GWEN IFILL: Congress returned to Capitol Hill today. And among the first items on the docket, bailing out business. The question: Are bailouts working? And who should get them?
Congressional correspondent Kwame Holman begins with a report on today’s hearings.
KWAME HOLMAN: Treasury Secretary Henry Paulson’s appearance at the House Financial Services Committee hearing this morning came amid strong criticism for the way he’s handled the $700 billion rescue package for the financial industry.
Paulson has shifted the focus from buying up bad assets to investing directly in banks and financial companies.
Today, for the first time, he defended that approach before Congress, which has gathered for a post-election session.
Alongside Federal Reserve Chairman Ben Bernanke and Federal Deposit Insurance Corporation Chair Sheila Bair, Paulson declared the Troubled Asset Relief Program, or TARP, has had success.
HENRY PAULSON, U.S. Treasury Secretary: The authorities in the TARP have been used to strengthen our financial system and to prevent the harm to our economy and financial system from the failure of a systemically important institution.
KWAME HOLMAN: But he faced tough questions from members who want more federal action to prevent home foreclosures, the original source of the financial meltdown.
The FDIC’s Bair also stressed the need to do more there. She’s estimated 4 million to 5 million loans will enter into foreclosure over the next two years.
SHEILA BAIR, Chairman, Federal Deposit Insurance Corporation: As foreclosures escalate, we’re clearly falling behind the curve. Much more aggressive intervention is needed if we are to curb the damage to our neighborhoods and to the broader economy.
KWAME HOLMAN: Committee Chairman Barney Frank asked why massive federal funds were used to prop up troubled insurance giant AIG and not to assist homeowners.
REP. BARNEY FRANK (D), Massachusetts: I don’t know what investment counselor, absent macroeconomic conditions, would have advised you to invest in AIG. I suspect it does not rate highly as an investment these days.
I hope it goes well going forward, and there’s no question that this will be helpful to it, but $40 billion for AIG, and then we can’t find $24 billion on the mortgage foreclosure is part of the reason we have the real problem with the country.
HENRY PAULSON: AIG was a situation, a company that would have failed had the Fed not stepped in. Had we had the TARP at that time, this is right down the middle of the plate for what we would have used the TARP for.
REP. BARNEY FRANK: I’m not objecting to AIG. But the point is that clearly part of this was not just to stabilize, but to reduce the number of foreclosures, for good macroeconomic reasons. And so, again, the intent couldn’t be clearer, from what I’ve read.
HENRY PAULSON: I am going to keep working on this and looking for ways to use the taxpayer money as they expect me to here with regard to foreclosure mitigation. We have been, you know, as recently as last week taking a step which I think will have…
REP. BARNEY FRANK: No, I’m sorry, Mr. Secretary. Those are not substitutable. Because I will tell you this — and I apologize for taking the time — it is nobody’s view that we have been as successful as we need to be for the stake of the economy in reducing foreclosures. We have a very large pot that was intended to be part of that effort that’s going untapped.
KWAME HOLMAN: The committee’s top Republican, Spencer Bachus of Alabama, asked the secretary if giving financial institutions cash to lend had actually worked.
REP. SPENCER BACHUS (R), Alabama: Do you think we’re on the right track in restoring lending?
HENRY PAULSON: The way I look at where we are today is I think we’ve turned the corner in terms of stabilizing the system and preventing a collapse.
I think there’s a lot of work that still needs to be done in terms of recovery of the financial system, getting it working again, getting credit flowing again. I think this is going to be key to getting the economy going.
KWAME HOLMAN: Pennsylvania’s Paul Kanjorski wanted some of the $700 billion used to help the battered U.S. auto industry.
REP. PAUL KANJORSKI (D), Pennsylvania: Do you consider the loss of the American auto industry a significant and systemic risk or don’t you? If we lose 3 million jobs, what would it cost to make it up?
What would be the loss of revenue? And would it be worth spending $25 billion initially to stop that from occurring? And if we don’t do that, what is our backup plan? And what do we intend to do?
HENRY PAULSON: I think it would be not a good thing, it would be something to be avoided, having one of the auto companies fail, particularly during this period of time.
We have asked Congress — you know, Congress has worked to deal with this. But I believe that any solution be a solution that leads to long-term viability, sustainable viability here.
And so, again, I don’t see this as the purpose of the TARP. Congress passed legislation that dealt with the financial system’s stability.
