By on February 8, 2009

TTAC proofreader and Editor Jeff Puthuff has been helping me chase down the Chrysler–Cerberus story, trying to identify the automaker’s secret co-investors. In the midst of that pursuit, Jeff has unearthed this heretofore unreported document: “U.S. Motor Vehicle Industry: Federal Financial Assistance and Restructuring” Dec. 3. 2008 (Prepared for Members and Committees of Congress).” The Congressional Research Service (CRS) drafted the report for elected representatives contemplating whether or not to loan Chrysler and GM money to prevent their bankruptcy. The U.S. Senate and House of Representatives eventually failed to create a bill to fund the loans (though not for lack of trying). Then-president Bush stepped in at the eleventh hour and provided $17.4b worth of federal loans, by stretching the provisions of the Troubled Asset Relief Program (TARP). There are some startling—and not so startling—insights.

Widely quoted Center for Automotive (CAR) Research Study Debunked, Rejected

A general criticism of this analysis is that it assumes that the suppliers and all other automakers, aside from the the initially failed company or companies, would see their output drop to zero, and that they would be merely passive observers of an industry collapse. There are many examples in recent years of bankrupt or financially distressed suppliers being supported by their OEM customers, or by other suppliers that acquire parts of the business to gain new contracts or to be able to continue servicing their own contracts from a failed subassembly producer…

While CAR posits, for the sake of analysis, that, in the first year, no auto manufacturing in the United States could survive a major Detroit 3 bankruptcy, in actuality, such an extreme outcome is unlikely. Immediate and radical restructurings among suppliers is a more likely outcome, and other brands would continue to produce.

U.S. Auto Manufacturing Employment Declining Generally, Anyway

Automotive manufacturing employment has also fallen as a share of total employment in manufacturing. While total manufacturing employment has fallen by more than three million jobs since September 2001, employment in motor vehicle manufacturing dropped at an even faster rate, with its share of total manufacturing employment falling from 7.4% to 6.4%. During this period, total automotive sector employment, including services fell from 5.1 million to 4.6 million, while total U.S. employment grew by six million. As a result, automotive employment, including both manufacturing and services, as a share of total U.S. employment, fell from 3.9% to 3.3%.

GM – Chrysler Shotgun Marriage Still An Option

GM’s plan to acquire Chrysler and merge the two companies, which was widely reported in October 2008, was similarly withdrawn when the companies could not find sufficient funds, including proposed federal financial support, for the deal. The plan could still be resurrected as part of a general plan of government financial assistance for the Detroit 3.

Chrysler / GM Chapter 11 Could Increase Consumer Confidence

One might question whether the recent urgent requests for financial assistance do not diminish consumer confidence at least as much as would a bankruptcy filing designed to reorganize the company and lead to financial viability . . . filing under Chapter 11 could boost consumer confidence in the troubled automakers.

Feds Could Back Vehicle Warranties

If Congress finds that concern about warranty coverage is an issue that would doom a reorganization, it could be possible to provide for alternative warranty coverage. This might be funded with premiums paid by automakers, similar to premiums paid by financial institutions to the Federal Deposit Insurance Corporation (FDIC).

Loan Default Risk

However, direct loans from the federal government commit government money more immediately than would loan guarantees. Several have questioned the advisability of extending such loans, fearing that the troubled automakers may be unable to repay them even if the loan terms are very favorable.

Loans Could Leave Federal Government SOL

Under current bankruptcy law, the loans, if unsecured, would enjoy no priority status under 11 U.S.C. § 507. This means that the government potentially could “stand in line” with the other non-priority unsecured creditors and ultimately might receive only a few pennies for each dollar of outstanding loan balance. In the worst case, there might be no funds to divide between these creditors.

Chrysler Pension Plan Funding Unknown

As a privately-held company, Chrysler is not subject to the same SEC reporting requirements as are GM and Ford. Current information about pension plans was not available at the time this CRS report was written.

