Posted by: David Kiley on December 4, 2008
9:53 AM: CNN reports that a CNN Opinion Poll shows that six in ten Americans are flatly against bailing out the U.S. automakers. The Big Three have a combined market share of about 45%. So, right off the bat, 55% of the country has considered an American car in the last year and passed. Now, consider the number of people who have shifted away from Detroit brands in the last few years. The point is that such a poll may measure the opinion, the feelings, of the moment. But it doesn’t have anything to do with whether or not allowing the automakers to go bankrupt would be dreadful for an already awful economy, pushing the Recession into a Depression. If not acting to help the industry stay clear of bankruptcy pushes the U.S. into Depression, will the same people ask their lawmakers: Why did you listen to us?
10:17 AM: Chris Dodd sets the stage. Dodd restates his belief that the President already has the power to release money to the auto industry from the $700 billion bailout fund.
Then he asks rhetorically “Who among us believes we should risk the collapse of the auto industry and the consequences that would follow?” The guy to your left, Alabama Sen. Richard Shelby, is among you and is happy to see Detroit go down the chute and the UAW with it.
Dodd makes the point that this is not about saving a handful of companies, but that not loaning the auto makers is playing “Russian Roulette” with the economy.
The point Dodd makes is not new, but striking: $300 billion for CITI. $30 billion for Bear Stearns and $150 billion for AIG, but not $34 billion in loans that can be paid back to an entire auto industry, the biggest industry in the U.S. that actually still makes products.
10:25: Ranking Republican Richard Shelby (R-Ala.): I am once again interested to hear how they are going to deal with current management, labor and product development shortfalls…What happens if their sales forecasts are wrong…Do the changes go far enough? How is the money going to be used…How do we account for it? How will you pay it back…In just two weeks, the price has gone from $25 billion to $34 billion. What changed? [Senator…you imposed the $25 billion limit on the companies…it’s not a figure they said was what they needed]…Your sales forecasts are too optimistic.
10:31 am: Gene Dodaro, acting U.S. Comptroller General: Was it necessary to open with Mr. Dodaro? Comptrollers are deadly.
Dodaro talks about a board of oversight required to oversee disbursement of funds and ongoing financial scrutiny of the companies and how they are performing. The automakers support all that.
10:37 AM: Dodd asks Dodaro, whose office is part of the Government Accounting Office (GAO) if he thinks The Treasury already has the authority to release TARP funds to the auto industry. Dodaro says yes. But he says the Federal Reserve would have too determine that credit is not available to the companies through any other means, and that the money could be paid back. He also says that management oversight of the banks and investment banks has been a problem [ya think?] and that an oversight board of auto company management would have to be assured. President Bush and Treasury Secretary Hank Paulsen are politically against using TARP funds for the auto industry, but they aren’t saying that there position is political, not practical.
10:46: Dodaro says he doesn’t have as much info from Chrysler as he would like owing to the fact that the company is private, not public like GM and Ford. Dodaro says that the magnitude of the impact of on the tax-payers is dependent on having more information. Senator Shelby is seizing on this because he wants to kick the issue down the road, claiming that Congress should stretch the automakers out for months in order to set up oversight and conditions before granting the automakers loans. Shelby favors the companies going Chapter 11 to restructure “if they are worthy of restructuring.”
Shelby also likes the idea of Treasury helping the automakers without him having to vote for loans. Alabama is home to assembly plants operated by Mercedes-Benz, Hyundai and Honda and numerous supplier plants that feed those factories. There are no Big Three plants in Alabama. Shelby maintains that loans to the auto industry will never be paid back.
10:55 AM: Senator Tim Johnson (D-South Dakota): This Senator has the guts of a lion. New viewers of C-Span may wonder why his speech is so slow. He had a stroke and has come back to the Senate. His speech is slurred, but his mind is sharp. This exchange with Dodaro spotlights the fact that these are loans, not grants. Also, the government would have senior status to be paid back over and above other debt holders. Dodaro says the best insurance for the tax payer getting paid back is a strong oversight board. The automakers wouldn’t get all the money at once. It would be doled out. If the money looked like it wasn;t working, the government could stop short of paying it all.
Senator Robert Bennett (R-Utah): Raises an interesting point. Some of the auto industry debt holders are banks and investment banks already being helped by the Treasury. He wonders what happens to those banks if they are forced to swap debt they hold for equity in the auto companies. Will they be compromised? He also asks if the Fed and Treasury could help the auto companies by taking the automaker debt held by the banks, and thus relieve the automakers of some of that debt burden. This is an interesting idea that hasn’t gotten much traction in the last several weeks.
11:01 AM:Dodaro is proving to be better than he seemed when he began. He seems very positive toward a loan program or the Fed helping the automakers because he is clear that Congress has a lot of discretion to set up very specific conditions and oversight parameters. The Congress is in a position here to call the tune to which the auto industry dances. This could even extend to forcing the Big Three to give up fighting California’s emissions standards. But many members of Congress seem purely ideologically opposed, and also interested in busting the UAW.
11:23AM Would the government participate in making management decisions at the automakers? When the government loaned money to Chrysler,that was not the case. The govt. Would review big moves and big expenditures. But most of the oversight would be characterized up-front—limits on management compensation, ban on dividends, agreements on debt for equity swaps, etc.
