY'S AUTHORITY

    With respect to the question of authority, the authority of 
Treasury to use TARP for support of the automotive companies 
seems unclear. It is clear that at one point, neither President 
Bush nor Secretary Paulson believed TARP was available for this 
purpose and there is a strong suggestion in the Congressional 
Record that many in Congress also believed that EESA was a 
statute aimed specifically at the financial sector. Given the 
lack of serious opposition from Congress on the current 
approach or any party with standing to challenge it, however, 
it is unlikely that there will be any definitive finding on the 
constitutionality of this use. These issues are thus unlikely 
to affect future administration of the program. The Panel 
recommends that Treasury provide a legal opinion justifying the 
use of TARP funds for the automotive bailouts.

              ANNEX A: ``WHAT'S GOOD FOR GENERAL MOTORS''
                     What's Good for General Motors


                      Barry E. Adler *

---------------------------------------------------------------------------
    \*\ Petrie Professor of Law and Business, New York University. This 
article is based on testimony given before the Congressional Oversight 
Panel's July 27, 2009 hearing on assistance to the automobile industry 
under the Troubled Asset Relief Program. I thank Steve Choi, Marcel 
Kahan, Troy McKenzie, and Mark Roe for conversation that was valuable 
in the preparation of that testimony and this article. The article's 
title comes from a famous, or infamous, quote by Charles Erwin Wilson, 
General Motors president and later Secretary of Defense, who testified 
in 1953 before the Senate Armed Services Committee that ``for years I 
thought that what was good for the country was good for General Motors 
and vice versa.''
---------------------------------------------------------------------------
    The recent bankruptcy cases of Chrysler and General Motors 
were successful in that they quickly removed assets from the 
burden of unmanageable debt, but the price of this achievement 
was unnecessarily high because the cases established a 
precedent for the disregard of creditor rights. As a result, 
the automaker bankruptcies may usher in a period where the 
specter of insolvency will increase the cost of capital in an 
economy where affordable credit is sorely needed.
    After brief analysis of the Chrysler and GM cases, below, 
and a brief description of potentially negative consequences, I 
describe how bankruptcy courts might disadvantageously extend 
these precedents and I offer a proposal for an amendment to the 
Bankruptcy Code to curb potential excesses. The proposal is 
designed to ensure that future bankruptcy courts honor the 
entitlement for which creditors contract and without which one 
cannot expect them to lend on favorable terms.

                       I. THE CHRYSLER BANKRUPTCY

    The rapid disposition of Chrysler in Chapter 11 was 
formally structured as a sale under 363 of the Bankruptcy 
Code.\1\ While that provision does, under some conditions, 
permit the sale of a debtor's assets, free and clear of any 
interest in them, the sale in Chrysler was irregular and 
inconsistent with the principles that undergird the Code.
---------------------------------------------------------------------------
    \1\ The Bankruptcy Code appears in Title 11 of the United States 
Code.
---------------------------------------------------------------------------
    The most notable irregularity of the Chrysler sale was that 
the assets were not sold free and clear, but rather the 
purchaser, ``New Chrysler''--an affiliation of Fiat, the U.S. 
and Canadian governments, and the United Auto Workers 
(``UAW'')--took the assets subject to specified liabilities and 
interests. More specifically, New Chrysler assumed about $4.5 
billion of Chrysler's obligations to, and distributed 55% of 
its equity to, the UAW's voluntary beneficiary employee 
association (``VEBA'') in satisfaction, perhaps full 
satisfaction, of old Chrysler's approximately $10 billion 
unsecured obligation to the VEBA (which is a retired workers 
benefit fund).\2\ So long as New Chrysler remains solvent, this 
means that at least half of its obligation to the VEBA will be 
paid. This, while Chrysler's secured creditors are to receive 
only $2 billion in satisfaction of about $7 billion in claims, 
about 30 cents on the dollar. That is, money that might have 
been available to repay these secured creditors was withheld by 
the purchaser to satisfy unsecured obligations owed the UAW. 
Thus, the sale of Chrysler's assets was not merely a sale, but 
also a distribution--one might call it a diversion--of the sale 
proceeds seemingly inconsistent with contractual priority among 
the creditors.
---------------------------------------------------------------------------
    \2\ Although there is a distinction, legal as well as practical, 
between the UAW and its VEBA fund for retired union workers, for 
simplicity of exposition, such distinction is generally ignored in this 
article, which sometimes treats as interchangeable payments to the UAW 
on account of its claims in bankruptcy and transfers to the VEBA.
---------------------------------------------------------------------------
    To be sure, the situation is more complicated than may 
first appear. The purchaser in this case was funded primarily 
by the U.S. government, which had previously advanced $4 
billion in funds from the Troubled Asset Relief Program 
(``TARP'') and, along with the Canadian government, agreed to 
loan the new enterprise billions more. The government had 
political reasons to assure continuation of auto production and 
toward that end may have been willing to pay more for the 
assets than they were worth. For purposes of bankruptcy law, 
then, the question is not whether the government paid the UAW 
(or holders of other assumed obligations) too much, but whether 
the process deprived the secured creditors of a return to which 
the law entitles them. Some of these creditors, albeit a 
minority, objected to the sale because they believed they 
should have received more and would have but for the 
orchestration of the sale by the U.S. Treasury and automotive 
task force.
    Proponents of the Chrysler sale argue that the sale was 
proper despite the protests. They contend that the secured 
creditors who objected to the sale were a minority of such 
creditors and as a minority lacked standing to complain, a 
point to which I return below. More fundamentally to the 
bankruptcy analysis, the proponents of the transaction insist 
that the company's assets would have been worth little in 
liquidation and so the secured creditors should have been 
satisfied with the return the bankruptcy sale provided them. 
But there was no market test of this proposition because Judge 
Gonzalez, who presided over the Chrysler case, permitted only 
days for a competitive bid to challenge the proposed sale and 
restricted bids to those that were willing to have the bidder 
assume specified liabilities, including Chrysler's obligation 
to the VEBA.\3\ (There was an exception to this restriction for 
specially approved bids, but by the court's order, the UAW had 
to be consulted before a noncompliant bid would be approved.)
---------------------------------------------------------------------------
    \3\ The bankruptcy court opinion in Chrysler appears at 405 B.R. 84 
(Bankr. S.D.N.Y. 2009). This opinion has now been affirmed, 2009 WL 
2382766 (2'd Cir.).
---------------------------------------------------------------------------
    Given the constraint on bids, it is conceivable that the 
liquidation value of Chrysler's assets exceeded the company's 
going-concern value but that no liquidation bidder came forward 
because the assumed liabilities--combined with the government's 
determination to have the company stay in business--made a 
challenge to the favored sale unprofitable, particularly in the 
short time frame afforded. It is also possible that, but for 
the restrictions, there might have been a higher bid for the 
company as a going concern, perhaps in anticipation of striking 
a better deal with workers.\4\ Thus, the approved sale may not 
have fetched the best price for the Chrysler assets. That is, 
the diversion of sales proceeds to the assumed liabilities may 
have been greater than the government's subsidy of the 
transaction, if any, in which case the secured creditors would 
have suffered a loss of priority for their claims. There is 
nothing in the Bankruptcy Code that allows a sale for less than 
fair value simply because the circumstances benefit a favored 
group of creditors.
---------------------------------------------------------------------------
    \4\ Note that these restrictions would have prevented credit 
bidding even if the secured bondholders had collectively desired to 
make such a bid because the required assumption of liabilities 
effectively eliminated the secured lender priority that is necessary 
for a credit bid.
---------------------------------------------------------------------------
    Against this criticism, the sale is defended on the ground 
that quick action was required to preserve the company's going 
concern value, but it is not certain that this was so or that 
the company's going concern value exceeded its liquidation 
value. Moreover, restrictions placed on the bidding process do 
not appear to be sensible even given a time constraint. The 
sale served the government's desire to assure continuation of 
the company and to protect the union's interest, but it is not 
apparent that the sale was designed to maximize the return to 
the bankruptcy estate and there seems no legitimate reason to 
have restricted bids based on the bidders' willingness to 
assume favored liabilities. The approved sale, therefore, ran 
afoul of the Supreme Court's admonition, in an analogous case, 
North LaSalle Street, that a court should not settle a 
valuation dispute among parties with a determination ``untested 
by competitive choice.'' \5\
---------------------------------------------------------------------------
    \5\ Bank of America v. 203 North LaSalle Street Partnership, 526 US 
434, 458 (1999). In North LaSalle Street, the prebankruptcy 
shareholders of an insolvent debtor in bankruptcy offered to pay for a 
continuing equity interest in the reorganized entity. When a creditor 
protested, the shareholders asked the bankruptcy court to affirm the 
exchange over the objection. The Supreme Court ruled that even if the 
bankruptcy judge believed the price offered to be a fair, the court 
lacked the authority to approve the transaction absent a market test of 
the price. The Bankruptcy Code provisions in the case were not entirely 
the same as those at issue in the Chrysler, or General Motors, case, 
but the principle applies equally well.
---------------------------------------------------------------------------
    Viewed another way, the approved transaction was not a sale 
at all, but a disguised reorganization plan, complete with 
distribution to preferred creditors. In this light, the secured 
creditors who objected to the sale and distribution did not 
necessarily have a complaint with the amount paid (by the 
government) for the assets. Indeed the objecting creditors may 
well concede that the amount paid to the UAW was quite high; 
they objected to the distribution, which favored others at 
their expense. That is, the, objection was to the fact that the 
approved transaction--a de facto reorganization plan--
illegitimately distributed assets inconsistently with the 
priorities established under the Bankruptcy Code.\6\
---------------------------------------------------------------------------
    \6\ As well summarized by Mark J. Roe and David Skeel, Assessing 
the Chrysler Bankruptcy (working paper, July 27, 2009), many bankruptcy 
courts have determined that a de facto reorganization plan is improper. 
See also, Scott D. Cousins, Chapter 11 Asset Sales, 27 Del. J. Corp. L. 
835 (2002). For an example of a recent decision, see In re Iridium 
Operating LLC, 478 F.3d 452 (2d Cir. 2007).
---------------------------------------------------------------------------
    Although the emphasis in this article is on the 
distribution of value creditors rather on the propriety of a 
sale in the first instance, the case law does address the 
latter. Under the law, the proponents of an all or almost all 
asset sale must demonstrate a business reason to hold a sale 
rather than reorganize the debtor in the traditional way, with 
assets in place. This was true, for example, in the Chrysler 
case itself, where the bankruptcy court (as well as the court 
of appeals) was satisfied that there was a valid business 
reason for the Sec. 363 sale. In this article, which critiques 
the Chrysler and GM bankruptcy cases, I don't question whether 
the business justification requirement was satisfied in the 
cases I examine simply because I think that the requirement is 
ill-advised. In my view, an unconditional auction designed to 
achieve the highest return for the bankruptcy estate should 
always be permitted; I would not interpose the vague 
obstruction of business justification. My concern with the 
Chrysler case, and the GM case, described below, is that there 
was no such auction.
    Analysis turns next, then, to whether the objecting secured 
creditors could have blocked the transaction had the 
distributions in the case been subject to the rules prescribed 
by Chapter 11 rather than as part of a Sec. 363 sale.\7\ One 
who would defend the approved transaction would say ``no,'' 
relying again on the contention that the liquidation value of 
Chrysler was so small that the secured creditors received at 
least their due from the sale, an amount that the judge deemed 
satisfactory. What this argument overlooks, however, is that 
Chapter 11 contains rules designed precisely to protect 
creditors from a judicial determination with which the 
creditors disagree. When Judge Gonzalez approved the Chrysler 
sale, he stripped these protections from the secured creditors.
---------------------------------------------------------------------------
    \7\ For a similar analysis, which reaches many, though not all, of 
the same conclusions, see Roe & Skeel, id.
---------------------------------------------------------------------------
    More specifically, the Chapter 11 rules that shield 
creditors from judicial error are called ``fair and equitable'' 
and ``no unfair discrimination'' provisions, which appear in 
Sec. 1129(b) of the Code and govern the confirmation of 
reorganization plans. The requirement that a reorganization 
plan be fair and equitable means that if a class of claims 
objects to the distribution under the plan, the plan may not be 
confirmed if the objecting class is not paid in full while a 
lower-priority class receives anything under the plan. The 
requirement that a plan not discriminate unfairly means that if 
a class of claims objects to the distribution under the plan, 
the plan may not be confirmed if a class of equal priority 
receives a higher rateable return under the plan. When 
applicable, these provisions prevent confirmation even if a 
judge is convinced that the claims in the dissenting class are 
receiving at least what they would receive in liquidation. 
Whether the dissenting class believes that the judge is 
mistaken as to the true liquidation value of the firm or merely 
demands its share of what it believes to be a firm's going 
concern surplus over liquidation value, the class can decide 
for itself whether to accept the plan.
    In Chrysler, the dissenting secured creditors attempted to 
invoke the protection against unfair discrimination. Whatever 
the judge might deem to be the liquidation value of their 
collateral, Sec. 506 of the Bankruptcy Code bifurcates an 
undersecured claim--a claim that exceeds the value of its 
collateral--into a secured portion and an unsecured portion. 
The secured portion is equal to the judicially determined value 
of the collateral; the unsecured portion is equal to the 
deficiency claim. The secured creditor objectors to the 
Chrysler sale based a legal challenge on the treatment of their 
deficiency claims. A deficiency claim, like the UAW claims, is 
a general unsecured obligation and these claims have the same 
priority. Yet while the sale and distribution approved in 
Chrysler paid the deficiency claims nothing, it paid the UAW 
claims with billions of dollars. This, the objectors argued, is 
an unfair discrimination that would have rendered unconfirmable 
a formal reorganization plan and should have rendered 
illegitimate what they saw as a de facto reorganization 
embodied in the sale and distribution.
    There is merit in the dissenters' argument. To be sure, 
proponents of the pro-UAW distribution can argue that the right 
to veto a plan on the basis of unfair discrimination is a 
class-based right--not available to individual dissenters 
within an accepting class of claims--and that a large majority 
of the secured creditors accepted the distribution.\8\ But the 
accepting secured creditors were largely recipients of 
government TARP funds and thus arguably beholden to the 
government, which engineered the distribution to the UAW. 
Therefore, under Sec. 1122 of the Bankruptcy Code and relevant 
precedent, in a formal reorganization, the judge might have 
been obliged to classify the TARP lenders separately from the 
non-TARP creditors, thereby giving the dissenters control over 
their own class and, perhaps, the right to veto the UAW 
distribution as unfairly discriminatory. Against this unfair 
discrimination contention, plan proponents can argue further 
that the payment to the VEBA not as a distribution on account 
of an unsecured claim at all, but rather as prospective expense 
that assured the company a needed supply of UAW workers, with 
the union thus portrayed as a critical vendor of labor. 
However, even if one assumed that the automaker's value was 
greater as a going concern than in liquidation, one wonders 
whether so large a transfer to its labor force would have been 
necessary in this depressed economy. In any case, because the 
court characterized the transfer of assets from Chrysler to New 
Chrysler as a sale rather than as reorganization, it didn't 
need to reach the classification issue or the critical vendor 
issue. Consequently, this characterization improperly denied 
the dissenters the chance at the full protections of the 
Bankruptcy Code.
---------------------------------------------------------------------------
    \8\ Section 1126 of the Bankruptcy Code provides that a class of 
claims accepts a plan if a majority of claim holders, holding at least 
two-thirds of claims by amount, accepts the plan.
---------------------------------------------------------------------------
    The foregoing assumes that the dissenting secured creditors 
had standing to object to the proposed, and ultimately 
approved, sale of Chrysler's assets. As noted above, proponents 
of the sale argued that the dissenters, as a minority of the 
secured creditors, lacked such standing. The proponents pointed 
to a provision of the secured creditors' loan agreement that 
arguably granted an agent of the creditors the right to sell 
their collateral on behalf of the group. According to this 
argument, because the creditors' agent was obliged to represent 
the secured creditor majority that favored the sale, the agent 
properly consented to the transaction on behalf of all secured 
creditors. Judge Gonzalez agreed and approved the sale, despite 
the lack of a true auction, in part because, in his opinion, 
given the agent's consent, there was no objection. The judge 
rejected the dissenters' claim, among others, that the 
influence of the TARP lenders among the secured creditors 
tainted the agent's authority.
    Whether Judge Gonzalez was correct to rule that the secured 
creditor dissenters should be deemed to have consented to the 
sale of their collateral is a matter of state contract law 
rather than bankruptcy law. But even if the judge correctly 
interpreted state law, Chrysler remains an unsettling 
bankruptcy precedent because approval of a sale of assets under 
Sec. 363 is not limited to a case where the affected parties 
consent. Some courts permit a sale free and clear of liens 
despite the objection of a secured creditor who will not be 
fully repaid by the proceeds.\9\ Moreover, a Sec. 363 sale of a 
debtor's assets may occur over the objection of an unsecured 
class of claims, one that disputes the efficacy of a sale 
because the creditors believe they would, despite their lack of 
priority, receive a better distribution if the sale is 
disallowed. Thus, given the holding in Chrysler, if a sale of a 
firm's assets is to occur without a market test, there remains 
the opportunity for courts to approve a de facto reorganization 
plan that fails to protect creditor entitlements even over the 
objection of the disadvantaged creditors.
---------------------------------------------------------------------------
    \9\ Section 363(f) of the Bankruptcy Code, which provides the 
conditions for a sale of assets free and clear of interests in those 
assets, is poorly drafted and internally inconsistent. On one reading 
of the provision, property cannot be sold free of liens unless the sale 
proceeds are sufficient fully to satisfy those liens. On another 
reading, there is no such requirement. See In re PW, LLC, 391 B.R. 25 
(9th Cir. BAP 2008), which describes the varying judicial interpretive 
approaches.
---------------------------------------------------------------------------
    There are at least two negative consequences from the 
disregard of creditor rights. First, at the time of the 
deviation from contractual entitlement, there is an inequitable 
distribution of assets. Take the Chrysler case itself, where 
the approved transaction well-treated the retirement funds of 
the UAW. If such treatment deprived the secured creditors of 
their due, one might well wonder why the UAW funds should be 
favored over other retirement funds, those that invested in 
Chrysler secured debt. Second, and at least as importantly, 
when the bankruptcy process deprives a creditor of its promised 
return, the prospect of a debtor's failure looms larger in the 
eyes of future lenders to future firms. As a result, given the 
holding in Chrysler, and the essentially identical holding in 
the General Motors case, discussed next, one might expect 
future firms to face a higher cost of capita1,\10\ thus 
dampening economic development at a time when the country can 
least well afford impediments to growth.
---------------------------------------------------------------------------
    \10\ Although I am unaware of empirical support for the claim that 
the Chrysler and General Motors cases will increase the cost of capital 
to corporate debtors, the cases are still new and it is not clear 
whether they will be extended, a topic to which I return in Part IV, 
below.
---------------------------------------------------------------------------

                           II. GENERAL MOTORS

    Chrysler was a blueprint for the General Motors bankruptcy, 
which, like that of Chrysler, included a sale of the debtor's 
valuable assets to an entity that assumed unsecured obligations 
owed its workers or former workers. In the case of GM, the 
purchaser, ``New GM,'' owned largely by the United States 
Treasury, agreed to satisfy General Motors' approximately $20 
billion pre-bankruptcy obligation to the VEBA with a new $2.5 
billion note as well as $6.5 billion of the new entity's 
preferred stock, 17.5% of its common stock, and a warrant to 
purchase up to an additional 2.5% of the equity; depending on 
the success of New GM, the VEBA claim could be paid in full. As 
in the Chrysler case, the sale procedures required that, absent 
special exemption, any competing bidder was to assume 
liabilities to the UAW as a condition of the purchase. 
Therefore, once again, there was no true market test for the 
sale.
    The primary difference between the cases, other than much 
larger size of General Motors, is that in GM there were no 
objections to the sale by holders of senior-secured claims, 
which were held by Unites States or Canadian governments or 
were to be assumed by the purchaser. Rather, in the case of 
General Motors, the United States and, to a lesser extent, 
Canadian governments were both the sponsors of the asset 
purchase that favored the UAW and the senior lenders from whose 
pockets any consequent diversion of value likely came. In 
particular, the United States Treasury, under TARP authority, 
lent GM about $50 billion in a combination of pre- and post-
petition secured transactions; the governments assigned these 
obligations to New GM, which then credit bid for the assets. 
Some unsecured creditors objected to the transaction. But while 
the unsecured claims are substantial--including about $27 
billion in unsecured bonds alone--the GM bankruptcy estate will 
receive between 10% and 12% of the shares of New GM plus 
warrants for additional shares. The value of these shares and 
warrants, plus that of other assets not tendered to New GM, may 
well exceed any plausible bid--net of the secured claims--that 
GM could have received from anyone else for the GM assets.
    Still, just as in the case of Chrysler, the approval of a 
restricted bid process establishes a dangerous precedent, one 
that went unnoticed, or at least unnoted, by the court. In his 
opinion approving the GM sale, Judge Gerber addresses the 
objections of some unsecured creditors and makes the following 
observation:

          A 363 sale may . . . be objectionable as a [disguised 
        reorganization] plan if the sale itself seeks to 
        allocate or dictate the distribution of sale proceeds 
        among different classes of creditors. But none of those 
        factors is present here. The [sale and purchase 
        agreement] does not dictate the terms of a plan of 
        reorganization, as it does not attempt to dictate or 
        restructure the rights of the creditors of this estate. 
        It merely brings in value. Creditors will thereafter 
        share in that value pursuant to a chapter 11 plan 
        subject to confirmation by the Court.\11\
---------------------------------------------------------------------------
    \11\ In re General Motors, Corp. 407 B.R. 463 (Bankr. S.D.N.Y. 
2009)

    In this passage, however, Judge Gerber ignores the sales 
procedure, which, like that in Chrysler, strictly limited the 
time for competing bids and restricted bidders to those willing 
to assume significant UAW liabilities. The process thus 
precluded a potentially higher bid by a prospective purchaser 
who was unwilling to make the same concessions to the UAW that 
the government-sponsored purchaser was willing to endure. Thus, 
there remained the theoretical possibility that the process 
impermissibly transferred asset value from the company's other 
creditors to the UAW. This is merely a theoretical possibility. 
As noted above, it may well be that no creditor other than the 
government secured lenders suffered a loss of priority from the 
transaction. But the case stands as precedent that might cause 
later lenders to doubt whether future debtors will be forced to 
live up to their obligations. And as also noted above, wary 
lenders are inhospitable to economic development.

                        III. POTENTIAL EXTENSION

    It is tempting to dismiss the Chrysler and General Motors 
bankruptcy cases as sui generis. The government insinuated 
itself into the process with cash in hand, and it may be that 
the cash was sufficient to pay everyone at least its due. The 
dissenters may have been greedy, not victims. And if the judges 
saw things this way, they may have been willing to approve a 
process that would not have survived their scrutiny under 
ordinary circumstances. But even if this is all true, the cases 
establish a precedent that could undermine the bankruptcy 
process in the future, even if the government recedes from the 
scene.
    Consider the following illustration, where the government 
as lender or purchaser is nowhere to be found. Imagine a simple 
firm, Debtor, with only two creditors, each unsecured: 
Supplier, owed $60, and Bank, owed $20. After Debtor runs out 
of working funds and files a bankruptcy petition, Bank offers 
$40 for all of Debtor's assets (which Bank intends to resell). 
Bank contends that this is the best offer Debtor is going to 
get and that if Debtor does not accept the offer immediately it 
will be forced to liquidate piecemeal for $10. The court agrees 
and approves the sale over Supplier's objection even though 
there is no auction or other market test for the value of the 
assets. After the sale, Debtor moves through the ordinary 
bankruptcy process and distributes the $40 proceeds ratably 
between Supplier and Bank, with $30 to Supplier and $10 to 
Bank.
    As long as the court is correct to accept Bank's valuation, 
the sale and the distribution are appropriate. But what if the 
court is wrong? Assume that Debtor's assets are worth $60. In 
this case, Supplier should receive $45 and Bank $15. But the 
sale and distribution approved by the court has different 
consequences. Instead, Bank pays $40 for assets worth $60 
(i.e., gains $20) then receives a $10 distribution from 
Debtor's bankruptcy estate, for a total effective distribution 
of $30, half the true value of Debtor's assets, twice the 
amount to which it is entitled. All this while, as a formal 
matter, it is correct to say, as the courts did in Chrysler and 
GM, that the sale proceeds were distributed fairly among the 
creditors. The problem, of course, is not with the distribution 
of sale proceeds received; the problem is with the diversion of 
value to the purchaser, which paid the estate too little and 
thus, in its role as a creditor, received too much. This is 
Supplier's complaint in this illustration and the dissenting 
creditors' complaint in the Chrysler and General Motors case.
    In this illustration, an auction would solve the problem--
because a bidder would offer $60 foiling Bank's scheme--as 
would granting Supplier a veto over the sale to reflect its 
dominant position in what would be the unsecured creditor (and 
only) class were the proposed distribution part of a 
reorganization plan. With neither protection in place, Supplier 
is left to suffer the consequences of judicial error, which can 
occur no matter how skilled or well meaning the judge; skilled 
and well meaning are not synonymous with omniscient.
    As Mark Roe and David Skeel observe in their own criticism 
of the Chrysler bankruptcy, the ability of a court to approve 
an untested sale at the behest of some creditors over the 
objection of others without the safeguards prescribed by the 
Bankruptcy Code returns us to a past centuries' practice 
referred to as the equity receivership, where it was widely 
believed that powerful, favored creditors routinely victimized 
the weak and unconnected.\12\ The Chrysler and General Motors 
cases are a step back and in the wrong direction.
---------------------------------------------------------------------------
    \12\ See Roe & Skeel, cited in note 7; see also David A. Skeel, 
Jr., Debt's Dominion: A History of Bankruptcy Law in America 48-70 
(2001) (describing the equity receivership and its faults).
---------------------------------------------------------------------------

                          IV. PROPOSED REFORM

    The Chrysler and General Motors bankruptcy cases are 
objectionable because they include a sale of virtually all of 
the debtors assets under Sec. 363 of the Bankruptcy Code 
without a market test for the value of those assets. In 
Chrysler and in GM, had the price paid for the assets been 
undeniably fair, dissenting creditors would have had no basis 
for complaint so long as they received a ratable share of the 
sale proceeds consistent with their levels of priority. In 
neither case, however, was the price undeniably fair. It is 
problematic that in each case the process favored some 
creditors over others through the assumption of some claims and 
the consequent relegation of others to receive perhaps 
inadequate sales proceeds.
    A response to this problem could be a ban on the use of 
Sec. 363 to sell all or substantially all of the assets of a 
debtor in bankruptcy. Without a sale as a tool for de facto 
reorganization, a court would be forced to follow the 
Bankruptcy Code's procedural provisions in an actual 
reorganization of a debtor and could not easily deprive 
creditors of the Code's protections. This response would be 
excessive, however. As long as a sale of a firm's assets is 
subject to a true market test, a sale may be the best and most 
efficient way to dispose of an insolvent debtor. Indeed, 
bankruptcy courts have increasingly, and usefully, conducted 
all-asset sales.\13\ The key is to ensure a true market test.
---------------------------------------------------------------------------
    \13\ This trend is noted in the Second Circuit's affirmation of 
Chrysler, 2009 WL 2382766, which sites, e.g., Douglas G. Baird and 
Robert K. Rasmussen, The End of Bankruptcy, 55 Stan. L. Rev. 751 
(2002).
---------------------------------------------------------------------------
    State courts have significant experience in deciding 
whether a proposed sale of a firm is likely to achieve the best 
price for investors. Under a line of cases that comprise what 
is referred to as the Revlon doctrine, the Delaware courts have 
imposed a standard that directors must meet when a corporation 
is up for sale. While this standard does not require any 
particular process in every case, the courts have suggested 
that there is a general obligation for the directors of the 
firm to hold an auction or conduct some other form of market 
test if there is a doubt about the true value of the firm.\14\ 
Congress would do well to establish as a minimum procedural 
safeguard state law requirements for Sec. 363 sales of all or 
substantially all of a debtor's assets, at least where the 
debtor is large enough to justify the administrative expense of 
such a process.
---------------------------------------------------------------------------
    \14\ The recent Delaware Supreme Court case of Lyondell Chemical 
Co. v. Ryan, 970 A.2d 235 (Del. 2009) summarizes the current state of 
the Revlon doctrine (though the holding of Lyondell addresses only a 
narrow issue of director liability).
---------------------------------------------------------------------------
    In addition, as described above, the requirement that a 
bidder assume some of a debtor's liabilities dictates the 
distribution of sale proceeds, and cannot enhance the amount of 
those proceeds. Therefore, a condition of liability assumption 
is not a proper part of any sale, and should not be permitted, 
regardless of applicable state law.
    To accomplish these ends, Congress could add to the 
Bankruptcy Code a new subsection of Sec. 363, one that would 
provide:

          The trustee may sell property under subsection (b) or 
        (c) of this section only if--
          (1)(A) where the debtor is not a small business 
        debtor, the sale of all or substantially all of the 
        debtor's assets complies with the requirements that 
        would be imposed on the debtor by applicable 
        nonbankruptcy law if the debtor were a corporation that 
        was not a debtor and if such corporation's equity 
        interest were publicly traded and subject to a bid for 
        control; and (B) the process for the sale of such 
        property imposes no condition, whether or not subject 
        to exception, that an offeror agree to assume or pay 
        some but not all claims; or
          (2) no holder of a claim, except a claim that will 
        receive on account of such claim cash equal to the 
        allowed amount of such claim upon distribution of the 
        property of the estate or as of the effective date of 
        the debtor's confirmed plan, objects to the sale.

    This provision, if adopted, would not apply to a small 
business debtor,\15\ which cannot be expected to absorb the 
expense of auctioning its assets, and would have no effect on a 
debtor that, while too large to qualify as a small business 
debtor under the Bankruptcy Code, is still small enough that 
applicable state law would not impose a market test. For large 
debtors such as Chrysler or GM, however, whether or not 
publicly traded,\16\ the provision would grant any creditor 
with a claim that will not be paid in full a right to insist on 
the sort of process that state law would provide shareholders 
of a solvent firm. This would include, where appropriate, the 
right to insist on an openly contested auction with ample time 
for potential bidders to assess the assets on which they may 
bid. Reliance on applicable state law--a common feature 
elsewhere in the Bankruptcy Code--would provide a debtor with 
the flexibility to opt out of an auction or other market test 
if exigent and unusual circumstances would allow a firm to opt 
out outside of bankruptcy. Yet, the provision would 
advantageously prevent a debtor from concluding a sale pursuant 
to a process that state law would disallow even if a bankruptcy 
judge believed, perhaps mistakenly, that the sale would be in 
the interest of the bankruptcy estate. That is, for a large 
firm, the bankruptcy sale process could not be more permissive 
than that required by applicable state law. And under no 
circumstance could the sale of a debtor's assets be conditioned 
on a bidder's willingness to assume some but not all of the 
debtor's liabilities, as this practice is illegitimate, and was 
the crux of the problem in the Chrysler and GM cases.
---------------------------------------------------------------------------
    \15\ This term is defined by Sec. 101(51D) of the Bankruptcy Code.
    \16\ The proposed provision is designed to apply and to protect 
creditors in large, privately held firms just as it would apply to a 
publicly traded firm. The reference in the proposed provision to a 
``publicly traded'' controlling interest is designed as a hypothetical 
test that would trigger the applicability of the provision; such tests 
are common in the Bankruptcy Code. A related provision might be 
desirable to define ``publicly traded'' for these purposes, though this 
term might be plain enough for courts to interpret in context.

