Thesis on "Tarp and American Auto Companies"

Thesis 8 pages (2747 words) Sources: 6 Style: Turabian

[EXCERPT] . . . .

TARP and American Auto Companies

Of the $1.1 trillion in authorized bailout funds for financial firms and banks ($700 billion Troubled Asset Relief Program (TARP) and $400 billion for Fannie and Freddie) over $450 billion is still uncommitted and unused (This doesn't count the $68 billion that was repaid by bailed out banks the week of June 15th) (Source). This paper discusses why these funds should also be used to help the beleaguered automotive industry. Although the intent of TARP was restricted to financial institutions, the President has the right to exercise executive power to use the funds for other purposes during times of crisis. Certainly, the potential devastating impacts of an automotive industry meltdown warrants such action despite concerns over interrupting free market dynamics. Throughout history, the government has assisted industries and companies in the national interest of this country. In fact, prior intervention in the automotive industry was successful. With a continuation of its policies to temporarily provide taxpayer money to rescue ailing firms, especially in a very fragile economy, the government is making an investment that in the long run that will be profitable, thus beneficial to everyone involved.

The Legal and Political Debate

In October 2008, President Bush signed into law the Emergency Economic Stabilization Act of 2008 which created TARP. This program authorizes the Department of the Treasury to purchase or insure up to $700 billion of troubled assets. The term "troubled asset" is defined as ("The Troubled Asset Relief Program: Report on Transactions through December 31, 2008," 2009):

"(A) resi

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dential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability; and (B) any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress."

Opponents of using TARP funds to bail out the auto industry believe this move is unconstitutional. In supporting their argument, they point to Article 1, Section 9 of the Constitution, which states that, "No money shall be drawn from the treasury, but in consequence of appropriations made by law." (cited in Meyers, 2009). They continue on in their debate to emphasize the lack of such appropriations by the Emergency Economic Stabilization Act of 2008. Indeed, this Act limits the recipients of TARP funds to financial institutions which are clearly defined according to the following criteria (cited in Grossman and Gattuso, 2008):

"The term 'financial institution' means any institution, including, but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company, established and regulated under the laws of the United States or any State, territory, or possession of the United States, the District of Columbia, Commonwealth of Puerto Rico, Commonwealth of Northern Mariana Islands, Guam, American Samoa, or the United States Virgin Islands, and having significant operations in the United States, but excluding any central bank of, or institution owned by, a foreign government."

Add to the debate the fact that Congress failed to pass a bailout bill of its own for automakers, and those against using TARP for the auto bailout state that they have more than made their case that the actions by both Presidents Bush and Obama are illegal.

However, precedents relying upon constitutional authority and congressional delegations made at various times over the past 200 years have granted the President of the United States the right to exercise executive authority when the nation is threatened by crisis, exigency, or emergency circumstances (Relyea, 2001). An emergency requires immediate action, but is, as well, unanticipated and, therefore, cannot always be "dealt with according to rule" (Relyea, 2001). Thus, on December 19, 2008, President Bush legally used his executive authority when he declared that TARP funds be spent on the auto bailout in order to avert financial crisis (Liu, 2009). At that time, Chrysler and General Motors would have been insolvent in January 2009 (Kiley, 2008). While Ford had enough cash to last until 2010, bankruptcy filings by Chrysler and General Motors would have also dragged down Ford and hundreds of auto suppliers because of the interdependencies of the industry (Kiley, 2008).

