Senate Tougher on Auto Industry Than Wall Street « The Washington Independent
Image has not been found. URL: /wp-content/uploads/2008/12/dodd-shelby.jpgSens. Christopher Dodd (D-Conn.) and Richard Shelby (R-Ala.) (WDCpix)
Maybe Congress has learned a lesson after all.
As the heads of Detroit’s automakers pleaded with Congress Thursday for $34 billion in emergency help, many lawmakers hinged their support on a strict system of regulation to ensure that the money would be well spent.
Illustration by: Matt Mahurin
To accomplish that, some lawmakers are pushing for an oversight board along the lines of one established to oversee the bailout of Chrysler in 1979. Others would authorize an individual — perhaps the Treasury secretary — to supervise bailout spending. But on one thing there is agreement: The spending freedoms given to the Treasury Dept. under the Wall Street rescue package shouldn’t be included in a bailout plan for the automakers.
“We should not throw good money after bad,” said Sen. Chris Dodd (D-Conn.), chairman of the Senate Banking Committee. “Nor should we subsidize inefficient performance and inefficient production. We must demand that the auto companies demonstrate their commitment to reform.”
Lawmakers’ concern over how the bailout money would be spent marks a departure from September’s debate over Wall Street’s rescue, which focused largely on whether $700 billion would be enough to buoy the sinking financial system. As a result, the Treasury Dept. was given nearly unlimited freedom to use the money as it pleased.
Since that emergency legislation was passed in September, Treasury has switched its strategy from buying toxic assets from distressed financial institutions to making direct capital investments into them. More recently, it tapped the Troubled Asset Relief Program to pump $20 billion of new capital into Citigroup, while also backstopping $306 billion in toxic assets held by that bank. Then Treasury changed positions again, announcing it would use some of the money to help the consumer credit market by targeting securities backed by credit card, student loan or auto financing debt. **
More troubling in the eyes of many lawmakers, the Bush administration has done almost nothing to monitor the effectiveness of the Wall Street rescue. The Government Accountability Office on Tuesday issued findings that Treasury has done virtually nothing to ensure that the financial bailout money is being spent to thaw frozen credit markets and not to pay enormous executive salaries.
Dodd blasted administration officials Thursday, saying they have “in no meaningful way insisted that these banks and insurance companies adopt tough reforms to ensure the kind of shabby lending practices they engaged in will not happen again. On the contrary, the Treasury Department’s largess with the taxpayer funds has been remarkably free of conditions placed on the recipients of those funds.”
Dodd said that he invited officials from the Treasury Dept. and Federal Reserve, which is also involved in Wall Street’s rescue, to testify Thursday, but they refused.
The senator’s comments arrive as the heads of the Big Three automakers — General Motors, Chrysler and Ford — urged members of the Senate Banking Committee to give them $34 billion in emergency loans and lines of credit to stave off what GM and Chrysler say is imminent bankruptcy.
It was the executives’ second visit to Capitol Hill in recent weeks. They drew intense criticism from lawmakers during their first trip when they failed to provide clear answers to questions about where the $25 billion in emergency loans they were requesting would be spent. In response, Congress asked for the CEOs to submit plans detailing how the Big Three would rework their business plans to make them profitable. The companies provided those strategies Tuesday, leading to Thursday’s Senate hearing.
The House Financial Services Committee will consider the plans Friday.
Many lawmakers worry that allowing one of the Big Three to fall into bankruptcy in the middle of a deepening recession would only exacerbate the economic turmoil. “My concern with such an approach is that it plays Russian roulette with the entire economy of the United States,” Dodd said. “Inaction is no solution. Inaction would only add more uncertainty and instability to our economy.”
But pointing to lessons from the Wall Street rescue, lawmakers want greater assurances that the auto companies won’t use the money to again pay dividends on its common stock or reward executives with huge salaries.
“I speak for many of us here,” Sen. Charles Schumer (D-N.Y) said during Thursday’s hearing. “We care less where the money comes from … but much more how it’s spent …. To hand money over with vague, unenforceable promises without an enforcement plan for viability isn’t good enough.”
U.S. Comptroller General Gene Dodaro, who heads the GAO, testified that any Detroit bailout should be accompanied by the creation of an oversight board to ensure that the money is spent as intended.
“[Such a] board has to have the ability to protect the taxpayers’ interest,” Dodaro said. “It has to have the right leadership, the right expertise and the right resources to succeed.”
The White House remains skeptical of moves to grant new spending on a Detroit bailout. It contends that $25 billion approved earlier in the year for the production of more fuel-efficient cars should be tapped instead. Commerce Sec. Carlos M. Gutierrez told C-Span Thursday that the administration is still weighing whether the companies’ recovery plans offer viable models worth supporting.
“Do they have the right brands, the right products?,” Gutierrez asked. “Do they have too many products? … Are they capable of producing the cars of the future in a profitable manner?”
Some lawmakers weren’t so cautious in their opposition to helping Detriot. Sen. Richard Shelby (R-Ala.), the ranking member of the Banking Committee, said he sees nothing in the companies’ restructuring plans to indicate they can become competitive anytime soon.
“Industry analysts contend that the firms continue to trail their major competitors in almost every category necessary to compete and to make a profit,” Shelby said.
Adding fuel to that criticism, some economists warn that the $34 billion is nowhere near enough to prevent the companies from going into bankruptcy. Mark Zandi, chief economist at Moody’s Economy.com, told lawmakers that, over the long haul, it would require between $75 billion and $125 billion to prevent one or more of the Big Three from having to declare bankruptcy. “I’m skeptical, doubtful, that it’s going to end at $34 billion,” he said.
Still, Zandi said the companies should be given the initial $34 billion as an opportunity to prove they can adapt to new consumer tastes. The alternative, he said, would be much worse.
“Bankruptcy at this point in time would be cataclysmic to the economy,” Zandi said.