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r1-ro.y\c_cr:e4_ 04 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis roceechr9S ) Nov.7 /9 -79 1 Collection: Paul A. Volcker Papers Call Number: MC279 Box 25 Preferred Citation: Transcript of Proceedings: Committee on Banking, Finance and Urban Affairs, Subcommittee on Economic Stability: Hearing on H.R. 5805 Chrysler Corporation Loan Guarantee Act of 1979, 1979 November 7; Paul A. Volcker Papers, Box 25; Public Policy Papers, Department of Rare Books and Special Collections, Princeton University Library Find it online: http://findingaids.princeton.edu/collections/MC279/c163 and https://fraser.stlouisfed.org/archival/5297 The digitization ofthis collection was made possible by the Federal Reserve Bank ofSt. Louis. From the collections of the Seeley G. Mudd Manuscript Library, Princeton, NJ These documents can only be used for educational and research purposes ("fair use") as per United States copyright law. 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Mudd Manuscript Library 65 Olden Street Princeton, NJ 08540 609-258-6345 609-258-3385 (fax) firstname.lastname@example.org https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis F Xonse of ieprestittatitles • Transcript of Proceedings COMMITTEE ON BANKING,FINANCE AND URBAN AFFAIRS SUBCOMMITTEE ON ECONOMIC STABILIZATION Hearing on • H. R. 5805 CHRYSLER CORPORATION LOAN GUARANTEE ACT OF 1979 - - - Washington, D. C. WEDNESDAY, NOVEMBER 7, 1979 • MONICK - SULLIVAN Official Reporters 444 North Capitol Street Washington, D. C. 20001 NATIONWIDE COVERAGE https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis i Telephone: (Code 202) 347-4912 674 CR8190 CONTENTS 1 • PAGE 2 STATEMENT OF: 3 HON. RUSSELL B. LONG, United States Senator from the State of Louisiana 676 HON. G. WILLIAM MILLER, Secretary of the Treasury 718 4 5 6I 7 8 9 10 11 • 12 13 14 15 16 17 18 19 20 21 • 22 23 24 Ace-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis CR8190 675 Hearing on 1 H. R. 5805 2 410 3 CHRYSLER CORPORATION LOAN GUARANTEE ACT OF 1979 4 5 WEDNESDAY, NOVEMBER 7, 1979 6 U. S. House of Representatives, 7 Committee on Banking, Finance, and Urban Affairs, 8 Subcommittee on Economic Stabilization, 9 Washington, D. C. 10 11 O 12 Rayburn House Office Building; the Honorable William S. 13 Moorhead, chairman of the subcommittee, presiding. 14 Present: Representatives Moorhead, Blanchard, Lundine, 15 Vento, Ashley, Hubbard, LaFalce, Evans (Indiana), Oakar, 16 McKinney, Kelly, Green, Shumway, Hinson, and Paul. 17 18 19 20 • The subcommittee met at 9:15 a.m. in room 2128 of the 21 22 23 24 Ace-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Also Present: Representatives Reuss, St Germain, Leach, Bethune, Cavanaugh, Stanton, and Barnard. CR8190.01 HEER rmg 1 676 1 2 • 3 Mr. Moorhead. The Subcommittee on Economic Stabilization will please come to order. The Subcommittee is pleased to welcome a very distinguished 4 guest from the other body, Senator Russell B. Long, United 5 States Senator from the State of Louisiana, and also ChaiLman 6 of the Senate Finance Committee. 7 Won't you come forward, Senator. STATEMENT OF RUSSELL B. LONG, UNITED STATES SENATOR, STATE OF LOUISIANA. 10 • Mr. Chaiiman and Members of this very 11 distinguished Committee, let me say that it is a please to 12 be here before this Subcommittee, and as you know I am 13 interested in the question of providing financial assistance 14 to Chrylser Corporation. 15 At this moment I have not yet decided whether financial 16 aid should be given, but I have publicly stated my strong 17 belief that any such financial assistance should be tied to an 18 employee stock ownership plan for Chrylser employees. 19 • Senator Long. In this statement, I have been joined by the Senator 20 Majority Leader, Robert Byrd; by Senator Donald Steward of 21 Alabama; Gravel of Alaska; Nelson of Wisconsin; and Mathias 22 of Maryland. 23 24 In addition, Senator Don Riegel of Michigan has introducedi a bill in the Senate to provide financial assistance to Ace-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Chrylser, and this bill contained a requirement for the 677 rmg 2 1 2 • If an American business wants to receive this type of financial 4 aid from the United States Congress, we should not simply go 5 along providing a windfall benefit to that company's existing 6 shareholders. Rather, that business should be required to share this 8 financial assistance with its employees through a stock 9 ownership plan. 10 I am aware that the Secretary of the Treasury had proposed 11 his own version of the legislation to provide assistance, and 12 I am also aware that this proposal contains absolutely no 13 reference to employee stock ownership. 14 because of this. 15 And I deeply troubled Frankly, Mr. Chairman and Members, I do not believe that 16 I can support a legislative proposal to provide this type of 17 relief for an American business unless the employees of that 18 American business are going to share in the benefit. 19 O I believe that the sentiment of the Senate is clear. 3 7 • inclusion of a stock ownership plan as part of this relief. I don't mean that they should share in it simply by the I believe that they should 20 fact that they keep their jobs. 21 share in the benefit by acquiring a significant stock ownership 22 in the company. 