Thank you for taking the time to let me know of your views on the efforts by the federal government to provide financial assistance to the U.S. automobile industry. Because this issue is of crucial concern to residents of all the communities I represent in Congress, my office received -- as in the case of the broader financial rescue package we adopted earlier this year -- a very large number of calls, emails, letters and faxes about whether and how to help the industry. Beyond the communications from people who either favored or opposed the proposals under consideration in Congress to help the auto industry, I also received many suggestions for alternative methods of addressing these issues. The House Financial Services Committee, which I chair, is the committee with jurisdiction over financial initiatives of this sort, so these are matters for which I had considerable responsibility. My staff and I reviewed all of the recommendations we received, and took them into account as we worked on auto assistance proposals in Washington. In order to ensure that everyone who contacted me receives the fullest possible explanation of my own views and actions on these matters, and because I think it is the best policy to give the same information to all constituents who contact me – whether they agree with me or not -- I have prepared the following comprehensive response.
Given the current fragile state of the economy, and the prominent role of the domestic automobile industry in our economy, I believe that it makes sense to provide financial help to the industry, but only if the companies agree to some tough conditions. The automobile industry in total represents some 10% of U.S. jobs and approximately 4% of our Gross Domestic Product. Beyond the automobile manufacturing plants, which are located in many states, the dealers, the auto parts suppliers and the many other companies that play a role in the industry are distributed across virtually every corner of our country.
Because of this interconnected nature of the industry, the failure of any of the “big three” American companies would have a catastrophic effect on the rest of the industry and the economy in general. It is possible that if we were in a stronger economic state it would have made sense to allow one of the companies to go out of business or declare bankruptcy, though even that would have caused a serious negative impact on the economy. But, in light of the current recession, I believe that would be a very serious mistake.
The domestic automobile industry has clearly made a number of mistakes, and those mistakes have left them unprepared for the current economic situation. In particular, their failure to be more innovative, especially in developing more energy-efficient vehicles, has put them in a weak competitive situation. But, those mistakes alone don’t account for their current difficulties. All of the major car companies operating in America, including those based in foreign countries, have seen their sales drop by 20 – 40 percent in recent months. Along with poor planning on the part of the U.S. automakers, these drops in sales are attributable to the credit freeze, and the broader economic problems that have resulted from the freeze.
These factors lead me to believe that there is strong justification for providing the companies with financial assistance, provided it is properly structured and includes tough conditions and taxpayer protections. Indeed, many foreign governments – including Japan, Canada, a number of European nations, and the European Union as a whole – have recently stepped in to provide financial help to their car companies. In other words, while I agree that the U.S, carmakers are partly responsible for their own plight, there are larger forces at work, and the home countries of our foreign competitors have recognized that and begun to take action. Thus, if we don’t take responsible action of our own to provide some help, we would essentially be allowing overseas competitors to have an advantage over our domestic companies by virtue of the foreign governmental subsidies they are receiving. But, again, it is vital that we insist on serious restructuring as a condition for receiving help from the U.S. government.
Like many of my colleagues, I was disappointed when the auto industry executives first came before us at a Financial Services Committee hearing on November 19 to request financial help, without providing much in the way of details on how they would restructure if we agreed to help them. Following that hearing, the CEOs worked with their boards, and then returned for a second hearing at which they were more forthcoming about the difficulties they faced and their willingness to accept conditions, I thought the time was right to move forward on a plan to help them. Many of us believed that the best approach would be to make use of the funds in the Troubled Asset Recovery Program (TARP), the pool of funds established by the financial rescue legislation we passed several months ago, provided strong conditions were attached.
To my disappointment, the Bush Administration was unwilling to proceed in this fashion, insisting instead that we provide financial help for the car companies by using separate funds that had previously been set aside to help them modernize from an energy efficiency point of view. I disagreed with this idea, both because I felt it was important to preserve those funds for their original purpose, and because I am convinced that TARP was well suited to this type of assistance. When it became clear that the Administration wouldn’t budge on this point, the Speaker agreed to use the energy efficiency funds, and asked me to move quickly to draft legislation to accomplish this. Again, my preference would have been to reserve the funds for their original intended purpose, but in view of the Administration’s insistence and the strong desire of Democrats to achieve a bipartisan compromise, this was the approach that we adopted. The Speaker, who is deeply committed to environmental improvements, also assured us that she would arrange to restore the energy efficiency funding in the economic recovery bill that the new Congress will take up when convenes in January.