Senator Charles Schumer (D-NY) “I don’t trust the car company leadership.” And Schumer is in favor of the loans! Odd. Schumer does not favor an oversight board over the automakers, but rather a czar. Schumer says he wants to make sure that workers, dealers or bond holders get the shaft.
11:31 AMElizabeth Dole (R-NC), a lame-duck Senator embarrassed herself last month with an ill-informed and harsh rebuke of the auto industry. Today, she actually asks a worthy question. The Treasury has released some $155 billion to several bank institutions without exerting the proper management oversight. She asks how we can make sure that the auto companies are monitored properly. That’s the job of Congress to make sure it is set up properly. How about learning from your mistake with the banks. Of course, she will be retired when it counts.
Senator Robert Menendez (D-NJ) has been harsh on the automakers, though he is widely expected to vote with other Democrats in favor of the loans. He is another lawmaker not happy that Ford and GM have closed plants in his state. But he does want the Big Three to cease opposition to California emissions standards, which NJ favors.
11:35AM Menendez is asking about Chrysler leaving open the possibility that it will be acquired by a foreign automaker. He rightly wants to know if the money it seeks would be subsidy for a foreign automaker. Chrysler is a real problem for Congress, because it is owned by a hedge fund and is being groomed fro break-up or sale. But if it goes Chap. 11, it could drag down GM and or Ford with it.
11:51AM:Senator Jon Tester (D-Montana) admits that lack of oversight on bank bailout is “bleeding over” into this hearing and admits that the auto industry is dealing with fallout from that.
Dodaro wants collateral associated with the loans and interest rates associated with the risk…higher interest rates than maybe what the automakers are suggesting.
He also says that he is pretty sure that automaker pension funds would not be compromised in a Chapter 11, but will issue a finding tomorrow. That could be key, and may hurt the automakers’ arguments against Chap. 11.
Moodys Rating Service has cut the legs out from under the automakers by suggesting that it will take between $75 billion and $125 billion to keep the Big Three out of Chapter 11, a long way from the $34 billion being asked for today. Let's keep in mind, though, that the rating agencies completely screwed up their job on rating mortgaged-back securites containing sub-prime loans, as well as their analysis of bank and investment bank balance sheets.
12:09:Evan Bayh: cites Dodaro’s finding that letting the auto industry go would have ‘significant ripple effect.” Bayh makes the point that it is impossible to know if the automakers would be back asking for more money. He also makes the point that AIG was back only a few weeks after it got an enormous amount of money and Treasury seemed to go blithely along. Senators are being refreshingly honest when it admits that the auto industry is staking extra harsh scrutiny because the AIG and CITI and FNMA and Freddie Mac problems are opaque to most members of Congress and voters. Cars—they understand.
Dodaro makes the good point that tight oversight of the auto industry will prevent any big surprises from the auto industry as the bailout help gets underway, unlike the surprise return trip from AIG.
There is a Senate aid digging and digging in his ear on TV. Doesn’t he know the cameras are rolling. Is his Mother watching?
Sen. Sherrod Brown (D-Ohio). He makes the point that several states simply don’t have the budget wiggle room to cope with the unemployment, healthcare and Medicaid expenditures that will arise from throwing three million more people out of work.
Sen. Chris Dodd drives a Ford Escape, but is looking at a Chevy Tahoe now. He’d better buy the hybrid version.
12:15PMGM CEO Rick Wagoner is the first CEO up. He is under the greatest pressure, and many believe his job is in jeopardy in the next few weeks. He notes its GM’s centennial year. He admits that they have made mistakes, but they also aren’t going to be bashful about spotlighting successes and accomplishments. “We have done best in our history…when we have kept close alignment between the goals of the company and the goals of country.” This line will be focused on by Detroit bashers who will say this has not been the case when GM battled against safety belts and higher fuel efficiency requirements.
12:38PM: James Fleming, President of the Conn. Auto Dealers Assoc.: Fleming makes a good and emphatic point that car dealers are small businesses. A lot of the rhetoric aimed against lending money to the automakers is that it would be better to help small businesses than GM and Ford. Three million jobs on the line are three million jobs. Does it matter how big each business is? Fleming also makes the point that the companies and supplier companies have gone out of their way to support women and minority-owned businesses, and that those hundreds of businesses will be impacted if the U.S. auto industry is allowed to go under. Fleming also makes the good point that automakers and healthy supplier companies have acted as "bridge financiers" to other supplier companies who have had trouble getting credit.
12:52PMMoody analyst Mark Zandi is killing the automakers. Her says that $34 billion wonl;t be enough and that it will take more like $75 billion to $125 billion because of how low industry sales will stay, buyers won’t come back to the Big Three brands because of bad publicity, etc.
He also is casting a lot of doubt on their ability to deliver on their plans and promises.
He suggests lending them $34 billion in exchange for stock warrants, and to give the money in two tranches. He is advising against a Chap. 11. If after the first tranche, the benchmarks aren’t met, then he says cut off the money.
Zandi’s testimony is confusing and I’sm sure is going to be the subject of much of the afternoon. He is basically saying it will never be enough, but give it to them anyway?