Adding to the political turmoil, the government soon revealed that the 17.4 billion in low-interest loans that Bush had just approved for General Motors and Chrysler would not be enough to avoid bankruptcies. Under the Obama Administration, both companies have recently headed to bankruptcy court. Chrysler's bankruptcy filing involves the assistance of another $8 billion in taxpayer money and a restructuring that would consist of ten percent ownership by United States. And Canadian governments, 35% ownership by Fiat and 55% ownership by the United Autoworkers ("Obama Backs Chrysler Bankruptcy," 2009). General Motors, on the other hand, would require even more government assistance with United States financial aid for the company expanding to nearly $50 billion (Miller, 2009). This investment would be in exchange for a United States government stake in the company of 60%. Also, under the bankruptcy plan, Canada agreed to provide $9.5 billion in funding and would get a 12% stake. The United Auto Workers union would have 17.5% share of General Motors, and bondholders would get a ten percent stake (Miller, 2009). The magnitude of the bankruptcy is tremendous; General Motors' bankruptcy will be the fourth largest in the history of the United States and the largest ever by an industrial company (Miller, 2009).

Political opponents of General Motors' partial nationalization are clearly unhappy with the notion of the government running a company using taxpayer dollars. These critics doubt that the government will be able to meet its objective to sell off shares of General Motors in six to 18 months time and, therefore, question if taxpayers will ever get their investment back. Opponents' concerns range from legal challenges to the uncertainty of when consumer demand for new cars, particularly those from a poorly perceived General Motors, will rebound (Helliker, King and Stoll, 2009). Opponents of nationalization also worry that liquidation of unwanted plants could take years and that Congress will interfere in the company's daily operations and business plans (Helliker, King and Stoll, 2009).

Despite these political criticisms, Obama aptly defends his nationalization plan by referring to it as temporary and stating that, "We are acting as reluctant shareholders because that is the only way to help GM succeed." (Thomas, Kuhnhenn, Espo and Johnson, 2009) According to these authors, due to the dire financial consequences, Obama did not believe in letting General Motors fail outright and he also did not think that giving it more bailout loans would work. Instead, Obama wants General Motors to start over with a clean slate, operating from the strongest parts of its business with one-third few workers, 40% less dealerships and nine less plants. In addition, General Motors' new deal with the United Auto Workers, will deliver considerable cash savings, and will place the company's labor costs on a more level playing field with competitors such as Toyota and Honda Motor (Helliker, King and Stoll, 2009). For example, General Motors has cut hourly costs, such as overtime provisions, supplemental unemployment and entry-level pay rates, by more than $1.5 billion a year.

Further, throughout history, the government has nationalized industries due to economic necessity. It has taken shares in railways, steel mills, coal mines and foreclosed homes as well as taken over failed savings and loans in the 1980s (Thomas, Kuhnhenn, Espo and Johnson, 2009). In the current economic crisis, the government has also taken stakes in banks and insurer American International Group as well as taking control of mortgagers Fannie Mae and Freddie Mac (Thomas, Kuhnhenn, Espo and Johnson, 2009), leading one to question why the vital automotive industry should be excluded from government control in times of economic distress.

In response to criticisms that government doesn't know how to run a business, Obama counters that, "GM will be run by a private board of directors and management team…They -- and not the government -- will call the shots and make the decisions about how to turn this company around. The federal government will refrain from exercising its rights as a shareholder in all but the most fundamental corporate decisions." (Thomas, Kuhnhenn, Espo and Johnson, 2009)

From an industry perspective, a bankruptcy without government assistance would have crippled Chrysler and General Motors. The automotive industry relies on brand power which is built over years, but can be lost in a blink of an eye. In order for revised versions of the companies to be sustainable and make sales, they have to demonstrate to vehicle buyers and owners that they can to meet their current, past and future obligations.

The Economic and Social Debate

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Quoted Instructions for "Tarp and American Auto Companies" Assignment:

“

Should the federal give TARP fund money to the American automobile industry?

Yes the Federal government should give the TARP fund money to the American automobile industry.

Economic

Part (B) of the Troubled Asset Relief Program (TARP) says - any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress."

Of the $1.1 trillion in authorized bailout funds ($700 billion TARP and $400 billion for Fannie and *****e) over $450 billion is still uncommitted and unused. (That doesn*****t count the $68 billion that was repaid by bailed out banks the week of June 15th)

70% of Chrysler bond holders were four major U.S. financial institutions which each had received TARP bailout funds from the U.S. government.