Loans Less Onerous Than Previous ChryCo Guarantees

By comparison to the broadly defined elements of these plans, the Chrysler loan guarantee legislation of 1980 was far more prescriptive in exchange for a loan guarantee that was worth far less than the $25 billion requested by the Detroit 3 in 2008, even allowing for inflation.

Clearly, the U.S. Congress had enough information to know that providing GM and Chrysler with federal loans was an extremely risky not to say stupid idea. As did President Bush. By making these loans, the president pushed “the Detroit problem” down the line to president-elect Obama.

The bottom line: adding more fuel to Chrysler and GM’s pyre is just as boneheaded now as it was then.

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22 Comments on “Editorial: Bailout Watch 381: Congressional Bailout Report: What They Knew Before They Loaned the Money...”


  • avatar
    menno

    It reads like a dry version of TTAC. The gummint could have saved some time and money by turning to TTAC and reading the articles as well as comments by the B&B.

  • avatar
    PeteMoran

    Good catch there Jeff Puthoff and RF. Does this advice normally make it’s way out of Reps offices? There would be hell to pay here in Australia for such a leak and much of Europe.

    With regard the issue of Ch11 and consumer confidence, I know of at least two other studies, plus our own companies’ version that support a formal Ch11 as giving an improved sales outcome!

    Otherwise, the only thing to add is that US lawmakers appear to have comprehensively ignored this report.

  • avatar
    bluecon

    You guys are taking this way to serious and in depth. It is much simpler.

    George Bush wanted to get out of Washington before they could say Herbert Hoover and the Dem’s being Dem’s saw a chance to spend taxpayer money, something they are unable to resist. This is chump change in the overall scheme and now that the Dems have free reign you will see why the USSR failed despite the 100% tax and spend model the Dems want to emulate. What I can’t figure out is why would you want to copy the Soviet model?

    I could see copying the US model and following that old Constitution but that is just old fashioned.

  • avatar
    PeteMoran

    @ RF

    Have any other media been given this? Could it be the start of a whispering campaign to soften everyone to let Chrysler (or GM) slip into a Chapter 11?

  • avatar
    Dr Lemming

    “What I can’t figure out is why would you want to copy the Soviet model?”

    Exactly. That’s why no one is doing it. With all due respect, to make a comparison with the Soviet Union displays a remarkably inaccurate understanding of what’s actually going on.

    I suppose you could chalk this up to the mediocrity of America’s education system. People graduate from college without an adequate understanding of comparative economics. So when we as a nation are confronted with some pretty basic issues, much of the voting public easily falls prey to politicians quite willing to exploit people’s ignorance.

    Simple ideas sell, e.g., bailout = communism

    My hope would be that the “news media” would help educate folks so that the debate could become more thoughtful. After all, a great deal is at stake here. Alas, all too often that’s not happening.

    Okay, back to our regularly scheduled programming. Please say more about the Dem’s “100% tax and spend model.”

  • avatar
    Jeff Puthuff

    bluecon,

    It is not simple and that is by design. Why was this report kept secret? I’m not sure why you say this is “the Dems being Dems” as I think we’ll discover that it has more to do with corruption, a malady that cuts across both parties.

  • avatar
    PeteMoran

    @ RF

    Scoop!

    Let’s hope the US stimulus is getting the attention it deserves. Has there even been time to get a report such as this done for that!

  • avatar
    50merc

    The Congressional Research Service report isn’t “secret,” despite this editorial’s title, it’s just not distributed beyond members of Congress. And if you read the report, you’ll see there’s no need for confidentiality; it’s just a review of the D3′s problems and the options available to Congress. Mostly it’s dry as dust, and analysis rather than argument.

    The OpenCRS.com website says:

    “American taxpayers spend nearly $100 million a year to fund the Congressional Research Service, a “think tank” that provides reports to members of Congress on a variety of topics relevant to current political events. Yet, these reports are not made available to the public in a way that they can be easily obtained. A project of the Center for Democracy & Technology, Open CRS provides citizens access to CRS Reports that are already in the public domain and encourages Congress to provide public access to all CRS Reports.

