"Democracy is the theory that the common people know what they want, and deserve to get it good and hard." H.L. Mencken
Six weeks after Congress voted a pre-election auto industry bailout of $25 billion, the "Big Three" asked the federal government for a second bailout. This latest example of democracy in action--the Congressional hearings for a December bailout of the "Big Three" American auto manufacturers--is a case study in the workings of American democracy.
The performance started when the CEOs for General Motors, Chrysler, and Ford flew to Washington, D.C. in their corporate jets this November to warn Congress of impending bankruptcy and the peril to the US economy if they weren't given immediate financial help.
As with any good performance, a lot of the work to create the show is done out of view of the audience: the American taxpayer. There are unseen characters such as Stephen Feinberg, head of Cerberus Capital Management, the majority owner of both Chrysler LLC and GMAC, and unexpected plot twists where former Treasury secretary John Snow and former Vice President Dan Quayle are chairman at Cerberus.
This most recent episode begins after bureaucrats at the Department of Transportation (DOT) sharply increased the rate at which automakers must comply with the CAFE mileage standard in April of this year, and a summer of record gas prices caused consumers to slow their purchase of the pickup trucks and sports utility vehicles which supply the bulk of the "Big Three’s" profits, automakers needed to retool to manufacture a product that met the standards, and they weren't ashamed to use taxpayer money to do so.
The September 24, 2008 bailout came before the elections, so both McCain and Obama supported it. Obama wanted twice the amount. Both were running for office at the time, and in our American democracy, parties throw taxpayer money around before an election; neither wants to be accused of hurting automakers or the American workers in an election year. In this case, opposing the September bailout would have meant opposing the United Auto Workers (UAW) union, and with both car-manufacturing states, Michigan and Ohio, being important states to win, principled opposition to making taxpayer money available to automakers from either party was nonexistent.
Congress generously decided to use other people's money and approved $25 billion in federal loan guarantees for the "Big Three," designating the funds be used to speed the makeover of the "Big Three" product line to feature smaller, more fuel-efficient vehicles to help meet the new Corporate Average Fuel Economy (CAFE) standard. The LA Times reported that the pre-election auto industry bailout moved unusually quickly through Congress with bipartisan support:
"Acting with unusual speed and bipartisanship, the House of Representatives on Wednesday approved funding for a $25-billion loan program to help the auto industry build more fuel-efficient vehicles."
The second bailout request came in November after sales plunged across the auto industry in the face of consumer fears and the drying up of credit in the wake of Wall Street’s meltdown:
- The "Big Three" first tried to get the money guaranteed in September and use it to pay suppliers.
- Environmentalists, a major D constituency, oppose using that money for anything other than designing and building vehicles that get higher gas mileage and produce less pollution. Ds instead wanted to prop up the automakers with some of the $700 billion in funds from that recent savaging of the taxpayer and the dollar, otherwise known by the benign-sounding acronym TARP (Troubled Assets Relief Program). The price automakers would pay would be the federal government gaining more control over them. The CEOs and the UAW don't care as long as they could continue to get paid.
- President-elect Barack Obama wants $50 billion from TARP, and new government oversight of the "Big Three" included in the package, with creation of an "auto czar" or independent board modeled on the government's rescue of Chrysler in 1979 (perhaps not the best example to choose considering how well Chrysler has performed).
- The White House rejected using any of the TARP money designated for the financial services industry. The Bush administration wanted Congress to expedite the release of the separate $25 billion loan package for automakers approved in September to help meet tougher fuel-efficiency rules.
- Rs didn't want to help the UAW, whose members would benefit from the bailout. The UAW supported D politicians during the recent elections as their political action committee pumped $1,918,450 this election cycle into the congressional campaigns of Ds and only $12,500 into Rs.
Why all the disagreement in November and December after the swift bailout in September? The difference is that the November elections are over. In the show called "democracy," politicians pay close attention to voters immediately before the election. Politicians know that after the election, the audience doesn't pay much attention and typically doesn't remember all of the "crises" from which the government "protects" them. After an election, both major political parties agree on one thing: the taxpayer is carrion.
Much of the performance in a democracy involves misdirection with catch phrases uttered so frequently in the media that the audience starts repeating them:
- "The 'Big Three' are too big to fail." This catch phrase is a misnomer: the "Big Three" isn't the "Big Three" anymore: Toyota moved ahead of Chrysler in US sales last year and Cerberus Capital owns 51% of GMAC and almost half of Chrysler LLC. In a free market, nothing is too big to fail, which, if you accept the premise, means the auto industry is not a free market.
- The problems of the "Big Three" are a "failure of capitalism and the free market." (See previous bullet.)
- "Protect American jobs." This phrase appeals to those concerned about the loss of American manufacturing capability, particularly mercantilists. Protectionism is one of the considerations of the second bailout: some members of Congress were concerned that giving money to American automakers would end up helping Chinese and other foreign parts manufacturers. Keep in mind that some vehicles manufactured by the "Big Three" are built in other countries, and US government statistics for domestic production include Canada and Mexico as a result of NAFTA. So your import car can be built in the US and your domestic car can be built in Canada.
