20 August 2009 
Here’s the President on the Michael Smerconish radio show today:
THE PRESIDENT: The auto interventions weren’t started by me — they were started by a conservative Republican administration. The only thing that we did was rather than just write GM and Chrysler a blank check, we said, you know what, if you’re going to get any more taxpayer money, you’ve got to be accountable.
I’m going to cut-and-paste here from a post I wrote on June 7th.
Structure of the December loans to GM and Chrysler
In the last few days of December, Treasury loaned $24.9 B from TARP to GM, Chrysler, and their financing companies.
According to the terms of the loan (see pages 5-6 of the GM term sheet), by February 17th GM and Chrysler would have to submit restructuring plans to the President’s designee (and they did).
Each plan had to “achieve and sustain the long-term viability, international competitiveness and energy efficiency of the Company and its subsidiaries.” Each plan also had to “include specific actions intended” to achieve five goals. These goals came from the legislation we (the Bush team) negotiated with Rep. Frank, Rep. Pelosi, and Sen. Dodd:
- repay the loan and any other government financing;
- comply with fuel efficiency and emissions requirements and commence domestic manufacturing of advanced technology vehicles;
- achieve a positive net present value, using reasonable assumptions and taking into account all existing and projected future costs, including repayment of the Loan Amount and any other financing extended by the Government;
- rationalize costs, capitalization, and capacity with respect to the manufacturing workforce, suppliers and dealerships; and
- have a product mix and cost structure that is competitive in the U.S.
The Bush-era loans also set non-binding targets for the companies. There was no penalty if the companies developing plans missed these targets, but if they did, they had to explain why they thought they could still be viable. We took the targets from Senator Corker’s floor amendment earlier in the month:
- reduce your outstanding unsecured public debt by at least 2/3 through conversion into equity;
- reduce total compensation paid to U.S. workers so that by 12/31/09 the average per hour per person amount is competitive with workers in the transplant factories;
- eliminate the jobs bank;
- develop work rules that are competitive with the transplants by 12/31/09; and
- convert at least half of GM’s obliged payments to the VEBA to equity.
If, by March 31, the firm did not have a viability plan approved by the President’s designee, then the loan would be automatically called. Presumably the firm would then run out of cash within a few weeks and would enter a Chapter 11 process. We gave the President’s designee the authority to extend this process for 30 days.
That’s not “writ[ing] GM and Chrysler a blank check.”
Keith: I have been reading your posts since not long after you went online. What a great education for just about all who take the time to read it. Thank you, I have learned so much. While I’m not familiar with the referenced radio show (liberal?), wouldn’t it be wonderful if they subscribed to fact check! Keep spreading the word…
Keith:
I disagree. The terms which the Bush administration forwarded were essentially unenforceable by any political will right or left. What was going to happen if they weren't followed? Anything? What could have happened anyway, since the companies would have been bankrupt by definition. Do you really think the USG was going to drag them into court over it? Even if you think the Bush administration would have; you guys also knew at the time that Obama had already won the election. Even if Bush's team had enforced the terms had they remained (which I do not believe even slightly), did you think Obama was going to enforce them? Did you feel comfortable doing it anyway, not knowing if he would one way or the other?
The short version is that you guys did write a blank check, just like TARP itself was a gigantic blank check. How are the troubled asset purchases going? Wait, they never got used for that. The administration all got bored with that idea (which admittedly was horrible) by the time they got what they wanted. That freed them to use their own "blank check" to write, another smaller one to GM and Chrysler. Why would GM and Chrysler, knowing the very money they were receiving was appropriated for an entirely different use, credibly believe they would be held to any terms?
There was no operating rule of law, and no political will in the Bush administration or the incoming one to make that happen. Anything you guys wrote down on paper might have made you feel more responsible, but on the outside we could all see that it was theatre, because under no conceivable circumstance would or could any of the terms be enforced.
Thomas –
It does not automatically follow that because President Bush made one loan to the auto companies that the next President is therefore bound to do so, especially when the terms of the original loan spelled that out. As events played out, the Obama Administration didn't make a subsequent loan to the auto comapnies — they let them go bankrupt and provided money for successor companies.
I believe that "both" Presidents did the right thing by bridging loans to GM & Chrysler. Had this not happened at the time, all three car companies would have went to Chapter 7, liquidation and not the anticipated Chapter 11. The country at the time was really in bad shape (not to say it is much better now) but recovery would never be in sight as of this day had these car companies went Chapter 7. With that said, this new President is in way over his head on the present economy and has "bitten off" more than he can chew. The country can not sustain the priniting of money at this rate and interest rates will come back to haunt this country just like the Jimmy Carter era. Healthcare reform should be tackled in increments and not all at once. Begin with the insurance situation first and then step back and monitor. Then go to the next problem area with all the "new" and qualified facts just required.