23 I understand that the Chrysler Corporation and its 24 employees have agreed that a representative of the employees Ace-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis will serve on the board of directors. I think that this is a 678 rmg 3 • good decision. 2 so good a step as it would be for the employees to acquire 3 substantial ownership positions. 4 I am sad to say laws to promote employee stock ownership. 6 that at the time we provided financial assistance to the 7 Lockheed Corporation, I was not thoroughly familiar with stock 8 ownership plans. Had we required that the Lockheed Company establish an 10 employee stock ownership plan as a part of the financial relief 11 and the transfer of stock for its employees, the value of the 12 stock held by the employees today would be over 10 times what 13 it was when we provided that assistance. 14 This would not be a case of the rich getting richer. 15 Rather, it would have been a situation in which the employees 16 who never had an opportunity to acquire ownership of corporate 17 stock would have been given the ability to do so and to acquire 18 the major stake in the future of their company. 19 • Over the past seven years this Congress has enacted eight 5 9 • However, I don't think that this is as nearly 1 My proposition is this: That as a part of this type of 20 legislation, we should require that the company establish 21 an employee stock ownership plan and give its employees a 22 significant ownership in the company. 23 enhancing the possibility of Chrysler's revitalization and 24 recovery. By doing so we will be ce-Fecleral Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis One of the essentials for recovery is productivity on the 679 rmg 4 • • • An employee stock ownership plan 1 part of Chrysler's employees. 2 helps to provide motivation for that productivity. 3 several senators and congressmen have asked whether this will 4 simply be a free gift to employees. In addition, 5 My opinion is that it would be fair for us to require 6 that the employees themselves make a meaningful contribution to 7 the plan. 8 purchase additional Chrysler stock with their own money, or 9 by requiring that they either forego a part of their wage This could be done by requiring that the employees 10 increases or take a part of those increases in stock instead 11 of cash. 12 incentive to help the company recover. 13 By doing so they would have a very strong financial I also feel that we should require a greater financial 14 commitment from Chrysler's suppliers, dealers, and creditors 15 as a part of this legislation. 16 problem -- the company, its employees, shareholders, creditors, 17 suppliers and customers make a genuine commitment for the future 18 of the company can this endeavor succeed. Only if all the parties to this 19 Thank you very much, Mr. Chairman. 20 Mr. Moorhead. 21 I notice, looking over the testimony of the Treasury Thank you, Senator. 22 Department, they say, "We are not opposed to these programs," 23 meaning stock ownership programs, but do not favor conditioning 24 this guarantee legislation on employee ownership. Ace-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Would you care to comment on that? 680 rmg 5 • 1 its employees that does not raise its cost or increase its 3 expenses is to provide the employees with some stock in the 4 company. 5 employee benefit that I know of that is not inflationary. That is not inflationary. That is about the only Now, if the Treasury understood -- and I think we ought 7 to help the Treasury understand -- when they come up here asking 8 for taxpayers' money to help a private corporation, that they 9 had better have the employees in on this deal. 10 11 They wouldn't bring them up here without the employees in on it. For example, at some point we ought to make it clear to 12 them -- I wish we had done it with the Lockheed situation; 13 if it had occurred to me at that point, I would have insisted -- 14 in offering and then saying, if we are going to take this 15 risk for the government, we want the employees to be a part 16 of the action. 17 Of course, part of what this whole situation has to do 18 with the productivity you get for workers. 19 at the second part of it. 20 • Well, the one thing a company can do for 2 6 • Senator Long. Well, let's look The second part of it is government policies over a period 21 of 200 years, whereby 15 percent of our people own 85 percent 22 of all the wealth, and 85 percent of the people own the other 23 15 percent. 24 another 35 percent own only 5 percent of what we have in the Ace-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis country. 16 percent own nothing, less than zero, and 681 rmg 6 • 1 2 therefore when they work for a company, that is those other 3 guys, that is those so and so's over there that we are nego- 4 tiating with. 5 for themselves, that they are part of what they are working 7 for, you just get a lot more productivity. 8 from the Labor Department that says that, and it is not close, 9 it is a tremendous amount of additional productivity. And we have studies In fact, America's secret weapon is how hard little people 11 will work to make their business succeed. 12 overtime. 13 putting it. 14 They will work They will work just like beavers putting a sacrifice I couldn't help but think when I was over in the Soviet 15 Union some years ago, you see those little plots of land that 16 people were farming for themselves. 