And, again, you know, there are other ways. And, you know, you also appropriated money for the auto industry in the Department of Energy bill, you know, 136. And you want another alternative maybe to modify that.
KWAME HOLMAN: At a second hearing, this one on the Senate side of the Capitol, the big three automakers pleaded their case before a packed meeting of the Banking Committee.
SEN. CHRIS DODD (D), Connecticut: If I had known the interest, I would have held this at RFK.
KWAME HOLMAN: Chairman Chris Dodd began by pointedly disagreeing with the treasury secretary’s decision not to use the TARP to aid Detroit.
SEN. CHRIS DODD: The secretary of the treasury has until now declined to use that authority, and I regret that, focusing the resources of the act on financial companies. It’s hard to explain how you can provide massive assistance to AIG but manage to find no room at all assistance for our three major automobile manufacturers.
KWAME HOLMAN: Top Republican Richard Shelby of Alabama opposed the original financial bailout legislation six weeks ago and was skeptical of the automakers’ plea.
SEN. RICHARD SHELBY (R), Alabama: How do they plan to deal with current management, labor, cost, and quality control, and product development shortfalls, which they know they have? Are we here in the Senate being asked to facilitate a stronger, more competitive auto manufacturing sector or to perpetuate a market failure?
KWAME HOLMAN: Alan Mulally of Ford outlined why his company needs assistance.
ALAN MULALLY, President and CEO, Ford: We suggest the loans be structured in a revolving format so exposure to the taxpayer would be limited and, if used, we would repay them, of course, with interest.
We at Ford are hopeful that we have enough liquidity, but we also must prepare ourselves for the prospect of further deteriorating economic conditions in 2009.
In addition, the collapse of one of our competitors would have a severe impact on Ford and our transformation plan, because the domestic auto industry is highly interdependent.
KWAME HOLMAN: G.M.’s Rick Wagoner rejected the charge that the automakers’ troubles mostly are due to their own mistakes.
RICK WAGONER, CEO, General Motors: Mr. Chairman, I do not agree with those who say we are not doing enough to position G.M. for success. What exposes us to failure now is not our product line-up, is not our business plan, is not our employees and their willingness to work hard. It is not our long-term strategy.
What exposes us to failure now is the global financial crisis, which has severely restricted credit availability and reduced industry sales to the lowest per capita level since World War II.
What would it mean if the domestic industry were allowed to fail? You heard Sen. Stabenow, so I won’t repeat other than to say the cost would be catastrophic in jobs lost, income lost, government tax revenue lost, and a huge blow to consumer and business confidence.
KWAME HOLMAN: The leaders of the big three automakers take their plea to the House side of the Capitol tomorrow.
Debating merits of a bailout
GWEN IFILL: So the auto industry is asking, but is the government in the mood to give? Jeffrey Brown has our debate.
JEFFREY BROWN: And for that, I'm joined by two senators who've been vocal in this fight. Democrat Sherrod Brown of Ohio, he sits on that Banking Committee we just saw that heard from automakers today, and Republican Jon Kyl of Arizona, the number-two ranking Republican in the Senate.
Well, Sen. Brown, let's start simply. What's the most compelling argument you've heard for helping the auto industry?
SEN. SHERROD BROWN (D), Ohio: Well, the most compelling argument is the cost of inaction is simply too great. Two hundred and fifty thousand jobs in my state depend on the auto industry. Millions of jobs around the country depend on this industry.
And, you know, they've had some relatively good times recently. Ford, the first quarter of this year, Ford was profitable. Then came the credit crunch; then came the recession. All these companies are in trouble.
And it's some of their own making. Certainly, management has been less than stellar at times. But it's too important to our country, too important to our economy for them to go bankrupt.
JEFFREY BROWN: And you think that the money should come out of the $700 billion?
SEN. SHERROD BROWN: Yes, we had three banks in front of the Banking Committee last week. Each of those banks received $25 billion. Each of them received $25 billion last week for these TARP funds that Secretary Paulson talks about, out of the $700 billion.
We're asking for the auto industry -- and these are low-interest loans; these are not grants or gifts -- for $25 billion, the same as any one of those banks got, to help to rescue an entire industry that represents hundreds of thousands of jobs in my state, Michigan, several others, and jobs all over the country, car dealerships, suppliers, all of that that are so important to our manufacturing base in this country.
JEFFREY BROWN: And, Sen. Kyl, then, what's the most compelling argument you've heard against this?