     ANNEX B: ``NO BIG DEAL: THE GM AND CHRYSLER CASES IN CONTEXT''
            NO BIG DEAL: THE GM AND CHYSLER CASES IN CONTEXT


                         Stephen J. Lubben \1\

---------------------------------------------------------------------------
    \1\ Daniel J. Moore Professor of Law, Seton Hall University School 
of Law. As always, Jennifer Ruth Hoyden made this article much better 
than it would have been.
---------------------------------------------------------------------------

                              Introduction

    In the past summer, two historically important North 
American corporations--Chrysler and General Motors--entered 
reorganization proceedings to address their longstanding 
financial and operational difficulties. Both debtors were 
provided with substantial governmental financing from both 
Canada and the U.S.,\2\ and both cases involved a quick sale of 
the ``good'' parts of the debtors'' operating assets, while the 
remainder was left behind for liquidation.\3\
---------------------------------------------------------------------------
    \2\ In the case of Canada, financial assistance came from both the 
federal and provincial (Ontario) governments.
    \3\ E.g., In re General Motors Corp 2009 Bankr. LEXIS 1687 (Bankr. 
S.D.N.Y. July 5, 2009).
---------------------------------------------------------------------------
    Almost every leading corporate bankruptcy academic has 
spoken against the automotive bankruptcy cases. And the 
Chrysler and GM chapter 11 cases have been vilified in every 
major finance-focused media outlet--by everyone from Ralph 
Nader \4\ to Richard Epstein.\5\ Why?
---------------------------------------------------------------------------
    \4\  http://online.wsj.comiarticle/SB124355327992064463.html.
    \5\  http://www.forbes.com/2009/05/11/chrysler-bankruptcy-mortgage-
opinions-colunmists-epstein.html.
---------------------------------------------------------------------------
    Many of the arguments against these cases, particularly 
those made in the press and by some of the participants in the 
cases, are hopelessly vague and amount, at heart, to a 
statement that the government should prefer investors over 
unions.\6\ These are essentially political questions that do 
not support their related arguments, including that these cases 
somehow violated the ``rule of law.'' The rule of law is not 
violated by a policy disagreement.
---------------------------------------------------------------------------
    \6\  http:// www.bloomberg.com/apps/
news?pid=20601039&refer=columnist_woolner&sid=aN_5hvV_xqHM.
---------------------------------------------------------------------------
    The academic critics of these chapter 11 cases make 
arguments that appear more credible. But they are not any more 
convincing upon close examination. For example, in his 
testimony before Congress,\7\ Professor Douglas Baird argued 
that the bidding procedures approved by the courts in 
connection with the sale of both companies amounted to an 
impermissible, stealth reorganization plan because bidders were 
required to treat the unions in the same manner as the initial, 
government-sponsored bidder.
---------------------------------------------------------------------------
    \7\ Because of the newness of this issue, few academics have 
published formal articles on these issues. Instead, they have engaged 
these issues in the form of testimony and editorial writings, which I 
respond to herein.
---------------------------------------------------------------------------
    This might be true if there had been alternative bidders, 
but in the absence of any evidence of such a bidder, the 
bidding procedures are irrelevant. The bidding procedures could 
require a competitive bidder to stand on its head, but if there 
is no such bidder the contents of the procedures are purely 
academic. In a period when the credit markets have been 
essentially ``closed,'' \8\ those who take for granted the 
existence of unknown or theoretical bidders have some 
obligation to explain how such a bidder would have bought GM, a 
company with $27 billion of secured debt.\9\
---------------------------------------------------------------------------
    \8\ http:// www.ft.com/cms/s/0/8174765a-6058-11de-a09b-
00144feabdc0.html.
    \9\ See In re General Motors Corp 2009 Bankr. LEXIS 1687, *36-37 
(Bankr. S.D.N.Y. July 5, 2009)(``There are no merger partners, 
acquirers, or investors willing and able to acquire GM's business. 
Other than the U.S. Treasury and EDC, there are no lenders willing and 
able to finance GM's continued operations. Similarly, there are no 
lenders willing and able to finance GM in a prolonged chapter 11 
case.'').
---------------------------------------------------------------------------
    I use this short paper to address the key arguments against 
the automotive cases and contextualize what happened in these 
two chapter 11 cases. Stripped of their speculation and ``what 
ifs,'' I show that these arguments are no more persuasive than 
the loose, unsupported arguments thrown about in the popular 
press.\10\ But first, I show how these cases, and particularly 
their structure--a quick lender-controlled Sec. 363 sale--are 
entirely within the mainstream of chapter 11 practice for the 
last decade.\11\
---------------------------------------------------------------------------
    \10\ For an example of the latter, see David Brooks, The Quagmire 
Ahead, N.Y. Times, June 1, 2009 (arguing that ``the Obama plan rides 
roughshod over the current private investors'').
    \11\ Douglas G. Baird & Robert K. Rasmussen, Chapter 11 at 
Twilight, 56 Stan. L. Rev. 673, 674 (2003). See also Florida Dept. of 
Revenue v. Piccadilly Cafeterias, Inc., 128 S. Ct. 2326, 2331 n.2 
(2008).
---------------------------------------------------------------------------
    Congress may well decide, as a matter of policy, that this 
should end, but until it does there is little to the idea that 
these cases are ``unprecedented'' in their structure.\12\ The 
identity of the DIP lender is novel,\13\ but what happened is 
routine.\14\ And the identity of the lender is not a bankruptcy 
issue.
---------------------------------------------------------------------------
    \12\ http://www.msnbc.msn.com/id/30507066/ (quoting Professor 
Skeel). In this article Skeel argues that government's role in the case 
is unprecedented in bankruptcy history, a contention which seems to 
neglect the Penn Central case in the 1970s. See In re Penn Central 
Transportation Co., 596 F.2d 1127, 1149 (3d Cir. 1979) (``The sheer 
size of the expenses of administration, the unprecedented scope and 
number of compromises preceding adoption of the Plan, and legislative 
intervention are all factors which require a unique approach. . . .'').
    \13\ U.S.C. Sec. 364 (authorizing post-petition or ``DIP'' 
lending). In chapter 11, the debtor retains possession or control of 
its bankruptcy estate, because no trustee is appointed, and is referred 
to as the ``debtor in possession'' or the ``DIP.'' 11 U.S.C. 
Sec. 1107(a). See David A. Skeel, Jr., The Past, Present and Future of 
Debtor-In-Possession Financing, 25 Cardozo L. Rev. 1905, 1920-29 
(2004).
    \14\ Rachael M. Jackson, Comment, Responding to Threats of 
Bankruptcy Abuse in a Post-Enron World: Trusting the Bankruptcy Judge 
as the Guardian of Debtor Estates, 2005 Colum. Bus. L. Rev. 451, 452 
(2005).
---------------------------------------------------------------------------

        I. MODERN CHAPTER 11 PRACTICE: ASSET SALES BEFORE PLANS

    There are two sections of the Bankruptcy Code applicable in 
chapter 11 that explicitly authorize the sale of property. 
Section 363(b) authorizes a trustee, and thus the chapter 11 
debtor in possession,\15\ to sell property of the estate 
outside the ordinary course of business.\16\ And section 1123 
provides that a chapter 11 plan may include provisions for sale 
of all or any part of the property of the estate.\17\ The 
latter course presupposes the drafting of a complete plan and 
disclosure statement, creditor voting, and a confirmation 
hearing.\18\ Section 363 sales are thus considered much faster 
alternatives, and the Bankruptcy Code provides no guidance on 
when either procedure should be used.\19\
---------------------------------------------------------------------------
    \15\ 11 U.S.C. Sec. 1107(a).
    \16\ John J. Hurley, Chapter II Alternative: Section 363 Sale of 
all of the Debtor's Assets Outside a Plan of Reorganization, 58 Am. 
Bankr. L.J. 233, 24-41 (1984) (Noting more than twenty years ago, that 
``it has become generally accepted that section 363(b) empowers a 
trustee or debtor in possession to sell all of the property of the 
debtor outside a plan of reorganization.'').
    \17\ 11 U.S.C. Sec. 1123(b)(4).
    \18\ Cf. Timothy D. Cedrone, A Critical Analysis Of Sport 
Organization Bankruptcies In The United States And England: Does 
Bankruptcy Law Explain The Disparity In Number Of Cases?, 18 Seton Hall 
J. Sports & Ent. L. 297, 310-12 (2008) (explaining the chapter 11 plan 
process).
    \19\ See J. Vincent Aug et al., The Plan of Reorganization: A Thing 
of the Past?, 13 J. Bankr. L. & Prac. 3, 45 (2004) (``A Section 363 
sale is generally the preferred method for selling assets because it is 
quicker and less expensive, and provides a quick fix to address 
continuing losses, rapidly depleting assets, and loss of cash flow.'').
---------------------------------------------------------------------------
    To prevent abuse of the 363 process, courts have developed 
rules that prevent imposition of a reorganization plan through 
the sale process.\20\ This is the so-called rule against ``sub 
rosa'' plans--that is, plans disguised as sales.\21\ While all 
Circuits seem to follow the rule against covert plans, the 
precise content of the rule varies by Circuit.\22\ For example, 
in the 2d Circuit the rule seems to be a subpart of that 
jurisdiction's larger requirement that a pre-plan sale be 
supported by a good business justification.\23\ Shortcutting 
the Bankruptcy Code is not a business justification, good or 
otherwise.\24\
---------------------------------------------------------------------------
    \20\ Jason Brege, An Efficiency Model of Section 363(b) Sales, 92 
Va. L. Rev. 1639, 1650 (2006).
    \21\ The phrase was first used in In re Braniff Airways, Inc., 700 
F.2d 935 (5th Cir. 1983), but seems to add little to the discussion.
    \22\ James J. White, Death and Resurrection of Secured Credit, 12 
Am. Bankr. Inst. L. Rev. 139, 161-63 (2004).
    \23\ Comm. of Equity Sec. Holders v. Lionel Corp. (In re Lionel 
Corp.), 722 F.2d 1063, 1071 (2d Cir. 1983).
    \24\ In re Chrysler LLC, 2009 WL 2382766, *6 (2d Cir. Aug 05, 
2009).
---------------------------------------------------------------------------
    At the other end of the spectrum, the 5th Circuit seems to 
have adopted a sense of the rule against disguised plans as 
requiring pre-plan sales to comply with the Bankruptcy Code's 
rules for plan confirmation, particularly when all of the 
debtor's assets are being sold.\25\ The 2d Circuit, on the 
other hand, has expressly rejected this equivalence, and has 
held that a pre-plan settlement can even violate the ``absolute 
priority rule'' \26\ if the debtor puts forth a sufficiently 
compelling business justification.\27\ In short, until the 
Supreme Court or Congress weighs in on this matter, the 
location of the chapter 11 cases can have some bearing on the 
law applied in the case.\28\
---------------------------------------------------------------------------
    \25\ See, e.g., In re Babcock and Wilcox Company, 250 F.3d 955 (5th 
Cir. 2001); In re Continental Air Lines, Inc. 780 F.2d 1223 (5th Cir. 
1986); see also In re Gulf Coast Oil Corp., 404 B.R. 407 (Bankr. S.D. 
Tex. 2009).
    \26\ The rule that each layer of debt be paid in full, starting 
with the most senior debt, before any junior claim receives any 
recovery. See generally Douglas G. Baird & Thomas H. Jackson, 
Bargaining After the Fall and the Contours of the Absolute Priority 
Rule, 55 U. Chi. L. Rev. 738 (1988).
    \27\ Motorola, Inc. v. Official Comm. of Unsecured Creditors and 
J.P. Morgan Chase Bank, N.A. (In re Iridium Operating LLC), 478 F.3d 
452, 466 (2d Cir. 2007).
    \28\ Cf. Stephen J. Lubben, Delaware's Irrelevance, 16 A.B.I. L. 
Rev. 267 (2008).
---------------------------------------------------------------------------
    Once a debtor in possession elects to sell its assets in a 
section 363 sale, the process typically involves identifying an 
initial bidder, frequently called a ``stalking horse,'' and 
approval of bidding procedures.\29\ These bidding procedures 
provide structure for the solicitation of competing bids, 
followed by an auction if any competing bids materialize.\30\ 
Throughout the process it is widely recognized that the 
bankruptcy courts have wide discretion in structuring sales of 
estate assets,\31\ and prospective purchasers are often 
counseled to expect a ``malleable'' process.\32\
---------------------------------------------------------------------------
    \29\ See In re O'Brien Environmental Energy, Inc., 181 F.3d 527, 
530 (3rd Cir. 1999).
    \30\ See C.R. Bowles & John Egan, The Sale of the Century or a 
Fraud on Creditors?: The Fiduciary Duty of Trustees and Debtors in 
Possession Relating to the ``Sale'' of a Debtor's Assets in Bankruptcy, 
28 U. Mem. L. Rev. 781, 805-36 (1998).
    \31\ In re Financial News Network, Inc., 980 F.2d 165, 169 (2d Cir. 
1992) (holding that the Bankruptcy Court may consider additional 
evidence pertaining to a bid after the official close of bidding, 
stating that ``we have observed that `[f]irst and foremost is the 
notion that a bankruptcy judge must not be shackled with unnecessarily 
rigid rules when exercising the undoubtedly broad administrative power 
granted him under the [Bankruptcy] Code) (quoting In re Lionel Corp., 
722 F.2d 1063, 1069 (2d Cir. 1983)).
    \32\ In Food Barn Stores, Inc., 107 F.3d 558, 565 (8th Cir. 1997).
---------------------------------------------------------------------------
    In particular, the ultimate goal is maximizing the value of 
the estate, to increase the return to creditors.\33\ Thus, 
there is substantial caselaw to support the notion that ``non-
conforming'' bids must be considered by bankruptcy courts if 
doing so will increase the return to creditors.\34\
---------------------------------------------------------------------------
    \33\ In re Chung King, Inc., 753 F.2d 547, 549 (7th Cir. 1985).
    \34\ See, e.g., Corp. Assets, Inc. v. Paloian, 368 F.3d 761 (7th 
Cir. 2004); In re Financial News Network, Inc., 126 B.R. 152 (S.D.N.Y. 
1991); In re Wintex, 158 B.R. 540 (D. Mass 1992); In re Edwards, 228 
B.R. 552 (Bankr. E.D. Pa. 1998).
---------------------------------------------------------------------------
    For much of the early years of the Bankruptcy Code and 
chapter 11, section 363 sales were of limited interest. Indeed, 
a review of the many cases in Lynn LoPucki's Bankruptcy 
Research Database \35\ shows that only about a half-dozen cases 
before 1995 involved important 363 issues.\36\ But in the past 
ten to fifteen years, secured lenders have used this provision, 
plus the control inherent in being a secured lender--
particularly control over the debtor's cash,\37\ to take charge 
of chapter 11 cases.\38\ Among the well-known debtors that have 
used 363 sales in their cases are TWA, Vlasic Foods, Polaroid 
and Bethlehem Steel.\39\
---------------------------------------------------------------------------
    \35\ http://lopucki.law.ucla.edu/.
    \36\ A complete list of cases is attached as Appendix A to my 
testimony before the TARP Congressional Oversight Panel, available at 
http://cop.senate.gov/ hearings/ library/ hearing-072709- 
detroithearing.cfm.
    \37\ Douglas G. Baird & Robert K. Rasmussen, Private Debt and the 
Missing Lever of Corporate Governance, 154 U. Pa. L. Rev. 1209, 1229 
(2006).
    \38\ Jay Lawrence Westbrook, The Control of Wealth in Bankruptcy, 
82 Tex. L. Rev. 795 (2005).
    \39\ Cf. Lynn M. LoPucki & Joseph W. Doherty, Bankruptcy Fire 
Sales, 106 Mich. L. Rev. 1 (2007).
---------------------------------------------------------------------------
    In the new world of sale-driven chapter 11 cases, the 
secured lender drives the process by the simple fact that it 
has no obligation to fund the debtor's reorganization attempts, 
and thus funding will be provided only if it also benefits the 
controlling lender.\40\ The lenders are willing to fund a quick 
sale because section 363 provides a better mechanism for 
selling assets than state foreclosure law.\41\
---------------------------------------------------------------------------
    \40\ Baird & Rasmussen, Missing Lever, supra note 37, at 1239-40. 
See also In re Decora Indus., 2002 WL 32332749, at *3 (D.Del. May 20, 
2002).
    \41\ See In re Trans World Airlines, Inc., 322 F.3d 283, 28890, 293 
(3d Cir. 2003).
---------------------------------------------------------------------------
    Other secured lenders are protected from ``low ball'' sales 
by their ability to credit bid their claim,\42\ and take over 
control of the collateral.\43\ Likewise, other creditors who 
think the sale price is too low can orchestrate a competing 
bid. Once the sale is completed, the creditors are further 
protected during the distribution of the sale proceeds by the 
normal rules of chapter 11, including the absolute priority 
rule \44\ and the rule against ``unfair discrimination.'' \45\
---------------------------------------------------------------------------
    \42\ In Chrysler, where the ability to credit bid was most 
relevant, the dissenting lenders had no independent right to credit 
bid, indeed they were arguably not even secured creditors when acting 
independently. Instead, all of the security interests in this loan were 
held by a collateral trustee, for the benefit of all lenders. Under the 
loan documents, the trustee was instructed to take orders from the 
agent bank upon default--Chase. At the Chrysler sale hearing, the 
government testified that Chase had been told it could credit bid if it 
did not like the deal. The dissenting lenders, representing less than 
5% of the total loan, had no right under the load documents to override 
Chase's decision in this regard. The government certainly could have 
explained this before the sale hearing, as the apparent inability to 
credit bid appeared to represent a problem with these cases. http://
www.creditslips.org/ creditslips/ 2009/05/ chrysler-creditbidding-
again.html.
    \43\ See Bruce A. Markell, Owners, Auctions, and Absolute Priority 
in Bankruptcy Reorganizations, 44 Stan. L. Rev. 69, 121-22 (1991).
    \44\ 11 U.S.C. Sec. 1129. Cf. John D. Ayer, Rethinking Absolute 
Priority After Ahlers, 87 Mich. L. Rev. 963, 969-70 (1989).
    \45\ Bruce A. Markell, A New Perspective on Unfair Discrimination 
in Chapter 11, 72 Am. Bankr. L.J. 227, 228 (1998).
---------------------------------------------------------------------------
    The basic structure used to reorganize both GM and Chrysler 
was not unprecedented. Indeed, it was entirely ordinary.\46\ In 
both cases the ``good'' assets were sold to new entities.\47\ 
The consideration for that sale goes to the ``old'' debtor, and 
will be distributed according to the absolute priority rule. 
None of this constitutes a covert reorganization plan or a 
corruption of the bankruptcy process.\48\
---------------------------------------------------------------------------
    \46\ Douglas R. Baird, The New Face of Chapter 11, 12 Am. Bankr. 
Inst. L. Rev. 69, 80-82 (2004).
    \47\ Cf. In re Dial-A-Mattress Operating Corp., 2009 Bankr. LEXIS 
1801 (Bankr. E.D.N.Y. June 24, 2009) (approving 363 sale to newly 
created corporation).
    \48\ See In re Trans World Airlines, Inc., 2001 Bankr. LEXIS 980, 
2001 WL 1820326, *11 (Bankr. D. Del. Apr. 2, 2001).
---------------------------------------------------------------------------
    The drawn-out, debtor-controlled chapter 11 process of 
Eastern Airlines and Pan Am is long gone.\49\ Whether this is a 
good thing is open to debate, but it clearly reflects current 
reality \50\ and creditor preference.\51\ Moreover, the 2005 
Amendments to the Bankruptcy Code, which increased the 
difficulty of pursuing a traditional chapter 11 reorganization 
plan arguably suggest a Congressional ``push'' in favor of 
quicker, sale-driven chapter 11 cases.\52\
---------------------------------------------------------------------------
    \49\ Douglas G. Baird & Robert K. Rasmussen, The End of Bankruptcy, 
55 Stan. L. Rev. 751, 751 (2002) (``Corporate reorganizations have all 
but disappeared. Giant corporations make headlines when they file for 
Chapter 11, but they are no longer using it to rescue a firm from 
imminent failure. Many use Chapter 11 merely to sell their assets and 
divide up the proceeds.'').
    \50\ Stephen J. Lubben, The ``New and Improved'' Chapter 11, 93 Ky. 
L.J. 839, 841-42 (2005) (``[I]t is not clear that this development 
promotes social welfare. Rather, lender control may only benefit 
lenders.'').
    \51\ Harvey R. Miller & Shai Y. Waisman, Is Chapter 11 Bankrupt?, 
47 B.C. L. Rev. 129, 156-57 (2005).
    \52\ Lubben, Stephen J., Systematic Risk & Chapter 11 (May 4, 
2009). Temple Law Review, 2009; Seton Hall Public Law Research Paper 
No. 1399015. Available at SSRN: http://ssrn.com/abstract=1399015.
---------------------------------------------------------------------------
    The notion that the speed of these cases was unique, or 
that the use of section 363 to effectuate a quick sale was 
novel, is therefore without merit.\53\ As Judge Gonzalez noted 
in Chrysler, ``[t]he sale 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.'' 
\54\
---------------------------------------------------------------------------
    \53\ Indeed, the Lehman Brothers sale was completed in even less 
time, with no government involvement. Stephen J. Lubben, The Sale of 
the Century and Its Impact on Asset Securitization: Lehman Brothers, 27 
Am. Bankr. Inst. Journal No. 10, page 1 (2009).
    \54\ In re Chrysler LLC, 405 B.R. 84, 87 (Bankr. S.D.N.Y. 2009), 
aff'd, 2009 WL 2382766 (2nd Cir. Aug 05, 2009).
---------------------------------------------------------------------------
    Of course, the academic critics of theses cases have 
largely avoided this line of argument. Since many of the 
critics were among those to first discuss the new face of 
chapter 11 in an academic setting,\55\ and were generally 
supportive of the new order,\56\ or have otherwise long argued 
for chapter 11 to move away from traditional reorganizations in 
favor of market-based solutions, it could hardly be 
otherwise.\57\ In the next part of this paper I address the 
more specific arguments that these leading scholars have made 
in the press and before Congress and the TARP Congressional 
Oversight Panel.
---------------------------------------------------------------------------
    \55\ E.g., David A. Skeel, Jr., Creditors' Ball: The ``New'' New 
Corporate Governance in Chapter 11, 152 U. Pa. L. Rev. 917, 935-38 
(2003).
    \56\ Barry E. Adler, Bankruptcy Primitives, 12 Am. Bankr. Inst. L. 
Rev. 219, 224-25 (2004).
    \57\ See Barry E. Adler & Ian Ayres, A Dilution Mechanism for 
Valuing Corporations in Bankruptcy, 111 Yale L.J. 83, 101-03 (2001); 
Mark J. Roe, Bankruptcy and Debt: A New Model for Corporate 
Reorganization, 83 Colum. L. Rev. 527, 559 (1983).
---------------------------------------------------------------------------

                       II. THE ACADEMIC ARGUMENTS

    In this section I address the arguments that bankruptcy 
academics have made against the automotive bankruptcies. These 
arguments are generally more sophisticated than those presented 
in the cases themselves, yet I contend they still suffer from 
serious flaws. I make little effort to engage the criticisms 
mounted by non-bankruptcy legal academics, like Professor 
Richard Epstein, a well-known torts expert at the University of 
Chicago Law School.\58\ As part of his critique of these 
bankruptcy cases, Professor Epstein notes that President Obama 
is ``no bankruptcy lawyer.'' \59\ The same, of course, can be 
said for Professor Epstein--and the suggestion that the 
President personally negotiated these cases is silly.\60\ More 
generally, I have previously argued that many of these 
critiques of the chapter 11 cases show little understanding of 
how chapter 11 works.\61\ The following arguments suffer from 
no such deficiencies.
---------------------------------------------------------------------------
    \58\ http://www.law.uchicago.edu/faculty/epstein.
    \59\ http://www.forbes.com/2009/05/11/chrysler-bankruptcy-mortgage-
opinions-columnists-epstein.html.
    \60\ The full quote is ``President Obama--no bankruptcy lawyer--
twisted the arms of the banks that have received TARP money to waive 
their priority.'' Id. As I discuss infra, the ``strong arming'' 
argument is a contention without any supporting evidence.
    \61\ http://www.creditslips.org/ creditslips/2009/06/the-absolute-
priority-rule.html.
---------------------------------------------------------------------------

A. Bidding Procedures and ``Sub Rosa'' Plans (Douglas Baird)

    In his recent testimony before the House Subcommittee on 
Commercial and Administrative Law,\62\ Professor Baird advanced 
a neat argument that the bidding procedures approved in the 
automotive cases so ``locked in'' a particular deal that they 
amounted to a plan of reorganization, in violation of the 
caselaw discussed in the prior section of this paper.
---------------------------------------------------------------------------
    \62\ http://judiciary.house.gov/hearings/pdf/Baird090722.pdf.
---------------------------------------------------------------------------
    In both automotive cases, the approved bidding procedures 
provided that a bidder would only become a ``Qualified Bidder'' 
if they agreed to assume the same collective bargaining 
agreements that the initial bidder intended to assume. Because 
this requirement could have led a bidder to offer less cash for 
the debtors' assets--since they would have been forced to 
assume this additional liability--Baird argues that the process 
became ``both a sale and a sub rosa plan.'' \63\
---------------------------------------------------------------------------
    \63\ Testimony at page 5.
---------------------------------------------------------------------------
    The requirement in the bidding procedures that any bidder 
assume the UAW agreements smacks of overreaching. But was 
another bidder willing to pay more than $2 billion for 
Chrysler's assets or otherwise top the proffered bids? I doubt 
it, and if not the bidding procedures are irrelevant.
    A bidding procedure that only applies to competing bidders 
is a dead letter if there are no competing bidders--the terms 
of the bidding procedures are no more relevant than the 
instructions for inflating a life vest on a plane you will 
never fly on. The dissenting Chrysler lenders,\64\ and some 
academic commentators,\65\ have argued that the bidding 
procedures may have deterred an unknown bidder, thus 
undermining the process.
---------------------------------------------------------------------------
    \64\ http://www.forbes.com/feeds/afx/2009/05/05/afx6380833.html.
    \65\ For example, Mark Roe in the commentary I discuss, infra.
---------------------------------------------------------------------------
    The deterrence argument presumes that the procedures have 
more ``stickiness'' than they actually do. As noted in Part I, 
the caselaw is abundant and clear that bankruptcy courts have 
an obligation to consider the highest bid presented, even if it 
does not conform with previously approved bidding procedures. 
Any investor who contemplates buying a multi-billion dollar 
distressed corporation will know this--the contrary presumption 
is not credible.
    Irrespective of the potential effects of the bidding 
procedures, there are good independent reasons to think that 
there were no inhibited bidders who failed to appear. The 
automotive industry, both domestic and foreign, is presently 
heavily distressed. At the same time, the credit markets show 
no ability to provide the kind of financing that would be 
needed to purchase either GM or Chrysler.\66\
---------------------------------------------------------------------------
    \66\ http://www.ft.com/cms/s/0/33dbf8a6-82a3-11de-ab4a-
00144feabdc0.html.
---------------------------------------------------------------------------
    And why should we not trust the market information that is 
available to us? The senior lenders--who could have ``credit 
bid'' their claim \67\--showed no interest in taking on these 
assets. Chrysler had been trying to sell itself for months 
before the chapter 11 case, with no success at all.\68\ And 
recall that in 2007, a time of easy credit and stable markets, 
Daimler essentially paid somebody to take Chrysler off its 
hands.\69\ This does not suggest a group of assets with a lot 
of hidden value.
---------------------------------------------------------------------------
    \67\ That is, forgiven their debt in exchange for the companies' 
assets. 11 U.S.C. Sec. 363(k).
    \68\ http://www.bloomberg.com/ apps/news?pid= 
20601103&sid=aCWc52_2KMYs&refer=us.
    \69\ http://business. timesonline.co.ulcitol/ business/
industry_sectors/engineering/article1786611. 
ece.
---------------------------------------------------------------------------
    Professor Baird acknowledges the theoretical nature of his 
concern,\70\ but still worries that the bankruptcy court could 
have done more. It is doubtful that such a move would have had 
any purpose, and thus seems to be an argument for more window 
dressing.
---------------------------------------------------------------------------
    \70\ Testimony at pages 5-6.
---------------------------------------------------------------------------

B. Plan-Sale Equivalence (Barry Adler)

    In his remarks before the TARP Congressional Oversight 
Panel hearing in Detroit this past July,\71\ Professor Adler 
argued
---------------------------------------------------------------------------
    \71\ http://cop.senate.gov/ documents/testimony-072709-adler.pdf.

          that Chapter 11 contains rules designed precisely to 
        protect creditors from a judicial determination with 
        which the creditors disagree. When Judge Gonzalez 
        approved the Chrysler sale, he stripped these 
        protections from the secured creditors.\72\
---------------------------------------------------------------------------
    \72\ Testimony at page 4 (discussing the Chryslers case).

    Adler goes on to argue that the requirements of chapter 
11--particularly the ``fair and equitable'' and ``no unfair 
discrimination'' provisions of section 1129(b)--should have 
been applied to protect the interests of senior creditors.
    There are two problems with this analysis. First, this is 
not the law in the 2d Circuit, where both GM and Chrysler's 
cases were filed. As previously discussed in Part I, the 2d 
Circuit has never held that 363 sales are subject to the full 
requirements of chapter 11, and has affirmatively held that one 
key part of section 1129(b), the absolute priority rule, can be 
ignored in situations where there is a suitable 
justification.\73\ In short, Adler's position is a fair 
statement of the law of the 5th Circuit, and there could be 
good arguments for why this is what the law in the 2d Circuit 
should be, but it hardly seems fair to fault a bankruptcy court 
for following the (binding) opinions issued by its own Circuit 
Court.
---------------------------------------------------------------------------
    \73\ Motorola, Inc. v. Official Comm. of Unsecured Creditors and 
J.P. Morgan Chase Bank, N.A. (In re Iridium Operating LLC), 478 F.3d 
452, 466 (2d Cir. 2007).
---------------------------------------------------------------------------
    More importantly, Adler has to rely on conjecture to even 
invoke the provisions of section 1129(b). As he notes, the 
tests he points to are class protections that are only 
applicable if the class in question rejects the debtor's 
plan.\74\ Given that more than 90% of the Chrysler lenders 
supported the transaction, the reasons for imagining this class 
rejecting the plan are somewhat unclear.
---------------------------------------------------------------------------
    \74\ 11 U.S.C. 1129(b)(1) (``if all of the applicable requirements 
of subsection (a) of this section other than paragraph (8) are met with 
respect to a plan, the court, on request of the proponent of the plan, 
shall confirm the plan notwithstanding the requirements of such 
paragraph if . . .''); see also 11 U.S.C. 1129(a)(8) (requiring all 
classes to accept the plan).
---------------------------------------------------------------------------
    Professor Adler argues ``the accepting secured creditors 
were largely recipients of government TARP funds and thus 
arguably beholden to the government, which engineered the 
distribution to the UAW.'' \75\ This, he argues, means that the 
lenders would have to be split into two classes, giving the 
non-TARP parties a means of rejecting the plan and invoking 
section 1129(b).\76\
---------------------------------------------------------------------------
    \75\ Testimony at page 5 (emphasis added).
    \76\ See G. Eric Brunstad, Jr. & Mike Sigal, Competitive Choice 
Theory and the Unresolved Doctrines of Classification and Unfair 
Discrimination in Business Reorganizations Under the Bankruptcy Code, 
55 Bus. Law. 1, 24-32 (1999).
---------------------------------------------------------------------------
    The problem is that after extensive discovery and 
depositions, there is still no evidence to support the claim 
that the TARP lenders were bullied into accepting the proffered 
deal in Chrysler. In other contexts, like that of home mortgage 
modifications, it appears that some of the biggest recipients 
of TARP funds have been the ones least likely to bend to 
Administration policy.\77\ And if these lenders were not 
``beholden'' to the Treasury, the entire argument evaporates.
---------------------------------------------------------------------------
    \77\ http://www.bloomberg.com/apps/
news?pid=20601103&sid=a7kYntqozaKo.
---------------------------------------------------------------------------
    It has to be remembered that all of the key players in 
these cases were highly sophisticated. GM's board--represented 
by Cravath, Swaine & Moore--is hardly a group to be easily 
cowed by some hard bargaining. And Chrysler's senior lenders 
had agreed by contract to have JPMorgan Chase, the lead lender, 
negotiate on their behalf.\78\ We would have heard if Jamie 
Dimon felt Chase was being strong-armed into supporting the 
sale--he's not known to be shy.\79\
---------------------------------------------------------------------------
    \78\ Under section 6.12 of the Chrysler collateral agreement, 
Chase, as agent, has the power to release the liens granted under the 
loan agreements. Indeed, upon default the agent has full control over 
any ``Collection Enforcement Action,'' defined to include ``exercising 
any other right or remedy under the [UCC] . . . or under any Bankruptcy 
Law or other applicable law.'' This is not a problem created by TARP, 
the Bankruptcy Code, or the federal government, but by the loan 
agreement to which the lenders themselves voluntarily agreed to be 
bound.
    \79\ http://www.businessweek.com/careers/managementiq/archives/
2008/10/ceos_on_the_cou.html.
---------------------------------------------------------------------------
    Likewise, it was entirely rational for the bulk of 
Chrysler's secured lenders to believe that $2 billion in cash, 
on their $6.9 billion claim, was, by far, the highest possible 
recovery they could obtain. Indeed, a nearly 30% recovery is 
clearly better than these lenders could have done if they had 
liquidated the debtor's assets. And liquidation was the 
lenders' only real alternative.
    While commentators often imply that liquidation is a 
costless endeavor, liquidating a company the size of Chrysler 
would have cost millions of dollars. Liquidation would thus 
only make sense if the lenders could be sure to recover more 
than $2 billion plus the costs of liquidation. Given the 
distressed state of the automotive industry, and the attendant 
effects this reality had for the value of Chrysler's assets, 
the lenders no doubt saw the wisdom of a risk-free $2 billion.