    CRS Reports do not become public until a member of Congress releases the report. A number of libraries and non-profit organizations have sought to collect as many of the released reports as possible. Open CRS is a centralized utility that brings together these collections to search.

    Unfortunately, there is no systematic way to obtain all CRS reports. Because of this, not all reports appear on the Open CRS web site. CDT believes that it would be far preferable for Congress to make available to the public all CRS Reports.”

    I think CRS reports should be sent to all federal depositories (e.g., libraries). The fact that Congress doesn’t disseminate all (non-classified) reports reminds me of my old refrain, “the better you know them, the less you like them.”

  • avatar
    Dr Lemming

    I don’t know the particulars of this report, but even as an undergrad I constantly used CRS materials. Found them in my college library. So unless there’s been a recent change of policy, these reports should be available to the public. If this one wasn’t available I wonder whether it hadn’t yet made it through the editing process. In my line of work there are protocols about when a draft can be released.

    Edit: 50Merc, you said it much better than I did.

  • avatar
    PeteMoran

    @ 50merc

    Thanks for the clarification on CRS. I must look out for more myself.

    From the report, no matter how dry, would you agree there is a conclusion that is inescapable?

    In my experience, such bureaucratic musings are most definitely dry but this one seems to be doing everything other than a final recommendation. Perhaps I’m just not familiar with US Bureaucratic ‘style’. Doesn’t seem to be fearless and frank advice.

  • avatar
    George B

    I’m not sure why you say this is “the Dems being Dems” as the report was compiled during a Republican presidency.

    Jeff, I know it’s minor point, but this report was prepared for Congress that was controlled by Democrats at the time. President Bush would not have had anything to do with a CRS report. The significance of the report is the public statements of many members of Congress were at odds with a document that had been prepared specifically to get them up to speed on the issue. They should have known that they were heading down a path where large amounts of taxpayer supplied money would be spent to prop up an failing part of the larger overall US auto industry and there was a large risk that those loans would never get repaid.

  • avatar
    Jeff Puthuff

    “Although all CRS reports are legally in the public domain, they are quasi-secret because the CRS, as a matter of policy, makes the reports available only to members of Congress, Congressional committees and select sister agencies such as the GAO.

    “Members of Congress are free to selectively release CRS reports to the public but are only motivated to do so when they feel the results would assist them politically. Universally embarrassing reports are kept quiet.”

    Source

    George B: Thanks for keeping me real. I’ve edited my comment to clarify my thoughts.

    50merc: It was quasi-secret as it had not been officially released to the public (even though “we” own all federal documents). The post’s title has been changed to more accurately reflect this. CRS documents officially released are obviously accessible by the public; and until wikileaks leaked it (along with about 6,500 other unreleased-to-the-public documents), this one was not.

  • avatar
    gimmeamanual

    So in late Dec, this is basically what happened?

    - Congress reads report. Some read, some read between lines.
    - Loan proposal #1 shot down.
    - Economy screams, stock market dives in response.
    - Money given to buy time and prevent an even bigger collapse (not here to argue whether this would have happened or not).

  • avatar
    mikey

    It’s all history anyway.Now round two comes up.
    The next 10 days are crucial.Up here in the Canada GM still hasn’t taken the money.Though I think Chrysler did.

    What plan if any does GM have to convince Washington its good for the loan?

    Me thinks that Robert Farago/Ken Elias theory of the shotgun wedding is highly probable.The more you look at,the more sense it makes.

    We shall see.

  • avatar
    magoo

    This CRS report is hardly a “quasi-secret” document. (What is a “quasi-secret,” anyway? Sounds like a weasel word.) It can be downloaded from a half-dozen websites, probably more with a little looking.

    Back in December I recieved a copy from the office of my House Rep for the asking. I also recieved the retrospective report on the Chrysler bailout.

