“Car Czar” and government-backed car warranties.
Those two ideas are being pushed by Sen. Charles Schumer Friday as Big Three automakers go to Capitol Hill again to plea for a bailout — $34 billion — before the end of the year.
The czar, or auto trustee, would oversee spending of the money, set conditions and make sure the promised concessions are met, the Democrat said. Similar types of oversight were put in place when the government bailed out Chrysler 30 years ago and rescued airlines after the Sept. 11, 2001 terrorism attacks, he said.
The czar, or auto trustee, would oversee spending of the money, set conditions and make sure the promised concessions are met, the Democrat said. Similar types of oversight were put in place when the government bailed out Chrysler 30 years ago and rescued airlines after the Sept. 11, 2001 terrorism attacks, he said.
“The ‘car czar” approach I envision would approximate a bankruptcy proceeding, except that it would occur outside of a bankruptcy court,” Schumer wrote in a letter sent to colleagues Friday. “A single government trustee would be appointed to lead the entire process. The value of appointing a single trustee is that the process is unified and that authority to ensure that appropriate benchmarks are being met can be concentrated in an official with the public’s interest at heart, rather than the automobile executives.”
Schumer said the trustee would authorize government-backed car warranties as carrots to getting the auto makers — Chrysler Llc, Ford Motor Co. and General Motors Corp. — to the negotiating table.
The automakers have said that filing for bankruptcy would further damage their companies because few consumers would buy their cars if they fear that the warranties won’t be honored. Critics said the car makers can have independent companies offering warranties.
Read the full letter:
December 5, 2008
Dear Colleague,
At yesterday’s Banking Committee hearing on the auto companies, I discussed a proposal that I believe would help move the process along. The idea to create an Auto Industry Trustee, now being referred to as the “car czar,” is predicated on a few key points.
First, we obviously can’t let the industry fail. In the words of respected economist Mark Zandi, who testified at yesterday’s Banking Committee hearing, failure would be “cataclysmic,” and the long-term economic cost of doing nothing would be far greater than the cost of assisting the companies.
Second, bankruptcy is not a good option, because it will seal the death of the industry. No one will buy a car from a company in bankruptcy. Even a pre-packaged bankruptcy creates similar problems.
Third, given the past track record, we cannot just turn over billions of dollars to the car companies’ leadership. Any government assistance needs to be inextricably linked to an enforceable plan for viability and sustainability.
The “car czar” approach I envision would approximate a bankruptcy proceeding, except that it would occur outside of a bankruptcy court. A single government trustee would be appointed to lead the entire process. The value of appointing a single trustee is that the process is unified and that authority to ensure that appropriate benchmarks are being met can be concentrated in an official with the public’s interest at heart, rather than the automobile executives.
Under the proposal, as soon as the legislation passes, the President would immediately appoint an “Auto Trustee” – it could be the Treasury Secretary or his designee. This person would have the power to bring all of the stakeholders to the table and set conditions for doling out the loans (GM, Chrysler) and/or lines of credit (Ford). The majority of the funds could not be distributed until the Trustee certifies that conditions he or she sets have been met. Given the time constraints, however, the Trustee will have the authority to release initial funds subject to a determination that adequate progress has been made towards a final resolution where all parties (i.e., unions, dealers, debtors, suppliers, etc.) have made measurable concessions.
The model is similar to the one used for the Chrysler bailout almost 30 years ago, and also to the Air Transportation Stabilization Board created in the wake of 9/11. In the Chrysler case, the company asked for loans up front, but instead the government established a loan guarantee board with the authority to issue up to $1.5 billion in loan guarantees over three years. The loans were to be repaid by the end of 1990. In addition, a number of strings were attached. To receive the loan guarantees, Chrysler had to do the following: (1) win concessions from the workers; (2) obtain hundreds of millions in new credit from U.S. and foreign banks; (3) receive aid or credit from state and local governments, dealers, and suppliers; (4) sell off company assets; and issue new common stock for its employees, among other things.
Under this proposal, the funding could come from the TARP, the Section 136 restructuring loans, or from a new appropriation. In addition, the Trustee can also be authorized to work with the Treasury Secretary on a process that would provide a government guarantee on car warranties or make enhancements to the credit markets to revitalize auto lending.
It is envisioned that we would pass this proposal early next week, so that the Trustee could be appointed quickly and bring the parties together with the pressure of bankruptcy on December 31 looming. It is difficult to get bondholders and lenders to make concessions, and with the deadline hanging overhead, it increases the chances of success.
We realize this is a very short period of time, but these kinds of complicated restructurings are regularly done in the financial world under such short timetables. Furthermore, the two alternatives – bankruptcy, or handing over money without real concessions having been made in advance – are equally untenable.
We welcome any suggestions, comments, changes, and additions.
Sincerely,
Charles E. Schumer