SEN. JON KYL (R), Arizona: I think the most compelling argument is that there are huge problems with these three automakers that aren't going to be solved with a loan. They have bills each month that far exceed what they can afford to pay, and they'd like to get some help to pay those bills.
But at the end of the $25 billion, they're still going to be in the same position they're in today. They have to make fundamental changes to unload a lot of the costs that they have.
And without some kind of restructuring, for example, under Chapter 11, they're not going to be able to voluntarily do that. They have mortgages on property that they're not even using they have to pay, bonds that they have to pay off, legacy costs for health care and pension costs for union workers.
Their costs of producing cars is far in excess of their competitors. And until those costs come down, simply lending them more money won't solve the problem.
A struggling auto industry
JEFFREY BROWN: Sen. Kyl, one of the areas of dispute, clearly, is what got the companies into this in the first place? How much of it is their own doing?
We heard in that hearing that Rick Wagoner from G.M. was saying it's really not our fault; we're caught up in circumstances. What do you think?
SEN. JON KYL: I think that both things are true. I don't want to point fingers. They're experts in their business. And a year-and-a-half ago, they negotiated some contracts that, if times had been really good, might have helped them get out of this mess.
The problem is, with the high cost of gasoline and then the falling apart of the economy, their plans simply all fell apart. And as a result, like all other segments of our economy, they're hurting big time.
It's just that, in their case, they started out with some huge legacy costs. They haven't gotten rid of those. And right now, it doesn't appear that there's any ability for them to do so.
JEFFREY BROWN: Well, Sen. Brown, you mentioned that they may have made some mistakes in the past. Given that, is there a reason to think that giving them more money or some help now, they'll do any better with it?
SEN. SHERROD BROWN: There is reason to believe that. First, we will put conditions on this money. It's not a gift; it's a loan. It's a low-interest loan, but there are also conditions, everything from restrictions and limits on executive compensation to a whole host of other issues.
You know, do they replace their management? Those are questions that I'm certainly willing to entertain.
And I go back to this industry has had its moments. It's had its good moments recently. I go back to Ford in the first quarter of the year. Then, as Sen. Kyl said, gas prices, the recession, the credit crunch. And this is an industry that does need to make some major structural changes.
They had a recent labor contract a year-and-a-half or so ago, as Sen. Kyl mentioned, where there were major, major restructuring, redoing the labor contracts they've had to cut costs both in labor and industry costs. That's a major step in the right direction.
Then the gas prices hit. Then the recession hit. So we haven't seen that work its way through. I think that will matter.
And this industry's too important to this country. And it really can, if we do this right -- and I think we can -- I think we probably learned something from the financial bailout, which, frankly, I don't think Secretary Paulson and the government have exactly done right. We've learned some things to move forward.
JEFFREY BROWN: Well, one of the arguments here -- I'll start with you, Sen. Brown, on this -- one of the arguments is that, if you let the companies go into bankruptcy, that's precisely the place to deal with a lot of these fixed costs that you both have been talking about.
So why not, in this case, as people have cited the examples of airlines in the past, why not go into bankruptcy court and deal with some of those problems, some of those fixed costs?
SEN. SHERROD BROWN: Well, there are several reasons. The bankruptcy would be devastating not just to those three companies -- even if one of them declares bankruptcy, it will have a major ripple effect on the other two or more than a ripple, more of a tidal effect, if you will, on the other two.
But the other reason -- the reasons bankruptcy is such a problem is that, first of all, there's the whole off-loading of pensions, that the government ends up having to cover a lot of these pensions through the Pension Benefit Guaranty Trust Corporation. And that's a huge number of taxpayer dollars that taxpayers probably wouldn't get back, unlike this low-interest loan.
Second, a lot of these suppliers that say that they supply G.M. in Ohio, they also -- some of those same suppliers supply Honda in Ohio, a company that's not in as much trouble because it doesn't have the legacy costs, in part.
And what happens with those suppliers, which are generally operating on thin margins, if they lose a big contract with G.M., one of their biggest customers or their biggest customer, with G.M., it causes all kinds of problems for their supplying Honda and in some of the transplant companies. And so there would be all kinds of problems there.
And, ultimately, bankruptcy will mean likely -- it's not like airlines, an airline. When an airline goes bankrupt, people keep buying the tickets because you're buying a ticket for a flight three weeks from now or three months from now.
With the auto industry, people won't buy cars from a company they know is in bankruptcy because they don't know what it's going to be like to service that car, what it's going to be like to get parts for that car in the future.