C. A return to the (Bad) old days? (David Skeel)

    In testimony before Congress,\80\ and as more fully 
explained in an article written for the American Enterprise 
Institute,\81\ David Skeel has argued that the automotive cases 
represent a resurrection of the worst features of corporate 
reorganization from 100 years ago. In particular, Professor 
Skeel argues that the sale transaction in both automotive cases 
amounted to the kind of ``sham'' sale that was once a common 
feature of railroad receiverships, a type of corporate 
reorganization Congress ended in the New Deal by federalizing 
corporate bankruptcy.\82\
---------------------------------------------------------------------------
    \80\ http://judiciary.house.gov/hearings/pdf/Skeel090521.pdf.
    \81\ http://www.american.com/archive/2009/may-2009/why-the-
chrysler-deal-would-horrify-a-new-dealer.
    \82\ David A. Skeel, Jr., Debt's Dominion: A History of Bankruptcy 
Law in America 48-70 (2001).
---------------------------------------------------------------------------
    Skeel is undoubtedly correct that railroad receiverships 
involved stylized sales of the railroad's assets,\83\ but he is 
wrong to identify that as the key problem with the 
receiverships.\84\ Indeed, Professor Skeel himself previously 
explained that the problem with receiverships was that
---------------------------------------------------------------------------
    \83\ In particular, receiverships involved the initiation of a 
foreclosure action by a secured lender, the credit bid by that secured 
lender of its claim, and the transfer of the debtor's assets to a new 
shell corporation, capitalized as agreed by the prior holders of the 
debtor's securities. Edward Sherwood Mead, Corporation Finance 406-12 
(rev. ed. 1920) (describing the process used to commence a 
receivership).
    \84\ See Stephen J. Lubben, Railroad Receiverships and Modern 
Bankruptcy Theory, 89 Cornell L. Rev. 1420, 1445-51 (2004).

          [t]he Wall Street professionals who organized 
        protective committees in order to negotiate the 
        reorganization seemed to focus more on obtaining 
        generous fees for themselves than on striking a good 
        bargain on behalf of the scattered investors whom they 
        purported to represent. The big losers, of course, were 
        small, individual investors.\85\
---------------------------------------------------------------------------
    \85\ David A. Skeel, Jr., Vern Countryman and the Path of 
Progressive (and Populist) Bankruptcy Scholarship, 113 Harv. L. Rev. 
1075, 1089 (2000)(footnote omitted).

    In addition, the process was generally designed to 
``squeeze out'' small bondholders, benefiting the shareholders 
(who were typically large institutions) and management.\86\ 
None of this really has much to do with the sale structure.
---------------------------------------------------------------------------
    \86\ Stephen J. Lubben, Out of the Past: Railroads & Sovereign Debt 
Restructuring, 35 Geo. J. Int'l L. 845, 850 (2004). See also In re 
Wabash Valley Power Ass'n, 72 F.3d 1305, 1314 (7th Cir. 1995) (``In its 
origins, the absolute priority rule was a judicial invention designed 
to preclude the practice in railroad reorganizations of ``squeezing 
out' intermediate unsecured creditors through collusion between secured 
creditors and stockholders (who were often the same people).'').
---------------------------------------------------------------------------
    And it clearly is not Professor Skeel's primary concern 
either--instead the receivership analogy simply serves as a 
frame for his larger arguments that the automakers assets were 
undervalued and that the structure of the sale process unduly 
favored the unions over other creditors.\87\
---------------------------------------------------------------------------
    \87\ This is particularly clear from the American Enterprise 
Institute paper, supra note 81.
---------------------------------------------------------------------------
    But in neither case were the objecting creditors able to 
produce any credible evidence that the debtors were worth more 
than was being paid, and in fact the evidence presented 
suggested that strategy promoted by the Automotive Task Force 
was all that stood between these investors and a substantially 
lower recovery.\88\ In addition, before presuming that these 
cases were some sort of intrigue to buy the automakers' assets 
on the cheap, it once again bears looking at the available 
market information. For example, the dissenting Chrysler 
lenders--the Indiana Pension funds--paid $17 million for their 
stake in the senior debt that had a face value of $43 million. 
They received $15 million through the Chrysler bankruptcy 
process.\89\ That is, their claim was paid at more than 88% of 
its market value, measured at the time the funds bought their 
claim. If the market price was roughly accurate, then the 
notion that the purchaser underpaid for Chrysler's assets falls 
apart.
---------------------------------------------------------------------------
    \88\ See In re Chrysler LLC, 405 B.R. 84, 105-06 (Bankr, S.D.N.Y. 
2009), aff'd), aff'd, 2009 WI 2382766 (2nd Cir. Aug 05, 2009)
    \89\ http://www.creditslips.org/creditslips/2009/06/what-did-the-
indiana-funds-want.html
---------------------------------------------------------------------------
    And if the purchaser did not underpay for the assets, then 
the idea that the bankruptcy court should concern itself with 
the companies' post-sale transactions with the unions also 
becomes suspect. The UAW is getting better treatment than other 
unsecured creditors. But that better treatment is not coming 
from the debtor. It is coming from the government, passing 
through the purchaser of the ``good'' assets in each case. 
Asset buyers have no obligation to buy anything more than they 
want to buy, and no obligation to absorb any claims other than 
those the buyer feels it needs to operate the purchased assets.
    We can debate whether it is wise for the government to bail 
out the UAW, but it does not implicate the bankruptcy process 
unless this bail out is being funded by value that should have 
gone into the debtors' estates. But if the assets were not 
undervalued, Skeel's argument that the funds going to the 
unions should have instead gone into the estates amounts to 
little more than a claim that the buyers (and thus the U.S. and 
Canadian governments) should have overpaid for the debtors' 
assets.\90\
---------------------------------------------------------------------------
    \90\ Or, alternatively, that the creditors should have received a 
bailout too--a policy question, and not one that demonstrates a 
violation of the Bankruptcy Code or the ``rule of law.''
---------------------------------------------------------------------------

D. Government overinvestment and the bidding procedures, again (Mark 
        Roe).

    In a recent editorial in Forbes,\91\ Mark Roe criticizes 
the government's decision to ``flood Chrysler with money on 
non-commercial terms'' and argues that the results in that case 
should not be taken at face value since ``there was a market 
test here, but in form only, because the bidding was for the 
proposed plan.'' The first claim accuses the government of 
overinvestment in the automakers, the second reanimates the 
argument that the bidding procedures mattered in these cases.
---------------------------------------------------------------------------
    \91\ http://www.law.harvard.edu/news/2009/06/15_roe.html.
---------------------------------------------------------------------------
    It is not clear that the overinvestment argument is a 
bankruptcy issue; rather, it seems like another way of saying 
that Professor Roe does not agree with the Administration's 
policy choices. It is also not clear that it is an issue 
confined to government as DIP lender. Most DIP financing comes 
from the debtor's pre-petition lender,\92\ and while these 
loans are often individually profitable, one might also wonder 
if there were not many cases of overinvestment by banks looking 
to postpone the consequences of an earlier lending mistake. 
Moreover, while Roe characterizes the automotive cases as an 
example of the government propping up defective companies, that 
alone does not tell us if the move was rational or socially 
efficient. For example, if the government faced an even greater 
cost upon liquidation of the debtors through unemployment 
payments, unpaid environmental cleanup costs, and other 
analogous expenses, providing bankruptcy financing to these 
debtors was the right move.\93\ Indeed, unlike a private lender 
who can largely ignore these costs since they will be absorbed 
by the government, the government as lender has a better set of 
incentives in this instance.
---------------------------------------------------------------------------
    \92\ A. Mechele Dickerson, Privatizing Ethics In Corporate 
Reorganizations, 93 Minn. L. Rev. 875, 908-09 (2009).
    \93\ http://www.nytimes.com/2009/06/01/business/01deese.html.
---------------------------------------------------------------------------
    And as noted earlier, the idea that the bidding procedures 
prevented a ``market test'' of the value of the debtors' assets 
presupposes that there was a market for these assets.

                               Conclusion

    The current reality of chapter 11 is undeniable--it is a 
sale-driven process, where courts seek to maximize the return 
to creditors. Chrysler and GM sit contentedly within this 
arrangement.
    In analyzing these cases, it is helpful to consider if a 
proffered objection would be tenable if a private lender had 
structured the cases. If not, one has to consider if the 
special nature of the government, and the powers inherent 
therein, make a difference or if the critique in question is 
simply being advanced because of the proponent's discomfort 
with government involvement in corporate finance.
    The objecting creditors in these cases had several options. 
They could have brought another buyer to the table, they could 
have credit bid, and they could have even sued the agent banks 
or indenture trustees that allegedly let them down. The fact 
that the objecting creditors did not pursue any of these more 
traditional options, and instead chose melodrama, is quite 
telling. Insisting that the buyer pay more than the debtor's 
assets are worth, or that the buyer pay specific creditors, or 
that the buyer not pay specific creditors, are not bankruptcy 
arguments but rather rhetorical arguments.
    In short, by and large, I think that the criticism of the 
automotive bankruptcy cases does not stand up to careful 
scrutiny. In the future, Congress may choose to consider the 
policy implications of a chapter 11 process that has become 
heavily driven by quick asset sales and lender control.\94\ But 
given the reality of current chapter 11 practice, both GM and 
Chrysler's chapter 11 cases were not all that exceptional.
---------------------------------------------------------------------------
    \94\ See George W. Kuney, Let's Make it Official: Adding an 
Explicit Preplan Sale Process as an Alternative Exit from Bankruptcy, 
40 Hous. L. Rev. 1265, 1267-68 (2004).
                     SECTION TWO: ADDITIONAL VIEWS


                    A. Representative Jeb Hensarling

    Although I commend the Panel and its staff for their 
efforts in producing the September report, I do not concur with 
all of the analysis and conclusions presented and, thus, 
dissent. I would like, however, to thank the Panel for 
incorporating several of the suggestions I offered during the 
drafting process.
    I offer the following summary of my Dissenting Views:
     Over the past several months the American 
taxpayers have involuntarily ``invested'' over $81 billion in 
Chrysler, General Motors (GM) and the other auto programs. 
According to the latest estimate from the Congressional Budget 
Office (CBO), the investment of TARP funds in the auto industry 
is expected to add $40 billion more to the deficit than CBO 
calculated just five months earlier in March 2009. This data 
supports Ron Bloom's--the head of Treasury's Auto Task Force 
recent comment that it is unlikely the taxpayers will recover 
all of their TARP funded investments in Chrysler and GM.
     By making such an unprecedented investment in 
Chrysler and GM, the Administration by definition chose not to 
assist other Americans who are in need. With the economic 
suffering the American taxpayers have endured during the past 
two years one wonders why Chrysler and GM merited such 
generosity to the exclusion of other taxpayers. The government 
clearly picked winners and losers.
     In my view, the Administration used taxpayer funds 
to orchestrate the bankruptcies of Chrysler and GM so as to 
promote its economic, social and political agenda.
     A number of bankruptcy law academics at top-tier 
law schools have questioned the Chrysler and GM bankruptcies. 
In the Chrysler and GM proceedings, Section 363 of the United 
States bankruptcy code was used by the Administration to upset 
well-established commercial law principles and the contractual 
expectations of the parties. A summary of the bankruptcy issues 
is provided in Annexes A and B.
     On a ``before'' v. ``after'' basis, the Chrysler 
and GM bankruptcy cases make little legal or economic sense. 
How is it possible that the Chrysler and GM pension funds 
(VEBAs)--unsecured creditors--received a greater allocation of 
proceeds than the Chrysler senior secured creditors or the GM 
bondholders? In other words, why did the United States 
government spend tens of billions of dollars of taxpayer money 
to bail out employees and retirees of the UAW to the detriment 
of other non-UAW employees and retirees--such as retired 
schoolteachers and police officers from the State of Indiana--
whose pension funds invested in Chrysler and GM indebtedness?
     A plain reading of the Emergency Economic 
Stabilization Act of 2008 (EESA) would necessarily preclude the 
employment of TARP funds for the benefit of the auto industry.
     The private sector must now consider incorporating 
the concept of ``political risk'' into its analysis before 
engaging in any direct or indirect transaction with the United 
States government. While private sector participants are 
accustomed to operating within a complex legal and regulatory 
environment, many are unfamiliar with the emerging trend of 
public sector participants to bend or restructure rules and 
regulations so as to promote their economic, social and 
political agenda as was clearly evident in the Chrysler and GM 
bankruptcies.
     I recommend that SIGTARP investigate: (i) whether 
it was appropriate for the Administration to use TARP funds in 
the Chrysler and GM transactions; (ii) Tom Lauria's claim that 
his client, Perella Weinberg, ``was directly threatened by the 
White House and in essence compelled to withdraw its opposition 
to the deal under threat that the full force of the White House 
press corps would destroy its reputation if it continued to 
fight;'' and (iii) the assertion that the Administration 
assisted with the negotiation of a ``sweetheart deal'' for the 
benefit of Platinum Equity in the Delphi transaction.
     Additional recommendations are provided in my 
Dissenting Views.

1. POLICY ISSUES AND FUNDAMENTAL QUESTIONS ARISING FROM THE USE OF TARP 
              PROCEEDS IN THE CHRYSLER AND GM BANKRUPTCIES

    Over the past several months the American taxpayers have 
involuntarily ``invested'' over $81 billion \525\ in Chrysler, 
GM and the other auto programs. Recently, in a discussion with 
staff members of the Panel, Ron Bloom, the head of Treasury's 
Auto Task Force, stated that it is unlikely the taxpayers will 
recover all of their TARP-funded investments in Chrysler and 
GM.\526\ In addition, auto assistance provided by the 
Administration has added tens of billions of dollars to the 
budget deficit, and the losses are continuing to increase above 
and beyond initial expectations. According to the latest 
estimate from the Congressional Budget Office (CBO), the 
investment of TARP funds in the auto industry is expected to 
add $40 billion more to the deficit than CBO calculated just 
five months earlier in March 2009.\527\ A reasonable 
interpretation of such estimate provides that the American 
taxpayers may suffer a loss of over 50 percent of the TARP 
funds invested in Chrysler, GM and the other auto programs. How 
is it possible that with the economic challenges facing our 
nation the Administration chose to allocate such a significant 
share of the TARP to such questionable investments? \528\ How 
much additional funding will be provided by the Administration 
for Chrysler and GM? What is the strategy and timeline for 
recouping taxpayer dollars? What are the metrics for 
determining whether or not Chrysler and GM are ``successful,'' 
and will the Administration continue to provide assistance 
until this is attained? If the Administration now equates TARP 
funds with Stimulus funds, why not direct the resources in the 
most efficient, equitable and transparent manner by granting 
tax relief to small businesses--the economic engine that 
creates approximately three out of every four jobs--and other 
American taxpayers?
---------------------------------------------------------------------------
    \525\ According to the Panel's report, as of August 5, 2009, over 
$73 billion of TARP funds remain outstanding with respect to the auto 
programs.
    \526\ Following Mr. Bloom's statement, Treasury staff contacted COP 
staff and attempted to clarify Mr. Bloom's comments. The Treasury staff 
members stressed that the recovery of the TARP funds invested in 
Chrysler and GM will ultimately depend upon the financial success or 
failure of Chrysler and GM and whether a favorable market develops for 
the sale of the equity interests held by the United States government 
in the automakers. In addition, they stated that although Mr. Bloom may 
have appeared ``personally pessimistic'' during his meeting with COP 
staff, it is simply not possible for the Auto Task Force to predict the 
future value of Chrysler and GM stock. The Treasury staffers did 
acknowledge that the equity interests of Chrysler and GM will have to 
``appreciate sharply'' for the American taxpayers to receive repayment 
in full. This attempt to explain Mr. Bloom's remarks is not 
particularly helpful because it is apparent that the TARP funds will 
not be repaid unless Chrysler and GM perform in an extraordinary 
manner--something they have not done in a long time. That Mr. Bloom--
the head of the Auto Task Force--may be ``personally pessimistic'' 
regarding these prospects remains significant.
    \527\ See ``The Budget and Economic Outlook: An Update,'' 
Congressional Budget Office, August 2009, pages 55-56, at www.cbo.gov/
ftpdocs/105xx/doc10521/08-25-BudgetUpdate.pdf. The report provides in 
part:

    The improvement in market conditions results in a reduction in the 
subsidy rate associated with the Capital Purchase Program (CPP--a major 
initiative through which the government purchases preferred stock and 
warrants (for the future purchase of common stock) from banks. CBO has 
dropped the projected subsidy for the remaining investments in that 
program from 35 percent in the March baseline to 13 percent. The 
decrease in the estimated CPP subsidy cost also reflects banks' 
repurchase of $70 billion of preferred stock through June. Similarly, 
the estimated subsidy cost for other investments in preferred stock 
(for example, that of American International Group) has also been 
reduced. Partially offsetting those reductions in projected costs is 
the expansion of assistance to the automotive industry; CBO has raised 
its estimate of the costs of that assistance by nearly $40 billion 
relative to the March baseline. [emphasis added.]

    In addition, our country faces a staggering deficit of $1.6 
trillion in 2009, and a debt that more-than triples in ten years.
    \528\ Section 113 of EESA discusses the ``[m]inimization of long-
term costs and maximization of benefits for taxpayers.'' It gives a 
clear mandate that the Treasury Secretary must consider the burdens and 
benefits to taxpayers in assessing initial outlays as well as potential 
long-term returns and economic benefits.
---------------------------------------------------------------------------
    By making such an unprecedented investment in Chrysler and 
GM \529\ the Administration by definition chose not to assist 
other Americans who are in need. With the economic suffering 
the American taxpayers have endured during the past two years, 
one wonders why Chrysler and GM merited such generosity to the 
exclusion of other taxpayers.\530\ Why, indeed, did the United 
States government choose to reward two companies that have been 
arguably mismanaged for many years at the expense of other 
hardworking taxpayers? \531\ More poetically, The New York 
Times on July 25 asked: ``Why, after all, should the automakers 
receive the equivalent of a Technicolor dreamcoat, giving them 
favorite-son status, when other industries, like airlines and 
retailers, also have suffered from the national recession?'' 
More bluntly, the September 2009 issue of The Atlantic simply 
cut to the bottom line: ``Essentially, the government was 
engineering a transfer of wealth from TARP bank shareholders to 
auto workers, and pressuring other creditors to go along.'' 
\532\ The Chrysler and GM reorganizations represent a sad day 
for the rule of law, the sanctity of commercial law principles 
and contractual rights, long term economic growth, and the 
ideal that the United States government should not pick winners 
and losers.
---------------------------------------------------------------------------
    \529\ In the bankruptcy proceedings for Chrysler and GM, (i) ``Old 
Chrysler'' sold substantially all of its assets to ``New Chrysler'' and 
(ii) ``Old GM'' sold substantially all of its assets to ``New GM,'' 
each pursuant to Section 363 of the United States Bankruptcy Code. For 
purposes of simplicity, I generally refer to these entities as 
``Chrysler'' or ``GM,'' but occasionally employ other terms as 
appropriate.
    \530\ In a written response to the Panel the Administration stated:

    Outright failure of GM and Chrysler would likely have led to 
uncontrolled liquidations in the automotive industry, with widespread 
devastating effects. Importantly, the repercussions of such 
liquidations could have included immediate and long-term damage to the 
U.S. manufacturing/industrial base, a significant increase in 
unemployment with direct harm to those both directly and indirectly 
related to the auto sector (e.g., dealerships being shuttered, plant 
closings, supplier failures, service centers closing, etc.), and 
further damaged our financial system, as automobile financing accounts 
for a material portion of our overall financial activity.
    Under the direction of the President, the Administration sought to 
avoid such disruptions to the financial system and the economy as a 
whole by providing the minimum capital necessary to these companies to 
facilitate their restructurings. Prior to advancing new funds, the 
Administration has relied on commercial principles in determining the 
viability of these businesses and in structuring the terms of its 
investments.
    The President's March 30th, April 30th, and June 1st speeches 
detail the rationale for further investments in the companies.
    Unfortunately, the Administration's response does not address how 
the $81 billion allocated to the auto programs could have been spent to 
assist other American taxpayers, including small businesses.
    \531\ In a written response to the Panel neither Chrysler nor GM 
acknowledged that by rescuing the two distressed and arguably 
mismanaged automakers the United States government chose not to assist 
other American taxpayers.
    Chrysler response:

    Please refer to (1) the materials submitted to the U.S. Congress by 
Chrysler LLC on December 2, 2008, (2) the Restructuring Plan for Long-
Term Viability submitted by Chrysler LLC to the U.S. Treasury on 
February 17, 2009, and (3) the testimony and supporting materials from 
Chrysler LLC and its advisors that are part of the public record in the 
bankruptcy proceedings of Chrysler LLC pending in the U.S. Bankruptcy 
Court for the Southern District of New York. These public materials 
provide comprehensive information detailing the sudden and drastic 
effects of the global credit crisis on the U.S. auto industry, the 
potential disastrous effects on the U.S. economy of a liquidating 
bankruptcy of Chrysler, and the potential for the new Chrysler to 
preserve tens of thousands of jobs and generate billions of dollars of 
federal, state and local tax revenues in the U.S.

    GM response:

    The government's provision of debtor-in-possessing financing when 
none was available in the private market, along with its other support 
for General Motors, enabled the company to go through bankruptcy 
without liquidation. As Mr. McAlinden testified, the government's 
actions probably avoided millions of job losses and billions of dollars 
of lost income and lost tax revenue. These millions of taxpayers, along 
with the state and local governments which their taxes support, 
benefited substantially from the government's involvement. Beyond this, 
the soundness of the government's investment will only be proved out 
over time.
    \532\ See ``The Final Days of Merrill Lunch,'' The Atlantic, 
September 2009, at www.theatlantic.com/doc/200909/bank-of-america.
---------------------------------------------------------------------------
    Given the unorthodox reordering of the rights of the 
Chrysler and GM creditors, a fundamental question arises as to 
whether the Administration directed that TARP funds be used to 
advance its economic, social and political objectives rather 
than to stabilize the American economy as required by EESA. It 
has long been my view that the United States government should 
not engage in the business of picking winners and losers and 
certainly should not allocate its limited resources to favor 
one group of taxpayers over another. Following the Chrysler and 
GM bankruptcies one has to question what's next in the 
Administration's playbook--a bailout of the airline industry 
and its unionized workforce? What about Starbucks?

 2. TRANSFER OF TARP PROCEEDS AND RETIREMENT SAVING OF INDIANA SCHOOL 
         TEACHERS AND POLICE OFFICERS TO THE UAW AND THE VEBAS

    On a ``before'' v. ``after'' basis the Chrysler and GM 
bankruptcy cases make little legal or economic sense.\533\ How 
is it possible that the Chrysler and GM VEBAs \534\--unsecured 
creditors--received a greater allocation of proceeds than the 
Chrysler senior secured creditors or the GM bondholders? In 
other words, why did the United States government spend tens of 
billions of dollars of taxpayer money to bail out employees and 
retirees of the UAW to the detriment of other non-UAW employees 
and retirees--such as retired school teachers and police 
officers from the State of Indiana \535\--whose pension funds 
invested in Chrysler and GM indebtedness? \536\ Chrysler and GM 
were restructured with taxpayer money, that is, funds from the 
TARP. After New Chrysler and New GM purchased the assets of the 
old auto makers, it's relatively clear that the new entities 
had little choice but to enter into collective bargaining 
agreements with the UAW--the companies needed workers. But 
what's not clear is why the new entities transferred a 
substantial amount of equity to the VEBAs of New Chrysler and 
New GM.
---------------------------------------------------------------------------
    \533\ The Chrysler and GM bankruptcy rearranged the rights of the 
creditors and equity holders as follows:

    Chrysler. Pursuant to the Chrysler bankruptcy, the equity of New 
Chrysler was allocated as follows:
    (i) United States government (9.846% initially, but may decrease to 
8%),
    (ii) Canadian government (2.462% initially, but may decrease to 
2%),
    (ii) Fiat (20% initially, but may increase to 35%), and
    (iii) UAW (comprising current employee contracts and a VEBA for 
retired employees) (67.692%, but may decrease to 55%).

    The adjustments noted above permit Fiat to increase its ownership 
interest from 20% to 35% by achieving specific performance goals 
relating to technology, ecology and distribution designed to promote 
improved fuel efficiency, revenue growth from foreign sales and U.S. 
based production.
    Some, but not all, of the claims of the senior secured creditors 
were of a higher bankruptcy priority than the claims of the UAW/VEBA.
    The Chrysler senior secured creditors received 29 cents on the 
dollar ($2 billion cash for $6.9 billion of indebtedness).
    The UAW/VEBA, an unsecured creditor, received (x) 43 cents on the 
dollar ($4.5 billion note from New Chrysler for $10.5 billion of 
claims) and (y) a 67.692% (which may decrease to 55%) equity ownership 
interest in New Chrysler.
    GM. Pursuant to the GM bankruptcy, the equity of New GM was 
allocated as follows:

    (i) United States government (60.8%),
    (ii) Canadian government (11.7%),
    (iii) UAW (comprising current employee contracts and a VEBA for 
retired employees) (17.5%), and
    (iv) GM bondholders (10%).

    The bankruptcy claims of the UAW/VEBA and the GM bondholders were 
of the same bankruptcy priority.
    The equity interest of the UAW/VEBA and the GM bondholders in New 
GM may increase (with an offsetting reduction in each government's 
equity share) to up to 20% and 25%, respectively, upon the satisfaction 
of specific conditions. It is important to note, however, the warrants 
received by the UAW/VEBA and the GM bondholders are out of the money 
and it's possible they will not be exercised. As such, it seems likely 
that the UAW/VEBA and the GM bondholders will hold 17.5% and 10%, 
respectively, of the equity of New GM.
    The GM bondholders exchanged $27 billion in unsecured indebtedness 
for a 10% (which may increase to 25%) common equity interest in New GM, 
while the UAW/VEBA exchanged $20 billion in claims for a 17.5% (which 
may increase to 20%) common equity interest in New GM and $9 billion in 
preferred stock and notes in New GM.
    \534\ The Chrysler and GM VEBAs (voluntary employee benefit 
associations) administer and fund the health and retirement plans of 
Chrysler and GM retirees.
    \535\ The Chrysler senior secured debt and the GM bonds were held 
by pension funds (for the benefit of retirees such as the Indiana 
school teachers and police officers), individuals (including the 
retirees who have contacted my office to ask why they lost their 
savings but UAW employees benefited) as well as different types of 
business entities.
    Mr. Richard E. Mourdock, the Indiana State Treasurer tirelessly 
challenged the Administration's attempt to abrogate commercial and 
contractual law principles in the Chrysler Section 363 sale on behalf 
of, among others, pension funds for retired Indiana school teachers and 
police officers.
    Mr. Mourdock has not conceded the match and on September 3, 2009 
filed a Petition for Writ of Certiorari with the United States Supreme 
Court on behalf of the Indiana pension funds for retired school 
teachers and police officers. The Petition may be found at www.in.gov/ 
tos/files/ In_ re_ Chrysler_LLC_ Cert_ Petition.pdf.
    The Petition (at page i) asks the Court to consider the following 
question:

    Chrysler's first lien lenders received a liquidation based recovery 
while unsecured creditors received over $20 billion of going-concern 
value in cash, new notes and stock from the reorganized business. 
Affirming, the Second Circuit declared that ``[t]he `side door' of 
Sec. 363(b) may well `replace the main route of chapter 11 
reorganization plans.''
    The question presented is whether section 363 may freely be used as 
a ``side door'' to reorganize a debtor's financial affairs without 
adherence to the creditor protections provided by the chapter 11 plan 
confirmation process.

    The Petition (at pages 37-39) argues:

    Regardless of its outcome, the Chrysler bankruptcy carries profound 
implications for the Nation's economy. Going forward, nearly everyone 
will feel the impact, from auto workers and suppliers to pensioners and 
bondholders to unrelated companies who hope to raise money through the 
sale of secured debt in the future. This is all the more true because 
this case is but one of the most extreme manifestations of an 
increasingly common occurrence--the use of a section 363 sale to bypass 
the chapter 11 plan confirmation process.
    With these results, it is hard to imagine why other companies 
facing mounting debt and possible bankruptcy would not take this path, 
even without Government financing. See Roe & Skeel, supra, at 26 (``a 
coalition of creditors, managers, and (maybe) shareholders could 
present a Sec. 363 `plan' to the court for approval, and the plan could 
squeeze out any creditor class.''); see also Micheline Maynard, 
Automakers' Swift Cases in Bankruptcy Shock Experts, N.Y. Times, July 
6, 2009 (``For businesses that follow similar legal strategies, the 
G.M. and Chrysler cases could pave the way for a faster trip through 
court.'').
    Any struggling company could, after having made side deals with its 
favorite creditors or equity holders that the bankruptcy court imposes 
on other potential bidders, use section 363 to ``sell'' its valuable 
assets to a shell company at a deflated price, and in so doing 
eliminate all of its other debt obligations.
    The high profile of this case and the extremes to which the courts 
below went to bless the Chrysler sale have shone a light on issues 
critical to many bankruptcy cases and the capital markets. There can be 
little doubt that these issues demand the Court's attention. There will 
be no better chance to address them than this, the case that most 
profoundly presents them; and there will be no better time to review 
them than now, when the urgency of an impending sale has passed and 
there is time for cool reflection about the implications of what has 
transpired.

    The Petition (at pages 40-42) seeks the following relief:

    The Indiana Pensioners, however, do not seek to unwind that sale by 
this appeal, and section 363(m), by its express terms, contemplates 
that a sale order can be reversed--even where a sale has been 
consummated--so long as ``a remedy can be fashioned that will not 
affect the validity of the sale.''
    The Second Circuit itself has observed that it is not ``clear why 
an appellate court, considering an appeal from an unstayed but 
unwarranted order of sale to a good faith purchaser, could not order 
some form of relief other than invalidation of the sale.
    Such is the case here, where the Indiana Pensioners seek reversal 
of the Transaction Orders only to the extent that the distribution of 
proceeds was inequitable. The effect of those unwarranted orders could 
be remedied without disturbing the validity of the sale to New 
Chrysler, for example, by compelling the VEBA and the UAW to return to 
the bankruptcy estate the $4.6 billion note and common stock that they 
received under the transaction to be properly distributed pursuant to a 
chapter 11 plan of reorganization.
    \536\ In a written response to the Panel the Administration stated:

    The President directed the auto team to take a commercial approach 
to the restructuring process of these companies. As a result, the 
Administration dealt with the various creditors to GM/Chrysler as a 
commercial actor would. The final division of debt, preferred, and 
equity securities between the various creditors was the result of arm's 
length negotiations.
    The UAW/VEBA had many billions of dollars of claims and labor 
agreements governing the companies' active workforces. As part of this 
process the Union agreed to major modifications in their labor 
agreements. Under the new contracts, the VEBA received a stake in the 
reorganized companies without any immediate payment. The cooperation 
and support of the UAW is essential to the ability of the reorganized 
companies to succeed.
    This response carefully avoids the fundamental issue--why were the 
UAW/VEBAs preferred to the Indiana school teachers and police officers, 
among other creditors?
---------------------------------------------------------------------------
    Do the Administration and the UAW/VEBAs expect the American 
people to believe that the UAW employees would have refused to 
work for New Chrysler and New GM without receiving ``the 
equivalent of a Technicolor dreamcoat''? I suspect the 
employees would have been grateful for a job at a decent wage 
even if the VEBAs had ``only'' received proceeds in accordance 
with commercial law principles and the contractual expectations 
of the various bankruptcy claimants. Yes, I appreciate that Old 
Chrysler and Old GM owed substantial sums to their respective 
VEBAs and, yes, I agree that the claims should have been paid 
in full, but, no, I do not concur that the VEBAs should have 
received a windfall at the expense of Indiana school teachers 
and police officers and the other creditors of Old Chrysler and 
Old GM. The ``company needs skilled workers'' defense only goes 
so far given the adverse economic conditions affecting American 
manufacturing these days. Such an excuse cannot be used to 
obfuscate the transfer of taxpayer-sourced TARP funds to a 
favored political constituency.
    If you trace the funds, TARP money was employed by New 
Chrysler and New GM to purchase assets of the old auto makers, 
yet a substantial portion of the equity in the new entities was 
transferred to the VEBAs and, thus, not retained for the 
benefit of the American taxpayers (who funded the TARP) or 
shared with other creditors of Old Chrysler and Old GM. 
Accordingly, it's hardly a stretch to conclude that TARP funds 
were transferred to the UAW and the VEBAs after being funneled 
through New Chrysler and New GM. In addition, New Chrysler and 
New GM entered into promissory notes and other contractual 
arrangements for the benefit of the VEBAs, but not for the 
benefit of the other creditors of Old Chrysler and Old GM. Why 
did the United States government--the controlling shareholder 
of New Chrysler and New GM--direct New Chrysler and New GM to 
make an exclusive gift of taxpayer funds to the VEBAs? Why 
didn't New Chrysler and New GM transfer more of their equity 
interests to the creditors of Old Chrysler and Old GM? Why were 
Indiana school teachers and police officers and other investors 
in the Chrysler senior secured indebtedness and the GM bonds in 
effect forced by the Administration to transfer a portion of 
their claims against Chrysler and GM, respectively, to the UAW 
and the VEBAs? That is, why did the Administration orchestrate 
two bankruptcy plans whereby one group of employees and 
retirees was preferred to another?
    Over the past two weeks the Administration has undertaken 
to educate the Panel regarding the due diligence investigation 
undertaken by the Auto Task Force and its advisors with respect 
to the Chrysler and GM transactions. That Mr. Bloom and the CBO 
now believe the American taxpayers may lose part of their TARP 
investments in the auto industry seems to negate both the 
seriousness and the effectiveness of any due diligence 
undertakings. I have little doubt that many detailed memos were 
prepared and that a multitude of attorneys, CPAs and other 
advisors worked long hours producing prodigious due diligence 
files. But to what purpose were these efforts directed? How is 
it possible that the Administration--based upon its putative 
due diligence--invested $81 billion in the auto industry only 
to discover less than three months later that it overinvested 
and may suffer substantial losses? What intervening event 
occurred to cause such a loss in value? Absence total 
incompetence on behalf of Treasury and its advisors--a theory I 
do not accept--only one answer follows--the Administration was 
determined to bail out the auto industry and the UAW/VEBAs 
regardless of the cost to the American taxpayers and the due 
diligence undertakings served as nothing more than expensive 
window dressing.