The argument that the BIg3 going under would be disastrous for the whole country is a purely emotional one, with no basis in economics. They are not such big employers as to have an impact on national unemployment, although clearly local effects would be significant. Further, their assets and employees would have been redeployed into more productive uses, resulting in a net gain to the economy. As it is, their employees are still overpaid in relation to their production, their cost structures are not competitive, their assets, to use an Austrian term, are malinvested, and it is likely just a matter of time before the other shoe drops anyway, and they have to be liquidated. Has GM wiggled out of all those "legacy cost" which include paying employees not to work and unsustainable retiree costs?
Finally, the recent economic stats that indicate that either the economy is not contracting as fast or suggest that a recovery may already be under way hardly argue for the absolute necessity of the "Porkulus," which is only 10% spent – what is that, 1% of GDP. The country has been rolled by the statists. It appears the country is waking up to that reality. Let's hope so.
ThomasL -
I think you are missing the larger point.
Obama was making a specific distinction between his administration and the previous one. By your own argument (to paraphrase: any government loan convenants are ultimately politically unenforceable, no matter the party in power), or Keith's (that he believed the Bush administration and Congress added some teeth to the loan agreements), Obama's statement is nonsense and misleading.
I agree that Obama's statements were not accurate in either case, or under any interpretation.
However, the way I read this post was closer to, "Obama said we wrote them a blank check, but we didn't: look at the terms and conditions we built in."
I don't agree with the last half of that, because I don't believe the terms and conditions could reasonably be expected to have been enforced by either President Bush or President Obama even at the time they were written. Given that, the terms are a convenient thing to point to now, but I think the contrast is artificial.
I could be wrong, of course.
Thanks to both ThomasL and hercules for their comments.
I'll try to make the point in a different way through an example.
Company A and Company B sign a legally binding contract containing certain terms and conditions, expressed in a term sheet. Both Companies sign the contract knowing that the CEO of Company A is soon to be replaced.
The contract between the two companies is still binding when the new CEO arrives. Company B is still legally required to abide by the term sheet.
Company B may have signed the contract with an expectation that the new CEO of Company A might be willing to renegotiate or not enforce the contract, and the old CEO of Company A knew that when he was negotiating.
But the terms and conditions of the original contract bind both companies until and unless both agree to renegotiate (or not enforce it).
We (Bush team) knew when we made these loans that the Obama team might rewrite them. We also knew that we were creating a hurdle for them to do so — they would need to explain why they were relaxing the terms of the loans issued by the Bush Administration, or they might have to explain why they were not enforcing certain terms of the loan.
In practice, I think this largely worked. The Obama team changed one deadline but left the rest of the Bush Administration loan terms intact.
Van
How do you know they would have gone Chapter 7? And if they had, so what? What we have now is large companies in which their assets are malinvested and their employees unproductive and therefore overpaid. That is not a plus for the economy, and when we have to bail them out again, it will be another hit to the taxpayer and more loss of credibility for the government. I am sympathetic to the plight of the BIg 3 to the extent that their disastrous labor costs can be traced to government force being used on behalf of rapacious unions. Nonetheless, they were not viable businesses, and the market ought to have been allowed to work. There would have been no economy-wide disaster. Most of their employees would have found work, albeit for much lower compensation, elsewhere, and their assets would have been bought up and put to more productive use by other companies. All that has been done via these interventions is, as usual, special interests (UAW) benefit, and the process of creative destruction is aborted, and the pain extended but not averted. It was a loser all around.
Thanks for your comment.
We did not know with certainty that GM and Chrysler would have liquidated, but based on the information we had at the time, we thought it was an extremely high probability scenario. Both firms were out of cash and needed to pay suppliers. The mechanics of a liquidation, we think, would have been that in the first week of January, GM and Chrysler would have been unable to pay in full suppliers for that month's supplies. There would then have been a "supplier run" in which suppliers would have ceased providing parts to GM & Chrysler. Shortly thereafter, production lines would stop for lack of parts. It's easy to see how that would then soon lead to liquidation.
You can never prove a counterfactual, of course. I can tell you that we believed that both firms would have liquidated, and that liquidation would have led to a bit more than 1 million jobs lost in the first few months of 2010. President Bush was unwilling to allow that to happen during the transition to a new Presidency.
Please note that I'm not disagreeing with all of your comment. You may be right about additional future taxpayer exposure, and I too was uncomfortable with the terms worked out by the Obama Administration, which strongly appear to favor UAW.
Keith,
I think the issue that is being overlooked is that the TARP bill itself was not intended (or presented) as a fund to bail out the auto industry. It was passed as an emergency measure to prevent the collapse of banking entities that were "…too big to fail…".
As a lame duck president, I believe Pres. Bush simply was not willing to fight any significant political battles and acceeded to pressure from labor and in portions of Congress to modify the useage of TARP to include the auto industry. The argument was that bankruptcy would be a disaster, which was hyperbole on its face; the intent of that argument was to provide cover from a public that was just starting to ask questions about the TARP plan itself.