17 1 percent of what they had in production, and they were producing 18 about 15 percent of what was being produced over there on their 19 farmlands, or more. 20 • When you have people feeling as though they are working 6 10 • 93 percent of the people own no corporate stock, and Now, that was less than They said that land wasn't getting any fertilizer -But if it wasn't getting fertilized, 21 that is what they said. 22 it was sure getting all the tender, loving care that people 23 could put into something that was his, and that was the 24 tremendous productivity that you get when people feel that they Ace-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis are working for themselves. I. 682 rmg 7 • 1 Mr. Moorhead. 2 Mr. Kelly. have an opportunity to have a conversation with you, because 4 you certainly are one of the people that I recognize as a 5 great national leader and have for some time. 7 8 9 10 11 But it becomes my lot to ask you a couple of questions that occur to me: If bailing out Chrysler is a lousy idea, then why would we try and make it better, or how would it be better with what I think is another lousy idea? In this country, we have a system, an ESOP that involves 12 a guy working hard, saving his money, and buying anything he 13 wants to. 14 to own the whole plant if he has got the grit to hold himself 15 together while he gets the job done. 16 • Senator, it is a real excitement for me to 3 6 O Mr. Kelly. And a worker in this country has an opportunity Now, I think that the suggestion that you make here this 17 morning looks like we are getting ready to give somebody 18 something at the taxpayers' expense. 19 to the Chrysler program, but this is just another opportunity 20 for the members of Congress to give something to somebody at 21 the expense of the economy and the taxpayers and the people 22 of the United States in general. 23 24 That may not be justified. understand what is going on. Now, we are tieing it It may be that I don't But this is the concern I have, Ace-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis and I wonder if you would address yourself to that concern. 683 rmg 8 O 1 Senator Long. Well, if we do what we ought to do, Now, if it doesn't work then 2 Mr. Kelly, this thing will work. 3 all of us will look like a bunch of idiots for having anything 4 to do with it; I would be the first to agree with that. 5 But if we do what we ought to do, we would insist that 6 management do its part, and that the workers do their part, 7 and that the government should do a part in a helping role. 8 All we would do is to endorse a note on behalf of this govern- 9 ment in an enterprise that we think would work, and because 10 it did work, I am led to believe that that is worth about $2 11 billion to the U.S. government or something like that. 12 It is worth a lot of money to the government. 13 Mr. Kelly. 14 It occurs to me that if the unions, for instance, that have Then let me ask you this: 15 a great deal at stake, because they are highest paid industrial 16 workers in the country, they have got the best industrial 17 jobs they are -- 18 Now, if they had taken the 25 percent pay cut in this 19 particular company, they would have provided $1 billion a 20 year to Chrysler, and there wouldn't have been any problem 21 about their finances. 22 have put Chrylser on top of the heap. And if they had worked hard they could 4110 23 24 Now, they would have done that themselves. increased productivity, and we wouldn't have started another Ace-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis We would have welfare program. 684 rmg 9 • But it seems to me, Senator, that what we are doing is 1 2 saying, look, it is going to cost us a lot more in welfare if 3 we don't bail Chrysler out. 4 program that won't cost quite so much for another welfare 5 program that will cost us a lot more. So we will substitute this welfare And I am just not real sure with what's going on in the 6 7 Middle East right now that we need another welfare program -- 8 maybe a few more divisions and a little more productivity, but 9 I am not real keen on the idea of another welfare program. 10 11 Senator Long. Mr. Kelly, if you think it is a welfare program, you ought to vote against it; I know I would. Now, please, understand this. 12 I am not proposing something I am proposing that these workers receive some- 13 for nothing. 14 thing for the work that they do. • Now, let me give you a simpler illustration of this thing 15 16 which I think people can understand. Some time back, over at South Bend, Indiana, you had a 17 18 lathe company. 19 going broke. 20 own. 21 O Those are high paid workers. The company was I believe Studebaker had it before it went on its And so the workers tried to save their jobs. They put up the money themselves. They borrowed what they The local people put money into it. And I personally 22 could. 23 called Ben Maisel and asked him to make a loan on behalf of 24 the EDA to help them get some capital with which to operate. Ace-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • They took that company over and it has made a profit from 685 rmg 10 Now, they did not have to cut their pay 1 that day forward. 2 after they had been at it for a while. 