       3. MESSAGES TO NON-UAW EMPLOYEES AND THE FINANCIAL MARKETS

    What message does the Chrysler and GM holdings send to non-
UAW employees whose pension funds invested in Chrysler and GM 
indebtedness--you lose part of your retirement savings because 
your pension fund does not have the special political 
relationships of the UAW? What message does the Chrysler and GM 
bankruptcies send to the financial markets--contractual rights 
of investors may be ignored when dealing with the United States 
government?
    In written testimony submitted to the Panel, Barry E. 
Adler, Professor of Law and Business at New York University, 
noted:

          There are at least two negative consequences from the 
        disregard of creditor rights. First, at the time of the 
        deviation from contractual entitlement, there is an 
        inequitable distribution of assets. Take the Chrysler 
        case itself, where the approved transaction well-
        treated the retirement funds of the UAW. If such 
        treatment deprived the secured creditors of their due, 
        one might well wonder why the UAW funds should be 
        favored over other retirement funds, those that 
        invested in Chrysler secured bonds. Second, and at 
        least as importantly, when the bankruptcy process 
        deprives a creditor of its promised return, the 
        prospect of a debtor's failure looms larger in the eyes 
        of future lenders to future firms. As a result, given 
        the holding in Chrysler, and the essentially identical 
        holding in the General Motors case, discussed next, one 
        might expect future firms to face a higher cost of 
        capital, thus dampening economic development at a time 
        when the country can least well afford impediments to 
        growth.

    In a recent article analyzing the Chrysler and GM 
bankruptcies, Mark J. Roe and David A. Skeel, Professors of Law 
at Harvard University and the University of Pennsylvania, 
respectively, noted:

          Warren Buffett worried in the midst of the 
        reorganization that there would be ``a whole lot of 
        consequences'' if the government's Chrysler plan 
        emerged as planned, which it did. If priorities are 
        tossed aside, as he implied they were, ``that's going 
        to disrupt lending practices in the future.'' ``If we 
        want to encourage lending in this country,'' Buffett 
        added, ``we don't want to say to somebody who lends and 
        gets a secured position that the secured position 
        doesn't mean anything.'' \537\
---------------------------------------------------------------------------
    \537\ Roe, Mark J. and Skeel, David A., Assessing the Chrysler 
Bankruptcy (August 12, 2009). U of Penn Law School, Public Law Research 
Paper No. 09-17; U of Penn, Inst for Law & Econ Research Paper No. 09-
22. Available at SSRN: ssrn.com/abstract=1426530.

    In a recent Op-Ed in The Wall Street Journal, Todd J. 
---------------------------------------------------------------------------
Zywicki, Professor of Law at George Mason University, noted:

          By stepping over the bright line between the rule of 
        law and the arbitrary behavior of men, President Obama 
        may have created a thousand new failing businesses. 
        That is, businesses that might have received financing 
        before but that now will not, since lenders face the 
        potential of future government confiscation. In other 
        words, Mr. Obama may have helped save the jobs of 
        thousands of union workers whose dues, in part, 
        engineered his election. But what about the untold 
        number of job losses in the future caused by trampling 
        the sanctity of contracts today? \538\
---------------------------------------------------------------------------
    \538\ The Wall Street Journal, May 13, 2009, at online.wsj.com/
article/SB124217356836613091.html.

    In the September 2009 issue of The Atlantic, William D. 
---------------------------------------------------------------------------
Cohan notes:

          The rules as to how the government will act are not 
        what we learned,'' explained Gary Parr, the deputy 
        chairman of Lazard and one of the leading mergers-and-
        acquisitions advisers to financial institutions. ``In 
        the last 12 months, new precedents have been set 
        weekly. The old rules often don't apply as much 
        anymore.'' He said the recent examples of the 
        government's aggression are ``a really big deal,'' but 
        adds, ``I am not sure it is going to last a long time. 
        I sure hope not. I can't imagine the markets will 
        function properly if you are always wondering if the 
        government is going to step in and change the 
        game.\539\
---------------------------------------------------------------------------
    \539\ See ``The Final Days of Merrill Lynch,'' The Atlantic, 
September 2009, at www.theatlantic.com/doc/200909/bank-of-america.

    In his testimony before the Judiciary Committee of the 
United States House of Representatives on May 21, 2009, Andrew 
M. Grossman, Senior Legal Policy Analysts, The Heritage 
---------------------------------------------------------------------------
Foundation, stated:

          Also detrimental to General Motors and Chrysler is 
        the difficulty that they will have accessing capital 
        and debt markets. Lenders know how to deal with 
        bankruptcy--it's a well understood risk of doing 
        business. But the tough measures employed by the Obama 
        Administration to cram down debt on behalf of the 
        automakers were unprecedented and will naturally make 
        lenders reluctant to do business with these companies, 
        for fear they could suffer the same fate. Even secured 
        and senior creditors, those who forgo higher interest 
        rates to protect themselves against risks, suffered 
        large, unexpected losses. So nothing that either 
        company can offer, no special status or security 
        measure, can fully assuage lenders' fears that, in an 
        economic downturn, they could be forced to accept far 
        less than the true value of their holdings. At best, if 
        General Motors and Chrysler have access to debt markets 
        at all, they will have to pay dearly for the privilege. 
        At worst, even high rates and tough covenants will not 
        be enough to attract interest.

    The Obama Administration's transparent favoritism toward 
its political supporters in the United Auto Workers Union may 
lead other unions to demand the same: hefty payouts and 
ownership stakes in exchange for halfhearted concessions. 
Lenders know now that the Administration is unable to resist 
such entreaties. As one hedge fund manager observed, ``The 
obvious [lesson] is: Don't lend to a company with big legacy 
liabilities, or demand a much higher rate of interest because 
you may be leapfrogged in bankruptcy.''
    Perhaps the most affected will be faltering corporations 
and those undergoing reorganization--that is, the enterprises 
with the greatest need for capital. Lending money to a nearly 
insolvent company is risky enough, but that risk is magnified 
when bankruptcy ceases to recognize priorities or recognize 
valid liens. With private capital unavailable, larger 
corporations in dire straits will turn to the government for 
aid--more bailouts--or collapse due to undercapitalization, at 
an enormous cost to the economy.
    Financial institutions--enterprises that the federal 
government has already spent billions to strengthen--will also 
be affected. Many hold debt in domestic corporations that could 
be subject to government rescue, rendering their obligations 
uncertain. It is that uncertainty which transforms loans into 
impossible-to-value toxic assets and blows holes in balance 
sheets across the economy.
    Finally, there are the investors, from pension funds and 
school endowments to families building nest eggs for their 
future. General Motors bonds, like the debt of other long-lived 
corporations, has been long regarded as a refuge from the 
turmoil of equity markets. The once-safe investment held 
directly by millions of individuals and indirectly, though 
funds and pensions, by far more, are now at risk, which will be 
reflected in those assets' values.\540\
---------------------------------------------------------------------------
    \540\ Andrew M. Grossman, Senior Legal Policy Analyst, The Heritage 
Foundation, ``Bailouts, Abusive Bankruptcies, And the Rule of Law,'' 
Testimony before the Judiciary Committee of the United States House of 
Representatives, May 21, 2009, at www.heritage.org/Research/Economy/
tst052209a.cfm.
---------------------------------------------------------------------------

      4. THE USE OF TARP FUNDS IN THE CHRYSLER AND GM BANKRUPTCIES

    As part of its review of auto industry TARP financing, the 
Panel must investigate Treasury's rationale for using funding 
from a program intended to prevent systemic meltdown in the 
financial sector to support failing automakers. Section 
101(a)(1) of the EESA states that:

          The Secretary [of the Treasury] is authorized to . . 
        . purchase, and to make and fund commitments to 
        purchase, troubled assets from any financial 
        institution, on such terms and conditions as are 
        determined by the Secretary, and in accordance with 
        this Act and the policies and procedures development 
        and published by the Secretary. [emphasis added.]

    A plain reading of the statute would necessarily preclude 
the employment of TARP funds for the benefit of the auto 
industry because, among other reasons, neither Chrysler nor GM 
qualifies as a ``financial institution.'' If Chrysler and GM 
are somehow deemed to qualify as ``financial institutions,'' 
then what business enterprise will fail to so qualify? If 
Congress had intended for TARP to cover all business 
enterprises it would not have incorporated such a restrictive 
term as ``financial institution'' into EESA.
    Further, a funding bill specifically aimed at assisting the 
auto industry was not approved by Congress. Nevertheless, the 
Bush Administration extended credit to Chrysler and GM and the 
Obama Administration orchestrated the Chrysler and GM 
bankruptcies which resulted in an investment of over $81 
billion in the auto industry.
    Since the authority for such an investment remains unclear, 
I request that the Administration provide the Panel with a 
formal written legal opinion justifying.\541\
---------------------------------------------------------------------------
    \541\ In a written response to the Panel the Administration stated:

    The Treasury described the authority to use TARP funds to finance 
the old Chrysler and GM in bankruptcy court filings made on its behalf 
by the Department of Justice, specifically in the Statement of the 
United States of America Upon The Commencement of General Motors 
Corporation's Chapter 11 Case filed June 10, 2009, a copy of which has 
been provided to the Panel. In Judge Gerber's final sale order in the 
GM bankruptcy case dated July 5, 2009, also provided to the Panel, he 
wrote:
    The U.S. Treasury and Export Development Canada (``EDC''), on 
behalf of the Governments of Canada and Ontario, have extended credit 
to, and acquired a security interest in, the assets of the Debtors as 
set forth in the DIP Facility and as authorized by the interim and 
final orders approving the DIP Facility (Docket Nos. 292 and 2529, 
respectively). Before entering into the DIP Facility and the Loan and 
Security Agreement, dated as of December 31, 2008 (the ``Existing UST 
Loan Agreement''), the Secretary of the Treasury, in consultation with 
the Chairman of the Board of Governors of the Federal Reserve System 
and as communicated to the appropriate committees of Congress, found 
that the extension of credit to the Debtors is ``necessary to promote 
financial market stability,'' and is a valid use of funds pursuant to 
the statutory authority granted to the Secretary of the Treasury under 
the Emergency Economic Stabilization Act of 2008, 12 U.S.C. 
Sec. Sec. 5201 et seq. (``EESA''). The U.S. Treasury's extension of 
credit to, and resulting security interest in, the Debtors, as set 
forth in the DIP Facility and the Existing UST Loan Agreement and as 
authorized in the interim and final orders approving the DIP Facility, 
is a valid use of funds pursuant to EESA.
    The rationale and determination of the ability to use TARP funds 
applies equally to the financing provided to the new Chrysler. There 
was no new financing provided to New GM. Instead, cash flowed from old 
GM to new GM as part of the asset sale, and new GM assumed a portion of 
the loan that Treasury had made to old GM.
    The interests received by other stakeholders of Chrysler and GM 
including the UAW/VEBAs were a result of negotiations between all 
stakeholders as described in detail by myself and Harry Wilson in our 
depositions in the bankruptcy cases, transcripts of which have been 
provided to the Congressional Oversight Panel.

    I find the response unhelpful and ask the Administration to provide 
a formal written legal opinion supporting its position. Since Congress 
specifically rejected the bailout of Chrysler and GM, under what theory 
and precedent did the Executive unilaterally invest $81 billion in 
these non-financial institutions?
---------------------------------------------------------------------------
    (i) the use of TARP funds to support Chrysler and GM prior 
to their bankruptcies;
    (ii) the use of TARP funds in the Chrysler and GM 
bankruptcies;
    (ii) the transfer of equity interests in New Chrysler and 
New GM to the UAW/VEBAs; and
    (iii) the delivery of notes and other credit support by New 
Chrysler and New GM for the benefit of the UAW/VEBAs.\542\
---------------------------------------------------------------------------
    \542\ The promissory notes issued to the UAW/VEBAs are senior to 
the equity issued to the United States government. Since the government 
controlled New Chrysler and New GM at the time the notes were issued, 
it's apparent that the government agreed to subordinate the TARP claims 
held by the American taxpayers to the claims held by the UAW/VEBAs. 
What was the purpose of the subordination except perhaps to prefer the 
claims of a favored class over the claims of the taxpayers who funded 
the TARP program?
---------------------------------------------------------------------------

     5. HOW THE CHRYSLER AND GM BANKRUPTCIES HAVE BEEN RECEIVED BY 
                          BANKRUPTCY SCHOLARS

    A number of bankruptcy law academics at top-tier law 
schools have questioned the Chrysler and GM bankruptcies. In 
the Chrysler and GM proceedings, Section 363 of the United 
States bankruptcy code was used by the Administration to upset 
well established commercial law principles and the contractual 
expectations of the parties. As Professors Adler, Roe and Skeel 
note, the Chrysler and GM bankruptcy courts required each 
Section 363 bidder to assume certain obligations of the UAW/
VEBAs as part of its bid. This means that potential purchasers 
could not simply acquire the assets free and clear of the 
liabilities of the seller, but, instead, were also required to 
assume certain of those liabilities. This requirement most 
likely chilled the bidding process and precluded the 
determination of the true fair market value of the assets held 
by Chrysler and GM. By disrupting the bidding process it's 
entirely possible that TARP proceeds were misallocated away 
from the Chrysler senior secured creditors and the GM 
bondholders to the UAW/VEBAs. Although I do not concur that 
EESA authorized the use of TARP proceeds in the Chrysler and GM 
bailouts, it's nevertheless important to follow the TARP funds 
once they were committed.
    A summary of the analysis of Professors Adler, Roe, Skeel 
and Lubben as well as a set of examples are included in an 
Annex to these Dissenting Views. The examples illustrate how 
the Administration manipulated Section 363 of the bankruptcy 
code to achieve its economic, social and political objectives 
at the expense of the American taxpayers and the Chrysler 
senior secured creditors and GM bondholders.

6. PRESSURE ON TARP RECIPIENTS AND A HIGHER STANDARD OF CONDUCT FOR THE 
                        UNITED STATES GOVERNMENT

    The technical bankruptcy laws issues illustrated in the 
Annex are exacerbated because the winning purchaser in the 
Chrysler and GM cases--entities directly or indirectly 
controlled by the United States government--had virtually 
unlimited resources, which is certainly not the case in typical 
private equity transactions. The matter becomes particularly 
muddled when you consider that a majority in interest of the 
Chrysler senior secured debt was held by TARP recipients at a 
time when there was much talk in the press about 
``nationalizing'' some or all of these institutions. It is not 
difficult to imagine that these recipients felt direct pressure 
to ``get with the program'' and support the Administration's 
proposal.\543\
---------------------------------------------------------------------------
    \543\ TARP recipients who were also Chrysler senior secured 
creditors included Citigroup, JP Morgan Chase, Morgan Stanley and 
Goldman Sachs.
    See ``Dissident Chrysler Group to Disband,'' The New York Times, 
May 8, 2009, at dealbook.blogs.nytimes.com/2009/05/08/oppenheimer-
withdraws-from-dissident-chrysler-group/
?scp=1&sq=TARP%20lender%20Chrysler%20pressure&st=cse. The article 
provides:

    After a great deal of soul-searching and quite frankly agony, 
Chrysler's non-TARP lenders concluded they just don't have the critical 
mass to withstand the enormous pressure and machinery of the US 
government,'' Thomas E. Lauria, a partner of Mr. Kurtz's and the lead 
lawyer for the group. ``As a result, they have collectively withdrawn 
their participation in the court case.''
    With the group's disbanding, a little over a week since it made 
itself public, a vocal obstacle to Chrysler's reorganization has 
subsided. The committee's membership has shrunken by the day as it 
faced public criticism from President Obama and others. That continued 
withdrawal of firms led Oppenheimer and Stairway to conclude that they 
could not succeed in opposing the Chrysler reorganization plan in 
court, the two firms said in separate statements.
    In its first public statement last week, the ad hoc committee said 
that it consisted of about 20 firms holding $1 billion in secured debt. 
But hours after Mr. Obama criticized the firms as ``speculators,'' the 
group lost its first major member, Perella Weinberg Partners, which 
changed its mind and signed onto the Chrysler plan.
---------------------------------------------------------------------------
    In addition, the United States government should have held 
itself to a higher standard of conduct. This was not the time 
for brass-knuckles negotiating tactics where, yes, the rights 
of UAW employees and retirees were ultimately preferred to the 
rights of retired Indiana school teachers and police officers--
notwithstanding the priority of their respective contractual 
claims under well accepted commercial law principles. That the 
United States government was part of the process--in fact, the 
driving force in the process--is distressing. Through the 
clever use of Section 363 of the bankruptcy code an ultra-
wealthy and sophisticated party--the United States government--
orchestrated and rammed-through a plan whereby a politically 
favored class of creditors--the UAW and the VEBAs--prevailed to 
the detriment and disenfranchisement of another class of 
creditors--retired Indiana school teachers and police officers, 
among others.
    Based upon the analysis of Professors Adler, Roe and Skeel, 
the bankruptcy courts should have called a time-out and changed 
the bidding procedure (i.e., no assumption of liabilities 
required), extended the time to submit a bid \544\ and applied 
the protections afforded under the Chapter 11 reorganization 
rules. With those changes the judicial holdings would have most 
likely appeared fair and reasonable and could have served as a 
model for high-pressure bankruptcies that followed. Without 
such changes, however, the process was inherently flawed 
because we will never know if another bidder would have paid 
more for the gross assets (without the assumption of any 
liabilities) of Chrysler or GM.\545\ As intentionally 
structured by the Administration, the bidding procedures 
ultimately adopted for the Section 363 sales necessarily 
precluded the determination of the true fair market value of 
the assets held by Chrysler and GM. Without such determination, 
the appropriateness of the price paid for the assets of Old 
Chrysler and Old GM as well as the appropriateness of the 
distribution made by Old Chrysler and Old GM to the Chrysler 
senior secured creditors and GM bondholders will remain in 
doubt.
---------------------------------------------------------------------------
    \544\ Mr. Richard E. Mourdock, the Indiana State Treasurer, whose 
pension funds invested in Chrysler senior secured indebtedness, 
provided the following testimony to the Panel:

    The principal restriction was imposed by the time requirement that 
mandated the bankruptcy be completed by June 15, 2009. Throughout the 
bankruptcy process, the government maintained if the deal was not 
completed by that date that Fiat would walk away from its ``purchase'' 
of 20% of the Chrysler assets. From the beginning, the June 15 date was 
a myth generated by the federal government. Fiat was being given the 
assets at no cost at a minimum value of $400,000,000. Why would Fiat 
establish or negotiate such a date when they were to receive such a 
bonanza? On the very day that the Chrysler assets were transferred to 
Fiat, the company's chairman stated to the media that the June 15th 
date never originated from them. The artificial date drove the process 
in preventing creditors from having any opportunity to establish true 
values, prepare adequate cases, and therefore failed to protect their 
rights to the fullest provisions of the law. The artificial date also 
forced the courts to act with less than complete information.
    The U.S. [Second Circuit] Court of Appeals in its written opinion 
of August 9th, 2009, denied our pensioners standing pursuant to the 
argument that we could not prove, under any other bankruptcy plan, we 
could have received more than the $0.29 we were offered. We believe 
this was an error because the court used a liquidation value for the 
company rather than an `on-going concern' basis. We received written 
notice from the U.S. Bankruptcy Court of New York by certified letter 
of our rights to file a claim on Monday, May 18, 2009, at 10:00 a.m. We 
were advised in the letter that any evidence we wished to submit to 
make a claim against the submitted plan, (in part, the $0.29), would 
have to include trade tickets, depositions, affidavits, documents of 
evidence to substantiate claims, and etc. and would have to be filed 
with the bankruptcy court on Tuesday, May 19, 2009, by 4:00 p.m. The 
bankruptcy of Chrysler was frequently referred to as ``the most complex 
bankruptcy in American history,'' and yet we were given thirty hours to 
respond. We feel this was clearly an error in the process that helped 
to reduce the wealth of our beneficiaries.

    \545\ It's also important to note that for these purposes it's 
irrelevant if certain Chrysler or GM creditors happened to have 
purchased their securities at a cheap price. Who cares? The substantive 
legal issue concerns whether their contractual rights were honored. 
Courts should not abrogate well established commercial law principles 
and contractual expectations simply because an investor has earned a 
``reasonable return'' on its investment. That's not the rule of law, 
but the law of political expediency.
---------------------------------------------------------------------------

               7. ``POLITICAL RISK'' IN AMERICAN BUSINESS

    I anticipate that the Chrysler and GM holdings will not age 
well as more corporate and commercial law attorneys, hedge and 
private equity fund managers and corporate finance officers 
learn of their intricacies. As previously noted, many 
bankruptcy scholars believe the cases were ill considered. This 
process will take some time to mature, but counsel will 
certainly add a ``political risk'' section to their diligence 
check-lists and businesspersons will price their deals 
accordingly.
    I am troubled that the private sector must now consider 
incorporating the concept of ``political risk'' into its 
analysis before engaging in any direct or indirect transaction 
with the United States government. While private sector 
participants are accustomed to operating within a complex legal 
and regulatory environment, many are unfamiliar with the 
emerging trend of public sector participants to bend or 
restructure rules and regulations so as to promote their 
economic, social and political agenda as was clearly evident in 
the Chrysler and GM bankruptcies. The realm of political risk 
is generally reserved for business transactions undertaken in 
developing countries and not interactions between private 
sector participants and the United States government. Following 
the Chrysler and GM decisions it is possible that private 
sector participants may begin to view interactions with the 
United States government through the same jaundiced eye they 
are accustomed to directing toward third-world governments. 
It's disingenuous for the Administration to champion 
transparency and accountability for the private sector but 
neglect such standards when conducting its own affairs.\546\ 
How is it possible for directors and managers of private sector 
enterprises to discharge their fiduciary duties and 
responsibilities when policy makers legislate and regulate 
without respect for precedent and without thoughtfully vetting 
the unintended consequences of their actions?
---------------------------------------------------------------------------
    \546\ I have little doubt that the tepid response from the private 
sector regarding the Term Asset-Backed Securities Loan Facility (TALF) 
and the Public-Private Investment Partnership (PPIP) programs is 
attributable in significant part to the political risk issue.
---------------------------------------------------------------------------

           8. MANAGEMENT DECISIONS BY THE FEDERAL GOVERNMENT

    The President, in his June 1, 2009 remarks on the 
forthcoming bankruptcy of GM, called the government a 
``reluctant'' shareholder that will ``take a hands-off 
approach, and get out quickly.'' \547\ Questions still remain 
on exactly the level of the Administration's involvement in 
operational decisions. If the Auto Task Force's conduct during 
the unique bankruptcies of Chrysler and GM is any indication of 
a heavier-handed approach to come, the Panel should carefully 
follow the taxpayer's TARP investment in the auto industry very 
closely.
---------------------------------------------------------------------------
    \547\ See the following speech: www.whitehouse.gov / 
the_press_office / Remarks-by-the-President-on-General-Motors-
Restructuring/.
---------------------------------------------------------------------------
    For example, in an April 2009 interview with NPR, 
Environmental Protection Agency Administrator Lisa Jackson said 
the following:

          Jackson: ``The President has said and I couldn't 
        agree more that what this country needs is one single 
        national road map that tells auto makers who are trying 
        to become solvent again, what kind of car it is they 
        need to be designing and building for the American 
        people.''
          NPR reporter (interrupting): ``Is that the role of 
        the government, though? I mean that doesn't sound like 
        free enterprise.''
          Jackson: ``Well . . . it is free enterprise in a way. 
        . . you know, first and foremost the free enterprise 
        system has us where we are right this second . . . and 
        so some would argue that the government already has a 
        much larger role than we might have when Henry Ford 
        rolled the first cars off the assembly line.'' \548\
---------------------------------------------------------------------------
    \548\  See the April 28, 2009 transcript of the interview between 
National Public Radio and Lisa Jackson at: www.npr.org/templates/story/
story.php?storyId=103582546.

    Lately, the Administration's policy goals have been 
explicit in its contractual dealings. At the government's 
discretion, Fiat may increase its ownership stake in Chrysler 
to 35 percent if, among other performance goals, it builds a 
car that gets 40 miles per gallon or more in the U.S.\549\ What 
does this requirement have to do with stabilizing the American 
economy as required by EESA? Will the Administration demand any 
other specifications from Fiat or any other party, including 
Chrysler or GM? If so, how will these requirements correlate 
with the EESA mandate? It is also worth noting that in the 
latest United Kingdom JD Power survey, Fiat ranks last in 
overall satisfaction rankings (28th out of 28), which, 
according to one trade magazine, ``is a roundabout way of 
saying Fiat's car's aren't exactly renowned for their 
reliability in Europe. . .'' \550\ Will the Auto Task Force 
require that Chrysler and GM produce and sell certain types of 
vehicles, even if demand for them is weak or reliability and 
performance are poor?
---------------------------------------------------------------------------
    \549\  See ``Chrysler Said to Set Board Review of Models, Fiat 
Integration,'' Bloomberg, August 28, 2009, at: bloomberg.com/apps/
news?pid=20601109&sid=ae_gNcQurQuA.
    \550\ See ``Fiat ranks last in UK JD Power survey, bodes poorly for 
Chrysler,'' MotorAuthority, May 4, 2009, www.motorauthority.com/blog/
1033084_fiat-ranks-last-in-uk-jd-power-survey-bodes-poorly-for-
chrysler#comments.
---------------------------------------------------------------------------
    Below, I discuss several recommendations for the Panel to 
follow in discharging its duty to provide proper oversight for 
the Administration's financing of the auto industry. It is 
especially important that the Panel ensure that the 
Administration match its actions with its words and preclude 
its own day-to-day management decisions with respect to 
Chrysler and GM.

            9. RECOMMENDATIONS FOR INVESTIGATIONS BY SIGTARP

    I request that SIGTARP promptly investigate the following 
three matters.
    1. In the September 2009 issue, The Atlantic--hardly a 
bastion of the conservative establishment--reported:

          As the crisis has receded this year, the government 
        has remained aggressive, seeking business outcomes it 
        finds desirable with some apparent indifference to 
        contractual rights. In Chrysler's bankruptcy 
        negotiations in April, for example, Treasury's plan 
        offered the automaker's senior-debt holders 29 cents on 
        the dollar. Some debt holders, including the hedge fund 
        Xerion Capital Partners, believed they were 
        contractually entitled to a much better deal as senior 
        creditors holding secured debt. But four TARP banks--
        JPMorgan Chase, Citigroup, Morgan Stanley, and Goldman 
        Sachs--which owned about 70 percent of the Chrysler 
        senior debt at par (100 cents on the dollar), had 
        agreed to the 29-cent deal. By getting these banks and 
        the other senior-debt holders to accept the 29-cent 
        deal and give up their rights to push for the higher 
        potential payout they were entitled to, the government 
        could give Chrysler's workers, whose contracts were 
        general unsecured claims--and therefore junior to the 
        banks'--a payout far more generous than would otherwise 
        have been possible or likely. Essentially, the 
        government was engineering a transfer of wealth from 
        TARP bank shareholders to auto workers, and pressuring 
        other creditors to go along.

    A somewhat similar story played out during GM's 
bankruptcy--the government again put together a deal that 
looked to many like a gift to the United Auto Workers at the 
expense of bondholders, who were pressed hard to quickly take a 
deal that would leave them with 10 percent of the equity of the 
reorganized company (plus some out-of-the-money warrants) when 
they likely would have been able to negotiate for more in a 
less well-orchestrated bankruptcy proceeding.\551\ [emphasis 
added.]
---------------------------------------------------------------------------
    \551\ See ``The Final Days of Merrill Lynch,'' The Atlantic, 
September 2009, at www.theatlantic.com/doc/200909/bank-of-america.
    The Atlantic article also includes the following observations:

    On April 30, when President Obama announced the bankruptcy, he 
forcefully stated the White House position: ``While many stakeholders 
made sacrifices and worked constructively,'' he said, ``I have to tell 
you, some did not. In particular, a group of investment firms and hedge 
funds decided to hold out for the prospect of an unjustified taxpayer-
funded bailout. They were hoping that everybody else would make 
sacrifices, and they would have to make none. Some demanded twice the 
return that other lenders were getting. I don't stand with them. I 
stand with Chrysler's employees and their families and communities.''
    In the face of this kind of political pressure, Perella Weinberg, 
the owner of Xerion, backed down. ``In considering the President's 
words and exercising our best investment judgment,'' the firm said in a 
statement, ``we concluded that the risks of potentially severe capital 
loss that could arise from fighting this in bankruptcy court far 
outweighed any realistic potential upside.'' Tom Lauria, an attorney 
who was representing the firm during the negotiations, said in a May 1 
radio interview that his client had been told by the administration 
that the White House press corps would destroy Perella Weinberg's 
reputation if it continued to fight the deal. He later told ABC News 
that Treasury adviser Steven Rattner had made the threat. (The White 
House denied making any threats, and Perella Weinberg denied Lauria's 
account of events, without elaboration.) Lauria said, in his radio 
interview, ``I think everybody in the country should be concerned about 
the fact that the president of the United States, the executive office, 
is using its power to try to abrogate that contractual right.''
    The Obama administration also famously browbeat AIG employees, who 
had a contractual right to some $165 million in bonuses, to void that 
right. (In the face of the government's pressure and the public outcry, 
some 15 of the top 20 recipients of the retention bonuses agreed to 
give back a total of more than $30 million in payments.) Curiously, the 
government has put no pressure on Merrill executives to return their 
$3.6 billion in bonuses that were paid out in December 2008, even 
though the company had suffered those huge losses.
    The rules as to how the government will act are not what we 
learned,'' explained Gary Parr, the deputy chairman of Lazard and one 
of the leading mergers-and-acquisitions advisers to financial 
institutions. ``In the last 12 months, new precedents have been set 
weekly. The old rules often don't apply as much anymore.'' He said the 
recent examples of the government's aggression are ``a really big 
deal,'' but adds, ``I am not sure it is going to last a long time. I 
sure hope not. I can't imagine the markets will function properly if 
you are always wondering if the government is going to step in and 
change the game.'' One former Treasury official in the Bush 
administration told me he believes that the Obama administration has 
been disturbingly heavy-handed with the automobile companies and those 
who have lent to them. ``It's very easy, when you're holding all the 
cards, to impose your will,'' he said. ``And when you are the only 
source of financing, forget it.
---------------------------------------------------------------------------
    If the Administration fails to submit a satisfactory formal 
written legal opinion justifying its investment of TARP funds 
in Chrysler, GM and the other auto programs, I recommend that 
SIGTARP undertake an investigation to determine:
    (i) if the Administration inappropriately employed TARP 
funds in the Chrysler and GM bankruptcies;
    (ii) if the Administration inappropriately influenced the 
actions of any TARP recipient in the Chrysler and GM 
bankruptcies;
    (iii) if the Administration inappropriately engineered a 
``transfer of wealth from TARP bank shareholders'' to the UAW/
VEBAs in the Chrysler and GM bankruptcies; and
    (iv) if the Administration otherwise inappropriately 
orchestrated the transfer of TARP funds to the UAW/VEBAs in the 
Chrysler and GM bankruptcies?
    In conducting its investigation I recommend that SIGTARP 
subpoena the appropriate parties and ask them to respond under 
oath.
    2. Thomas E. Lauria, the Global Practice Head of the 
Financial Restructuring and Insolvency Group at White & Case 
LLP, represented a group of senior secured creditors, including 
the Perella Weinberg Xerion Fund (``Perella Weinberg''), during 
the Chrysler bankruptcy proceedings.
    On May 3, The New York Times reported:

          In an interview with a Detroit radio host, Frank 
        Beckmann, Mr. Lauria said that Perella Weinberg ``was 
        directly threatened by the White House and in essence 
        compelled to withdraw its opposition to the deal under 
        threat that the full force of the White House press 
        corps would destroy its reputation if it continued to 
        fight.''

