[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
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C O N T E N T S
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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
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SEPTEMBER OVERSIGHT REPORT
_______
September 9, 2009.--Ordered to be printed
_______
EXECUTIVE SUMMARY*
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\*\ 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.
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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.
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\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'').
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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.
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\2\ Emergency Economic Stabilization Act of 2008 (EESA), Pub. L.
No. 110-343 (hereinafter ``EESA'').
\3\ EESA Sec. 101(a)(1).
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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\
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\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).
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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\
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\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'').
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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\
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\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'').
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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\
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\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.
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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\
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\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.
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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:
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\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'').
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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\
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\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'').
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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.
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\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.
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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.
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\32\ Chrysler February 17 Viability Plan, supra note 11.
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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:
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\33\ Chrysler February 17 Viability Plan, supra note 11.
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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\
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\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.
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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\
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\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.
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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.
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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.
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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.
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\205\ Ron Bloom COP Testimony, supra note 36 at 23-24.
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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.
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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\
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\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).
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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.
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\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.
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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.
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\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.
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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.
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\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.
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\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.
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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\
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\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'').
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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.
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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.
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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.
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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/).
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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.''
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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.
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\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.).
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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.
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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).
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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).
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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.
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\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\
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\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).
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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?
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\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.
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\6\ http:// www.bloomberg.com/apps/
news?pid=20601039&refer=columnist_woolner&sid=aN_5hvV_xqHM.
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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).
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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).
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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).
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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).
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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).
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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.
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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.
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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.
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\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.
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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.
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\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\
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\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\
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\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\
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\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\
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\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.
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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\
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\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?
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(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\
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\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?
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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\
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\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.
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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.
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\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.
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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?
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\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.
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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/.
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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\
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\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.
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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/.
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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\
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\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\
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\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\
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\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.
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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\
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\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.
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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\
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\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.
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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\
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\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\
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\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.
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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.
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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.
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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.
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\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.
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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.
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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\
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\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]