    People, when an issue is debated in Congress there will be reports and associated documents. That is a given. Something to know for future reference…like for round 2 of the bailout talks in the upcoming days. These documents are not “released to the public” in the sense that each registered voter gets one in the mail. But they are available to all. For the asking.

  • avatar

    Thanks for the clarification about the meaning and availability of CRS reports.

    As some savvy members of our Best and Brightest have pointed out, access to CRS materials isn’t easy or reliable. But our headline’s implication– the the report was purposely withheld to avoid certain facts from coming to light– now appears to be an exaggeration of the truth.

    I apologize for giving our readers this fale impression.

    That said, the CRS report sheds light on some crucial matters, such as the doomsday scenario contained in the widely CAR report. If this information had been released BEFORE the end of the bailout “process,” it could have well changed the nature and even final outcome of that debate.

    Given that the CRS is a taxpayer-funded organization, its reports should be available in a timely and user-friendly manner. The public has a right to know what information our elected representatives are using to make important decisions on our behalf.

    I mean, these decision were made on our behalf, yes?

    Headline amended.

  • avatar
    Morea

    magoo : Back in December I recieved a copy from the office of my House Rep for the asking.

    magoo, how did you know to ask? Is there a publicly available list of all CRS reports? Where could I, Mr Average Taxpayer, find such a list? This could be a gold mine of information on a wide array of subjects.

  • avatar
    PeteMoran

    So the bureaucrats give a situation report, which may or may not have been available “on request” (I presume you have to know it exists), and the Bailout result is questionable and half-arsed.

    Then the best defense that can be mustered is “well, the documents were there if you wanted them”.

    Here’s an example; does anyone know, did someone suggest TARP controls should be tighter (or exist)? Who can tell…

    This is like a Cabinet-in-Confidence version of “WMD Intelligence Failures”. To me the US version of “Democracy” isn’t working.

    You’ve got to wonder what advice has gone before to provide the alternate reality that is the US Stimulus. Will anyone ask for some documents? Will the resulting Pork-splatter be contrary to the sit-rep?

    Put the original headline back RF, anything that “they” don’t want you to know at the time of a decision is a Secret. Isn’t that the test? After the event is too late.

    Outrage, someone in the USA has heard of it…..

  • avatar
    zerofoo

    This is, most definitely, not a loan. Loans must be paid back, and I don’t think we, the taxpayers, will ever see this money ever again.

    That said, I don’t really mind the “loan” given to GM and Chrysler. Wall St. got a GIGANTIC “loan” that makes the money given to automakers look like peanuts by comparison.

    What I do want, however, is something for the cash. It’s time for GM and Chrysler to accept the fact that they don’t do the car business very well. They should follow this administration’s lead and take their design, engineering, and manufacturing talent and go into different businesses – like alternative energy (generating and consuming it).

    This will keep the rank and file employed, and it will produce SOMETHING for our tax dollars.

    -ted

  • avatar
    magoo

    Morea :
    “magoo, how did you know to ask? Is there a publicly available list of all CRS reports? Where could I, Mr Average Taxpayer, find such a list? This could be a gold mine of information on a wide array of subjects.”

    To be perfectly honest, I didn’t at the time so I did not make a specific request. I simply asked for whatever information was available and recieved the two reports along with a three-page letter explaining the representative’s position — supporting the loan gaurantees.

  • avatar
    Morea

    Thanks magoo.

    I always like to get my information from primary sources if possible, even if they are long and boring government reports! Much can be found on the web, but clearly not all.

  • avatar
    RetardedSparks

    Since when is Congress ignoring objective analysis news? They have never cared a bit about facts, in any legislation. They all just find someone to write something supporting their pre-determined conclusion and wave it around like idiots.
    And could we please tone down the political rhetoric? I want to talk about cars, not politics. It’s safe to say nobody of any party or ideology has a leg to stand on in these arguments – there’s plenty of blame to go around.


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