So this would just cripple their ability to ever get back on their feet because of the uniqueness of the auto industry versus a whole lot of other kinds of companies that might have gone Chapter 11 but been able to restructure and come back stronger than before.
JEFFREY BROWN: What do you think, Sen. Kyl? Is this a unique industry or is bankruptcy the way to go?
SEN. JON KYL: Let's, first of all, define what we mean by bankruptcy. They don't go out of business. There's a special chapter called Chapter 11. In fact, people refer to it as protection of bankruptcy, because you restructure everything under Chapter 11.
You stay in business. In fact, you have an 18-month period where it's a timeout. You don't even have to pay your bills for 18 months.
And during that period of time, committees of experts decide what kind of expenses you can get rid of so that, when you come out of Chapter 11, you're in a leaner, tougher, more competitive kind of position. And that's what's occurring or what does occur in Chapter 11.
The biggest problem, the one reason they are somewhat unique is that these three big automakers have a lot of legacy costs. It's like a swimmer that's got a 100-pound weight around his neck. He's just not going to go very far.
Even if you help him swim 25 yards, he's still got the weight around his neck. A lot of those costs have got to be eliminated.
Now, what it will -- the suppliers who continue to supply parts for cars are going to continue to get the contracts to supply those parts. And people are still going to be employed, and franchises will still exist.
But what will likely happen, for example, is that some of the franchises will be shut down. For the Japanese automakers of the United States, they have far fewer numbers of franchises, but state law makes it very difficult to close down franchises. In fact, the auto companies get sued when they try to close down franchises.
Well, if you're in Chapter 11, the bankruptcy court can say, "You have 20 percent too many franchises. Get rid of these 20 percent." Your costs go way down. And while it's true that the people who had the franchises are going to have to find something else to do, at least the company then can survive.
They've gotten rid of the costs that are precluding them from competing today.
And that's the point here: $25 billion in loans without changing anything is only going to pay bills for a few months, whereas, through the Chapter 11 process, they actually make the changes necessary to come out of Chapter 11 in a very competitive position. And then, if we need to be helping them during that process, we can do so.
Final point. Just -- it's pure speculation that people won't buy cars for companies that are in Chapter 11 reorganization. I have no reason to believe they won't. They should.
Reaching a potential compromise
JEFFREY BROWN: Let me ask you both briefly, if you could, before we go, is there some compromise here -- I'll start with you, Sen. Kyl -- by which the companies might make some promises that would allow you to say, "OK, we'll do some kind of bridge loans, given certain stipulations, very tough stipulations"?
SEN. JON KYL: I think the answer is no, because everybody wants it exactly the way it is. None of the franchises want to close down; none of the employees want to be unemployed; none of the other costs can be addressed, except through the Chapter 11 process.
So, unfortunately, I just don't think that voluntarily the companies are going to be able to negotiate with the labor unions or these other folks in order to eliminate those costs.
JEFFREY BROWN: Sen. Brown, does it seem like an all-or-nothing to you or do you see some compromise?
SEN. SHERROD BROWN: I think compromise is absolutely realistic. And that compromise is really what we have in mind: the $25 billion in bridge loans, but some conditions on the companies to cut costs and perhaps some of the ways that Sen. Kyl suggests.
And we can do that. We know they have to change. They know they have to change. They know that, to make this industry vibrant, they've got to deal with costs. That's what that labor agreement was about a year-and-a-half ago, but it's going to take more than that, perhaps with dealerships, perhaps with some other things.
JEFFREY BROWN: But do you think, Sen. Brown, that the automakers, the auto workers are open to those kinds of very tough stipulations that you hear being asked for, if any money is going to change hands?
SEN. SHERROD BROWN: Yes, it's not going to unload the legacy costs, because those legacy costs are promised pensions and health care benefits to union and non-union workers and retirees alike, but it can be some significant savings.
We've got to figure out -- and that's what the secretary of the treasury needs to do, if he would release this $25 billion -- that's not new money. It's part of the $700 billion, some of the same amount that went to those -- that went to those banks and that went to AIG and other -- and other financial institutions and insurance companies.
So it just means that secretary of treasury has to do this right, and be tough, and get these kinds of compromises and agreements from the big three.
JEFFREY BROWN: All right, Sherrod Brown of Ohio, Jon Kyl of Arizona, thank you both very much.
SEN. SHERROD BROWN: Thank you very much, Jeff.