3 themselves a pay raise. The point was that they were getting better productivity 4 5 They were able to give because they were working for themselves. 6 Mr. Kelly. But in this particular case aren't you 7 suggesting giving labor something more than they already have? 8 In other words, we have got the mass of workers out there that 9 work. 10 Half of the workers work for less than, 100 percent less than these workers at Chrylser. 11 And now we are telling all of those millions of workers 12 out there that we are going to have you help us to give more 13 to those that have already got a welfare program for Chrylser 14 and a welfare program for the highest paid production workers 15 in the United States. • 16 Senator Long. No, not necessarily. What I am suggesting 17 is that this government, speaking either through its Secretary 18 of Treasury, who should be speaking for this Administration 19 or speaking to this Congress, ought to say to labor, "Now, 20 we want you to do your part," and we ought to negotiate with 21 them. 22 "Here's what we think your part should be. And part of • 23 what you get for doing your part is you would get some stock 24 in the company." Ace-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis I think that labor should make an additional concession 686 rmg 11 1 2 • The Secretary of the Treasury didn't negotiate that package. 4 am told that he is in a position to say what he is willing to 5 do as a part of recommending that the government endorse that 6 note, and you are in a position to say what you think the 7 government ought to do as a part of endorsing that note. 9 Now, I have indicated what I think we ought to do as a part of endorsing it, and I think that stock ownership ought And I think that when the government gets 10 to be a part of it. 11 in these things, we ought to see to it that the workers would 12 be a part of it. 13 Now, if you go back into World War II aid other areas, 14 we had all of these programs where the government would take 15 all the risk out of it, guarantee that this thing succeeded. 16 Someone would make a lot of money -- 17 O Now, I didn't negotiate this package, Mr. Kelly. 3 8 O beyond what they have done. Take all of the risk by the government signing up to 18 guarantee the loan or whatever it took to get the money. 19 invariably, there was a situation where the investors, the 20 business people made all of the gain out of it. 21 been -- the workers got wages and that was all. 22 And The money had If I had my way about it, we would have required that 23 part of that be that the workers would own some stock in the 24 company. And just check it out. ice-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis I will be glad to furnish you a study that indicates that 687 rmg 12 • 1 where the workers own a substantial equity position in a 2 company, you just get a great deal more productivity. Mr. Moorhead. 4 Before you proceed, Jim, I would just like to say to 5 Members that the distinguished Chairman of the Finance 6 Committee has other things to do across the aisle, so if we 7 could be brief, I think it would be helpful. 8 Mr. Blanchard. 9 Mr. Blanchard. 10 O Thank you, Mr. Chairman. I just simply want to thank Chairman Long for being here 11 and indicate I am more than willing to try to work on some form 12 of ESOP in this bill. 13 Mr. Chairman, I have been working on this bill for quite 14 some time, and I am aware of your interest in employee stock 15 ownership plans, and want you to know that I would be more 16 than willing to try to work something out. 17 • Mr. Blanchard. 3 I think in the House directly, we have some jurisdictional 18 problems that such an amendment would cause, but assuming 19 either we can conquer those problems or at some later point 20 work out an ESOP, I want you to know that I will be more than 21 cooperative if we are lucky enough to get a bill passed here 22 in the House of Representatives. 23 Thank you for being with us. 24 Senator Long. Thank you, sir. Mr. Moorhead. Mr. Green. Ace-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 688 rmg 13 • • 1 Senator, you said in your remarks that if we 2 are going to take this risk for the government, we want the 3 employees to be part of the action. 4 if we are going to take this risk for the government, and by 5 that you really mean the American taxpayer, shouldn't the 6 American taxpayer be part of the action and shouldn't the 7 American taxpayer have an equity interest in Chrysler through 8 some form of equity kicker to the government in exchange for 9 this loan guarantee? I would like to ask you Well, we haven't done that and I don't 10 Senator Long. 11 think we ought to. 12 make a lot of money out of it by saving a tremendous amount 13 of unemployment benefits that we will have to pay. 14 If it succeeds, the government is going to And the government will make money by collecting taxes It is worth billions 15 on those wages and all the rest of it. 16 of dollars to this government for that company to succeed 17 rather than go broke. 18 O Mr. Green. Mr. Green. But if a private investor were taking this 19 kind of risk -- and none of them will take it, so it is 20 obviously a very high risk -- they would certainly not make 21 this loan in consideration simply of a loan guarantee fee. 22 They want some equity participation. 