[Congressional Record (Bound Edition), Volume 154 (2008), Part 18]
[Senate]
[Pages 24726-24729]
[From the U.S. Government Publishing Office, www.gpo.gov]




                       AUTOMOBILE INDUSTRY CRISIS

  Mr. WHITEHOUSE. Madam President, I rise today to address what I feel 
is an unfortunate omission from our economic rescue strategy to date. 
This week, we are considering another bailout which would give $15 
billion in so-called bridge loans to America's struggling automakers.
  Now, when we debated a bailout program to protect our Nation's 
financial system back in September, we created legislative branch roles 
and executive branch roles. We ultimately passed legislation that 
empowered the Department of the Treasury to invest up to $700 billion. 
Debate was rushed. The Treasury Secretary came to us on a Friday in 
September and told leaders of both parties in both Houses that our 
economy would collapse if we did not take immediate action. With the 
threat of immediate financial calamity and the apparent good faith of 
Secretary Paulson, Congress moved quickly to pass the best bill we 
could. Senator Chris Dodd of Connecticut and my colleague from Rhode 
Island, Senator Jack Reed, worked heroically, almost around the clock, 
to negotiate for taxpayer protections and several levels of oversight. 
In the end, we created a program of congressional and executive roles 
but no judicial role. We ignored the role that courts can play here or, 
more correctly, that executive agencies can play when supported by 
judicial or even quasi-judicial due process. We are about to ignore 
that role again in the auto bailout.
  Why is this point important? This is important because under our 
American system of government, there are important powers of government 
that can only be exercised after due process opportunity for a hearing. 
The famous Supreme Court case of Fuentes v. Shevin is on point. I 
quote:

       The constitutional right to be heard is a basic aspect of 
     the duty of government to follow a fair process of decision-
     making when it acts to deprive a person of his possessions.

  That is citation 407 U.S. 67 at 82.
  In other words, some means of restructuring require due process if 
they involve adjusting people's financial rights and claims. When we 
fail to provide that process, we unilaterally disarm government's 
response, taking away its ability to restructure using those means.
  The price of this repeated omission has been high. Going back before 
we even got into this current mess, when there was only a subprime 
mortgage problem, Senator Durbin of Illinois proposed a bill that would 
have empowered bankruptcy judges to modify the terms of a mortgage on a 
person's primary residence. One needed a due process hearing such as 
that in order to adjust the rights within that mortgage of the banks 
and the myriad investors who bought strips of that mortgage when it was 
carved up and sold to the four winds. Our Republican colleagues stymied 
this provision which we now see could have kept tens of thousands of 
families in their homes. Because the clarity and finality of a court 
decision on a troubled mortgage was not available, there was little 
alternative to foreclosure, and troubled mortgages, by the tens of 
thousands, cascaded into foreclosure--numbers never before seen in our 
history. Our fault. Bad design. And every day we don't get it right, 
every day we don't pass Senator Durbin's bill, that foreclosure problem 
worsens.
  Similarly, as part of the $700 billion Wall Street bailout, we could 
have addressed lavish and indefensible executive compensation by 
providing for some judicial power to restructure these packages. 
Because we didn't, these grotesque liabilities remain on the books of 
the bailed out entities as obligations to their disgraced management. 
According to an analysis by the Wall Street Journal, the executive 
deferred compensation obligations of bailed out Wall Street firms 
amount to more than $40 billion. Banks participating in the bailout 
program carried these obligations on their books, and the cash from our 
bailout is being used to pay them--or will be used to pay

[[Page 24727]]