    In a follow-up interview with ABC News's Jake Tapper, he 
identified Mr. [Steven] Rattner,\552\ the head of the auto task 
force, as having told a Perella Weinberg official that the 
White House ``would embarrass the firm.'' [emphasis added.]
---------------------------------------------------------------------------
    \552\ For a further discussion of the interactions between Mr. 
Rattner and Perella Weinberg see:

    ``The Final Days of Merrill Lynch,'' The Atlantic, September 2009, 
at www.theatlantic.com/doc/200909/bank-of-america, and ``Exit the 
Czar,'' New York Magazine, August 2, 2009, at nymag.com/news/featuers/
58193/.
---------------------------------------------------------------------------
    I recommend that SIGTARP undertake an investigation to 
determine if Mr. Rattner made such statement to Mr. Lauria or 
Perella Weinberg.
    In conducting its investigation I recommend that SIGTARP 
subpoena Mr. Rattner, Mr. Lauria and representatives of Perella 
Weinberg and ask them to respond under oath.\553\
---------------------------------------------------------------------------
    \553\ In a written response to the Panel the Administration stated:

    As [Mr. Bloom--the head of Treasury's Auto Task Force] testified 
during the July 27 Field Hearing of the Congressional Oversight Panel, 
[he has] spoken to Mr. Rattner about this matter, and he categorically 
denies Mr. Lauria's allegations. [Mr. Bloom has] no knowledge of any 
other contact with Mr. Lauria or with people at Perella Weinberg 
regarding the issues mentioned above. SIGTARP will determine the 
appropriate use of its subpoena power.

    The response is not acceptable because the Administration has 
refused to conduct a proper due diligence investigation of this matter 
by contacting Mr. Lauria and representatives of Weinberg Perella. I 
recommend that SIGTARP promptly investigate this matter.

    Mr. Beckmann's interview with Mr. Lauria is available at 
www.760wjr.com/article.asp?id=1301727&spid=6525. It's 
definitely worth taking a few minutes to listen to Mr. 
Lauria.\554\
---------------------------------------------------------------------------
    \554\ I have read reports to the effect that Perella Weinberg 
denied the veracity of the statements made by Mr. Lauria. Perhaps 
that's true, but the press release issued by Perella Weinberg does no 
such thing. The press release merely states that Perella Weinberg did 
not change ``its stance on the Chrysler restructuring due to pressure 
from White House officials,'' which is entirely different from simply 
denying Mr. Lauria's statements. See The New York Times, May 3, 2009, 
at dealbook.blogs.nytimes.com/2009/05/03/white-house-perella-weinberg-
deny-claims-of-threat-to-firm/#statement.
---------------------------------------------------------------------------
    3. Regarding the reorganization of the auto parts 
manufacturer, Delphi, on July 17, The New York Times reported:

          Delphi's new proposal [reached with its lender group] 
        is similar to its agreement with Platinum [Equity, a 
        private equity firm], which was announced June 1, the 
        day GM filed for bankruptcy. But hundreds of objectors, 
        including the company's debtor-in-possession lenders, 
        derided that proposal as a ``sweetheart deal'' that 
        gave the private equity firm control of Delphi for $250 
        million and a $250 million credit line. [emphasis 
        added.]

    On June 24, The New York Times reported that ``Delphi 
worked with GM and the Obama administration to negotiate with 
Platinum . . .''
    I recommend that SIGTARP undertake an investigation to 
determine if the Administration assisted with the negotiation 
of a ``sweetheart deal'' for the benefit of Platinum Equity.
    In conducting its investigation I recommend that SIGTARP 
subpoena the appropriate parties and ask them to respond under 
oath.\555\
---------------------------------------------------------------------------
    \555\ In a written response to the Panel the Administration stated:

    The Delphi transactions were negotiated between GM and Delphi. GM 
determined a failure of Delphi would have led to high losses at GM. The 
auto team was involved in discussions to the extent necessary to avoid 
potential destruction of equity value of GM, which would have led to 
large losses to the Treasury investment and for the U.S. taxpayer.

    Again, this response is particularly vague and inappropriate and 
avoids the key issue--did the Administration advocate a ``sweetheart'' 
deal for the benefit of Platinum Equity. I recommend that SIGTARP 
promptly investigate this matter.
---------------------------------------------------------------------------

                     10. ADDITIONAL RECOMMENDATIONS

    I offer the following additional recommendations:
    1. In order to end the abuses of EESA as evidenced by the 
Chrysler and GM bankruptcies the TARP program must end. These 
bankruptcies clearly show that the program is beyond capable 
oversight. Further, the TARP program should be terminated due 
to:
         The desire of the American taxpayers for the 
        TARP recipients to repay all TARP related investments 
        sooner rather than later;
         The troublesome corporate governance and 
        regulatory conflict of interest issues raised by 
        Treasury's ownership of equity and debt interests in 
        the TARP recipients;
         The stigma associated with continued 
        participation in the TARP program by the recipients; 
        and
         The demonstrated ability of the Administration 
        to use the program to promote its economic, social and 
        political agenda with respect to, among others, the 
        Chrysler and GM bankruptcies.\556\
---------------------------------------------------------------------------
    \556\ See ``BofA Seeks to Repay a Portion of Bailout,'' The Wall 
Street Journal, September 1, 2009, at online.wsj.com/ article/ 
SB125176546582274505.html#mod= todays_ us_ money_and _investing.
    The article provides:

    The discussions between Bank of America and the government are the 
latest example of large corporations trying to wrestle themselves free 
of the government's grip after extraordinary federal assistance last 
year. Some other large firms, such as Goldman Sachs Group Inc., have 
already repaid the government's investment, but Bank of America's 
situation was seen as much more complex.

    In addition to giving Bank of America extra TARP money, the 
government agreed in January to absorb a chunk of losses on a $118 
billion pool of assets owned by BofA and Merrill. The bank would be on 
the hook for the first $10 billion in losses, and the U.S. would cover 
90% of the remainder.
    In exchange for this protection, the bank would issue to the 
Treasury $4 billion in preferred stock carrying an 8% dividend, costing 
the bank about $320 million a year. BofA also would pay the Federal 
Reserve two-tenths of a percent on the $118 billion, or $236 million.
    If the bank wanted to end the arrangement, an ``appropriate fee'' 
was required. The Treasury and the Federal Reserve are asking the bank 
to pay between $300 million and $500 million to end this plan and 
pushing executives to consider a number on the high end of that 
spectrum, said a person close to the situation. The bank is now 
considering the request.
    The bank and the government never signed a final contract on the 
loss-sharing pact amid disagreement about what it would cover, and BofA 
said in May that it wanted out. Its view was that regulators ``tried to 
change the game,'' said a person familiar with the bank's position.
    The bank balked at the idea of an exit fee, saying that its 
positions had never actually been covered. Regulators argued that the 
bank benefited from the implied protection, and thus the bank should 
pay as if the agreement had been legally in place from January through 
May.
---------------------------------------------------------------------------
    Some of the adverse consequences that have arisen for TARP 
recipients include, without limitation:
         Although necessary, uncertain executive 
        compensation restrictions;
         Corporate governance and conflict of interest 
        issues;
         Employee retention difficulties; and
         The distinct possibility that TARP 
        recipients--including those who have repaid all Capital 
        Purchase Program advances but have warrants outstanding 
        to Treasury--may be subjected to future adverse rules 
        and regulations.
    I introduced legislation--H.R. 2745--to end the TARP 
program on December 31, 2009. In addition, the legislation:
         Requires Treasury to accept TARP repayment 
        requests from well capitalized banks;
         Requires Treasury to divest its warrants in 
        each TARP recipient following the redemption of all 
        outstanding TARP-related preferred shares issued by 
        such recipient and the payment of all accrued dividends 
        on such preferred shares;
         Provides incentives for private banks to 
        repurchase their warrant preferred shares from 
        Treasury; and
         Reduces spending authority under the TARP 
        program for each dollar repaid.
    2. As previously noted, according to the latest estimate 
from the CBO, the investment of TARP funds in the auto industry 
is expected to add $40 billion more to the deficit than CBO 
calculated just five months earlier in March 2009.\557\ A 
reasonable interpretation of such estimate provides that the 
American taxpayers may suffer a loss of over 50 percent of the 
TARP funds invested in Chrysler, GM and the other auto 
programs. I request that the CBO release its latest estimates 
regarding the subsidy rate for the investment of TARP funds in 
the auto industry.
---------------------------------------------------------------------------
    \557\ See ``The Budget and Economic Outlook: An Update,'' 
Congressional Budget Office, August 2009, pages 55-56, at www.cbo.gov/ 
ftpdocs/ 105xx/doc10521/08-25-BudgetUpdate.pdf. The report provides in 
part:

    The improvement in market conditions results in a reduction in the 
subsidy rate associated with the Capital Purchase Program (CPP)--a 
major initiative through which the government purchases preferred stock 
and warrants (for the future purchase of common stock) from banks. CBO 
has dropped the projected subsidy for the remaining investments in that 
program from 35 percent in the March baseline to 13 percent. The 
decrease in the estimated CPP subsidy cost also reflects banks' 
repurchase of $70 billion of preferred stock through June. Similarly, 
the estimated subsidy cost for other investments in preferred stock 
(for example, that of American International Group) has also been 
reduced. Partially offsetting those reductions in projected costs is 
the expansion of assistance to the automotive industry; CBO has raised 
its estimate of the costs of that assistance by nearly $40 billion 
relative to the March baseline. [emphasis added.]
---------------------------------------------------------------------------
    3. The Administration should provide the Panel with the 
criteria it uses to determine which entities or types of 
entities are allowed to receive assistance through TARP. The 
Administration should also provide the Panel with a formal 
written legal opinion justifying the use of TARP for any such 
entities.\558\
---------------------------------------------------------------------------
    \558\ In a written response to the Panel the Administration stated:

    Each program has guidelines that specify eligibility criteria. 
These criteria are posted on the financial stability website, 
www.financialstability.gov.

    For example, in determining whether an institution is eligible for 
funding under the Automotive Industry Financing Program, Treasury has 
identified the following factors for consideration, among other things:

    1. The importance of the institution to production by, or financing 
of, the American automotive industry;
    2. Whether a major disruption of the institution's operations would 
likely have a materially adverse effect on employment and thereby 
produce negative effects on overall economic performance;
    3. Whether the institution is sufficiently important to the 
nation's financial and economic system that a major disruption of its 
operations would, with a high probability, cause major disruptions to 
credit markets and significantly increase uncertainty or losses of 
confidence, thereby materially weakening overall economic performance; 
and
    4. The extent and probability of the institution's ability to 
access alternative sources of capital and liquidity, whether from the 
private sector or other sources of U.S. government funds.
    I find the ``anything goes,'' ``we know it when we see it'' 
response unhelpful and ask the Administration to provide a formal 
written legal opinion.
---------------------------------------------------------------------------
    4. The Administration should inform the Panel whether it 
intends to recycle TARP funds that have been repaid by TARP 
recipients and, if so, provide the Panel with a formal written 
legal opinion justifying the treatment of TARP as a revolving 
credit and equity facility.
    5. The Administration should inform the Panel whether it 
intends to extend the TARP program beyond December 31, 2009.
    6. The Administration should continue to describe in detail 
what meaningful due diligence it conducted before investing $81 
billion in Chrysler, GM, GMAC and the auto suppliers.
    7. The Administration should disclose how much additional 
funding and credit support (and the source of such amounts) it 
expects to ask the American taxpayers to provide each of 
Chrysler, GM, GMAC and the auto suppliers (i) by the end of 
this year and (ii) during each following year until all 
investments have been repaid in full in cash and all credit 
support has been terminated. The Administration should clearly 
state that the U.S. government will not in any manner directly 
or indirectly guarantee the indebtedness, obligations or 
undertakings of Chrysler, GM, GMAC or any of the auto 
suppliers.\559\
---------------------------------------------------------------------------
    \559\ In a written response to the Panel the Administration stated:

    The Administration does not plan to provide any additional funds to 
GM and Chrysler beyond those that have already been committed. GM and 
Chrysler may draw additional amounts under the loan agreements relating 
to the supplier support program. This amount is expected to be up to 
$500 million in total.

    After allocating $81 billion of taxpayer funded TARP proceeds I 
sincerely doubt that the Administration will be able to resist 
``spending only a few more billion'' if either Chrysler or GM hit a 
bump along the road.

    8. The Administration should forthrightly answer the 
following question: If Chrysler and GM are unable to sell a 
substantial number of cars at an appropriate profit margin will 
they be permitted to fail and liquidate or will they remain 
wards of the state?
    9. The Administration should provide the American taxpayers 
with monthly reports describing in sufficient detail the full 
extent of their investments in Chrysler, GM, GMAC and the auto 
suppliers. The reports should also address the following 
matters:
            When does the Administration anticipate 
        that Chrysler, GM, GMAC and the auto suppliers will 
        return to profitability; \560\
---------------------------------------------------------------------------
    \560\ In a written response to the Panel the Administration stated:

    The Administration reviewed Chrysler's and GM's business plans, 
which were developed by the companies. As part of this review process, 
the Administration's financial advisors performed sensitivity analyses 
by varying the assumptions underlying the business plans. These 
scenarios helped the Administration with its decision making process.
    The Administration has not projected dates by which the companies 
will return to profitability, which is dependent on the overall market 
conditions and economic recovery
    GM, which will probably go public before Chrysler, is expected to 
go public over the next twelve months, but the final decision will be 
made in both cases by the companies' boards of directors and will be 
dependent, among other things, on the state of the public securities 
markets. [emphasis added.]

    It is simply amazing to me that the Administration would invest 
over $81 billion of taxpayer sourced TARP funds without even projecting 
when Chrysler and GM may return to profitability.
---------------------------------------------------------------------------
            What are the Administration's financial and 
        business projections for Chrysler, GM, GMAC and the 
        auto suppliers over the next five years;
            When does the Administration anticipate 
        that Chrysler and GM will go public;
            What is the Administration's exit strategy 
        regarding Chrysler, GM, GMAC and the auto suppliers; 
        \561\ and
---------------------------------------------------------------------------
    \561\ In a written response to the Panel the Administration stated:

    The Administration plans to be a responsible steward of taxpayer 
money, and will periodically evaluate both public and private options 
to exit these investments. For GM the most likely exit strategy is a 
gradual sell off of shares following a public offering. For Chrysler, 
the exit strategy may involve either a private sale or a gradual sell 
off of shares following a public offering.

    The American taxpayers deserve a more thoughtful response for their 
$81 billion investment of TARP funds.
---------------------------------------------------------------------------
            When does the Administration anticipate 
        that Chrysler, GM, GMAC and the auto suppliers will 
        repay in full in cash all TARP funds advanced by the 
        American taxpayers? \562\
---------------------------------------------------------------------------
    \562\ In a response to the Panel the Administration stated:

    The Administration evaluated various scenarios and believes that, 
under certain assumptions, GM may be able to pay off a high percentage 
of the total funds advanced by the taxpayers. Less optimistic, and in 
Treasury's view more likely scenarios involve a reasonable probability 
of repayment of substantially all of the government funding for new GM 
and new Chrysler, and much lower recoveries for the initial loans. Such 
analyses are obviously sensitive to the overall market and the economy.

    Based upon this vague response it appears that Chrysler and GM will 
most likely not repay all of the TARP funds advanced by the American 
taxpayers.
    In a written response to the Panel representatives of GM stated:

    Question: When do you anticipate that your company will return to 
profitability?
    Response: On July 10, GM's CEO announced that our Viability Plan 
projections contemplate breakeven Adjusted Earnings Before Interest and 
Tax (EBIT) by 2010 and positive Adjusted Operating Cash Flow by 2011.
    Question: What are your projections for your company over the next 
five years?
    Response: Business plan projections for GM were included in the 
Stephen Worth Declaration filed in Bankruptcy court on June 4, 2009, in 
support of the proposed 363 sale. These projections contemplate 
adjusted Earnings Before Tax (EBT) of ($1.3)B, $3.0B, $5.3B, $6.9B and 
$7.8B for CY 2010--2014 and at the time were based on current 
assumptions including total U.S. industry sales projections of 12.5M 
units, 14.3M units, 16.0M units, 16.4M units and 16.8M units for CY 
2010--CY 2014.
    Question: When do you anticipate that your company will go public?
    Response: The timing of an initial public offering will be heavily 
influenced by conditions in the equity markets and continued recovery 
in the auto industry, but we'd like to see the company in a position to 
launch a public offering as soon as sometime next year if the market 
conditions are suitable. Ultimately, General Motor's Board of Directors 
will determine when an IPO would be in the best interest of the Company 
and its stockholders.
    Question: What is the Administration's exit strategy regarding the 
investment of TARP funds in your company?
    Response: We do not have any information to add to the testimony of 
Mr. Bloom at the hearing.
    Question: When do you anticipate that your company will repay in 
full in cash all TARP funds advanced by the American taxpayers?
    Response: The American taxpayer will be repaid as GM repays the 
United States Department of the Treasury loan and as the United States 
Department of the Treasury monetizes its equity in GM post our IPO. 
While we are required to repay the United States Department of the 
Treasury loan by 2015, our goal is to repay this loan much sooner. We 
expect the company will be taken public as soon as practical sometime 
next year. Ultimately, General Motor's Board of Directors will 
determine when an IPO would be in the best interest of the Company and 
its stockholders.
    In a written response to the Panel representatives of Chrysler 
stated:

    Question: When do you anticipate that your company will return to 
profitability? What are your projections for your company over the next 
five years? When do you anticipate that your company will go public?
    Response: As part of the 363 sales process, Chrysler LLC submitted 
a business plan (the ``363 plan''). Currently, Chrysler Group LLC is 
elaborating its 5-year business plan, the results of which are expected 
to represent an improvement on the 363 plan outcome.
    Decisions with respect to an initial public offering are within the 
province of the Members (equity holders).
    Question: What is the Administration's exit strategy regarding the 
investment of TARP funds in your company?
    Response: The $7 billion secured loan to Chrysler Group LLC from 
the US Treasury requires repayment of all amounts borrowed by June 
2017. Decisions with respect to an initial public offering are within 
the province of the Members (equity holders).
    Funds advanced under the Warranty Support Program were repaid in 
July 2009, and funds advanced under the Supplier Support Program in May 
2009 are scheduled to be repaid in 2010.
    Question: When do you anticipate that your company will repay in 
full in cash all TARP funds advanced by the American taxpayers?
    Response: The $7 billion secured loan to Chrysler Group LLC from 
the US Treasury requires repayment of all amounts borrowed by June 
2017. Decisions with respect to an initial public offering are within 
the province of the Members (equity holders).
    Funds advanced under the Warranty Support Program were repaid in 
July 2009, and funds advanced under the Supplier Support Program in May 
2009 are scheduled to be repaid in 2010.
---------------------------------------------------------------------------
    10. The Administration should treat the American taxpayers 
as bona fide investors in Chrysler and GM and provide them with 
at least the same level of disclosure they would receive under 
the securities laws and state corporate law if Chrysler and GM 
were public companies and each American taxpayer a common 
shareholder. Such materials should include, without limitation, 
Forms 10-K, 10-Q and 8-K, annual reports, management's 
discussion and analysis (MD&A), projections, proxy materials, 
offering documents, and the like.
    11. Chrysler and GM should promptly disclose all 
contractual arrangements with the U.S. government, together 
with a detailed description of the contract, its purpose, the 
transparent and open competitive bidding process undertaken and 
the arm's length and market-directed nature of the 
contract.\563\
---------------------------------------------------------------------------
    \563\ In a written response to the Panel the Administration stated:

    Chrysler and GM will be subject to the same reporting requirements 
with respect to contractual arrangements as are any other similarly 
situated business entity. The companies are also subject to audit, 
including by SIGTARP and GAO.
---------------------------------------------------------------------------
    12. Chrysler and GM should not receive favorable government 
contracts or other direct or indirect subsidies the award of 
which is not based upon competitive, objective and transparent 
criteria.\564\
---------------------------------------------------------------------------
    \564\ In a written response to the Panel the Administration stated:

    Chrysler and GM will not receive any special treatment when 
competing for government contracts or any direct or indirect subsidies 
as a result of the government's investments in these companies. They 
will have to win contracts based on their commercial strengths like any 
other auto manufacturer. As a principle, the Administration does not 
plan to manage these businesses or get involved in day to day 
management.
    It is critical that the Panel continue to monitor this issue.
---------------------------------------------------------------------------
    13. The U.S. government should establish transparent 
procedures to resolve any conflict of interest issues arising 
from its role as a creditor or equity holder in Chrysler and GM 
and as a supervising governmental authority for Chrysler and 
GM.\565\
---------------------------------------------------------------------------
    \565\ In a written response to the Panel the Administration stated:

    The Administration has already separated its role as investor/
lender from that of regulator. The Administration has completely 
different teams working in these capacities, and decision-making in 
these areas is very purposefully separated. For matters related to the 
financial interests of taxpayers, the team overseeing the investments 
and loans will continue to act like any commercial actor in terms of 
protecting taxpayer capital. For regulatory matters, those functions 
will continue as if the GM and Chrysler interventions had not taken 
place.
    It is critical that the Panel continue to monitor this issue.
---------------------------------------------------------------------------
    14. The IRS, SEC and other governmental agencies should be 
permitted to discharge their regulatory and enforcement 
responsibilities with respect to Chrysler and GM without 
political influence.\566\
---------------------------------------------------------------------------
    \566\ In a written response to the Panel the Administration stated:

    The companies will be subject to the same regulatory and 
enforcement requirements as are any other similarly situated business 
entity.
    It is critical that the Panel continue to monitor this issue.
---------------------------------------------------------------------------
    15. The Administration should disclose its corporate 
governance policies regarding Chrysler and GM as well as the 
vetting process for new directors of Chrysler and GM.\567\
---------------------------------------------------------------------------
    \567\ In a written response to the Panel the Administration stated:

    The Treasury auto team used a commercial process to vet directors 
as would be expected of any well-managed corporation. In the end, the 
auto team is comfortable that it has brought together world-class 
boards that are focused on being responsible stewards of taxpayer 
dollars and creating shareholder value.
    In a written response to the Panel representatives of GM stated:

    Question: How frequently does communication occur between any 
member of the Administration and the directors and executives from your 
company?
    Response: Communications between the Administration and General 
Motors Company has been reduced significantly since July 10, 2009. The 
number of members on the President's Automotive Task Force has been 
reduced significantly.
    Question: What is the nature of such communication?
    Response: The contact has focused on questions related to regular 
financial reporting requirements under the UST loan as well as the 
amendment of the UST loan document to further clarify certain reps and 
warranties related to GM and its covered group members.
    Question: Is the Administration in any manner providing input 
regarding corporate policy and/or the day-to-day management of your 
company?
    Response: There are some areas regarding corporate policy in which 
we communicate with the Administration such as executive compensation. 
The Administration does not provide input regarding day-to-day 
management of our company.
    Question: If so, what input is being provided and under what 
authority?
    Response: Generally, input has been provided by the United States 
Department of the Treasury and we expect input from the TARP Special 
Compensation Master.
    Question: Does your company seek the approval of the Administration 
regarding any matter?
    Response: Yes, under the terms of the United States Department of 
the Treasury loan we must seek approval on items such as withdraws from 
the escrow account as well as TARP Special Compensation Master approval 
of compensation plans and payments for our senior executive officers 
and the next 20 highest compensated employees.

    In a written response to the Panel representatives of Chrysler 
stated:

    Question: How frequently does communication occur between any 
member of the Administration and the directors and executives from your 
company? What is the nature of such communication?
    Response: There is no established schedule for communications. 
Since June 10, 2009, interactions with the US Treasury have occurred a 
few times a week and have related to, among other things, the formation 
and composition of the Board, financial reporting requirements, efforts 
to finalize a long-term business plan and an executive compensation 
program, and the Warranty Commitment Program and Supplier Receivables 
Program sponsored by the US Treasury.
    Question: Is the Administration in any manner providing input 
regarding corporate policy and/or the day-to-day management of your 
company? If so, what input is being provided and under what authority? 
Does your company seek the approval of the Administration regarding any 
matter?
    Response: The US Treasury has no role in the company's day-to-day 
management or policy making, except that (1) the US Treasury included a 
requirement in its First Lien Credit Agreement with the company that 
requires the company to maintain an expense policy prohibiting or 
limiting certain expenditures, and (2) the company's executive 
compensation program is required to be approved by the US Treasury's 
Special Master for Executive Compensation, Mr. Kenneth Feinberg.
---------------------------------------------------------------------------
    16. The Chair of the Board and CEO of Chrysler and GM 
should certify each quarter that the government has not in any 
manner directed or influenced the policies or day-to-day 
management and affairs of either company.
    17. The management of Chrysler and GM should provide the 
American taxpayers with a quarterly business plan that 
addresses, without limitation, the following challenging 
issues:
     Without a growing SUV market, how do Chrysler and 
GM plan to compete against the Asian and European manufacturers 
who have all but perfected the design and manufacture of well-
built fuel efficient cars? \568\
---------------------------------------------------------------------------
    \568\ In a written response to the Panel representatives of GM 
stated:

    GM continuously assesses the automotive market and consumer 
behavior from three viewpoints: historical lessons, current realities 
and future projections. History provides insight re: consumer behavior 
relative to actual market conditions--the end result of economic 
factors such as overall economic health, gas prices, regulatory 
impacts; new product entries; societal trends, etc. Current realities 
provide insight to real-time behaviors--for example, the dramatic shift 
to compact sized vehicles during the gas price spike of 2008 when 
consumers expected fuel prices to continue to climb to the $5/gal 
level. Future projections assess the expected impact of the economic 
and regulatory outlook, demographic and societal trends and expected 
supply side influences. This ``scanning'' process leverages consumer 
surveys, primary research and product clinics, internal models and 
external academic and industry experts from various fields.
    As part of both the vehicle and marketing development processes, GM 
leverages extensive consumer and expert opinion research. The research 
may include full scale models of future entries in a competitive 
showroom environment with a representative sample of current new 
vehicle owners, ``garage visits'' (ethnography) in competitive owners'' 
homes or focus groups in a neutral setting. All research is constructed 
to eliminate bias and GM's sponsorship of the research is masked.

    In a written response to the Panel, representatives of Chrysler 
stated:

    Analysis of industry trends indicate that over the past five years 
small and compact vehicles have captured a larger portion of the U.S. 
light vehicle industry (2004 14%; 2008 22%). Industry forecasts predict 
a continuation of this growth over the next five years.
    Based on our propriety web-based survey about powertrains, 
Americans feel that fuel prices will be, on average, $2.89 per gallon 
in one year and $4.50 in five years. This supports the expectation that 
more fuel efficient vehicles will grow in demand as we have seen with 
recent fuel price spikes. With technology, consumers will also have a 
choice of getting large vehicles that are more fuel efficient but with 
the likely price premium of the technology, small car demand will rise.
    Since 2004, there has been a gradual increase in purchase 
intentions for smaller vehicles and a gradual decrease for larger 
vehicles. The gas price spike in 2008 magnified (and possibly 
accelerated) this trend.
    Based on our dedicated, proprietary i-community that monitors 
consumer perceptions of automotive propulsion and small cars, 41% of 
consumers would likely consider a small car in the future. Fifty 
percent indicated they were unlikely to consider a small car.