The only certain domestic characteristic of the "Big Three" are the locations of their headquarters in Michigan and the three well-dressed CEOs looking for taxpayer money:
- Richard Wagoner, chief executive of General Motors, received compensation valued at $14 million in 2007.
- Robert L. Nardelli, chief executive of Chrysler LLC, receives no salary until Chrysler's owner Cerberus Capital Management LP makes a profit on Chrysler, so when Nardelli volunteered to work for $1 at the hearing, he wasn't giving up much. Nardelli, originally a GE executive, recently headed Home Depot, where he made $38.1 million in 2006, and received a $210 million retirement package.
- Alan Mulally, Ford president and chief executive of Ford, formerly of Boeing, earned $2,000,000 in salary and received incentive bonus awards of $7 million. Total 2007 compensation was $21,670,674, which includes salary, bonuses, the Company-recognized expense for stock options and other stock-based awards, as well as all other compensation. In 2006 he earned $28 million in 2006 for four months work. (Or was that $39.1 million for four months?)
The performance, as with other forms of entertainment and public distraction, succeeds in getting the audience to willingly suspend their disbelief as the story unfolds. For this performance to succeed, taxpayers must believe that federal bureaucrats will do a better job making sure automakers balance their books than Congress has done balancing the books of the US government. With a National Debt greater than $10 trillion, this is quite a stretch and an indication of how successfully the public is distracted in a democracy.
The "Big Three" submitted three separate survival plans to Congress:
- Ford wanted a $9 billion standby line of credit in case a competitor fails.
- Chrysler said it needed $7 billion by year's end to keep operating.
- GM asked for an immediate $4 billion as the first installment of a $12 billion loan, plus a $6 billion line of credit to use if conditions worsen.
- Ford's chief executive, Alan Mulally, and GM's chief executive, Rick Wagoner, said they would work for $1 a year if each company accepted government loans. The automakers also offered to cancel bonuses and merit raises. Chrysler said its chief executive had cut his annual pay to $1.
- All three plans included the government getting a stake in the companies that would allow taxpayers to share in future gains if they recover.
Over the last five weeks in Washington, D.C., the argument wasn't about the propriety of feeding on taxpayer money to keep a failing business afloat, instead the question was how much control over the auto industry the federal government would arrogate while doing so.
"If we continue down the path of taking money from more efficient and competitive companies and giving them to companies which are less efficient and in trouble because of bad management and bad decisions, our overall productivity as a country will continue to suffer," said Rep. Spencer Bachus, the top R on the financial-services panel.
Apparently Bachus has changed his view since he voted to bail out poorly managed banks.
House Financial Services Committee Chairman Barney Frank (D-Mass.) proposed extending $25 billion in loans from the $700 billion rescue fund. The loans would be repaid with interest and come with stock options, limitations on executive compensation, and oversight by a government board.
At the climax of the performance, the Senate rejected the bailout. All was resolved as the Bush administration suggested it would use the coveted TARP money to keep GM and Chrysler LLC afloat until new performers and old actors recast in new roles take the stage in January.
This most recent performance of democracy in action, a play with many acts, showed both parties bickering over which pot of taxpayer money to give to the "Big Three" while the three CEOs, the UAW, and the three-headed monster Cerberus, hidden behind the curtains, looked on drooling.
Democracy in action is a lion and a pack of hyenas fighting over a kill. Fellow taxpayers: How does it feel being the zebra in the fight?
The timeline below lists some of the major acts in the play.
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Timeline for Multiple Payoffs while Moving towards Nationalization of "Domestic" Auto Manufacturers
August 23, 2005: Bush administration proposes new CAFE standards for light trucks.
May 3, 2006: DOT secretary Mineta testifies in bureaucratize before the House Committee on Energy and Commerce about "reforming" CAFE standards:
"On March 29th of this year, we completed a rulemaking that replaced the single fuel economy standard with an innovative size-based system...If given the authority to reform CAFE for passenger cars, we will replace the one-size-fits-all system with a size-based system, as we did with light trucks."
Mineta's bureaucratic stroke of the pen may have resulted in the "Big Three" shifting production to larger, less fuel-efficient vehicles to benefit from the change in standards that applies separate fuel economy targets to each vehicle based on its footprint. Larger vehicles didn't sell so well when gas prices went over $3 a gallon this year.
January 23, 2007: In his State Of The Union Address, Bush proposes 20% reduction in gasoline usage in ten years because he knows force is better than the free market:
"Let us build on the work we've done and reduce gasoline usage in the United States by 20 percent in the next 10 years. To reach this goal, we must increase the supply of alternative fuels, by setting a mandatory fuels standard to require 35 billion gallons of renewable and alternative fuels in 2017 – and that is nearly five times the current target. At the same time, we need to reform and modernize fuel economy standards for cars the way we did for light trucks – and conserve up to 8.5 billion more gallons of gasoline by 2017."