them. Taxpayer dollars will end up in the pockets of the scoundrels who 
tanked those firms. I contend we have to find ways in which the court 
system, due process, can be brought to bear on this problem. But again, 
the inaction on that so far is our fault. Bad design. Unilateral 
disarmament in the face of the Wall Street meltdown.
  Now we have the auto bailout plan with its provision for a ``car 
czar,'' but once again, lacks a role for those due process powers of 
government. Once we are committed to this deal--once we are in--the 
only tool we will have at that negotiating table is Uncle Sam's 
checkbook--that, and the somewhat improbable threat to walk away and 
tank the auto companies after having put $15 billion into them. So now 
we will have to negotiate about the companies' continuing lavish 
executive and board compensation packages and other obligations 
impeding a fair and rational recovery. As for looking backwards at 
preexisting obligations, as we say in Rhode Island, forget about it. 
That requires due process. We have created no process to even invoke 
government's power to review those. So the effect of all of this is to 
encourage special interests to play the holdout in the auto 
negotiations and dare us to tank the companies. It is going to be a 
high stakes game of chicken and, no matter who wins, the taxpayers 
lose.
  We created this ``hold out'' problem by not providing a judicial role 
in the restructuring. We could, for example, give the car czar the 
powers of a judicially appointed conservator or receiver--those are 
roles I have held--and the power to go to court for an order approving 
his plan or her plan over the objections of any holdouts. If we did 
that, it would change the bargaining position of the holdouts. This 
judicial due process would allow the strong powers of government that 
require due process to be brought to bear on this mess. We do this in a 
lot of different contexts.
  Bankruptcy courts oversee restructuring all the time and so do other 
quasi-judicial bodies. For example, the FDIC has the power under 
current law to place a troubled bank into receivership and wind it down 
as if in chapter 7, or put it under conservatorship to restructure it 
as if in chapter 11. The bankruptcy courts and the FDIC possess the 
tools necessary to cut through whatever Gordian knots may snarl 
restructuring plans absent that power. The judicial imprimatur will 
also increase public confidence in the fairness and the propriety of 
these plans. There is flexibility about how we do this. We don't have 
to have it be the FDIC. We don't have to have it be a bankruptcy court 
to recognize the due process powers of government.
  Fuentes v. Shevin again, and I quote:

       Due process tolerates variances in the form of a hearing 
     ``appropriate to the nature of the case,'' and ``depending 
     upon the importance of the interests involved and the nature 
     of the subsequent proceedings, if any.''

  I hope my colleagues will recognize the importance of authorizing 
judicially supervised powers in these bailout plans. I pledge to work 
hard with anyone who wants to achieve this goal. It is vital, I 
contend, to recognize that directed judicial oversight expands 
government's powers and authorities to do the things the public and the 
circumstances demand. It gives us a means to unsnarl the foreclosure 
mess on Main Street, to restructure obscene executive compensation on 
Wall Street, and to force good-faith negotiations in Detroit.
  We cannot ignore the judicial power in restructuring companies and 
industries. We must not let that sword sleep in our hands. Times are 
bleak in Detroit, as they are around the country. The automobile 
industry stands on the brink of collapse, and the jobs of thousands--
some say millions--of workers hang in the balance.
  Michigan shares the sad distinction with my home State of Rhode 
Island in having the Nation's highest unemployment rate, 9.3 percent, 
in October. Families are struggling in Rhode Island and across the 
country. That is the background against which we must consider whether 
to bail out yet another industry. In making such a weighty decision, I 
implore my colleagues, we must not consider just whether but how we go 
about doing this.
  I contend that we should empower our Government to take steps that we 
have, to date, foreclosed--steps that exercise the power of Government 
that can be only exercised after due process of law. I hope we consider 
that.
  Madam President, I ask unanimous consent that the Wall Street Journal 
article to which I referred be printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

              [The Wall Street Journal, October 31, 2008]

                    Banks Owe Billions to Executives

                         (By Ellen E. Schultz)