GM is carrying a $172.81 billion debt burden, with nearly billion*****s per year in interest costs. If bondholders have their stakes swapped for common stock (equity) which pays no interest, GM's debt and interest burden would be substantially reduced.

Estimates are that a Big Three shutdown would cause a decline in personal income of $151 billion the first year, and $398 billion over three years. The federal, state and local governments would lose tax revenue, and instead spend on welfare programs a total of $156 billion over three years.

The bailout has been successfully exercised in the past and can be considered part of the revised market capital model. The most recent example - the airline industry (2001).

The government is making an investment that in the long run will be profitable, thus beneficial to everyone involved.

Even if the bankruptcy is unavoidable it is still will not be able to recover the industry. Automotive industry relies on the brand power which is built over years and can be lost in a blink of an eye. In order for revised versions of the companies to be sustainable and make sales it has to meet its current, past and future obligations to it primary stakeholders in the current situation - vehicle buyers / owners.

Social

Some banks were opposed to receiving the money and had it forced upon them by the government. Auto companies are *****˜on-their-knees***** requesting funds and are having a hard time getting them.

Closing the Big Three would mean loss of 240,000 very highly-paid jobs at the Big Three, a loss of 980,000 highly-paid jobs at the suppliers and local dealers, plus the loss of 1.7 million additional jobs throughout the economy*****”a total loss of 3 million jobs. Plus an estimated two million people rely on the industry for health care and 775,000 retirees collect auto-industry pensions.

Throughout US auto industry*****s most recent history it has been a great contributor to the US prosperity. In contrast to its counterparts in the rest of auto-producing world, the US autoworkers were paid the most (higher taxes at the expense of GM, Ford, and Chrysler added to the budget and guaranteed a prosperous retirement for hundred thousands of US citizens

The bailout has been successfully exercised in the past and can be considered part of the revised market capital model. The most recent example - the airline industry (2001).

Political

On December 19, 2008, President Bush used his executive authority to declare that TARP funds may be spent on any program he personally deems necessary to avert the financial crisis, and declared Section 102 to be nonbinding. This has allowed President Bush to extend the use of TARP funds to support the auto industry

On June 1, 2009, the court gave interim approval to GM's request to borrow US$ 15 billion as debtor-in-possession funding, the company only having US$ 2 billion cash in hand. The United States Treasury argued in court that it was the only source of such debtor in possession funding, and that without the money from the loan General Motors would have no option but liquidation.

Vehicle Acquisition Holdings LLC is a limited liability company formed in Delaware to purchase the assets of General Motors that will become the "New GM" as part of the General Motors bankruptcy.

At the time of the GM bankruptcy filing, Vehicle Acquisition Holdings was owned by the United States Department of the Treasury. It is planned that approximately 60.8% will continue to be owned by the Treasury, and other shareholders will include a new United Auto Workers Voluntary Employee Beneficiary Association to act as the retiree healthcare fund (17.5%); the government of Canada and government of Ontario (11.7% together); and the "Old GM" in order to represent the interests of some of the original GM bond holders (10%).

Research Paper Format:

1. Your essay will be based on your debate topic and consist of a footnoted research article, six to ten pages in length, single-spaced, not including the page of footnotes that appears at the end of your paper.

2. Your paper should follow MLA format using MS Word default settings (Times New Roman, 12 pt. font, single spaced, standard margins).

3. Citations for your essay should be gathered by way of a library search. It is not sufficient to simply gather your information from an internet search, particularly if the information in those web sites is not supported by scholarly research. No more than 20% of your sources should be web sites, not including those sources which also appear as government documents or in scholarly publications. At least three of your sources should be from scholarly texts, such as a refereed journal article. All supporting facts and quotes should be identified by use of endnotes.

4. Footnotes should appear as endnotes on a separate page at the end of the paper. A well researched paper should have a minimum of six or more different factual sources to draw from. Your paper does not need to include a bibliography.

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