23 American taxpayer get that directly? 24 Senator Long. Why shouldn't the Well, I don't think that our purpose is Ace-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis to try to acquire stock for the United States government. The , 689 rmg 14 • 1 government will be an indirect beneficiary to the tune of 2 billions of dollars if this endeavor succeeds. 3 the government has an interest in the welfare of its people. 4 It took a long time to get that agreed through American 5 history, but it seems to me as though we have pretty well agreed 6 upon that today, and it would seem to me as though that this 7 government ought to want to save employees, to see employees 8 own something more than just an equity interest in their home. 9 1111 Mr. Green. I am not quarreling with the proposition 10 that if that is something the union wants and the union members 11 want it, that is something that the union and the employers 12 should bargain for. 13 But I am saying that when the American people take risks 14 that are like those of a venture capitalist, they ought to get 15 the kind of rewards the venture capitalist gets. 16 • But I think Senator Long. Well, we are taking risk, and we are going 17 to take a lot more. We are going to take risk in these 18 energy investments. But it seems to me all 19 if you look at what the bottom line is, the government takes 20 the risk and so further on down the line you have got some 21 people who are very, very wealthy as a result of that. 22 along the line, And I am not against any of those people, they are very But you 23 nice people, public-spirited citizens and all that. 24 could have had it so that by the time you got through with all Ace-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis that, the rank and file would have been a part of all this. 690 rmg 15 • Now, in my judgment, Mr. Green, if this system of ours is 1 2 going to succeed, you are going to have to have more than 10 3 percent of the American people who want an equity in this 4 productive society of ours. 5 then they are not going to be very enthusiastic about it. 6 Mr. Green. it up to the UAW to decide what it should bargain for in 8 negotiations with Chrysler, rather than us? Senator Long. Well, I am sorry, Mr. Green, that the 10 labor unions have not put stock ownership high on their list. 11 Most of them don't put it on there at all, they don't ask for. And I think one reason they haven't is because they are 12 O If we believe in collective bargaining, isn't 7 9 O And if they are not a part of it, 13 inclined to feel that when those employees own stock in the 14 company they start thinking like capitalists, they start 15 thinking like businessmen and they do, there is no doubt about 16 it. 17 Look what happened to Chicago and Northwest Railroad 18 when they started an employee stock ownership plan there. 19 labor leader bought all the stock he could find and encouraged 20 everybody else to do likewise. 21 succeeding, the people that didn't buy in wanted to buy in. 22 So they met and they said, well, these other guys want That When the thing started Shall we take them in at the price we paid,; 23 to buy some stock. 24 or for what it is worth now? Ace-Feclerai Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis What do you think those guys said? Why, heck no. They 691 rmg 16 1 can pay what it is worth now. 2 the risk later on. 3 • 5 Why, heck, no, make they pay what it is worth now. 6 what it was worth when we went in. 9 We paid They start thinking like businessmen when they own an equity position in something. And this thing of giving somebody a piece of the action, They have been afraid of it 10 they have been afraid of it. 11 because they are a little afraid those fellows might not want 12 to go out on strike when they are asked to go out if they 13 own the thing, own a substantial equity interest in it. 14 They have been a little worried about that. But they 15 are finding, though, that employee stock ownership plans 16 do not destroy labor unions. 17 18 19 20 21 111 They had a second tier of fellows that said, well, do we pay it at the price you paid, or pay for what it is worth now? 8 end #1 They made another opening. 4 7 • We took the risk, let them take 22 23 24 Ace-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Mr. Green. It just does not happen. I have no further questions. 692 0 02 01 mgcHEE 1 2 3 Mr. Moorhead. I would recognize our resident expert on employee stock ownership plants, Mr. Lundine. Mr. Lundine. Thank you, Mr. Chairman. I thank you and 4 the other members for your courtesy in arranging this 5 testimony this morning. 6 7 Senator, you are acknowledged as the leader in this country in the area of encouraging employee stock ownership, and I really appreciate your testimony here today. 9 411 Well, I'm willing to share this with 10 anyone who will get involved, Mr. Lundine. II should try to work together on that. 12 • Senator Long. r. Lundine. I think we Well, I intend to do that, sir. If I 13 understand your testimony, you do not intend the government 14 requirement of a guarantee, an employee stock ownership 15 plan, to be just a gift on top of all of the other benefits lo that employees have, and those would be union and non—union 17 employees that would penefit from it. lo you expect those employees to participate in some way by 19 foregoing some benefits that they might have or subscribing 20 to the stock in some way, so that the Chrysler Corporation 21 would likewise benefit from this participation. 