NPR’s Morning Edition featured a very interesting interview with Chairman Barney Frank this morning. In it he asserted that the $25 billion that the Big 3 is now seeking is definitely not enough to keep the companies going, and it will be followed by tens of billions more if the companies come up with a ‘plan’ that seems promising. Although if you listen to the interview, he gets awfully agitated at the NPR host for trying to hone in on this point:
Steve Inskeep: I want to ask you about something mentioned in that report from an economist from the University of Maryland. What makes you think the $25 billion would even be enough?
Rep. Barney Frank: We don’t think it would be enough. The way we have this structured, they will get $25 billion if the bill passes, with a lot of conditions. No dividends can be paid, no bonuses for people over $200,000, and some other things. But they would have to prepare and file by March 31 a plan that shows how they plan to get much more efficient and to get cars that can be marketed.
But let me ask you about the first thing you said, Congressman, because you said you don’t think $25 billion is enough.
Right, I’m trying to explain to you how it works.
They get $25 billion — the federal government would be in the first position to be repaid. We will come ahead of the debt holders, the shareholders, etc. They file this plan on March 31. If, on March 31, the president does not believe that this is going to get them the viability with energy efficiency cars, they have to repay the loan; they get no more money. If they can show by March 31 a plausible way to go forward, then we would consider giving more money, again, under equally stringent conditions.
So this could be $50 billion, $75 billion, $100 billion?
Well, [insurance company] AIG, which I don’t think anyone would think was as important to the American economy as the auto industry … got $40 billion just now to make it up over $100 billion. To some extent, let’s not have a white-collar/blue-collar bias in our public policy. You know, those who say, hey, go bankrupt so you can cut back on what the unions have won — the unions have already made some concessions. But, you know, we’ve had enough anti-union activity, and enough increase in income inequality in this country. I don’t want to set a precedent that bankruptcy now is a way in which you undo what gains unions have been able to hold on to.
Notice Frank is already retreating from a debate on the merits of the proposal. For him, a decision on whether or not to bail out the automakers is really a decision on whether unions are good things. And of course, given the information that Rob Bluey provides about average wages for unionized auto workers, it’s easy to see that the competitiveness of the Big 3 is not helped by the UAW.
Beyond that, is Frank willing to speak honestly about his plan for hundreds of billions in taxpayer money? How much is he willing to spend? And what does he expect the Big 3 ‘plan’ to look like, in order to convince him to loosen the purse strings. Lastly, he should stop pretending that the automakers will pay back the first $25 billion in April if their plans are found wanting. That money will be spent relatively quickly, and if more federal dollars are not forthcoming, the Big 3 won’t have any revenue with which to pay back.
On a related note, let’s remember that the real reason for all this bailout talk is that Democrats in Washington want to run a car company. They believe the team in Detroit failed at the job, and they want to take a shot themselves. If you have any doubt of that, look at Frank’s bill:
• Long-Term Restructuring Plan – Not later than 3/31/09, loan recipients must submit to Treasury acceptable restructuring plan for long-term viability and international competitiveness, including fuel efficiency standards and advanced technology vehicle manufacturing, rationalization of costs, and proposals for restructuring existing debt.
• Oversight Board The Financial Stability Oversight Board (Oversight Board) established under EESA will provide oversight of the loan program, and will have four additional members for purposes of the loan program (Secretaries of Energy, Labor and Transportation and the EPA Administrator) in addition to the five existing members (Fed Chairman, Treasury Secretary, FHFA Director, SEC Chairman, and HUD Secretary).
• Warrants – Treasury must obtain warrants from each loan recipient (or economic equivalent in the case of a privately held firm) equal to 20% of the loan or such greater percentage as may be determined by Treasury in consultation with the Oversight Board.
• Executive Compensation and Corporate Governance – All executive compensation restrictions from EESA apply to loan recipients for the duration of the loan plus the following additional restrictions:
no bonuses to employees making more than $200,000 (which Treasury will adjust for inflation). no golden parachutes under any circumstances. no compensation plan that could encourage manipulation of reported earnings to enhance compensation.
• Ability to Prohibit Transactions, Oversight of Financial Condition – For duration of the loan, Treasury in consultation with the Oversight Board will have the authority to review and prohibit any asset sale, investment, contract, or commitment proposed to be entered into by the recipient valued in excess of $25 million.
So Barney Frank’s plan is for the federal government to acquire a stake in the car companies, approve their operating plans going forward, and to have veto power over any business decision costing more than $25 million. He might as well appoint himself CEO.
The management in Detroit has not done a great job. Do you think Barney Frank and Barack Obama’s Cabinet are likely to do better? Because Barney Frank’s plan is to switch the latter for the former — with the taxpayer donating untold billions for the privilege to make the switch.
Bankruptcy sounds better by the day.