    Chrysler does not currently offer A/B segment vehicles, however, we 
are successful in the segments in which we offer vehicles:

    Chrysler Share of Segment (Chrysler Segmentation) 
     Full Size Luxury 17.8 % (Chrysler 300/C)
    Compact SUV 43.5% (Wrangler, Compass, Patriot)
    MPV 40.1% (Town & Country, Grand Caravan)
    Large Pick-Up 17.8% (Ram)
    Research shows that for small car buyers the top five primary 
reasons for purchase are the following (2008 New Vehicle Experience 
Study, Strategic Vision Inc.):
    Fuel Economy 42.7%
    Value for the Money 17.6%
    Price/Monthly Payment 6.0%
    Fun to Drive 4.2%
    Reliability 3.7%
    Having access to Fiat's technology will enable Chrysler to compete 
in the small vehicle segments with these needs.
    Fiat's success in highly competitive small car segments in markets 
such as Europe and Brazil helped establish Fiat as a highly competitive 
global manufacturer. The small car technology that Fiat will transfer 
to Chrysler will lead to similar success in the growing U.S. small car 
segment.
    In addition, Fiat will make available to Chrysler Group its C 
platform technology, which will be the basis for the renewal of the 
Chrysler product offerings in both the C and D market segments. These 
actions by Fiat will provide Chrysler with technologically updated and 
more competitive products in the most important segments in the U.S. 
market.
---------------------------------------------------------------------------
     How do Chrysler and GM plan to stop the 
deterioration of their market share?
     How do Chrysler and GM plan to decrease their time 
from design to market?
     How do the all-in wage costs of Chrysler and GM 
compare with those of Asian automakers both within and outside 
the United States?
     How do Chrysler and GM plan to develop the design 
and technical expertise necessary to build vehicles with the 
fit-and-finish and price-point of, for example, a Honda Accord 
or Civic or a Toyota Camry or Corolla, not to mention a Toyota 
Prius? \569\
---------------------------------------------------------------------------
    \569\ See ``Fiat ranks last in UK JD Power survey, bodes poorly for 
Chrysler,'' MotorAuthority, May 4, 2009, at: www.motorauthority.com/
blog/1033084--fiat-ranks-last-in-uk-jd-power-survey-bodes-poorly-for-
chrysler#comments. The article provides:

    Chrysler's vehicles, like all of America's cars, have improved 
greatly in recent years. But not-too-distant memory reminds us of the 
Le Baron and even of another ill-fated Italian tie-up and its Maserati-
branded spawn. So Fiat's poor scores in the most recent JD Power survey 
in the United Kingdom gives cause to wonder if the Fiat-Chrysler union 
might ultimately be a tragic one.
    Fiat's role in helping to save Chrysler post-bankruptcy was 
applauded by President Obama just days ago, but already the naysayers 
are building their case. And unfortunately, it's shaping up to be a 
decent one. The latest JD Power figures put Fiat at the bottom--28th of 
28--in UK satisfaction rankings. Lexus, Skoda, Honda, Toyota and Jaguar 
filled out the top 5 spots, while Citroen, Kia, Chevrolet, Mitsubishi 
and Fiat rounded out the bottom five.
    Which is a roundabout way of saying Fiat's car's aren't exactly 
renowned for their reliability in Europe, nor are those of sister brand 
Alfa Romeo though the brand wasn't separated in the results list. The 
last time either car was sold in the U.S. they had developed and 
suffered from a reputation for unreliability that ultimately 
contributed to their retreat from our shores.
    Now the continued poor performance of Fiat in markets where it's 
already established calls into question whether the Italian company 
will be able to turn things around at Chrysler, or whether the 
partnership will just degenerate into a downward spiral of poor design 
feeding poor execution. On the other hand, Fiat also makes brilliant 
cars like the 500, which slots into a segment where Chrysler is 
completely absent.
    Will the synergies make both companies better than they are on 
their own? Or will the Fiat-Chrysler partnership make the 
DaimlerChrysler era seem like a golden age?''
    See also ``Chrysler Said to Set Board Review of Models, Fiat 
Integration,'' Bloomberg.com, August 28, 2009, at bloomberg.com/apps/
news?pid=20601109&sid=ae_gNcQurQuA.
---------------------------------------------------------------------------
     What progress have Chrysler and GM made with 
respect to the development of global car platforms?
     Will the Chevrolet Volt materially assist GM's 
turn-around efforts or is its anticipated price-point too high? 
\570\
---------------------------------------------------------------------------
    \570\ See ``GM's Long, Hard, Bumpy Road to the Chevrolet Volt,'' 
The New York Times, July 10, 2009, at www.nytimes.com/cwire/2009/07/10/
10climatewire-gms-long-hard-bumpy-road-to-the-chevrolet-vo-
40366.html?scp=3&sq=volt%20chevrolet%20july%20prius&st=cse. See also 
``Sticker Shock,'' The Economist, August 21, 2009, at 
www.economist.com/sciencetechnology/displaystory.cfm?story_id=14292008.
---------------------------------------------------------------------------
     Will American consumers embrace very small Fiat-
type cars?
     After the treatment of the Chrysler senior secured 
creditors and the GM bondholders in the bankruptcy proceedings, 
how do Chrysler and GM anticipate that they will raise private 
sector financing?
    18. Why does it appear that Chrysler and GM failed to place 
any vehicle in the top-ten list of cars purchased under the 
``Cash for Clunkers Program''? \571\ It has been reported that 
Asian manufacturers claimed eight spots and Ford took the 
remaining two. The program served as a real-world market-check 
for the products offered by Chrysler and GM, and the news does 
not appear overly reassuring. Is it possible that in its haste 
to develop and expand the Cash for Clunkers Program the 
Administration actually harmed the prospects for Chrysler and 
GM? To the extent the program expedited the purchase of cars--
primarily foreign cars--it's possible that future sales 
including those by Chrysler and GM--will be unusually 
sluggish.\572\ The management of Chrysler and GM should address 
their performance under the Cash for Clunkers Program and 
whether the program had the unintended consequence of 
depressing future demand for their products.
---------------------------------------------------------------------------
    \571\ GM, however, placed second overall with 17.6 percent of total 
sales under the program. Toyota was the lead manufacturer (19.4 
percent) and Ford was third (14.4 percent) followed by Honda (13 
percent) and Nissan (8.7 percent). See www.huffingtonpost.com/2009/08/
26/cash-for-clunkers-topsell_n_269700.html.
    See an AP article on the ``Cash for Clunkers Program'' at 
www.google.com/hostednews/ap/article/
ALeqM5h4OJw5vl4nQapaKrl9XOdfTLhElwD9A5CE1O2.
    See also, ``Toyota Tops List of Cash-for-Clunkers Winners,'' The 
New York Times, August 26, 2009, at www.nytimes.com/2009/08/27/
business/27clunkers.html?_r=1&emc=eta1.
    See also, ``Next for Auto Sector, Post-Clunker Hangover,'' The Wall 
Street Journal, September 1, 2009, at online.wsj.com/article/
SB125175596718373969.html#mod=todays_us_
money_and_investing.
    The article provides:

    That could help send some car sales downward in coming months, 
offsetting somewhat the benefit to car makers and retailers of the 
governments' $2.9 billion of rebates given to customers who traded in 
700,000 old, gas-guzzling cars, for new ones in the cash-for-clunkers 
program. ``We expect sales for the remainder of the year to fall well 
below August results,'' wrote Brian Johnson, analyst at Barclays 
Capital.
    Mr. Johnson warned that investors may use Tuesdays sales figures to 
take profits in auto stocks. Already, auto stocks that appeared to get 
a boost from the program have begun to sell off.
    Now investors need signs of more solid repair to consumer 
confidence and growth in demand for cars absent government coupons.
    See ``GM, Chrysler to Advance Cash for Clunker Rebates,'' The Wall 
Street Journal, August 20, 2009, at online.wsj.com/article/
SB125077503806246225.html.
    \572\ See ``Bangers and Cash,'' The Economist, August 24, 2009, at 
www.economist.com/businessfinance/displaystory.cfm?story_id=14296297. 
The article provides:

    Rebate schemes like this tend to encourage buyers to advance 
purchases that they would have made anyway, thus cannibalising future 
sales. The termination of a car-scrappage scheme in France in the 1990s 
led to sales plunging by 20%. Nor is it certain that the scheme 
provides a more general boost to the economy, as buyers may have been 
put off other purchases in order to afford a new vehicle. That said, 
there is a case to be made that, given the depth of the crisis a few 
months ago, the boost to total demand prompted by the scrappage scheme 
did at least help to avert a Keynsian ``liquidity trap'', leading to a 
depression.
    The green benefits are also hotly contested. The scheme should help 
to make America's car fleet slightly less fuel inefficient, but there 
are significant environmental costs in scrapping perfectly good cars 
and building new ones.
    At least the scheme may have persuaded Americans to consider the 
whole cost of owning a vehicle, beyond the sticker price. Early figures 
showed that over 80% of the vehicles traded in were trucks and SUVs and 
that 59% of the vehicles bought were cars. That may be a sign of more 
trouble for American carmakers which are particularly reliant on sales 
of SUVs and trucks and which have been bailed out at huge cost to 
taxpayers. The top ten clunkers traded in are all products of Detroit's 
big three and the greater gains have come for foreign car companies 
(mainly American-built vehicles at non-unionised factories).
    Only Ford, which did not seek a government bail-out, partly because 
it was making and selling cars more in tune with America's new tastes, 
features in the top five of models bought under the programme. GM and 
Chrysler, hoping to reinvent themselves as greener car firms, may find 
that cash-for-clunkers, by turning more American heads towards Asia's 
carmakers, is a present they regret receiving.
---------------------------------------------------------------------------
    19. It has been reported that GM may be developing a plan 
to retain Opel and its British affiliate Vauxhall.\573\ The 
Administration should disclose if TARP funds will be used in 
such endeavor or if the U.S. government will directly or 
indirectly guarantee any related financings or contractual 
undertakings. The Administration should also explain how the 
retention of Opel and Vauxhall will create or save any jobs in 
this country or facilitate the repayment of TARP funds 
previously invested in GM.
---------------------------------------------------------------------------
    \573\ See ``GM is Developing an Option to Keep Opel,'' The Wall 
Street Journal, August 24, 2009, at online.wsj.com/article/
SB125114535906254779.html. See also ``Looking for Reverse,'' The 
Economist, August 27, 2009, at www.economist.com/businessfinance/
displaystory.cfm?story_id=14327351.
---------------------------------------------------------------------------
    20. The Panel should address the following questions: (i) 
did the Administration force Chrysler to accept a deal with 
Fiat,\574\ and (ii) did the Administration impede any potential 
merger or business combination or arrangement between Chrysler 
and GM? \575\
---------------------------------------------------------------------------
    \574\ In a written response to the Panel the Administration stated:

    The Administration made the determination that Chrysler's business 
plan submitted on February 17th was not viable and that, in order for 
Chrysler to receive taxpayer funds, it needed to find a partner with 
whom it could establish a successful alliance. Chrysler identified Fiat 
as a potential partner after conducting a lengthy search process that 
began before Treasury made its initial loan to Chrysler and in which 
Treasury had no involvement. Fiat was the only potential partner to 
offer to enter into such an alliance, and ultimately the Chrysler Board 
made the determination that forming an alliance with Fiat was the best 
course of action for its stakeholders.

    In a written response to the Panel representatives of Chrysler 
stated:

    Chrysler pursued an alliance with Fiat because it viewed Fiat's 
products and distribution network as complementary to Chrysler's and 
capable of strengthening Chrysler for the long-term. The US Treasury 
indicated that it would provide financing in support of an alliance 
with Fiat--first in the context of an out-of-court restructuring that 
required significant concessions by key constituencies, and later in 
the context of a sale transaction under Section 363 of the U.S. 
Bankruptcy Code.''

    I would have expected a simple ``no'' or ``yes'' followed by an 
explanation.
    \575\ See ``Unions Express Unease Over Potential G.M.-Chrysler 
Deal,'' The New York Times, October 14, 2008, at 
dealbook.blogs.nytimes.com/2008/10/14/unions-express-unease-over-
potential-gm-chrysler-deal/?scp=24&sq=chrysler%20gm%20merger&st=cse. 
The article reports:

    According to Bloomberg News, United Auto Workers President Ron 
Gettelfinger, told a Detroit radio station on Tuesday, `I personally 
would not want to see anything that would result in a consolidation 
that would mean the elimination of additional jobs.

    In a written response to the Panel the Administration stated:

    The Administration allowed GM and Chrysler to work toward a 
commercial solution they thought made sense for their businesses. Each 
company made its own determination to pursue a future independent of 
the other.

    In a written response to the Panel representatives of Chrysler 
stated:

    GM advised Chrysler it would discontinue merger discussions due to 
the need to address its own pressing liquidity issues.

    In a written response to the Panel representatives of GM stated:

    No, the Obama Administration did not thwart or discourage any 
arrangements between GM and Chrysler.
---------------------------------------------------------------------------
    21. Representatives of the UAW were invited to testify at 
the auto bailout hearing held by the Panel at Wayne State 
University School of Law in Detroit on July 27. Even though the 
headquarters of the UAW--Solidarity House--is a mere fifteen 
minute drive from the location of the hearing,\576\ no 
representative from the UAW agreed to testify. In addition, the 
CFOs of Chrysler and GM declined to appear and for some reason 
the Panel failed to invite the CEOs. Since the leadership of 
the UAW and senior management of Chrysler and GM have 
experienced little difficulty in arranging their schedules to 
travel to Washington, DC--hat-in-hand--in search of bailout 
funds, you would think they could find time to drive across 
town to testify before the Panel. You might also think they 
would welcome the opportunity to thank the American taxpayers 
for their profound generosity in rescuing two insolvent and 
grossly mismanaged companies from liquidation. With respect to 
all future hearings, the Panel should issue a press release 
noting the names and affiliations of all invitees who decline 
to testify.
---------------------------------------------------------------------------
    \576\ See MapQuest driving directions from Solidarity House to 
Wayne State University School of Law at www.mapquest.com/
maps?1a=8000+Jefferson+Avenue 
%2C+Detroit%2C+Michigan+48214&2a=471+W.+Palmer+Avenue%2C+Detroit% 
2C+Michigan+48202+.

         ANNEX TO CONGRESSMAN JEB HENSARLING'S ADDITIONAL VIEWS

      1. ANALYSIS OF CHRYSLER AND GM CASES BY BANKRUPTCY SCHOLARS

    The following analysis indicates that a number of well 
respected bankruptcy scholars believe the Chrysler and GM 
reorganizations were not legally well founded.\577\ Instead of 
simply paraphrasing the analysis of the bankruptcy scholars, I 
thought it best to let them describe the problems raised by the 
Chrysler \578\ and GM decisions in their own words. The next 
section contains a set of examples that illustrate certain of 
the fundamental objections raised by the bankruptcy law 
professors.
---------------------------------------------------------------------------
    \577\ Other bankruptcy law scholars have commented on the Chrysler 
and GM cases, including:

    (i) Richard A. Epstein, the James Parker Hall Distinguished Service 
Professor of Law, The University of Chicago, the Peter and Kirsten 
Bedford Senior Fellow, The Hoover Institution, and a visiting law 
professor at New York University Law School, offered the following 
analysis in the May 12, 2009 issue of Forbes, at www.forbes.com/2009/
05/11/chrysler-bankruptcy-mortgage-opinions-columnists-epstein.html:

    The proposed bankruptcy of the now defunct Chrysler Corp. is the 
culmination of serious policy missteps by the Bush and Obama 
administrations. To be sure, the long overdue Chrysler bankruptcy is a 
welcomed turn of events. But the heavy-handed meddling of the Obama 
administration that forced secured creditors to the brink is not.
    A sound bankruptcy proceeding should do two things: productively 
redeploy the assets of the bankrupt firm and correctly prioritize 
various claims against the bankrupt entity. The Chrysler bankruptcy 
fails on both counts.
    In a just world, that ignominious fate would await the flawed 
Chrysler reorganization, which violates these well-established norms, 
given the nonstop political interference of the Obama administration, 
which put its muscle behind the beleaguered United Auto Workers. Its 
onerous collective bargaining agreements are off-limits to the 
reorganization provisions, thereby preserving the current labor 
rigidities in a down market.
    Equally bad, the established priorities of creditor claims outside 
bankruptcy have been cast aside in this bankruptcy case as the 
unsecured claims of the union health pension plan have received a 
better deal than the secured claims of various bond holders, some of 
which may represent pension plans of their own.
    President Obama--no bankruptcy lawyer--twisted the arms of the 
banks that have received TARP money to waive their priority, which is 
yet another reason why a government ownership position in banks is 
incompatible with its regulatory role. Yet the president brands the 
non-TARP lenders that have banded together to fight this bogus 
reorganization as ``holdouts'' and ``speculators.''
    Both charges are misinformed at best. A holdout situation arises 
when one party seeks to get a disproportionate return on the sale of an 
asset for which it has little value in use. Thus the owner of a small 
plot of land could hold out for a fortune if his land is the last piece 
needed to assemble a large parcel of land. But the entire structure of 
bankruptcy eliminates the holdout position of all creditors, secured 
and unsecured alike, by allowing the court to ``cram'' the 
reorganization down their throats so long as it preserves the 
appropriate priorities among creditors and offers the secured creditors 
a stake in the reorganized business equal to the value of their claims. 
Ironically, Obama's Orwellian interventions have allowed unsecured 
union creditors to hold out for more than they are entitled to.
    His charge of ``speculation'' is every bit as fatuous. Speculators 
(who often perform a useful economic function) buy high-risk assets at 
low prices in the hope that the market will turn in their favor. By 
injecting unneeded uncertainty into the picture, Obama has created the 
need for a secondary market in which nervous secured creditors, facing 
demotion, sell out to speculators who are better able to handle that 
newly created sovereign risk. He calls on citizens to buy Chrysler 
products, but patriotic Americans will choose to go to Ford, whose own 
self-help efforts have been hurt by the Chrysler and GM bailouts.
    Sadly, long ago Chrysler and GM should have been allowed to bleed 
to death under ordinary bankruptcy rules, without government subsidy or 
penalty. Libertarians have often remarked on these twin dangers in 
isolation. The Chrysler fiasco confirms their deadly synergistic 
effect.

    (ii) Professor Todd J. Zywicki, Professor of Law, George Mason 
University, offered the following analysis in the May 13, 2009 issue of 
The Wall Street Journal, at online.wsj.com/article/
SB124217356836613091.html:

    The rule of law, not of men--an ideal tracing back to the ancient 
Greeks and well-known to our Founding Fathers--is the animating 
principle of the American experiment. While the rest of the world in 
1787 was governed by the whims of kings and dukes, the U.S. 
Constitution was established to circumscribe arbitrary government 
power. It would do so by establishing clear rules, equally applied to 
the powerful and the weak.
    Fleecing lenders to pay off politically powerful interests, or 
governmental threats to reputation and business from a failure to toe a 
political line? We might expect this behavior from a Hugo Chavez. But 
it would never happen here, right?
    Until Chrysler.
    The close relationship between the rule of law and the 
enforceability of contracts, especially credit contracts, was well 
understood by the Framers of the U.S. Constitution. A primary reason 
they wanted it was the desire to escape the economic chaos spawned by 
debtor-friendly state laws during the period of the Articles of 
Confederation. Hence the Contracts Clause of Article V of the 
Constitution, which prohibited states from interfering with the 
obligation to pay debts. Hence also the Bankruptcy Clause of Article I, 
Section 8, which delegated to the federal government the sole authority 
to enact ``uniform laws on the subject of bankruptcies.''
    The Obama administration's behavior in the Chrysler bankruptcy is a 
profound challenge to the rule of law. Secured creditors--entitled to 
first priority payment under the ``absolute priority rule''--have been 
browbeaten by an American president into accepting only 30 cents on the 
dollar of their claims. Meanwhile, the United Auto Workers union, 
holding junior creditor claims, will get about 50 cents on the dollar.
    The absolute priority rule is a linchpin of bankruptcy law. By 
preserving the substantive property and contract rights of creditors, 
it ensures that bankruptcy is used primarily as a procedural mechanism 
for the efficient resolution of financial distress. Chapter 11 promotes 
economic efficiency by reorganizing viable but financially distressed 
firms, i.e., firms that are worth more alive than dead.
    Violating absolute priority undermines this commitment by 
introducing questions of redistribution into the process. It enables 
the rights of senior creditors to be plundered in order to benefit the 
rights of junior creditors.
    The U.S. government also wants to rush through what amounts to a 
sham sale of all of Chrysler's assets to Fiat. While speedy bankruptcy 
sales are not unheard of, they are usually reserved for situations 
involving a wasting or perishable asset (think of a truck of oranges) 
where delay might be fatal to the asset's, or in this case the 
company's, value. That's hardly the case with Chrysler. But in a 
Chapter 11 reorganization, creditors have the right to vote to approve 
or reject the plan. The Obama administration's asset-sale plan 
implements a de facto reorganization but denies to creditors the 
opportunity to vote on it.
    By stepping over the bright line between the rule of law and the 
arbitrary behavior of men, President Obama may have created a thousand 
new failing businesses. That is, businesses that might have received 
financing before but that now will not, since lenders face the 
potential of future government confiscation. In other words, Mr. Obama 
may have helped save the jobs of thousands of union workers whose dues, 
in part, engineered his election. But what about the untold number of 
job losses in the future caused by trampling the sanctity of contracts 
today?
    \578\ The United States Court of Appeals for the Second Circuit 
recently affirmed the decision of the bankruptcy court in the Chrysler 
proceedings. In re Chrysler LLC, 2009 WL 2382766 (2d Cir. 2009). The 
court accepted the bankruptcy court's finding that the assets of Old 
Chrysler had a fair market value of approximately $2 billion, but, 
unfortunately, did not address the ``bidding procedure'' irregularities 
raised by Professors Adler, Roe and Skeel which are discussed in the 
text below. The court also declined to address whether the Bush and 
Obama Administrations had the authority to use TARP funds with respect 
to Chrysler and GM.
---------------------------------------------------------------------------
    1. Barry E. Adler, the Petrie Professor of Law and 
Business, New York University, offered the following testimony 
to the Panel:

          The rapid disposition of Chrysler in Chapter 11 was 
        formally structured as a sale under Sec. 363 of the 
        Bankruptcy Code.\579\ While that provision does, under 
        some conditions, permit the sale of a debtor's assets, 
        free and clear of any interest in them, the sale in 
        Chrysler was irregular and inconsistent with the 
        principles that undergird the Code.
---------------------------------------------------------------------------
    \579\ Professor Adler: The Bankruptcy Code appears in Title 11 of 
the United States Code.
---------------------------------------------------------------------------
          The most notable irregularity of the Chrysler sale 
        was that the assets were not sold free and clear . . . 
        That is, money that might have been available to repay 
        these secured creditors was withheld by the purchaser 
        to satisfy unsecured obligations owed the UAW. Thus, 
        the sale of Chrysler's assets was not merely a sale, 
        but also a distribution--one might call it a 
        diversion--of the sale proceeds seemingly inconsistent 
        with contractual priority among the creditors.
          Given the constraint on bids, it is conceivable that 
        the liquidation value of Chrysler's assets exceeded the 
        company's going-concern value but that no liquidation 
        bidder came forward because the assumed liabilities--
        combined with the government's determination to have 
        the company stay in business--made a challenge to the 
        favored sale unprofitable, particularly in the short 
        time frame afforded. It is also possible that, but for 
        the restrictions, there might have been a higher bid 
        for the company as a going concern, perhaps in 
        anticipation of striking a better deal with 
        workers.\580\ Thus, the approved sale may not have 
        fetched the best price for the Chrysler assets. That 
        is, the diversion of sales proceeds to the assumed 
        liabilities may have been greater than the government's 
        subsidy of the transaction, if any, in which case the 
        secured creditors would have suffered a loss of 
        priority for their claims. There is nothing in the 
        Bankruptcy Code that allows a sale for less than fair 
        value simply because the circumstances benefit a 
        favored group of creditors.
---------------------------------------------------------------------------
    \568\ Professor Adler: Note that these restrictions would have 
prevented credit bidding even if the secured bondholders had 
collectively desired to make such a bid because the required assumption 
of liabilities effectively eliminated the secured lender priority that 
is necessary for a credit bid.
---------------------------------------------------------------------------
          Viewed another way, the approved transaction was not 
        a sale at all, but a disguised reorganization plan, 
        complete with distribution to preferred creditors.
          Chrysler was a blueprint for the General Motors 
        bankruptcy, which, like that of Chrysler, included a 
        sale of the debtor's valuable assets to an entity that 
        assumed unsecured obligations owed its workers or 
        former workers.
          Still, just as in the case of Chrysler, the approval 
        of a restricted bid process [in GM] establishes a 
        dangerous precedent, one that went unnoticed, or at 
        least unnoted, by the court.
          Judge Gerber [in GM] ignores the sales procedure, 
        which, like that in Chrysler, strictly limited the time 
        for competing bids and restricted bidders to those 
        willing to assume significant UAW liabilities. The 
        process thus precluded a potentially higher bid by a 
        prospective purchaser who was unwilling to make the 
        same concessions to the UAW that the government-
        sponsored purchaser was willing to endure. Thus, there 
        remained the theoretical possibility that the process 
        impermissibly transferred asset value from the 
        company's other creditors to the UAW. This is merely a 
        theoretical possibility. As noted above, it may well be 
        that no creditor other than the government secured 
        lenders suffered a loss of priority from the 
        transaction. But the case stands as precedent that 
        might cause later lenders to doubt whether future 
        debtors will be forced in bankruptcy to live up to 
        their obligations. And as also noted above, wary 
        lenders are inhospitable to economic development.

    2. Mark J. Roe and David A. Skeel, Professors of Law, 
Harvard University and the University of Pennsylvania, 
respectively, offered the following analysis in their paper 
``Assessing the Chrysler Bankruptcy'' (which also addresses the 
GM bankruptcy):

          Chrysler entered and exited bankruptcy in 42 days, 
        making it one of the fastest major industrial 
        bankruptcies in memory. It entered as a company widely 
        thought to be ripe for liquidation if left on its own, 
        obtained massive funding from the United States 
        Treasury, and exited through a pseudo sale of the main 
        assets to a new government funded entity. Most 
        creditors were picked up by the purchasing entity, but 
        some were not. The unevenness of the compensation to 
        prior creditors raised considerable concerns in capital 
        markets.
          Appellate courts had previously developed a strong 
        set of standards for a Sec. 363 sale: The sale must 
        have a valid business justification, the sale cannot be 
        a sub rosa plan of reorganization, and if the sale 
        infringes on the protections afforded creditors under 
        Chapter 11, the court can only approve it after 
        fashioning appropriate protective measures.
          The Chrysler reorganization failed to comply with 
        these requirements. Although Chrysler needed to be 
        repositioned, and needed to be repositioned quickly, it 
        had a few weeks, maybe a month, to get the process done 
        right in a way that would neither frighten credit 
        markets nor violate priorities. Chrysler's facilities 
        were already shut down and not scheduled to reopen 
        immediately. Fiat, the nominal buyer, was providing no 
        cash. The party with the money was the U.S. Treasury, 
        and it wasn't walking away.
          The plan surely was a sub rosa plan, in that it 
        allocated billions of dollars--the core determination 
        under Sec. 1129--without the checks that a plan of 
        reorganization requires.
          The informal, makeshift checks that courts had 
        previously required when there were strong Sec. 1129 
        implications were in Chrysler weak or nonexistent. The 
        courts did not even see fit to discuss Sec. 1129 in 
        their opinions. There was de facto consent from a 
        majority of the bank lenders (although not from 
        products liability claimants), but that consent came 
        from parties afflicted with serious conflicts of 
        interest and who may well be viewed as controlled by 
        the player controlling the reorganization--the United 
        States Treasury. There was a pseudo-market test, not a 
        real market test, because the plan only marketed the 
        reorganization plan itself, when the issue at stake was 
        whether the assets alone had a higher value.
          Worse yet, it's quite plausible to view the Chrysler 
        bankruptcy as not having been a sale at all, but a 
        reorganization. The New Chrysler balance sheet looks 
        remarkably like the old one, sans a couple of big 
        creditors. Courts will need to develop rules of thumb 
        to distinguish true Sec. 363 sales from bogus ones that 
        are really reorganizations. We suggest a rough rule of 
        thumb to start with: if the new balance sheet has 
        creditors and owners who constituted more than half of 
        the selling company's balance sheet, but with some 
        creditors left behind, the transaction should be 
        presumed not to be a sale at all, but a reorganization. 
        The Chrysler transaction would have failed that kind of 
        a test.
          One might be tempted to dismiss the inquiry as 
        needless worry over a few creditors. But we should 
        resist that easy way out. Much corporate and commercial 
        law has to do with the proper treatment of minority 
        creditors and minority shareholders. For minority 
        stockholders, there's an elaborate corporate law 
        machinery for freezeouts when a majority stockholder 
        seeks to engineer a transaction that squeezes out 
        minority stockholders. For minority creditors, there's 
        a century of bankruptcy and equity receivership law 
        designed to balance protection from the majority's 
        potential to encroach on the minority and squeeze them 
        out from their contractual priority against the 
        minority's potential to hold out perniciously. These 
        are neither small nor simply fairness-based 
        considerations: Capital markets depend on effective 
        mechanisms that prevent financial majorities from 
        ousting financial minorities from their ratable 
        position in an enterprise. That's what's at stake.
          It's in that light that the Chrysler bankruptcy was 
        pernicious, in that it failed to comply with good 
        bankruptcy practice, reviving practices that were 
        soundly rejected nearly a century ago. Going forward, 
        the extent of Chrysler's damage to bankruptcy practice 
        and financial markets will depend on how it is 
        construed by other courts, and whether they will limit 
        its application, as they should.''
          We can hope that bankruptcy judges will come to see 
        Chrysler as flawed, but unique. They should require a 
        better bidding process and attend better to priority. 
        They can be more skeptical of the facts when parties 
        say that the new entity is sua sponte recognizing the 
        bulk of the old entity's debts; this is a strong signal 
        that they are witnessing a sub rosa reorganization 
        plan, designed to avoid Sec. 1129. They could latch 
        onto the fact that in Chrysler there was an unrebutted 
        liquidation value study and, if they are faced with a 
        contested valuation, require a more open auction and 
        better makeshift substitutes for the Sec. 1129 
        protections. Or they might simply say that the 
        government's involvement made Chrysler sui generis. 
        Better yet, the courts could develop rules of thumb, 
        such as the 50% rule we suggested above to cull 
        presumed pseudo sales from the real ones.
          Whatever promising signs can be gleaned from Delphi 
        and Phoenix Coyotes, are offset by the General Motors 
        bankruptcy court's invocation of Chrysler as 
        controlling law in the Second Circuit. The government 
        used the same template for the Sec. 363 sale in GM as 
        it did in Chrysler. As in Chrysler, the buyer was not a 
        true third party, the ostensible immediacy to the 
        urgency of the sale was debatable, and the Sec. 363 
        bidding procedures required that would-be bidders agree 
        to the retiree settlement negotiated by the government 
        and GM. But GM's secured creditors, unlike their 
        counterparts in Chrysler, were paid in full. The GM 
        sale was in this dimension thus easier to reconcile 
        with ordinary priority rules than Chrysler. It's 
        plausible that the Treasury adjusted to the pushback 
        from capital markets and the media criticism that 
        accompanied the Chrysler deal.\581\
---------------------------------------------------------------------------
    \581\ Roe, Mark J. and Skeel, David A., Assessing the Chrysler 
Bankruptcy (August 12, 2009). U of Penn Law School, Public Law Research 
Paper No. 09-17; U of Penn, Inst for Law & Econ Research Paper No. 09-
22. Available at SSRN: ssrn.com/abstract=1426530.

    3. Stephen J. Lubben, the Daniel J. Moore Professor of Law, 
Seton Hall University, offered the following testimony to the 
---------------------------------------------------------------------------
Panel:

          In short, by and large, I think that the criticism of 
        the automotive bankruptcy cases does not stand up to 
        careful scrutiny. In the future, Congress may choose to 
        consider the policy implications of a chapter 11 
        process that has become heavily driven by quick asset 
        sales and lender control. But given the reality of 
        current chapter 11 practice, both GM and Chrysler's 
        chapter 11 cases were not all that exceptional.\582\
---------------------------------------------------------------------------
    \582\ I don't believe Professor Lubben's testimony is particularly 
instructive. I concur that Section 363 sales have become more 
commonplace, but I'm not sure the significance of that conclusion. He 
neglects the link between the procedural error in the bidding process 
and the sub rosa plan and concludes without support that the error was 
harmless.
---------------------------------------------------------------------------

2. EXAMPLES THAT ILLUSTRATE THE ISSUES RAISED BY PROFESSORS ADLER, ROE 
                               AND SKEEL

    The following examples \583\ illustrate the issues noted 
above by Professors Adler, Roe and Skeel:
---------------------------------------------------------------------------
    \583\ Another example: If a bidder determines that the gross assets 
of Company X have a fair market value of $100, the bidder may 
reasonably enter a bid of up to $100 for the assets ($100 FMV of the 
assets, less $0 of assumed liabilities). If the bidding process, 
however, requires the bidder to assume $20 of the liabilities of the 
seller, the bidder may reasonably enter a bid of up to $80 for the 
assets ($100 FMV of the assets, less $20 of assumed liabilities). In 
the latter case the seller only has $80 (not $100) to distribute to its 
creditors. So, it's possible that a senior creditor of the seller may 
not recover its full claim (because a distribution of $80 is 
insufficient) even though the claim of the $20 junior creditor that was 
assumed by the purchaser pursuant to the Section 363 bidding process 
may quite likely be paid in full. Due to the required assumption of the 
$20 claim, $20 of purchase consideration has been redirected and 
applied outside the provisions of the bankruptcy code that are charged 
with protecting commercial law priority rules and the contractual 
expectations of the parties.
---------------------------------------------------------------------------
    Example 1. Professor Adler offered the following example in 
the paper he submitted to the Panel:

          Consider the following illustration, where the 
        government as lender or purchaser is nowhere to be 
        found. Imagine a simple firm, Debtor, with only two 
        creditors, each unsecured: Supplier, owed $60, and 
        Bank, owed $20. After Debtor runs out of working funds 
        and files a bankruptcy petition, Bank offers $40 for 
        all of Debtor's assets (which Bank intends to resell). 
        Bank contends that this is the best offer Debtor is 
        going to get and that if Debtor does not accept the 
        offer immediately it will be forced to liquidate 
        piecemeal for $10. The court agrees and approves the 
        sale over Supplier's objection even though there is no 
        auction or other market test for the value of the 
        assets. After the sale, Debtor moves through the 
        ordinary bankruptcy process and distributes the $40 
        proceeds ratably between Supplier and Bank, with $30 to 
        Supplier and $10 to Bank.
          As long as the court is correct to accept Bank's 
        valuation, the sale and the distribution are 
        appropriate. But what if the court is wrong? Assume 
        that Debtor's assets are worth $60. In this case, 
        Supplier should receive $45 and Bank $15. But the sale 
        and distribution approved by the court has different 
        consequences. Instead, Bank pays $40 for assets worth 
        $60 (i.e., gains $20) then receives a $10 distribution 
        from Debtor's bankruptcy estate, for a total effective 
        distribution of $30, half the true value of Debtor's 
        assets, twice the amount to which it is entitled. All 
        this while, as a formal matter, it is correct to say, 
        as the courts did in Chrysler and GM, that the sale 
        proceeds were distributed fairly among the creditors. 
        The problem, of course, is not with the distribution of 
        sale proceeds received; the problem is with the 
        diversion of value to the purchaser, which paid the 
        estate too little and thus, in its role as a creditor, 
        received too much. This is Supplier's complaint in this 
        illustration and the dissenting creditors' complaint in 
        the Chrysler and General Motors case.
          In this illustration, an auction would solve the 
        problem--because a bidder would offer $60 foiling 
        Bank's scheme--as would granting Supplier a veto over 
        the sale to reflect its dominant position in what would 
        be the unsecured creditor (and only) class were the 
        proposed distribution part of a reorganization plan. 
        With neither protection in place, Supplier is left to 
        suffer the consequences of judicial error, which can 
        occur no matter how skilled or well meaning the judge; 
        skilled and well meaning are not synonymous with 
        omniscient.
          As Mark Roe and David Skeel observe in their own 
        criticism of the Chrysler bankruptcy, the ability of a 
        court to approve an untested sale at the behest of some 
        creditors over the objection of others without the 
        safeguards prescribed by the Bankruptcy Code returns us 
        to a past centuries' practice referred to as the equity 
        receivership, where it was widely believed that 
        powerful, favored creditors routinely victimized the 
        weak and unconnected.\584\ The Chrysler and General 
        Motors cases are a step back and in the wrong 
        direction.
---------------------------------------------------------------------------
    \584\ See Roe & Skeel, cited in note 7; see also David A. Skeel, 
Jr., Debt's Dominion: A History of Bankruptcy Law in America 48-70 
(2001) (describing the equity receivership and its faults).