       Financial giants getting injections of federal cash owed 
     their executives more than $40 billion for past years' pay 
     and pensions as of the end of 2007, a Wall Street Journal 
     analysis shows.
       The government is seeking to rein in executive pay at banks 
     getting federal money, and a leading congressman and a state 
     official have demanded that some of them make clear how much 
     they intend to pay in bonuses this year.
       But overlooked in these efforts is the total size of debts 
     that financial firms receiving taxpayer assistance previously 
     incurred to their executives, which at some firms exceed what 
     they owe in pensions to their entire work forces.
       The sums are mostly for special executive pensions and 
     deferred compensation, including bonuses, for prior years. 
     Because the liabilities include stock, they are subject to 
     market fluctuation. Given the stock-market decline of this 
     year, some may have fallen substantially.
       Some examples: $11.8 billion at Goldman Sachs Group Inc., 
     $8.5 billion at J.P. Morgan Chase & Co., and $10 billion to 
     $12 billion at Morgan Stanley.
       Few firms report the size of these debts to their 
     executives. (Goldman is an exception.) In most cases, the 
     Journal calculated them by extrapolating from figures that 
     the firms do have to disclose.
       Most firms haven't set aside cash or stock for these IOUs. 
     They are a drag on current earnings and when the executives 
     depart, employers have to pay them out of corporate coffers.
       The practice of incurring corporate IOUs for executives' 
     pensions and past pay is perfectly legal and is common in big 
     business, not limited to financial firms. But liabilities 
     grew especially high in the financial industry, with its 
     tradition of lavish pay.
       Deferring compensation appeals both to employers, which 
     save cash in the near term, and to executives, who delay 
     taxes and see their deferred-pay accounts grow, sometimes 
     aided by matching contributions. In some cases, firms give 
     top executives high guaranteed returns on these accounts.
       The liabilities are an essentially hidden obligation. Even 
     when the debts to their executives total in the billions, 
     most companies lump them into ``other liabilities''; only a 
     few then identify amounts attributable to deferred pay.
       The Journal was able to approximate companies' IOUs, in 
     some cases, by looking at an amount they report as deferred 
     tax assets for ``deferred compensation'' or ``employee 
     benefits and compensation.'' This figure shows how much a 
     company expects to reap in tax benefits when it ultimately 
     pays the executives what it owes them.
       J.P. Morgan, for instance, reported a $3.4 billion deferred 
     tax asset for employee benefits in 2007. Assuming a 40% 
     combined federal and state tax rate--and backing out 
     obligations for retiree health and other items--implies the 
     bank owed about $8.2 billion to its own executives. A person 
     familiar with the matter confirmed the estimate.
       Applying the same technique to Citigroup Inc. yields 
     roughly a $5 billion IOU, primarily for restricted stock of 
     executives and eligible employees. Someone familiar with the 
     matter confirmed the estimate.
       The Treasury is infusing $25 billion apiece into J.P. 
     Morgan and Citigroup as it seeks to get credit flowing. In 
     return, the federal government is getting preferred stock in 
     the banks and warrants to buy common shares. The Treasury is 
     injecting $125 billion into nine big banks and making a like 
     amount available for other banks that apply.
       It's imposing some restrictions on how they pay top 
     executives in the future, such as curtailing new ``golden 
     parachutes'' and barring a tax deduction for any one person's 
     pay above $500,000. But the rules won't affect what the banks 
     already owe their executives or make these opaque debts more 
     transparent.
       Asked about the Journal's calculation, the Treasury said, 
     ``Every bank that accepts money through the Capital Purchase 
     Program must first agree to the compensation restrictions 
     passed by Congress just last month--and every bank that is 
     receiving money has done so.''
       Bear Stearns Cos., the first financial firm the U.S. 
     backstopped, owed its executives $1.7 billion for accrued 
     employee compensation and benefits at the start of the year, 
     according to regulatory filings. When Bear

[[Page 24728]]

