In a week in which lawmakers from both sides of the aisle have excoriated the Bush Administration for putting forth a $700 billion bailout of the financial industry with no built-in accountability or taxpayer protection measures, these same lawmakers have chosen to hand out $25 billion with literally no-strings-attached.
In 1979 and 1980 Chrysler, on the verge of bankruptcy, lobbied congress for a $1.2 billion bailout. Chrysler was subjected to months of hearings, scrutiny and congressional debate. In the end, facing a potential 1% jump in already high unemployment rates, congress passed the bailout measure with a caveat that Chrysler produce a strict repayment schedule, a new business plan, accounting oversight to monitor the use of funds, strict limitations on executive pay and even Union concessions. In fact, under congressional scrutiny, Lee Ioccoca agreed to accept just $1 in annual salary until the loan was repaid.
In 2001, Congress bailed out the airline industry on the verge of bankruptcy following 9/11. But once again, the bailout was only granted after the industry companies produced restructuring plans, agreed to oversight and accepted strict limits on executive pay.
The $25 billion granted to the automotive industry yesterday was passed with no such provisions, no set oversight and no demand for limitations on executive compensation. The funds which were appropriated to help the industry upgrade infrastructure and develop hybrid technologies came with no oversight to assure that funds were used for that purpose. In fact, it is unlikely that the industry that is suffering massive operating losses will use the money for any of those activities.
Moreover, with no repayment plan put forth, it is likely that taxpayers could be on the hook for these loans permanently. Last year General Motors reported a record setting loss of $38.7 billion dollars. On August 2nd of this year, GM reached a new milestone when they reported the largest quarterly loss of any business in history, $15.5 Billion. GM's losses second quarter losses were accompanied by second quarter losses of $8.7 billion by Ford. In all the big 2 lost nearly as much last quarter as the entire bailout. In addition, the automakers credit status was lowered to "junk" status this past summer meaning that the 5% loan rate on the bailout funds is much lower that the double digit loan rates that the companies would qualify for in the private market.
Under current legislation the Bush administration could impose rules before releasing the funds; however, knowing this administrations past and Democrat's failure to request oversight, it is unlikely that any tough restrictions will be put into place. The hand-out of these funds to the automotive industry is shameful, considering that no hearings or debate ever took place on the bailout. Additionally, handing out billions to an industry, without acting on the fundamental reasons causing the failure of the industry is an exercise in futility. As I pointed out yesterday, this $25 billion is akin to putting applying a band-aid to an industry that has had it's legs cut off and is hemorrhaging cash. Ultimately, most wall street analysts fully expect the at least one of the big 2 to collapse unless there is a major turn-around in the economy and in fuel prices. If this occurs, taxpayers will be on the hook for the uncollateralized loans.
For their part, Democratic leadership in congress is refusing to call the bailout a "bailout". Instead sticking to the party line that this is just a loan. Yet, by their reasoning, the $85 billion that was handed to AIG was technically a loan that must be repaid. The fact is that unlike AIG and the earlier bailout of Chrysler and the Airline industry in 2001, these "loans" to the auto industry are uncollateralized and being allocated to companies that have no reasonable assurance of survival. AIG's collapse was brought on by devalued mortgage assets, despite the fact that the long-term value of these assets were in tact along with the security of the companies enormous insurance-based assets and income. In 1980, Chrysler's financial problems stemmed from its own financial problems, not those of an industry combating economic and energy challenges beyond it's control. Chrysler put forth a re-structuring plan and congress along with investors were confident in the companies recovery. The 2001 bailout of the Airline industry was in large part to a global failure of the airline industry following 9/11. The airline industry was essential to our economy and their recovery was imminent considering that there was no viable competition available to replace domestic carriers. The bailout of the auto industry is unfortunate, not because a bailout is not necessary, but because Congressional Democrats, along with Republican support, have failed to demand anything in return.
Sen. Debbie Stabenow, D-Mich., said the loans were "critical to saving jobs" in an industry that has already shed jobs and struggled with weak sales, credit problems and a rapid shift to fuel-efficient cars. However, Stabenow in no way demanded oversight or guarantees as to how this money would be spent. Michigan Democrat, John Dingell stated that this was an auto industry loan package, not a bailout, stating that loans would be repaid to the federal government at a profit. Yet, Dingell could not tell reporters when or how these loans would be repaid and cannot explain how this "loan" is different than the AIG "loan". I can tell you: The AIG Loan came with the caveat that the government take non-voting ownership of nearly 80% of the company. Whereas, the Auto Industry "Loans" come with "hope" that auto makers that have shed a record $24 Billion dollars last quarter will miraculously recover and pay back the loans, when the government has done nothing to address the fundamental energy challenges that are destroying these companies.
When asked about the $25 billion dollar bailout on Wednesday, Senator Majority Leader, Harry Reid told reporters that this $25 billion was, "SMALL CHANGE".
"Small Change", just like the 2,322 "pork-barrel" earmarks amounting to more than $6.6 Billion that was attached to the stop-gap bill. It is unfortunate that while our nation's attention is turned to major bill's such as the financial bailout, our congressional leaders continue to bankrupt our nation a little at a time. After all, all of Senator Reid's "Small Change" adds up quick.
J Brown
September 25th, 2008
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2 comments:
"...There is another bailout going on, which is not gathering much attention, and this one is a bad mistake."
Its all about the Federal Reserve system.
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