    Example 2. Assume Oldco (i.e., Old Chrysler or Old GM) has 
(i) assets with a fair market value (FMV) of $70, (ii) secured 
debt (with liens on $40 FMV of assets) in an outstanding 
principal amount of $90 held by Creditor 1, and (iii) unsecured 
debt in an outstanding principal amount of $50 held by Creditor 
2. Creditor 1 in effect holds two claims, a $40 secured claim 
(equal to the FMV of the assets securing Creditor 1's claim) 
and a $50 unsecured claim (which together equal Creditor 1's 
total claim of $90); and Creditor 2 holds a $50 unsecured 
claim. Any distribution on the unsecured claims should be 
shared 50/50% (because each creditor holds a $50 unsecured 
claim) under the ``no unfair discrimination'' rule of Chapter 
11.
    If, in a Section 363 sale, Newco (i.e., New Chrysler or New 
GM) purchased the Oldco assets (with no assumption of Oldco 
liabilities) for $70 FMV, then the $70 cash proceeds would be 
distributed as follows: Creditor 1 would receive $55 ($40 
secured position, plus $15 unsecured position), and Creditor 2 
would receive $15.
    Conversely, if in the Section 363 sale the bankruptcy court 
required Newco to assume Creditor 2's debt of $50, then Newco 
would only pay $20 cash for the Oldco assets ($70 FMV of 
assets, less $50 required assumption of Creditor 2's debt). In 
such event, Creditor 1 would only receive $20 (representing 
100% of the cash sales proceeds from the Section 363 sale, but 
leaving a shortfall of $70 ($90, less $20)). Creditor 2 would 
receive no proceeds from the Section 363 sale, but would quite 
possibly receive $50 in the future from Newco (the amount of 
Creditor 2's debt assumed by Newco).
    Thus, without the required assumption of the $50 claim by 
Newco, Creditor 1 (the senior creditor) would receive $55 and 
Creditor 2 (the junior creditor) would receive $15. This result 
is consistent with commercial law principles and the 
contractual expectations of the parties. With the required 
assumption, however, Creditor 1 would only receive $20 and 
Creditor 2 would receive $50. The required assumption results 
in a shift of $35 from Creditor 1 to Creditor 2, a result that 
is not consistent with commercial law principles, the 
contractual expectations of the parties and the Chapter 11 
reorganization rules.
    Example 3. If the FMV of the Oldco assets was only $30 
(instead of $70), is it possible that Newco would pay $30 cash 
for the assets AND assume Creditor 2's debt of $50. Creditor 1 
would, thus, receive $30 (representing 100% of the cash sales 
proceeds from the Section 363 sale, but leaving a shortfall of 
$60 ($90 outstanding principal balance, less $30)), and 
Creditor 2 would quite possibly receive $50 in the future from 
Newco (the amount of Creditor 2's debt assumed by Newco). No 
buyout group (other than one that legally controls the printing 
press--the United States government) would agree to pay full 
FMV for Oldco's assets AND assume Oldco's liabilities. A 
solvent buyout group might very well agree to pay FMV for the 
Oldco assets but would generally expect a dollar-for-dollar 
purchase price reduction for any liabilities assumed.
    Newco may argue that since it paid $30 FMV for the Oldco 
assets it discharged its obligations under Section 363. Newco 
may further argue that it's of no concern to Creditor 1 that 
Newco also elected to assume Creditor 2's debt.
    In response, Creditor 1 may argue that (i) another 
purchaser might have paid, for example, $35 or more for the 
Oldco assets (with no assumption of Creditor 2's debt), (ii) 
another purchaser (other than the United States government) 
would never have paid $30 FMV for the Oldco assets AND assumed 
Creditor 2's debt (and that any such requirement would have 
chilled the bidding process),\585\ (iii) without a market 
auction or compliance with the applicable Revlon/Lyondell 
standards established by the Delaware courts, it's impossible 
to know if $30 or $35 or another amount represents the true FMV 
of the Oldco assets (with no assumption of Creditor 2's 
debt),\586\ and (iv) to the extent the true FMV of the Oldco 
assets exceeds $30, Newco redirected its purchase price away 
from Creditor 1 to Creditor 2 by using funds to assume Creditor 
2's debt that would have ordinarily been used to purchase the 
Oldco assets.
---------------------------------------------------------------------------
    \585\ A purchaser may conclude, however, that it's in its best 
interest to assume some of Creditor 2's debt.
    \586\ As noted in Professor Adler's proposed legislative fix to the 
problems created by the Chrysler and GM cases (discussed below), it's 
important that the bidding procedures approved by the courts not 
require potential purchasers to assume some or all of Oldco's 
indebtedness to Creditor 2.
           SECTION THREE: CORRESPONDENCE WITH TREASURY UPDATE

    On behalf of the Panel, Chair Elizabeth Warren sent a 
letter on July 20, 2009,\587\ to Secretary of the Treasury 
Timothy Geithner and Federal Reserve Board Chairman Ben 
Bernanke requesting copies of confidential memoranda of 
understanding involving informal supervisory actions entered 
into by the Federal Reserve Board and the Office of the 
Comptroller of the Currency with Bank of America and Citigroup. 
The letter further requests copies of any similar future 
memoranda of understanding executed with Bank of America, 
Citigroup, or any other bank holding companies that were 
subject to the Supervisory Capital Assessment Program (SCAP). 
Finally, the letter asks that the Panel be apprised of any 
other confidential agreements relating to risk and liquidity 
management that Treasury, or any of the bank supervisors, has 
or will enter into with any of the SCAP bank holding companies. 
Secretary Geithner responded on August 12, 2009.\588\ The Panel 
has not received a response from Chairman Bernanke.
---------------------------------------------------------------------------
    \587\ See Appendix I of this report, infra.
    \588\ See Appendix II of this report, infra.
              SECTION FOUR: TARP UPDATES SINCE LAST REPORT


                           A. TARP Repayment

    Since the Panel's prior report, additional banks have 
repaid their TARP investment under the Capital Purchase Program 
(CPP). CVB Financial Corp. repaid $97,500,000 in TARP funds. 
Bank of Commerce repaid $12,500,000 in TARP funds. As of August 
28, 2009, neither has repurchased their warrants. A total of 37 
banks have repaid their preferred stock TARP investment 
provided under the CPP to date. Of these banks, 22 have 
repurchased the warrants as well.

                     B. CPP Monthly Lending Report

    Treasury releases a monthly lending report showing loans 
outstanding at the top 20 CPP recipient banks. The most recent 
report, issued on August 17, 2009, includes data up through the 
end of June 2009 and shows that CPP recipients had $4.29 
trillion in loans outstanding as of June 2009. This represents 
a 1.1 percent decline in loans outstanding between the end of 
May and the end of June.

                     C. Regulatory Reform Proposals

    On August 11, 2009, the Obama Administration sent a 
legislative proposal to Congress which seeks to regulate over-
the-counter (OTC) derivatives. The proposed legislation will 
require standardized OTC derivatives to be centrally cleared by 
a derivatives clearing organization regulated by the 
Commodities Futures Trading Commission (CFTC) or a securities 
clearing agency regulated by the Securities and Exchange 
Commission (SEC). The proposed legislation would also require 
standardized OTC derivatives to be traded on a CFTC- or SEC-
regulated exchange or a CFTC- or SEC-regulated alternative swap 
execution facility, as well as higher capital and margin 
requirements for non-standardized derivatives. In addition, the 
proposal seeks to allow financial regulatory agencies access to 
confidential information on OTC derivative transactions and 
open market positions, require supervision and regulation of 
any firm that deals in OTC derivatives and any other firm that 
takes large positions in OTC derivatives. The proposal would 
require the SEC, CFTC, and federal banking regulators to 
supervise and regulate all OTC derivatives dealers and major 
market participants within their respective jurisdictions. The 
SEC, CFTC, and federal banking regulators would create and 
enforce margin and capital requirements for all OTC derivatives 
dealers and major market participants. The SEC and the CFTC 
would also issue and enforce strong business conduct, 
reporting, and recordkeeping (including audit trail) rules for 
all OTC derivative dealers and major market participants, as 
well as limit the number of investors eligible to engage in OTC 
derivative transactions. Finally, the proposal would grant the 
SEC and CFTC authority to set position limits and large trader 
reporting requirements for OTC derivatives and to deter market 
manipulation, fraud, insider trading, and other abuses in the 
OTC derivative markets.

          D. Term Asset-Backed Securities Loan Facility (TALF)

    On August 17, 2009, the Federal Reserve Board and Treasury 
announced their approval of an extension to the Term Asset-
Backed Securities Loan Facility (TALF). With the extension, the 
deadline for TALF lending against newly issued asset-backed 
securities (ABS) and legacy commercial mortgage-backed 
securities (CMBS) was extended from December 31, 2009 to March 
31, 2010. Additionally, the deadline for TALF lending against 
newly issued CMBS was extended to June 30, 2010.
    Also on August 17, 2009, the Federal Reserve Board and 
Treasury announced that they are holding in abeyance any 
further expansion in the types of collateral eligible for the 
TALF. The securities already eligible for collateralizing TALF 
loans include the major types of newly issued, triple-A-rated 
ABS backed by loans to consumers and businesses, and newly 
issued and legacy triple-A-rated CMBS. Nevertheless, the 
Federal Reserve and Treasury have indicated that they are 
prepared to reconsider their decision if financial or economic 
developments indicate that providing TALF financing for 
investors' acquisitions of additional types of securities is 
warranted.
    At the August 20, 2009 facility, $2.15 billion in legacy 
CMBS were settled (though $2.3 billion in loans were 
requested). At the September 3, 2009 non-CMBS facility, $6.5 
billion in loans were requested to support the issuance of ABS 
collateralized by loans in the auto, credit card, equipment, 
property and casualty, small business, and student loan 
sectors. There were no requests supported by floorplan or 
residential mortgage loans.

 E. Making Home Affordable Program Monthly Servicer Performance Report

    On August 4, 2009, the Treasury released its first monthly 
Servicer Performance Report detailing the progress to date of 
the Making Home Affordable (MHA) loan modification program. The 
report discloses that as of July 31, 2009, 85 percent of 
mortgages are covered by a Home Affordable Modification Program 
(HAMP) participating servicer. The report also indicates that 
as of July 31, 2009, 230,000 trial loan modifications have 
occurred out of 406,542 trial plan offers extended.

                               F. Metrics

    The Panel continues to monitor a variety of financial 
market indicators that provide insight into the current 
economic conditions. In recent months, the Panel's oversight 
reports have highlighted a number of metrics that the Panel and 
others, including Treasury, Government Accountability Office 
(GAO), Special Inspector General for the Troubled Asset Relief 
Program (SIGTARP), and the Financial Stability Oversight Board 
consider useful in assessing the effectiveness of the 
Administration's efforts to restore financial stability and 
accomplish the goals of the EESA. This section discusses 
changes that have occurred in several indicators since the 
release of the Panel's August report.
     Interest Rate Spreads. Key interest rate spreads 
have continued to flatten since the Panel's August report. 
Numerous officials have cited tightening credit spreads as a 
sign of the improving economy.\589\ It is of particular note 
that the 3 Month LIBOR-OIS spread, an important measure of the 
cost of capital, has nearly rebounded to its pre-crisis level 
of .09 in January 2007.\590\
---------------------------------------------------------------------------
    \589\ Herbert Allison COP Testimony, supra note 470. Allison noted 
that ``[t]here are tentative signs that the financial system is 
beginning to stabilize and that our efforts have made an important 
contribution. Key indicators of credit market risk, while still 
elevated, have dropped substantially.''
    \590\ 3 Mo LIBOR-OIS Spread, Bloomberg (online at 
www.bloomberg.com/apps/quote?ticker=.LOIS3:IND/) (accessed Aug. 31, 
2009).

                    FIGURE 12: INTEREST RATE SPREADS
------------------------------------------------------------------------
                                  Current
          Indicator           Spread  (as of  Percent Change  Since Last
                                  8/31/09)         Report  (8/05/09)
------------------------------------------------------------------------
3 Month LIBOR-OIS Spread                0.17                      -37.04
 \591\......................
1 Month LIBOR-OIS Spread                0.09                        0
 \592\......................
TED Spread \593\ (in basis             20.75                      -29.08
 points)....................
Conventional Mortgage Rate              1.66                        5.06
 Spread \594\...............
Corporate AAA Bond Spread               1.76                        1.73
 \595\......................
Corporate BAA Bond Spread               3.08                       -4.94
 \596\......................
Overnight AA Asset-backed               0.24                       14.29
 Commercial Paper Interest
 Rate Spread \597\..........
Overnight A2/P2 Nonfinancial            0.16                      -11.11 
 Commercial Paper Interest
 Rate Spread \598\..........
------------------------------------------------------------------------
\591\ 3 Mo LIBOR-OIS Spread, Bloomberg (online at www.bloomberg.com/apps/
  quote?ticker=.LOIS3:IND/) (accessed Aug. 31, 2009).
\592\ 1 Mo LIBOR-OIS Spread, Bloomberg (online at www.bloomberg.com/apps/
  quote?ticker=.LOIS1:IND/) (accessed Aug. 31, 2009).
\593\ TED Spread, Bloomberg (online at www.bloomberg.com/apps/
  quote?ticker=.TEDSP:IND) (accessed Aug. 31, 2009).
\594\ Board of Governors of the Federal Reserve System, Federal Reserve
  Statistical Release H.15: Selected Interest Rates: Historical Data
  (Instrument: Conventional Mortgages, Frequency: Weekly) (accessed July
  9, 2009) (online at www.federalreserve.gov/releases/h15/data/
  Weekly_Thursday_/H15_MORTG_NA.txt); Board of Governors of the Federal
  Reserve System, Federal Reserve Statistical Release H.15: Selected
  Interest Rates: Historical Data (Instrument: U.S. Government
  Securities/Treasury Constant Maturities/Nominal 10-Year, Frequency:
  Weekly) (accessed July 9, 2009) (online at www.federalreserve.gov/
  releases/h15/data/Weekly_Friday_/H15_TCMNOM_Y10.txt) (hereinafter
  ``Fed H.15 10-Year Treasuries'').
\595\ Board of Governors of the Federal Reserve System, Federal Reserve
  Statistical Release H.15: Selected Interest Rates: Historical Data
  (Instrument: Corporate Bonds/Moody's Seasoned AAA, Frequency: Weekly)
  (online at www.federalreserve.gov/releases/h15/data/Weekly_Friday_/
  H15_AAA_NA.txt) (accessed Aug. 31, 2009); Fed H.15 10-Year Treasuries,
  supra note 594.
\596\ Board of Governors of the Federal Reserve System, Federal Reserve
  Statistical Release H.15: Selected Interest Rates: Historical Data
  (Instrument: Corporate Bonds/Moody's Seasoned BAA, Frequency: Weekly)
  (online at www.federalreserve.gov/releases/h15/data/Weekly_Friday_/
  H15_BAA_NA.txt) (accessed Aug. 31, 2009); Fed H.15 10-Year Treasuries,
  supra note 594.
\597\ Board of Governors of the Federal Reserve System, Federal Reserve
  Statistical Release: Commercial Paper Rates and Outstandings: Data
  Download Program (Instrument: AA Asset-Backed Discount Rate,
  Frequency: Daily) (online at www.federalreserve.gov/DataDownload/
  Choose.aspx?rel=CP) (accessed July 9, 2009); Board of Governors of the
  Federal Reserve System, Federal Reserve Statistical Release:
  Commercial Paper Rates and Outstandings: Data Download Program
  (Instrument: AA Nonfinancial Discount Rate, Frequency: Daily) (online
  at www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (accessed
  Aug. 31, 2009) (hereinafter ``Fed CP AA Nonfinancial Rate'').
\598\ Board of Governors of the Federal Reserve System, Federal Reserve
  Statistical Release: Commercial Paper Rates and Outstandings: Data
  Download Program (Instrument: A2/P2 Nonfinancial Discount Rate,
  Frequency: Daily) (online at www.federalreserve.gov/DataDownload/
  Choose.aspx?rel=CP) (accessed Aug. 31, 2009); Fed CP AA Nonfinancial
  Rate, supra note 597.

     Commercial Paper Outstanding. Commercial paper 
outstanding, a rough measure of short-term business debt, is an 
indicator of the availability of credit for enterprises. While 
asset-backed commercial paper outstanding had a modest increase 
since the last report, the total outstanding is still more than 
55 percent below its level in January 2007.\599\ Financial 
commercial paper outstanding increased in June, leaving the 
measure less than 20 percent below its January 2007 level.\600\
---------------------------------------------------------------------------
    \599\ Board of Governors of the Federal Reserve System, Federal 
Reserve Statistical Release: Commercial Paper Rates and Outstandings: 
Data Download Program (Instrument: Asset-Backed Commercial Paper 
Outstanding, Frequency: Weekly) (accessed Aug. 31, 2009) (online at 
www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (hereinafter 
``Fed CP and Asset-Backed Commercial Paper Outstanding'').
    \600\  Board of Governors of the Federal Reserve System, Federal 
Reserve Statistical Release: Commercial Paper Rates and Outstandings: 
Data Download Program (Instrument: Financial Commercial Paper 
Outstanding, Frequency: Weekly) (accessed Aug. 31, 2009) (online at 
www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (hereinafter 
``Fed CP and Financial CP Outstanding'').

                                     FIGURE 13: COMMERCIAL PAPER OUTSTANDING
----------------------------------------------------------------------------------------------------------------
                                                                Current Level (as  of 8/
                           Indicator                                31/09) (dollars        Percent Change Since
                                                                       billions)          Last Report (8/05/09)
----------------------------------------------------------------------------------------------------------------
Asset-Backed Commercial Paper Outstanding (seasonally                            $457.8                     4.56
 adjusted) \601\..............................................
Financial Commercial Paper Outstanding (seasonally adjusted)                      579.7                    12.03
 \602\........................................................
Nonfinancial Commercial Paper Outstanding (seasonally                             116.7                   -5.66
 adjusted) \603\..............................................
----------------------------------------------------------------------------------------------------------------
\601\ Fed CP and Asset-Backed Commercial Paper Oustanding, supra note 599.
\602\ Fed CP and Financial CP, supra note 600.
\603\ Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release: Commercial Paper
  Rates and Outstandings: Data Download Program (Instrument: Nonfinancial Commercial Paper Outstanding,
  Frequency: Weekly) (accessed Aug. 31, 2009) (online at www.federalreserve.gov/DataDownload/
  Choose.aspx?rel=CP).

     Lending by the Largest TARP-recipient Banks. 
Treasury's Monthly Lending and Intermediation Snapshot tracks 
loan originations and average loan balances for the 21 largest 
recipients of CPP funds across a variety of categories, ranging 
from mortgage loans to commercial and industrial loans to 
credit card lines. Originations increased across nearly all 
categories of bank lending in June when compared to May.\604\ 
Lenders surveyed by Treasury attribute this increase to 
attractive rates that increased mortgage originations.\605\ The 
return of mortgage originations to October 2008 levels is due 
in large measure to the increase in mortgage refinancings, 
which comprise over 63 percent of mortgage originations since 
that date.\606\ The noticeable increases in commercial, 
industrial, and commercial real estate originations are 
particularly noteworthy, with originations in both categories 
increasing by over 20 percent.\607\ Average loan balances 
decreased by one percent from June to May, with banks reporting 
that borrowers are paying down existing debt.\608\ The data 
below exclude lending by two large CPP-recipient banks, PNC 
Bank and Wells Fargo, because significant acquisitions by those 
banks since last October make comparisons difficult.
---------------------------------------------------------------------------
    \604\ U.S. Department of the Treasury, Treasury Department Monthly 
Lending and Intermediation Snapshot Data for October 2008-April 2009 
(Aug. 31, 2009) (online at www.financialstability.gov/docs/surveys/
Snapshot_Data_June%202009.xls).
    \605\ U.S. Department of the Treasury, Treasury Department Monthly 
Lending and Intermediation Snapshot: Summary Analysis for June 2009 
(Aug. 31, 2009) (online at www.financialstability.gov/docs/surveys/
SnapshotAnalysisJune2009.pdf).
    \606\ Id.
    \607\ Id.
    \608\ Id.

                          FIGURE 14: LENDING BY THE LARGEST TARP-RECIPIENT BANKS \609\
----------------------------------------------------------------------------------------------------------------
                                              Most Recent Data (June  Percent Change Since  Percent Change Since
                 Indicator                     2009) (in millions)          May 2009            October 2008
----------------------------------------------------------------------------------------------------------------
Total Loan Originations....................                 $226,898                 13.28                  4.00
Mortgage Total Originations................                   89,703                 15.31                102.53
Commercial Real Estate New Commitments.....                    3,701                 24.6                 -64.83
Commercial & Industrial New Commitments....                   40,978                 22.4                 -30.5
Total Average Loan Balances................                3,311,902                 -0.76                 -3.24
----------------------------------------------------------------------------------------------------------------
\609\  Id.

     Loans and Leases Outstanding of Domestically-
Chartered Banks. Weekly data from the Federal Reserve Board 
track fluctuations among different categories of bank assets 
and liabilities. The Federal Reserve Board data are useful 
because they separate out large domestic banks and small 
domestic banks. Loans and leases outstanding for large and 
small domestic banks both fell last month.\610\ However, total 
loans and leases outstanding at small domestic banks remain 
near last October's level, while total loans and leases 
outstanding at large banks have dropped by over 6.7 percent 
since that time.\611\
---------------------------------------------------------------------------
    \610\ Board of Governors of the Federal Reserve System, Federal 
Reserve Statistical Release H.8: Assets and Liabilities of Commercial 
Banks in the United States: Historical Data (Instrument: Assets and 
Liabilities of Large Domestically Chartered Commercial Banks in the 
United States, Seasonally adjusted, adjusted for mergers, billions of 
dollars) (accessed Aug. 31, 2009) (online at www.federalreserve.gov/
releases/h8/data.htm).
    \611\ Id.

                                  FIGURE 15: LOANS AND LEASES OUTSTANDING \612\
----------------------------------------------------------------------------------------------------------------
                                             Current Level (as                             Percent Change Since
                 Indicator                    of 8/31/09) (in     Percent Change Since     EESA Signed into Law
                                                 billions)        Last Report (8/5/09)          (10/3/08)
----------------------------------------------------------------------------------------------------------------
Large Domestic Banks--Total Loans and                   $3,780                    -1.13                    -6.73
 Leases....................................
Small Domestic Banks--Total Loans and                    2,496                     -.86                    -.87
 Leases....................................
----------------------------------------------------------------------------------------------------------------
\612\ Id.

     Housing Indicators. Foreclosure filings increased 
by roughly seven percent from May to June and are roughly 25 
percent above the level of last October. Housing prices, as 
measured by the S&P/Case-Shiller Composite 20 Index, increased 
slightly in June. The index remains down over 10 percent 
percent since October 2008.

                                          FIGURE 16: HOUSING INDICATORS
----------------------------------------------------------------------------------------------------------------
                                                                                                  Percent Change
                 Indicator                     Most Recent    Percent Change From Data Available   Since October
                                               Monthly Data     at Time of Last Report (8/5/09)        2008
----------------------------------------------------------------------------------------------------------------
Monthly Foreclosure Filings \613\..........      360,149                                    7.13           28.8
Housing Prices--S&P/Case-Shiller Composite           141.3                                   .86          -10.05 
 20 Index \614\............................
----------------------------------------------------------------------------------------------------------------
\613\ RealtyTrac, Foreclosure Activity Press Releases (accessed Aug. 31, 2009) (online at www.realtytrac.com//
  ContentManagement/PressRelease.aspx). The most recent data available is for July 2009.
\614\ Standard & Poor's, S&P/Case-Shiller Home Price Indices (Instrument: Seasonally Adjusted Composite 20
  Index) (accessed Aug. 31, 2009) (online at www2.standardandpoors.com /spf/pdf/ index/
  SA_CSHomePrice_History_082562.xls). The most recent data available is for June 2009.

                          G. Financial Update

    Each month since its April oversight report, the Panel has 
summarized the resources that the federal government has 
committed to economic stabilization. The following financial 
update provides: (1) an updated accounting of the TARP, 
including a tally of dividend income and repayments the program 
has received as of July 31, 2009; and (2) an update of the full 
federal resource commitment as of August 28, 2009.

                                1. TARP

a. Costs: Expenditures and commitments \615\
---------------------------------------------------------------------------

    \615\ Treasury will release its next tranche report when 
transactions under the TARP reach $450 billion.
---------------------------------------------------------------------------
    Treasury is currently committed to spend $531.2 billion of 
TARP funds through an array of programs used to purchase 
preferred shares in financial institutions, offer loans to 
small businesses and automotive companies, and leverage Federal 
Reserve loans for facilities designed to restart secondary 
securitization markets.\616\ Of this total, $369.5 billion is 
currently outstanding under the $698.7 billion limit for TARP 
expenditures set by EESA, leaving $329.2 billion available for 
fulfillment of anticipated funding levels of existing programs 
and for funding new programs and initiatives. The $369.5 
billion includes purchases of preferred and common shares, 
warrants and/or debt obligations under the CPP, TIP, SSFI 
Program, and AIFP; a $20 billion loan to TALF LLC, the special 
purpose vehicle (SPV) used to guarantee Federal Reserve TALF 
loans; and the $5 billion Citigroup asset guarantee, which was 
exchanged for a guarantee fee composed of additional preferred 
shares and warrants and has subsequently been exchanged for 
Trust Preferred shares.\617\ Additionally, Treasury has 
allocated $21.5 billion to the Home Affordable Modification 
Program, out of a projected total program level of $50 billion.
---------------------------------------------------------------------------
    \616\ EESA, as amended by the Helping Families Save Their Homes Act 
of 2009, limits Treasury to $698.7 billion in purchasing authority 
outstanding at any one time as calculated by the sum of the purchase 
prices of all troubled assets held by Treasury. EESA Sec. 115(a)-(b), 
supra note 2; Helping Families Save Their Homes Act of 2009, Pub. L. 
111-22, Sec. 402(f) (reducing by $1.26 billion the authority for the 
TARP originally set under EESA at $700 billion).
    \617\ August 28 TARP Transactions Report, supra note 102.
---------------------------------------------------------------------------

b. Income: Dividends, interest payments, and CPP repayments

    A total of 32 institutions have completely repaid their CPP 
preferred shares, 22 of which have also repurchased warrants 
for common shares that Treasury received in conjunction with 
its preferred stock investments. The rapid pace of preferred 
shares and warrant repayments has slowed considerably since the 
issuance of the Panel's August report--out of a total preferred 
shares and warrant repayment of $70.3 billion, only $200 
million has been repaid since July 29, 2009.\618\ In addition, 
Treasury is entitled to dividend payments on preferred shares 
that it has purchased, usually five percent per annum for the 
first five years and nine percent per annum thereafter.\619\ 
Treasury has begun to report dividend payments made by all TARP 
recipients. In addition to $7.3 billion in dividend payments, 
Treasury has received $206 million in interest from its 
assistance provided under the AIFP and over $2 million in 
interest stemming from the ASSP. In total, the Treasury has 
received approximately $85 billion in income from repayments, 
warrant repurchases, dividends, and interest payments deriving 
from TARP investments.\620\
---------------------------------------------------------------------------
    \618\ August 28 TARP Transactions Report, supra note 102.
    \619\ See, for example, U.S. Department of the Treasury, Securities 
Purchase Agreement: Standard Terms (online at 
www.financialstability.gov/docs/CPP/spa.pdf).
    \620\ U.S. Department of the Treasury, Cumulative Dividends Report 
as of July 31, 2009 (Sep. 2, 2009) (online at 
www.financialstability.gov/docs/dividends-interest-reports/
072009_report.pdf).
---------------------------------------------------------------------------

c. Citigroup Exchange

    Treasury has invested a total of $49 billion in Citigroup 
through three separate programs: the CPP, TIP, and AGP. As 
noted in the Panel's March report, Treasury announced on 
February 27, 2009 that it would convert up to $25 billion of 
its preferred stock holdings in Citigroup into common stock, 
which would provide additional tangible common equity for 
Citigroup. On June 9, 2009, Treasury agreed to terms to 
exchange its CPP preferred stock holdings for 7.7 billion 
shares of common stock priced at $3.25/share (for a total value 
of $25 billion) and also agreed to convert the form of its TIP 
and AGP holdings.
    On July 23, 2009, Treasury, along with both public and 
private Citigroup debt holders, participated in a $58 billion 
exchange, which resulted in the conversion of Treasury's $25 
billion CPP investment from preferred shares to interim 
securities to be converted to common shares upon shareholder 
approval of a new common stock issuance. The $25 billion 
exchange substantially dilutes the equity holdings of existing 
Citigroup shareholders and was subject to shareholder approval 
on September 2, 2009. Treasury's common stock investment in 
Citigroup, when finalized, will have a paper value of about 
$34.96 billion based on the company's September 1, 2009 $5.54 
share price.\621\ On July 30, Treasury exchanged its $20 
billion of preferred stock holdings in Citigroup under the TIP 
and its $5 billion investment in the AGP \622\ from preferred 
shares to Trust Preferred Securities (TruPS). The conversion 
allows Citigroup to improve its Tangible Common Equity ratio--a 
key measure of bank solvency and a component of the stress 
tests--60 percent.\623\
---------------------------------------------------------------------------
    \621\ The Panel continues to account for Treasury's original $25 
billion CPP investment in Citigroup under the CPP until formal approval 
of the exchange by Citigroup's shareholders and until Treasury 
specifies under which TARP program the common equity investment will be 
classified.
    \622\ The AGP provides certain loss protections to select pools of 
mortgage or related assets held by financial institutions viewed as 
critical to the functioning of the financial system, and whose 
portfolios of distressed or illiquid assets pose a risk to market 
confidence. Similar to a typical insurance plan, Treasury insures these 
assets by providing guarantees or non-recourse loans with respect to 
the assets in exchange for a premium paid by the institution in 
preferred stock.
    \623\ The key components of the old and new TIP and AGP financial 
agreements between Citigroup and Treasury, including the amount 
outstanding and the coupon rate (8 percent), are essentially the same. 
U.S. Department of Treasury, Transaction Outline (Feb. 27, 2009) 
(online at www.treas.gov/press/releases/reports/
transaction_outline.pdf).
---------------------------------------------------------------------------

d. TARP Accounting

                                FIGURE 17: TARP ACCOUNTING (AS OF JULY 31, 2009)
----------------------------------------------------------------------------------------------------------------
                                     Anticipated      Purchase                     Net current
  TARP initiative (in billions)        funding         price       Repayments      investments     Net available
----------------------------------------------------------------------------------------------------------------
Total...........................            $531.3       $444.1          $72.4            $369.5   \624\ $329.26
CPP.............................             218          204.3           70.3             134.2     \625\ 13.7
TIP.............................              40           40              0                40              0
SSFI Program....................              69.8         69.8            0                69.8            0
AIFP............................              80           80              2.1        \626\ 75.5      \627\ 0
AGP.............................               5            5              0                 5              0
CAP.............................             TBD            0            N/A                 0            N/A
TALF............................              20           20              0                20              0
PPIP............................              30            0            N/A                 0             30
Supplier Support Program........         \628\ 3.5          3.5            0                 3.5      \629\ 0
Unlocking SBA Lending...........              15            0            N/A                 0             15
HAMP............................              50     \630\ 21.5            0                21.5           28.5
(Uncommitted)...................             167.4        N/A            N/A               N/A      \631\ 242.2
----------------------------------------------------------------------------------------------------------------
\624\ This figure is the summation of the uncommitted funds remaining under the $698.7 billion cap ($167.4
  billion) and the difference between the total anticipated funding and the net current investment ($168.8
  billion).
\625\ This figure reflects the repayment of $70.3 billion in CPP funds. Secretary Geithner has suggested that
  funds from CPP repurchases will be treated as uncommitted funds upon return to the Treasury. This Week with
  George Stephanopoulos, Interview with Secretary Geithner, ABC (Aug. 2, 2009) (online at www.abcnews.go.com/
  print?id=8233298) (``[W]hen I was here four months ago, we had roughly $40 billion of authority left in the
  TARP. Today we have roughly $130 billion, in partly [sic] because we have been very successful in having
  private capital come back into this financial system. And we've had more than $70 billion . . . come back into
  the government''). The Panel has therefore presented the repaid CPP funds as uncommitted (i.e., generally
  available for the entire spectrum of TARP initiatives). The difference between the $130 billion of funds
  available for future TARP initiatives cited by Secretary Geithner and the $239.8 billion calculated as
  available here is the Panel's decision to classify certain funds originally provisionally allocated to TALF
  and PPIP as uncommitted and available for TARP generally. See infra notes xiv and xvi.
\626\ This figure reflects the amount invested in the AIFP as of August 18, 2009. This number consists of the
  original assistance amount of $80 billion subtracted by de-obligations ($2.4 billion) and repayments ($2.1
  billion), $2.4 billion in apportioned funding has been de-obligated by Treasury ($1.91 billion of the
  available $3.8 billion of DIP financing to Chrysler and a $500 million loan facility dedicated to Chrysler
  that was unused). U.S. Department of Treasury, TARP Transactions Report (Aug. 26, 2009).
\627\ Treasury has indicated that it will not provide additional assistance to GM and Chrysler through the AIFP.
  Nick Bunkley August 5 New York Times Report, supra note 80. The Panel therefore considers the repaid and de-
  obligated AIFP funds to be uncommitted TARP funds.
\628\ On July 8, 2009, Treasury lowered the total commitment amount for the program from $5 billion to $3.5
  billion, this reduced GM's portion from $3.5 billion to $2.5 billion and Chrysler's portion from $1.5 billion
  to $1 billion. August 28 TARP Transactions Report, supra note 102.
\629\ Treasury has indicated that it will not provide additional funding to auto parts suppliers through the
  Supplier Support Program. Nick Bunkley August 5 New York Times Report, supra note 80.
\630\ This figure reflects the total of all the caps set on payments to each mortgage servicer. August 28
  Transactions Report, supra note 102.
\631\ This figure is the summation of the uncommitted funds remaining under the $698.7 billion cap ($167.4
  billion), the repayments ($72.4 billion), and the de-obligated portion of the AIFP ($2.4 billion). Treasury
  provided de-obligation information in response to specific inquiries relating to the Panel's oversight of the
  AIFP. Treasury provided the Panel with information regarding specific investments made under the AIFP on
  August 18, 2009. Specifically, this information denoted allocated funds that had since been do-obligated.
  (hereinafter ``Treasury De-obligation Document'').