22 Is that accurate? 23 Senator Long. But in a general way, I would like to see the workers do 24 something, make some contribution, and it should have been 25 in there in the beginning. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis In other words, the idea would 693 10 02 02 mgcHEE 1 from square one to talk about providing a plan where the 2 workers would own some stock as a part of this operation. 3 But if it wasn't raised and wasn't negotiated at the point where the Secretary of the Treasury comes into it, I think he ought to put it in the package, and if he doesn't put it o 7 in the package, I tnink we ought to put it in the package. Lundine. If we out it in the package, how much, dollar—wise, should we require the minimum stock ownership investment to be? 10 Nell, at this roment, I wouldn't want to As I H name a precise price, but let me just make this point. 12 understand ic in that negotiation -- and I had no part of 13 it, but I'm just saying from what I heard, and I don't even 14 know if this is true, out I believe it to be true -- it is lt my understanding that those workers agreed to defer part of lo their pay raise, when you compare what General Motors is 17 paying its employees, in consideration of working this whole 10 thing out. lY rather than defer some of their pay raise, that that part of 20 the paY raise would have been put into stock for the 21 employees. 22 111 Senator Long. And they could just as easily have agreed that Now, if they did that, it should be the type 23 situation -- end they have ways of doing this on the stock 24 market where you can't sell that stock; that stock has got 25 to be held until this thing is worked out, until the company https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 694 90 02 03 mgcHEC 1 is in good shape again -- it could have been worked out in 2 that fashion, and I have no doubt it would have been if it 3 had been in there to begin with. 4 me that they could reopen negotiations where they could -- 5 the Secretary of the i'reasury could negotiate about the matter. 7 6 9 10 11 12 • If he thinks they ought to do more, le c him take it up with them. The difficuly of us negotiating, Mr. Lundine, is, by the time we get a parliamentary body, we've got so many people in the act that we can't speak with one voiced. I'm acutely aware of that, Senator. Mr. Lundine. Thank you, Mr. Chairman. 13 Mr. Moorhead. 14 Mr. Shumway. Mr. Shumway? Thank you, Mr. Chairman. I would like to 15 express my appreciation to the Senator for being here this 16 morning and helping us try to reach some resolution to this 17 difficult question. 16 Senator, you indicated in your remarks that whatever 1 asssistance we do provide to Chrysler Corporation should be 20 designed to benefit the employees, and you therefore 21 suggested the device of an employee stock ownership plan. 22 23 24 410 But even now, it seems to 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Senator Long. Please understand, I'm for benefiting both. Mr. Shumway. I understand that, but what's good for the employees is certainly good for the company. 695 90 02 04 Senator Long. 1 mgcHEE If this government is going to endorse a 2 note for $1,500,000,000, it seems to me as though it ought 3 to be something than just cenefit the existing shareholders. Mr. 6humway. 4 The employees in this case are represented by the united Auto Workers, and as you know, they recently conclucea a contract with th..-3 United Auto Workers. 7 Prior to that annoucement, however, Chrysler employees were making something on the average in excess of $18,000 per year. In the contract in there, there are some deferred increases. 111 10 It nevertheless guarantees them over the next three years 11 something like, perhaps, a 10 or even 12 per year when you include the cost of living adjustments as 13 well as fringe benefits. 14 percent increase They are going to receive those cost of living It seems to me that we have 15 adjustments right on scheoule. 16 not seen in the conclusion of these labor negotiations the 17 kind of concessions that Mr. Fraser told us that his union Id and his employees were willing to make. 1 Now I ask you, do you believe that the Chrysler 20 employees have demonstrated the kind of sacrifice or 21 concessions that would be required to justify the kind of 22 assistance that would be given to them under an ESOP? 23 111 11 Senator Long. I think that the company is in a The company is on the ropes 24 weak bargaining position. 25 financially, and frankly that is a big strong union, and I https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1 696 90 02 05 mgcHEE I think the UAW is a great 1 regard it as a great union. 2 union, and they are hard bargainers, and they ought to be 3 nard bargainers. 