     Stearns ran into trouble after investing heavily in risky 
     mortgage-backed securities, the government stepped in, 
     arranging a sale of the firm and taking responsibility for up 
     to $29 billion of its losses.
       The buyer, J.P. Morgan, says it will honor the debt to Bear 
     Stearns executives, which it said is shrunken because much of 
     it was in stock that sank in value.
       J.P. Morgan will also honor deferred-pay accounts at 
     another institution it took over, Washington Mutual Inc. It 
     couldn't be determined how big this IOU is. J.P. Morgan's 
     move will leave the WaMu executives better off than holders 
     of that ailing thrift's debt and preferred stock, who are 
     expected to see little recovery. J.P. Morgan's share of the 
     federal capital injection is $25 billion.
       Obligations for executive pay are large for a number of 
     reasons. Even as companies have complained about the cost of 
     retiree benefits, they have been awarding larger pay and 
     pensions to executives. At Goldman, for example, the $11.8 
     billion obligation primarily for deferred executive 
     compensation dwarfed the liability for its broad-based 
     pension plan for all employees. That was just $399 million, 
     and fully funded with set-aside assets.
       The deferred-compensation programs for executives are like 
     401(k) plans on steroids. They create hypothetical 
     ``accounts'' into which executives can defer salaries, 
     bonuses and restricted stock awards. For top officers, 
     employers often enhance the deferred pay with matching 
     contributions, and even assign an interest rate at which the 
     hypothetical account grows.
       Often, it is a generous rate. At Freddie Mac, executives 
     earned 9.25% on their deferred-pay accounts in 2007, 
     regulatory filings show--a better deal than regular employees 
     of the mortgage buyer could get in a 401(k). Since all this 
     money is tax-deferred, the Treasury, and by extension the 
     U.S. taxpayer, subsidizes the accounts.
       In addition, because assets are rarely set aside for 
     executive IOUs, they have a greater impact on firms' earnings 
     than rank-and-file pension plans, which by law must be 
     funded.
       Bank of America Corp.'s $1.3 billion liability for 
     supplemental executive pensions reduced earnings by $104 
     million in 2007, filings show. By contrast, the bank's 
     regular pension plan is overfunded, and the surplus helped 
     the plan contribute $32 million to earnings last year.
       While disclosing its liability for executive pensions, the 
     bank doesn't disclose its IOU executives' deferred 
     compensation, and it couldn't be calculated. The bank's share 
     of the federal capital injection is $25 billion.
       Bank of America has agreed to acquire Merrill Lynch & Co. 
     Merrill is a rare example of a firm that has set aside assets 
     for its deferred-pay obligation: $2.2 billion, matching the 
     liability. Morgan Stanley also says its liability for 
     executives' deferred pay is largely funded.
       To be sure, deferred-compensation accounts can shrink. 
     Those of lower-level executives usually track a mutual fund, 
     and decline if it does. Often the accounts include restricted 
     shares, which also may lose value, especially this year. To 
     the extent financial-firm executives were being paid in 
     restricted stock, many have lost huge amounts of wealth in 
     this year's stock-market plunge.
       The value of Morgan Stanley Chief Executive John Mack's 
     deferred-compensation account declined by $1.3 million in 
     fiscal 2007, to $19.9 million; much of it was in company 
     shares. Mr. Mack didn't accept a bonus in 2007.
       Executives can even lose their deferred pay altogether if 
     their employer ends up in bankruptcy court. When Lehman 
     Brothers Holdings Inc. filed for bankruptcy last month, most 
     executives became unsecured creditors. The government didn't 
     come to Lehman's aid.
       In assessing liabilities, the Journal examined federal 
     year-end 2007 filings by the first nine banks to get capital 
     injections, plus six other banks and financial firms 
     embroiled in the financial crisis. In many cases, the firms 
     didn't report enough data to estimate their obligations to 
     executives. As for identifying amounts due individual 
     executives, company filings provided a look at only the top 
     few, and not a full picture of what they were owed.
       Just as banks aren't the only financial firms getting 
     federal aid amid the crisis, they aren't the only ones facing 
     scrutiny of their compensation programs.
       Struggling insurer American International Group Inc. agreed 
     to suspend payment of deferred pay for some former top 
     executives pending a review by New York state Attorney 
     General Andrew Cuomo. Mr. Cuomo is also demanding to know 
     this year's bonus plans for the first nine banks getting 
     federal cash, as is House Oversight Committee Chairman Henry 
     Waxman.
       Among the payouts AIG agreed not to make are disbursements 
     from a $600 million bonus pool for executives of a unit that 
     ran up huge losses with complex financial products. AIG also 
     is suspending $19 million of deferred compensation for Martin 
     Sullivan, whom AIG ousted as chief executive in June. His 
     successor as CEO, Robert Willumstad, who left when the U.S. 
     stepped in to rescue AIG in September, has said he's forgoing 
     $22 million in severance because he wasn't there long enough 
     to execute his strategy for AIG.
       However, the giant insurer--whose total liability for its 
     executives' deferred pay couldn't be calculated--says most of 
     the managers will receive the compensation. ``Of course, 
     we'll be looking at all these to make sure they're consistent 
     with the requirement of the program,'' said spokesman 
     Nicholas Ashooh.
       AIG isn't eligible for the government's capital-injection 
     plan, since it's not a bank, but it's getting plenty of U.S. 
     aid of another sort. The Treasury has made $123 billion of 
     credit available, a little more than two-thirds of which MG 
     has borrowed so far.
       Fannie Mae and Freddie Mac also don't get in on the 
     capital-injection plan for banks. But under a federal 
     ``conservatorship,'' the Treasury agreed to provide each with 
     up to $100 billion of capital if needed. In return, the 
     government got preferred shares in the firms and the right to 
     acquire nearly 80% of them.
       Their regulator, the Federal Housing Finance Agency, says 
     it will bar golden-parachute severance payouts to the 
     mortgage buyers' ousted chief executives. The executives 
     remain eligible for their pensions.
       Fannie Mae had a liability of roughly $500 million for 
     executive pensions and deferred compensation at the end of 
     2007, judging by the size of its deferred tax assets. A 
     spokesman for the firm wouldn't discuss the estimate or 
     whether the executives would get the assets.
       At Freddie Mac, most will. ``Deferred compensation belongs 
     to the officers who earned it,'' said Shawn Flaherty, a 
     spokeswoman.
       Indeed, in September Freddie Mac made its deferred-
     compensation plan more flexible, allowing executives to 
     receive their money earlier than initially spelled out. 
     ``Officers were nervous about market changes,'' said Ms. 
     Flaherty. ``We wanted a retention tool for top talent.''