                          FIGURE 18: TARP REPAYMENTS AND INCOME (AS OF AUGUST 28, 2009)
----------------------------------------------------------------------------------------------------------------
                                                                                     Warrant
        TARP Initiative  (in billions)           Repayments   Dividends \632\   Repurchases \633\      Total
----------------------------------------------------------------------------------------------------------------
Total........................................          $72.4           $9.1                  $2.9   \634\ $84.6
CPP..........................................           70.3            7.3                   2.9          80.5
TIP..........................................            0              1.5                   0             1.5
AIFP.........................................            2.1             .16                N/A             2.46
AGP..........................................            0               .17                  0              .17 
----------------------------------------------------------------------------------------------------------------
\632\ U.S. Department of the Treasury, Cumulative Dividends Report as of July 31, 2009 (Sep. 2, 2009) (online at
  www.financialstability.gov/docs/dividends-interest-reports/072009_report.pdf).
\633\ This number includes $1.6 million in proceeds from the repurchase of preferred shares by privately-held
  financial institutions. For privately-held financial institutions that elect to participate in the CPP,
  Treasury receives and immediately exercises warrants to purchase additional shares of preferred stock. August
  28 Transactions Report, supra note 102.
\634\ This includes interest payments made by recipients under the ASSP ($2 million) and AIFP ($200 million).

                  2. OTHER FINANCIAL STABILITY EFFORTS

Federal Reserve, FDIC, and other programs

    In addition to the direct expenditures Treasury has 
undertaken through TARP, the federal government has engaged in 
a much broader program directed at stabilizing the U.S. 
financial system. Many of these initiatives explicitly augment 
funds allocated by Treasury under specific TARP initiatives, 
such as FDIC and Federal Reserve asset guarantees for 
Citigroup, or operate in tandem with Treasury programs, such as 
the interaction between PPIP and TALF. Other programs, like the 
Federal Reserve's extension of credit through its section 13(3) 
facilities and SPVs and the FDIC's Temporary Liquidity 
Guarantee Program, operate independent of TARP.

     3. TOTAL FINANCIAL STABILITY RESOURCES (AS OF AUGUST 28, 2009)

    Beginning in its April report, the Panel broadly classified 
the resources that the federal government has devoted to 
stabilizing the economy through a myriad of new programs and 
initiatives as outlays, loans, or guarantees. Although the 
Panel calculates the total value of these resources at over 
$3.1 trillion, this would translate into the ultimate ``cost'' 
of the stabilization effort only if: (1) assets do not 
appreciate; (2) no dividends are received, no warrants are 
exercised, and no TARP funds are repaid; (3) all loans default 
and are written off; and (4) all guarantees are exercised and 
subsequently written-off.
    With respect to the FDIC and Federal Reserve programs, the 
risk of loss varies significantly across the programs 
considered here, as do the mechanisms providing protection for 
the taxpayer against such risk. The FDIC, for example, assesses 
a premium of up to 100 basis points on Temporary Liquidity 
Guarantee Program (TLGP) debt guarantees. The premiums are 
pooled and reserved to offset losses incurred by the exercise 
of the guarantees, and are calibrated to be sufficient to cover 
anticipated losses and thus remove any downside risk to the 
taxpayer. In contrast, the Federal Reserve's liquidity programs 
are generally available only to borrowers with good credit, and 
the loans are over-collateralized and with recourse to other 
assets of the borrower. If the assets securing a Federal 
Reserve loan realize a decline in value greater than the 
``haircut,'' the Federal Reserve is able to demand more 
collateral from the borrower. Similarly, should a borrower 
default on a recourse loan, the Federal Reserve can turn to the 
borrower's other assets to make the Federal Reserve whole. In 
this way, the risk to the taxpayer on recourse loans only 
materializes if the borrower enters bankruptcy. The only loans 
currently ``underwater''--where the outstanding principal 
amount exceeds the current market value of the collateral--are 
the non-recourse loans to the Maiden Lane SPVs (used to 
purchase Bear Stearns and AIG assets).

                FIGURE 19: FEDERAL GOVERNMENT FINANCIAL STABILITY EFFORT (AS OF AUGUST 28, 2009)
----------------------------------------------------------------------------------------------------------------
                                                           Treasury       Federal
                 Program  (in billions)                     (TARP)        Reserve        FDIC          Total
----------------------------------------------------------------------------------------------------------------
Total..................................................        $698.7      $1,630.8        $834.6  iii $3,164.1
Outlays i..............................................         388             0            35.6         423.6
Loans..................................................          40.5        1401             0          1441.5
Guarantees ii..........................................          25           229.8         799          1053.8
Uncommitted TARP Funds.................................         245.2           0             0           245.2
                                                        --------------------------------------------------------
AIG....................................................          69.8          98             0           167.8
Outlays................................................       iv 69.8           0             0            69.8
Loans..................................................           0          v 98             0            98
Guarantees.............................................           0             0             0             0
                                                        --------------------------------------------------------
Bank of America........................................          45             0             0            45
Outlays................................................      vii 45             0             0            45
Loans..................................................           0             0             0             0
Guarantees vi..........................................           0             0             0             0
                                                        --------------------------------------------------------
Citigroup..............................................          50           229.8          10           289.8
Outlays................................................     viii 45             0             0            45
Loans..................................................           0             0             0             0
Guarantees.............................................        ix 5         x 229         xi 10           244.8
                                                        --------------------------------------------------------
Capital Purchase Program (Other).......................          97.7           0             0            97.7
Outlays................................................      xii 97.7           0             0            97.7
Loans..................................................           0             0             0             0
Guarantees.............................................           0             0             0             0
                                                        --------------------------------------------------------
Capital Assistance Program.............................         TBD             0             0      xiii TBD
                                                        --------------------------------------------------------
TALF...................................................          20           180             0           200
Outlays................................................           0             0             0             0
Loans..................................................           0        xv 180             0           180
Guarantees.............................................      xiv 20             0             0            20
                                                        --------------------------------------------------------
PPIP (Loans) xvi.......................................           0             0             0             0
Outlays................................................           0             0             0             0
Loans..................................................           0             0             0             0
Guarantees.............................................           0             0             0             0
                                                        --------------------------------------------------------
PPIP (Securities)......................................     xvii 30             0             0            30
Outlays................................................          12.5           0             0            12.5
Loans..................................................          17.5           0             0            17.5
Guarantees.............................................           0             0             0             0
                                                        --------------------------------------------------------
Home Affordable Modification Program...................          50             0             0        xix 50
Outlays................................................    xviii 50             0             0            50
Loans..................................................           0             0             0             0
Guarantees.............................................           0             0             0             0
                                                        --------------------------------------------------------
Automotive Industry Financing Program..................          77.5           0             0            77.5
Outlays................................................       xx 55.5           0             0            55.5
Loans..................................................          22             0             0            22
Guarantees.............................................           0             0             0             0
                                                        --------------------------------------------------------
Auto Supplier Support Program..........................          $3.5           0             0             3.5
Outlays................................................           0             0             0             0
Loans..................................................       xxi 3.5           0             0             3.5
Guarantees.............................................           0             0             0             0
                                                        --------------------------------------------------------
Unlocking SBA Lending..................................         $15             0             0            15
Outlays................................................     xxii 15             0             0            15
Loans..................................................           0             0             0             0
Guarantees.............................................           0             0             0             0
                                                        --------------------------------------------------------
Temporary Liquidity Guarantee Program..................           0             0           789           789
Outlays................................................           0             0             0             0
Loans..................................................           0             0             0             0
Guarantees.............................................           0             0     xxiii 789           789
                                                        --------------------------------------------------------
Deposit Insurance Fund.................................           0             0            35.6          35.6
Outlays................................................           0             0       xxiv 35.6          35.60
Loans..................................................           0             0             0             0
Guarantees.............................................           0             0             0             0
                                                        --------------------------------------------------------
Other Federal Reserve Credit Expansion.................           0         1,123             0         1,123
Outlays................................................           0             0             0             0
Loans..................................................           0     xxv 1,123             0         1,123
Guarantees.............................................           0             0             0             0
                                                        --------------------------------------------------------
Uncommitted TARP Funds.................................    xxvi 245.2           0             0           245.2
----------------------------------------------------------------------------------------------------------------
i The term ``outlays'' is used here to describe the use of Treasury funds under the TARP, which are broadly
  classifiable as purchases of debt or equity securities (e.g., debentures, preferred stock, exercised warrants,
  etc.). The outlays figures are based on: (1) Treasury's actual reported expenditures; and (2) Treasury's
  anticipated funding levels as estimated by a variety of sources, including Treasury pronouncements and GAO
  estimates. Anticipated funding levels are set at Treasury's discretion, have changed from initial
  announcements, and are subject to further change. Outlays as used here represent investments and assets
  purchases and commitments to make investments and asset purchases and are not the same as budget outlays,
  which under section 123 of EESA are recorded on a ``credit reform'' basis.
ii While many of the guarantees may never be exercised or exercised only partially, the guarantee figures
  included here represent the federal government's greatest possible financial exposure.
iii This figure is roughly comparable to the $3.0 trillion current balance of financial system support reported
  by SIGTARP in its July report. SIGTARP Quarterly Report to Congress, supra note 272, at 138. However, the
  Panel has sought to capture additional anticipated exposure and thus employs a different methodology than
  SIGTARP.
iv This number includes investments under the SSFI Program: a $40 billion investment made on November 25, 2008,
  and a $30 billion investment committed on April 17, 2009 (less a reduction of $165 million representing
  bonuses paid to AIG Financial Products employees). August 28 Transactions Report, supra note 102.
v This number represents the full $60 billion that is available to AIG through its revolving credit facility
  with the Federal Reserve ($37.8 billion had been drawn down as of August 28, 2009) and the outstanding
  principle of the loans extended to the Maiden Lane II and III SPVs to buy AIG assets (as of August 28, 2009,
  $16.9 billion and $20.9 billion respectively). Board of Governors of the Federal Reserve System, Federal
  Reserve Statistical Release H.4.1: Factors Affecting Reserve Balances (Aug. 27, 2009) (accessed Sep. 2, 2009)
  (online at www.federalreserve.gov/releases/h41/Current/) (hereinafter ``Fed Balance Sheet August 27''). Income
  from the purchased assets is used to pay down the loans to the SPVs, reducing the taxpayers' exposure to
  losses over time. Board of Governors of the Federal Reserve System, Federal Reserve System Monthly Report on
  Credit and Liquidity Programs and the Balance Sheet, at 16-20 (Aug. 2009) (online at www.federalreserve.gov/
  monetarypolicy/files/monthlyclbsreport200908.pdf) (hereinafter ``Fed August 2009 Credit and Liquidity
  Report'').exposure to losses over time. See Board of Governors of the Federal Reserve System, Federal Reserve
  System Monthly Report on Credit and Liquidity Programs and the Balance Sheet, at 16-20 (Aug. 2009) (online at
  www.federalreserve.gov/monetarypolicy/files/monthlyclbsreport200908.pdf).
vi Beginning in our July report, the Panel excluded from its accounting the $118 billion asset guarantee
  agreement among Bank of America, the Federal Reserve, Treasury, and the FDIC based on testimony from Federal
  Reserve Chairman that the agreement was never signed and was never signed or consummated and the absence of vi
  Beginning in our July report, the Panel excluded from its accounting the $118 billion asset guarantee
  agreement among Bank of America, the Federal Reserve, Treasury, and the FDIC based on testimony from Federal
  Reserve Chairman that the agreement was never signed and was never signed or consummated and the absence of
  the guarantee from Treasury's TARP accounting. House Committee on Oversight and Government Reform, Testimony
  Federal Reserve Chairman Ben S. Bernanke, Acquisition of Merrill Lynch by Bank of America, 111th Cong., at 3
  (June 25, 2009) (online at oversight.house.gov/documents/20090624185603.pdf) (``The ring-fence arrangement has
  not been consummated, and Bank of America now believes that, in light of the general improvement in the
  markets, this protection is no longer needed.''); Congressional Oversight Panel, July Oversight Report: TARP
  Repayments, Including the Repurchase of Stock Warrants, at 85 (July 7, 2009) (online at .cop.senate.gov/
  documents/cop-071009-report.pdf). According to a recent news report, it now appears that the U.S. government
  is seeking at least $500 million from Bank of America to shelve the tentative agreement. Dan Fitzpatrick, B of
  A Seeks to Repay a Portion of Bailout, Wall Street Journal (Sept. 1, 2009) (online at online.wsj.com/article/
  SB125176546582274505.html). The account reports the government as taking the position that even though the
  guarantee deal was never signed, the government believes that because Bank of America benefited in the
  marketplace from its implied protection between from January to May 2009, Bank of AmericaBank of America
  benefited in the marketplace from its implied protection between from January to May 2009, Bank of America
  should be responsible for the payment of dividends and other fees, including a program exit fee, associated
  with the program. Id. While the past and current status of the program is in some doubt, in the absence of
  official guidance, the Panel continues to follow Treasury and exclude it from our accounting, in part because
  the putative protection offered by the program is no longer in place. The Panel will include in its accounting
  premiums or fees, if any, that Bank of America ultimately agrees to pay the U.S. government in relation to the
  guarantee program.
vii August 28 TARP Transactions Report, supra note 102. This figure includes: (1) a $15 billion investment made
  by Treasury on October 28, 2008 under the CPP; (2) a $10 billion investment made by Treasury on January 9,
  2009 also under the CPP; and (3) a $20 billion investment made by Treasury under the TIP on January 16, 2009.
viii August 28 TARP Transactions Report, supra note 102. This figure includes: (1) a $25 billion investment made
  by Treasury under the CPP on October 28, 2008; and (2) a $20 billion investment made by Treasury under TIP on
  December 31, 2008.
ix U.S. Department of the Treasury, Summary of Terms: Eligible Asset Guarantee (Nov. 23, 2008) (online at
  www.treasury.gov/press/releases/reports/cititermsheet_112308.pdf) (hereinafter ``Citigroup Asset Guarantee'')
  (granting a 90 percent federal guarantee on all losses over $29 billion of a $306 billion pool of Citigroup
  assets, with the first $5 billion of the cost of the guarantee borne by Treasury, the next $10 billion by
  FDIC, and the remainder by the Federal Reserve). See also U.S. Department of the Treasury, U.S. Government
  Finalizes Terms of Citi Guarantee Announced in November (Jan. 16, 2009) (online at www.treas.gov/press/
  releases/hp1358.htm) (reducing the size of the asset pool from $306 billion to $301 billion).
x Citigroup Asset Guarantee, supra note ix.
xi Citigroup Asset Guarantee, supra note ix.
xii This figure represents the $218 billion Treasury has anticipated spending under the CPP, minus the $50
  billion investment in Citigroup ($25 billion) and Bank of America ($25 billion) identified above, and the
  $70.3 billion in repayments that will be reflected as uncommitted TARP funds. This figure does not account for
  future repayments of CPP investments, nor does it account for dividend payments from CPP investments.
xiii Funding levels for the CAP have not yet been announced but will likely constitute a significant portion of
  the remaining $245.2 billion of TARP funds.
xiv This figure represents a $20 billion allocation to the TALF SPV on March 3, 2009. August 28 Transactions
  Report, supra note 102. Consistent with the analysis in our August report, see COP August Report, supra note
  317, and the fact that only $43 billion has been lent through TALF as of September 2009, the Panel continues
  to predict that TALF subscriptions are unlikely to surpass the $200 billion currently available by year's end.xv This number derives from the unofficial 1:10 ratio of the value of Treasury loan guarantees to the value of
  Federal Reserve loans under the TALF. U.S. Department of the Treasury, Fact Sheet: Financial Stability Plan
  (Feb. 10, 2009) (online at www.financialstability.gov/docs/fact-sheet.pdf) (describing the initial $20 billion
  Treasury contribution tied to $200 billion in Federal Reserve loans and announcing potential expansion to a
  $100 billion Treasury contribution tied to $1 trillion in Federal Reserve loans). Because Treasury is
  responsible for reimbursing the Federal Reserve Board for $20 billion of losses on its $200 billion in loans,
  the Federal Reserve Board's maximum potential exposure under the TALF is $180 billion.
xvi It now appears unlikely that resources will be expended under the PPIP Legacy Loans Program in its original
  design as a joint Treasury-FDIC program to purchase troubled assets from solvent banks. In June, the FDIC
  cancelled a pilot sale of assets that would have been conducted under the program's original design. Federal
  Deposit Insurance Corporation, FDIC Statement on the Status of the Legacy Loans Program (June 3, 2009) (online
  at www.fdic.gov/news/news/press/2009/pr09084.html). In July, the FDIC announced that it would rebrand its
  established procedure for selling the assets of failed banks as the Legacy Loans Programs. Federal Deposit
  Insurance Corporation, Legacy Loans Program--Test of Funding Mechanism (July 31, 2009) (online at www.fdic.gov/
  news/news/press/2009/pr09131.html). These sales do not involve any Treasury participation, and FDIC activity
  is accounted for here as a component of the FDIC's Deposit Insurance Fund outlays.
xvii U.S. Department of the Treasury, Joint Statement By Secretary of the Treasury Timothy F. Geithner, Chairman
  of the Board Of Governors Of The Federal Reserve System Ben S. Bernanke, and Chairman of the Federal Deposit
  Insurance Corporation Sheila Bair: Legacy Asset Program (July 8, 2009) (online at www.financialstability.gov/
  latest/tg_07082009.html) (``Treasury will invest up to $30 billion of equity and debt in PPIFs established
  with private sector fund managers and private investors for the purpose of purchasing legacy securities.'');
  U.S. Department of the Treasury, Fact Sheet: Public-Private Investment Program, at 4-5 (Mar. 23, 2009) (online
  at www.treas.gov/press/releases/reports/ppip_fact_sheet.pdf) (hereinafter ``Treasury PPIP Fact Sheet'')
  (outlining that, for each $1 of private investment into a fund created under the Legacy Securities Program,
  Treasury will provide a matching $1 in equity to the investment fund; a $1 loan to the fund; and, at
  Treasury's discretion, an additional loan up to $1). In the absence of further Treasury guidance, this
  analysis assumes that Treasury will allocate funds for equity co-investments and loans at a 1:1.5 ratio, a
  formula that estimates that Treasury will frequently exercise its discretion to provide additional financing.
xviii GAO, Troubled Asset Relief Program: June 2009 Status of Efforts to Address Transparency and Accountability
  Issues, at 2 (June 17, 2009) (GAO09/658) (online at www.gao.gov/new.items/d09658.pdf) (hereinafter ``GAO June
  29 Status Report''). Of the $50 billion in announced TARP funding for this program, $21.5 billion has been
  allocated as of August 28, 2009, and no funds have yet been disbursed. August 28 Transactions Report, supra
  note 102.
xix Fannie Mae and Freddie Mac, government-sponsored entities (GSEs) that were placed in conservatorship of the
  Federal Housing Finance Housing Agency on September 7, 2009, will also contribute up to $25 billion to the
  Making Home Affordable Program, of which the HAMP is a key component. U.S. Department of the Treasury, Making
  Home Affordable: Updated Detailed Program Description (Mar. 4, 2009) (online at www.treas.gov/press/releases/
  reports/housing_fact_sheet.pdf).
xx August 28 Transactions Report, supra note 102. A substantial portion of the total $80 billion in loans
  extended under the AIFP has since been converted to common equity and preferred shares in restructured
  companies. $22 billion has been retained as first lien debt (with $7.7 billion committed to GM and $14.3
  billion to Chrysler). This figure represents Treasury's cumulative obligation under the AIFP, the total does
  not reflect the aid provided under the Auto Supplier Support Program or any de-obligations or repayments.
  Treasury De-obligation Document, supra note 286. See also GAO June 29 Status Report, supra note xviii at 43.
xxi August 28 Transactions Report, supra note 102.
xxii Treasury PPIP Fact Sheet, supra note xvii.
xxiii This figure represents the current maximum aggregate debt guarantees that could be made under the program,
  which, in turn, is a function of the number and size of individual financial institutions participating.
  $320.1 billion of debt subject to the guarantee has been issued to date, which represents about 41 percent of
  the current cap. Federal Deposit Insurance Corporation, Monthly Reports on Debt Issuance Under the Temporary
  Liquidity Guarantee Program: Debt Issuance Under Guarantee Program (July 31, 2009) (online at www.fdic.gov/
  regulations/resources/tlgp/total_issuance7-09.html) (updated Sep. 2, 2009).
xxiv This figure represents the FDIC's provision for losses to its deposit insurance fund attributable to bank
  failures in the third and fourth quarters of 2008 and the first quarter of 2009. Federal Deposit Insurance
  Corporation, Chief Financial Officer's (CFO) Report to the Board: DIF Income Statement (Fourth Quarter 2008)
  (online at www.fdic.gov/about/strategic/corporate/cfo_report_4qtr_08/income.html); Federal Deposit Insurance
  Corporation, Chief Financial Officer's (CFO) Report to the Board: DIF Income Statement (Third Quarter 2008)
  (online at www.fdic.gov/about/strategic/corporate/cfo_report_3rdqtr_08/income.html); Federal Deposit Insurance
  Corporation, Chief Financial Officer's (CFO) Report to the Board: DIF Income Statement (First Quarter 2009)
  (online at www.fdic.gov/about/strategic/corporate/cfo_report_1stqtr_09/income.html). This figure includes the
  FDIC's estimates of its future losses under loss share agreements that it has entered into with banks
  acquiring assets of insolvent banks during these three quarters. Under a loss sharing agreement, as a
  condition of an acquiring bank's agreement to purchase the assets of an insolvent bank, the FDIC typically
  agrees to cover 80 percent of an acquiring bank's future losses on an initial portion of these assets and 95
  percent of losses of another portion of assets. See, for example Federal Deposit Insurance Corporation,
  Purchase and Assumption Agreement Among FDIC, Receiver of Guaranty Bank, Austin, Texas, FDIC and Compass Bank
  at 65-66 (Aug. 21, 2009) (online at www.fdic.gov/bank/individual/failed/guaranty-tx_p_and_a_w_addendum.pdf).
  The FDIC does not publish aggregated data on the total amount of assets subject to these agreements and the
  amount that the FDIC has guaranteed, and it does not disaggregate anticipated losses from loss share agreement
  from total losses under the Deposit Insurance Fund. But, in contrast, see Damian Paletta, Raft of Deals for
  Failed Banks Puts U.S. on Hook for Billions, Wall Street Journal (Aug. 31, 2009) (online at http://
  online.wsj.com/article/SB125166830374670517.html) (calculating the total insolvent bank assets subject to loss
  sharing agreements at $80 billion and reporting an FDIC estimate of the FDIC's anticipated losses from its
  guarantees on these assets at $14 billion).
xxv This figure is derived from adding the total credit the Federal Reserve Board has extended as of August 27,
  2009 through the Term Auction Facility (Term Auction Credit), Discount Window (Primary Credit), Primary Dealer
  Credit Facility (Primary Dealer and Other Broker-Dealer Credit), Central Bank Liquidity Swaps, loans
  outstanding to Bear Stearns (Maiden Lane I LLC), GSE Debt Securities (Federal Agency Debt Securities),
  Mortgage Backed Securities Issued by GSEs, Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity
  Facility, and Commercial Paper Funding Facility LLC. Fed Balance Sheet August 27, supra note v. The level of
  Federal Reserve lending under these facilities will fluctuate in response to market conditions. The Federal
  Reserve has earned significant amounts of interest in these lending and purchase programs. Fed August Report
  on Credit and Liquidity, supra note v, at 23-24, Tables 30-32 (showing partial income statement for various
  Federal Reserve programs, including $1.88 billion interest earned from Jan. 1-June 30, 2009 on Central Bank
  Liquidity Swaps, $614 million interest earned from Jan. 1-June 30, 2009 on GSE Debt Securities, $4.97 billion
  interest earned from Jan. 1-June 30, 2009 on Mortgage Backed Securities, and $4.18 billion interest earned
  from Jan. 1-June 30, 2009 under the CPFF).
xxvi As discussed in the Panel's August report, we do not account for the Temporary Guarantee Program for Money
  Market Mutual Funds because it does not involve TARP funds and this program will expire September 18, 2009.
  August COP Report, supra note 317.

                   SECTION FIVE: OVERSIGHT ACTIVITIES

    The Congressional Oversight Panel was established as part 
of the Emergency Economic Stabilization Act (EESA) and formed 
on November 26, 2008. Since then, the Panel has produced nine 
oversight reports, as well as a special report on regulatory 
reform, issued on January 29, 2009, and a special report on 
farm credit, issued on July 21, 2009. Since the release of the 
Panel's August oversight report on the continued risk of 
troubled assets, the following developments pertaining to the 
Panel's oversight of the Troubled Asset Relief Program (TARP) 
took place:
     The Panel has received responses to its June 2009 
letters to the largest mortgage servicing companies that had 
not signed a contract to formally participate in the Making 
Home Affordable foreclosure mitigation program. Fourteen of the 
fifteen servicing companies responded. These letters will 
assist the Panel in its evaluation of the foreclosure 
mitigation efforts.
     The Panel and Panel staff have held meetings with 
and requested documents from Treasury regarding the Automobile 
Industry Financing Program. The information obtained has 
assisted the Panel in its preparation of the September report, 
on the Automobile Industry Financing Program.

                     UPCOMING REPORTS AND HEARINGS

    The Panel will release its next oversight report in 
October. The report will provide an updated review of TARP 
activities and continue to assess the program's overall 
effectiveness. The report will also examine the effectiveness 
of foreclosure mitigation efforts.
    The Panel will hold its second hearing with Secretary 
Geithner on September 10, 2009. The Secretary has agreed to 
testify before the Panel once per quarter. His first hearing 
was on April 21, 2009.
    Additionally, the Panel is planning a field hearing in 
Philadelphia on September 24, 2009 to hear testimony on 
foreclosure mitigation efforts.
          SECTION SIX: ABOUT THE CONGRESSIONAL OVERSIGHT PANEL

    In response to the escalating crisis, on October 3, 2008, 
Congress provided Treasury with the authority to spend $700 
billion to stabilize the U.S. economy, preserve home ownership, 
and promote economic growth. Congress created the Office of 
Financial Stabilization (OFS) within Treasury to implement a 
Troubled Asset Relief Program. At the same time, Congress 
created the Congressional Oversight Panel to ``review the 
current state of financial markets and the regulatory system.'' 
The Panel is empowered to hold hearings, review official data, 
and write reports on actions taken by Treasury and financial 
institutions and their effect on the economy. Through regular 
reports, the Panel must oversee Treasury's actions, assess the 
impact of spending to stabilize the economy, evaluate market 
transparency, ensure effective foreclosure mitigation efforts, 
and guarantee that Treasury's actions are in the best interests 
of the American people. In addition, Congress instructed the 
Panel to produce a special report on regulatory reform that 
analyzes ``the current state of the regulatory system and its 
effectiveness at overseeing the participants in the financial 
system and protecting consumers.'' The Panel issued this report 
in January 2009. Congress subsequently expanded the Panel's 
mandate by directing it to produce a special report on the 
availability of credit in the agricultural sector. The report 
was issued on July 21, 2009.
    On November 14, 2008, Senate Majority Leader Harry Reid and 
the Speaker of the House Nancy Pelosi appointed Richard H. 
Neiman, Superintendent of Banks for the State of New York, 
Damon Silvers, Associate General Counsel of the American 
Federation of Labor and Congress of Industrial Organizations 
(AFL-CIO), and Elizabeth Warren, Leo Gottlieb Professor of Law 
at Harvard Law School to the Panel. With the appointment on 
November 19 of Congressman Jeb Hensarling to the Panel by House 
Minority Leader John Boehner, the Panel had a quorum and met 
for the first time on November 26, 2008, electing Professor 
Warren as its chair.

                            ACKNOWLEDGEMENTS

    The Panel thanks Professor Steven Lubben, the Daniel J. 
Moore Professor of Law at Seton Hall School of Law; and, 
Professor Barry E. Adler, the Bernard Petrie Professor of Law 
and Business and Associate Dean for Information Systems and 
Technology at New York University School of Law for their 
papers discussing the Chrysler and GM bankruptcy cases. Special 
thanks also go to Professor Mark J. Roe, the David Berg 
Professor of Law at Harvard Law School; Professor David Arthur 
Skeel, the S. Samuel Arsht Professor of Corporate Law at 
University of Pennsylvania Law School; and, Professor Richard 
A. Fallon, the Ralph S. Tyler Professor of Constitutional Law 
at Harvard Law School for reviewing drafts of this report and 
providing invaluable comments. The Panel also wishes to express 
thanks to the following individuals for their thoughts and 
suggestions: Edward Altman, Max L. Heine Professor of Finance 
at the Stern School of Business, New York University; Susan R. 
Helper, AT&T Professor of Economics at the Weatherhead School 
of Management, Case Western Reserve University; Mr. Howard 
Wial, Fellow for the Metropolitan Policy Program at the 
Brookings Institute; Dr. Sean McAlinden, Vice President for 
Research and Chief Economist at the Center for Automotive 
Research; Professor Clayton S. Rose, Senior Lecturer of 
Business Administration at the Harvard Business School; 
Jonathan Rosenthal, Partner at Saybrook Capital; Professor 
Malcolm Salter, James J. Hill Professor of Business 
Administration, Emeritus, Harvard Business School; Professor 
Michael A. Cusumano, Professor at the MIT Sloan School of 
Management and Co-director of the International Motor Vehicle 
Program; and, Mr. Dan Luria, Research Director at the Michigan 
Manufacturing and Technology Center.

  APPENDIX I: LETTER FROM CHAIR ELIZABETH WARREN TO SECRETARY TIMOTHY 
 GEITHNER AND CHAIRMAN BEN BERNANKE, RE: CONFIDENTIAL MEMORANDA, DATED 
                             JULY 20, 2009

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


APPENDIX II: LETTER FROM SECRETARY TIMOTHY GEITHNER TO CHAIR ELIZABETH 
       WARREN, RE: CONFIDENTIAL MEMORANDA, DATED AUGUST 12, 2009

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