May 2007: DaimlerChrysler announces plans to pay $650 to $675 million to sell Chrysler to Cerberus Capital after purchasing Chrysler for $37 billion in 1998. Cerberus may merge Chrysler and GMAC.
August 2007: Cerberus Capital buys an 80.1% stake in Chrysler from DaimlerChrysler.
November 19, 2007: $4 billion sale of loans connected to August purchase of Chrysler by Cerberus Capital will be postponed. The underwriters are J.P. Morgan Chase, Citigroup, Goldman Sachs Group, Morgan Stanley, and Bear Stearns.
Note: Underwriters are all future players in the TARP performance of October 2008.
December 18, 2007: Congress passes Energy Independence and Security Act, H.R. 6, which contains new CAFE standards for the first time in 32 years. Raises fleet mileage standard to 35 mpg by 2020. Bush administration takes credit for pushing bill through. Section 136 (d) of bill provides for $25 billion in loan guarantees:
"(d) DIRECT LOAN PROGRAM.—
(1) IN GENERAL.—Not later than 1 year after the date
of enactment of this Act, and subject to the availability of
appropriated funds, the Secretary shall carry out a program
to provide a total of not more than $25,000,000,000 in loans
to eligible individuals and entities (as determined by the Secretary)
for the costs of activities described in subsection (b)."
February 2008: Steve Feinberg, head of Cerberus, owner of 51% of GMAC and 80% of Chrysler LLC, concerned about GMAC and a $921 million loss in its mortgage business.
April 22, 2008: DOT secretary Mary Peters proposes rule requiring automakers to meet new CAFE standards five years sooner than required by Congressional law:
"Under the proposed rule, the fuel economy on a fleet-wide basis will increase by an average of four-and-a-half percent annually through 2015 – a 25 percent improvement over five years. This standard exceeds the 3.3 percent average annual increase needed to reach the target passed by Congress last year."
June 2008: Cerberus Capital sells more than half of its Chrysler LLC holdings as sales drop. Citigroup-owned Avenue Capital is one of the buyers.
September 3, 2008: Cerberus Capital announces Chrysler LLC car sales down a third in August.
September 24, 2008: Appropriations bill HR 2638 passes House and three days later is approved by Senate. Supplies another $25 billion in addition to what was approved for automakers in December 2007.
October 27, 2008: US Treasury Department planning $5 billion in financial assistance as Chrysler LLC and GMAC work on merger plan.
November 6, 2008: Wagoner, Alan Mulally, and Bob Nardelli in Washington, D.C. to get $25 billion in loans sooner to see them through a 2009 even worse than 2008. Meet with House Speaker Nancy Pelosi.
November 8, 2008: D-leaders House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid send a letter to Henry Paulson, secretary of the Treasury, urging him to use funds from $700 billion TARP money.
November 14, 2008: House Financial Services Committee Chairman Barney Frank's (D-Mass.) loan guarantee bill has virtually no R support in Senate.
November 15, 2008: UAW, automakers, and Ds step up lobbying efforts. The three CEOs return to Capitol Hill to plead their case for bridge loans a second time in two days of congressional hearings.
November 18, 2008: CEOs appear before Senate Banking Committee.
November 19, 2008: CEOs of "Big Three" make their case again before the House that auto industry is running out of cash and needs $25 billion in taxpayer money to avoid bankruptcy and warning that auto industry collapse could lead to loss of 3 million jobs.
November 21, 2008: House Speaker Pelosi says "Big Three" must show Congress a plan by December 2nd.
December 2, 2008: "Big Three" Executives return to Capitol Hill, but don't use corporate jets. Ask for $34 billion in federal loans. Grilled during their previous visit, they retooled their pitches, but not their production lines, promising labor concessions and restructuring just as long as Congress gives them money.
December 4, 2008: Executives appear before Senate banking committee. They mention JP Morgan estimate of a loss of $1 trillion to economy if they fail.
December 5, 2008: Executives appear before House Financial Services Committee.
December 7,2008: President-elect Obama describes a long-term bailout conditioned on federal oversight similar to nationalization of the car industry. Both Rs and Ds reportedly favor a car czar to oversee the auto industry.
December 10, 2008: House approves $14 billion rescue of American automobile industry. Ds speculate that if Senate Rs kill plan, Treasury secretary, Henry M. Paulson, Jr., would be forced to keep G.M. and Chrysler afloat until new Congress begins early next month and D majorities sworn in.
December 11, 2008: Bailout fails in Senate as Senate Rs refuse to support a bill endorsed by White House and Congressional Ds.
December 12, 2008: After refusing to tap $700 billion financial rescue fund, White House says it will dip into fund to permit companies to continue operations until new Congress and President arrive next month.
December 17, 2008: GMAC restructures debt to be considered a bank and qualify for TARP money.
"Mankind will in time discover that unbridled majorities are as tyrannical and cruel as unlimited despots." John Adams in a letter from John Adams by David McCullough, 2001, Simon and Schuster, New York, N.Y. pp 443-4
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