  Mr. WHITEHOUSE. I thank the Chair, yield the floor, and I suggest the 
absence of a quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The assistant legislative clerk proceeded to call the roll.
  Mr. LEVIN. Madam President, I ask unanimous consent that the order 
for the quorum call be rescinded.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. LEVIN. Madam President, I ask unanimous consent that the 
Presiding Officer, the Senator from Missouri, be recognized for up to 5 
minutes, and that I be recognized for 30 minutes in morning business.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. LEVIN. I suggest the absence of a quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The legislative clerk proceeded to call the roll.
  Mrs. McCASKILL. Mr. President, I ask unanimous consent that the order 
for the quorum call be rescinded.
  The PRESIDING OFFICER (Mr. Levin). Without objection, it is so 
ordered.
  Mrs. McCASKILL. Mr. President, I know we have an important piece of 
legislation that we are going to vote on today. I desperately want to 
support that legislation. I wish to ask first and most importantly if 
anyone has the information as to whether the CEOs of Wells Fargo or 
Bank of America or Citigroup have taken private jets in the last month. 
Has anyone asked the CEOs of Citigroup, Wells Fargo--all of these 
financial companies--to take a cut in compensation? Has anyone asked 
about their workers and how much money they make and whether they are 
overpaid and whether they are competitive with the salaries of 
community bankers across the country?
  Every one of the institutions I named has gotten $15 billion or more 
of taxpayer money. Think about that for a minute. Citigroup has gotten 
$50 billion. Have we checked on their private jets? Have we checked on 
their CEO compensation? Have we checked on their work rules and whether 
their workers are given enough flexibility?
  It is unbelievable to me that we are setting this double standard. 
The thousands of jobs and families who build great American cars do not 
deserve this incredible hypocrisy in terms of the different treatment 
they are getting. What is good for the goose is good for the gander.
  I say let's call in those CEOs of those big companies that have 
gotten more than $15 billion of our money and ask them when they are 
going to take a dollar in pay, ask them if they got here on a corporate 
jet, ask them if their workers have cut their pay to $14 an hour, ask 
them if they have talked

[[Page 24729]]

about cutting their pension costs and their health care costs. Until we 
do that, we ought to be quiet about the American autoworkers, and we 
ought to be quiet about these companies that have reduced fixed costs, 
that have agreed to sell corporate jets, that have agreed to cut 
executive compensation.
  I want to support this bill on behalf of manufacturing in the United 
States of America, on behalf of wonderful, hard-working families in 
Missouri. However, there is one problem that has arisen, and that is, 
unfortunately, in this bill right now, as written, is a provision to 
increase the pay of Federal judges. Wrong time, wrong place.
  We have unemployment numbers today that show we have the highest 
unemployment in this country we have had in decades. We have families 
all over this Nation who are scared today, who are not buying Christmas 
presents. Federal judges get lifetime appointments and they never take 
a dime's cut in pay. They die with the same salary they have today. My 
phone is ringing off the hook from people who want to be Federal 
judges. I am having to have staff work overtime to handle all the phone 
calls I am getting from people who think there may be a Federal 
judgeship opening in the eastern district of Missouri and how badly 
accomplished, wonderful, smart lawyers want that Federal appointment.
  We are not hurting for qualified applicants for the Federal 
judiciary. Is it fair that they have not gotten a cost-of-living 
increase like every other Federal employee? Probably not. But you know 
what is a lot more unfair is to give somebody with a lifetime 
appointment, great health care, no cut in pay when they actually 
retire, what is unfair is to give them a pay raise on this day in this 
bill at this time. It is not the right time. And if it is in the bill, 
I regrettably will have to vote against this legislation because I feel 
so strongly that it sends the wrong message to the United States of 
America at this scary moment in our economic history.
  Mr. President, I suggest the absence of a quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The legislative clerk proceeded to call the roll.
  Mr. LEVIN. Madam President, I ask unanimous consent that the order 
for the quorum call be rescinded.
  The PRESIDING OFFICER (Mrs. McCaskall). Without objection, it is so 
ordered.

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