4 who was a tough bargainer if I were in that union. But if you If I were voting, I would vote for a guy look at the weak position the company is in, I would think that they are not in a position to be very 7 tough from the management side, and the Secretary of the Treasury or failing him, those of us up here are in a 9 111 position to be in a tougher bargaining position because 10 we're in a position to say, ",14e11, you want $1,500,000,000; 11 this doesn't look like a very good deal to us. 12 look to us like you're doing what you ought to do. 13 have the right to ask more of you, and we ought to talk 14 about what that ought to be." It doesn't Now, we Now, I would hope that the Secretary of Labor -- pardon 15 16 me, the Secretary of the Treasurey would speak for you and 17 for me and for the Congress in general, and he says he thinks that employee stock ownership is a good deal. 19 you would put that in the package and negotiate with labor 20 about that and management, too. Now he is in a strong bargaining position, and it seems 21 • I wish 22 to me that he is in a stronger bargaining position than 23 management or labor. 24 it. 25 their jobs, so that he ought to be our spokesman, and I hope https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis He doesn't have to put anything into He can just sit there and watch them go broke and lose 697 90 02 06 mgcHEE 1 that you can prevail upon him to be our spokesman in that 2 respect. Mr. Shumway. 3 Well, I will certainly try, but it seems to me, Senator, that of all of the times that the union and •4 5 Chrysler have met at the bargaining table to discuss 6 contracts for employees, this time when the very livelihood 7 and jobs of those employees are indeed at stake, I would 8 think that management's position at the table would be strengthened, that they would be in a position to require 111 10 the kind of sacrifice that I think this Committee and the 11 American public is expecting will be forthcoming from the 12 employees in orcer to save their jobs because it's important 13 to them as well as the country. 14 Iell, I don't see that the position is 15 strengthened, Mr. Shumway, when you're on the ropes, when 16 you're standing on quicksand. 17 in no position to stand a strike, for example, so I would 18 think that they are not in a strong position. lY 111 Senator Long. Mr. Shumway. It seems to me that they are But on the side of labor, do you think 20 they are standing on anything but quicksand, that their 21 position is stronger. 22 Senator Long. 'Nell, in negotiating with the United 23 States government, they are not in a strong position because 24 this government is in a position to endorse that note or not 25 endorse it. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis So this government is in a very strong 698 10 02 07 1 mgcHEE and I think we ought to act from strength on our side. 2 Mr. Shumway. 3 Mr. ,ioornead. 4 Mr. Vento. Thank you, Mr. Chairman. Mr. Vent°. Thank you, Mr. Chairman. Senator, I appreciate your testimony. I think I would 6 just make a point here that the UAN has deferred these 7 payments, but in a very real sense, it may be actually assuming more risk than what would be envisioned under an • 411 employee stock option program by deferring that. Nho knows 10 whether or not they will ever get the increases? So I think 11 that this is something that, ought to be looked at. 12 know where they are standing in line in terms of bankruptcy, 13 and I don't think that you do, Senator. 14 I don't One of the points that we have is -- I mean, we have got There's a stock option 15 employee stock option programs now. 16 on a voluntary basis, so what you are suggesting, I guess -- 17 what is being suggested by advocates on the Senate side and lb the House side is to mandate this type of program to force 1 participation, and it is sort of, I think -- is somewhat 20 bothersome. 21 The first question is, would we give up anything, and 22 would this cost the federal government anything in terms of, 23 if we put the money out at nine or ten percent to Chrysler, 24 will we put it out at less than that by virtue of imposing 25 this particular type of mandate with regards to our $1.5 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 699 10 02 08 mgcHEE 1 billion guarantee as opposed to others? 2 Is it your intention that it would cost that? 3 Senator Long. Nell, I'm not sure that I understand the 4 question, but our thought is that the company is willing to 5 do the kind of thing that I'm suggesting. My understanding is that as far as the company is concerned, they want to 7 negotiate about what the extent of this employee stock ownership arrangement would be. And that's proper. 3ut they are presently content to go along with the 10 concept, and they're perfectly willing to go along with it 11 to a very substantial extent. 12 from the management side. 13 111 So I don't see any opposition Now as far as labor is concerned, they're willing to So far they haven't been asked to 14 have this in the picture. 15 pay for it, and if it had been in the picture to begin with, lo I think the package would have had some concession. 17 Now I don't want to pass judgment, Mr. Vento. lo Mr. Vento. Well, I think the whole thing is, it sort of 19 stands -- the voluntary investor kind of idea and I'd say, 20 so you are going to put out some preferred or some class of 21 stock and you're going to give it to employees by virtue of 22 receiving this loan. 23 value of the existing stock. 24 intention, by virtue of this guarantee. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Senator Long. Certainly, we're going to increase the At least that is our We hope we do. Well, if we do what we ought to do -- to 700 1Y0 02 OY mgcHEE 111 1 do what we ought to do, the employees will get stock by 2 virtue of the government participation. 