As Chairman of the Financial Services Committee I was a lead negotiator with the Administration, the Senate, the car companies and the unions in developing the new legislation. Our bill, which was approved by the House on a mostly party line vote of 237-170, with 1 voting present, called for making loans and lines of credit of up to $14 billion to the companies contingent upon solid corporate restructuring, plans to focus more on energy-efficient vehicles, financial protections in the form of stock warrants which will mean that taxpayers would benefit in the future when the companies return to profitability, and restrictions on executive compensation. I was also pleased that the United Auto Workers union announced a series of important financial concessions in advance of the bill and during negotiations with the Senate. Of particular importance, the bill made it clear that we could demand a return of the funds if certain conditions were not met. More specifically, if the Auto companies that took taxpayer money did not deliver restructuring plans to the government by March 31, 2009 the loan would be called or cancelled within 30 days.
Unfortunately, when the bill was considered in the Senate, to my dismay Senator Corker of Tennessee proposed an amendment which would have required union workers in U.S. auto plants to have their pay and compensation cut within a period of less than a year to a level equal to those employed by foreign owned plants in Tennessee and elsewhere, without regard to previously agreed transition plans for older workers. I disagreed with this approach because the union had already agreed to some compensation concessions, and because there had been no push for restrictions on the pay of non-executive employees of financial companies when we had passed the original economic rescue package in September. Yet, in this case, with blue collar workers instead of white collar employees involved, there was an effort to cut their pay and benefits. I believe this was unfair. In any case, Senator Corker’s amendment was never brought to a vote and died on the negotiating table. Subsequently, the overall bill was unable to achieve the 60 votes necessary to stop the filibuster threatened by Senate Republican Leader Mitch McConnell (R-KY). The final vote was 52 - 35, with 17 Senators missing the vote, meaning that the bill was defeated. 10 Republicans voted for cloture (that is, cutting off the filibuster and moving forward with the vote) and 3 Democrats voted against cloture (not counting Sen. Reid, who voted against cloture for procedural reasons).
When that happened, the Administration reconsidered its stance, and as you may know, has now agreed to provide some financial help to the car companies using TARP funds. I am pleased that, given the inability of the Senate to pass the bill because of the Republican opposition in that chamber, the Administration agreed to take this step. Indeed, in announcing an intention to use the TARP funds, they are doing what I would have preferred they had done initially. As you can see from the attached letter, I urged the Administration to apply the same set of conditions to the TARP assistance for the auto industry that we had included in the legislation that was passed by the House. And, while I was pleased that the Administration did agree to apply most of the conditions, I was disappointed that they imposed unfair additional provisions, derived from Senator Corker’s amendment, on union workers. As indicated in the attached statement, I believe these provisions should be removed, and I will be pushing for that when the new Administration is in power.
I must also note the other positive result of the Senate’s failure to pass the bill is that the money that had originally been set aside for energy efficiency is once again preserved for that purpose, and it is no longer necessary to restore these funds in the economic recovery package that we will be taking up in the new Congress.
I recognize that many people disagree with the very concept of the government providing assistance to private businesses, particularly when they may have played a role in contributing to the economic problems we are facing. This is particularly the case when there are a great many people who played no direct role in our economic difficulties who will be called upon to make contributions – as taxpayers – to the assistance we provide the automobile industry. In this connection, I believe it is important for us also to pass a major economic stimulus package that will bolster the economy across the board, and also provide some direct assistance to taxpayers in the form of middle class tax cuts. I am disappointed that President Bush resisted the idea of a passing a stimulus package as part of, or at the same time as, the earlier economic rescue package. I believe very strongly that if we are going to provide financial help for Wall Street firms, the automobile industry and to those who are confronting difficulties in meeting their mortgage payments, we need to also provide help to those who are active participants in our economy, and have lived within their means, including those who have diligently paid their mortgages without any problems.
Even though we were unable to pass a stimulus package at the time we adopted the earlier economic rescue legislation, I had hoped we would be able to do so at some point in the months following passage of that bill. Unfortunately, the President’s opposition and that of Republicans in the Senate made that impossible. It is now clear that we will have to wait until the Obama Administration is in office to have a recovery package signed into law. I am pleased to see that the President-Elect is talking about a package of hundreds of billions of dollars for this purpose, which he would like to be able to sign very soon after he takes office in late January. I am hopeful that such a package can include funds for infrastructure projects, help for people struggling with education costs, aid to states, cities and towns, an extension of unemployment benefits and the expansion of food stamps and other nutrition programs, and middle class tax cuts. Financial assistance of this kind will in my view help make our response to the economic crisis more balanced in terms of its help for low and moderate income Americans, and will recognize more fully the contributions of those who did not contribute to our present economic difficulties.
I am optimistic that the new Congress will pass recovery legislation in consultation with the new administration, and that it will be available for the new President to sign shortly after he takes office. And, as work moves forward on the effort to provide assistance to the domestic automobile industry, I will be doing all I can to ensure that taxpayers are given appropriate protections.
BARNEY FRANK
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