3 we ought to do, the employees will make a proper 4 contribution to participate in a plan to save that company 5 and save their jobs. And if we do what Now I didn't negotiate that deal. 7 Mr. Vento. well, what I want to know, do you envision that that will cost anything, that that is going to cost us more money to buy that program than to buy a strict 10 11 12 13 111 Senator Long. It I don't think it would cost anything. won't cost you a nickel. Let me put it this way. To me, it would be just as 14 though -- as it was when the Lockheed people came to us. 15 They wanted us to endorse a note for about $100 million, if 16 I recall the figure. 17 "Look, we will sign a note for you on one condition. its have got to put your employees in here as part of this. 1J • guarantee with a matching commitment type of program? Mr. Vento. 4e could have just as easily said, You Well, what it really boils down to is, you That is what 20 say that you must invest to keep your job. 21 you're saying -- that you have to invest, and of course I 22 mean it does depart from that voluntary investment. 23 saying you have to invest in something that might not be as 24 good an investment as something else. 25 bothersome. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis You're And that is somewhat I don't know what the mechanics are of it. I 701 [90 02 10 mgcHEE I think that the UAN has I can understand your sentiment. 2 already done something, and we ought to look at that as opposed to that value as opposed to what this particular 4 tyce of commitment is that you and others are suggesting. I don't o the ramifications, but I co want to estaolish -- first of 7 all, I don't think this ought to cost us anything more in 6 terms of what we're doing. 9 program into place really gains us very little. 10 III now, frankly, it we have time to look at all If it does, then putting this Ana, of course, I think you have to balance it off One of the biggest H against what is already being done. 12 problems that Chrysler had was the stock option program. 13 has almost stopped that because it cost money. 14 inducement that cost Chrysler -- selling below the market , rate its various types of stock classes. 16 that type or -- putting that program in effect under those 17 circumstances is a much different type of situation than lo what you are envisioning. It It was an And I think that I would hope that that is what you mean. 20 Senator Long. Nell Chrysler, as I understand it -- and 21 I'm not familiar with the details, but as I understand it, 22 they have made their employees some very tempting offers in 23 terms of stock ownership and that the union hasn't been 24 particularly interested in it. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis I'm not in a position to pass judgment on it. 702 190 02 11 1 mgcHEE 111 I'm not either, but it's my understanding Mr. Vent°. 2 that a program on the other side, the management side, 3 actually ended up costing them money, and I don't think that 4 is what you're proposing in terms of your ESOP program. 5 you a nickel. 7 My thought is that it's not going to cost Senator Long. It's not going to cost you one nickel more to require that the employees have some stock in the company if this thing succeeds. 9 • possibility of its succeeding. Thank you. 10 Mr. Vento. 11 Mr. Moorhead. 12 dlr. Hinson. 13 Senator, the distinguished Chairman of our Full Mr. Hinson. Thank you, Mr. Chairman. 14 Committe, Mr. Reuss, has a statement before the Committee 1 this morning which indicates his intention of introducing an 16 amendment to the bill that the Committee has that will, 17 among other things, allow for the Secretary of the Treasury lb come back to the Congress and request some additional 19 authorization if he deems it to be in the public interest. 20 111 And I chink that will increase the Do you agree with that, and would you generally support I have a great deal 21 this kind of approach to the problem? 22 of concern about this. 23 going to be adequate, or do you think that Chrysler might 24 well be coming back to us for additional funds? 25 you support such an additional request, it it was made? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Do you think that $1.5 billion is And would 703 190 02 12 mgcHEE Well, I don't know the answer to that. Senator Long. 1 2 haven't studied the Reuss Amendment, and I haven't even 3 heard the sponsor of the amendment explain this amenament, I so I'm not in a position to pass judgment on his amendment What I think about them coming 5 with regard to the issue. 6 back -- I don't think you ought to vote for the thing unless 7 You really believe that you have put together a package here where everybody is going to do his part and that you think will work. 10 11 and you may have, too, of urging the SBA or the EDA or 12 somebody to make a loan and then have this fellow come back 13 in later on and say, "That's not enought; I need more 14 money." 15 That is tough, to come back the second time. You had better put together a package you think will 16 work the first time if you're going to have anything to do 17 with it. Thank you very much. lo Mr. Hinson. 19 Mr. Moorhead. Thank you, Senator, for excellent 20 testimony and the suggestion which, I can assure you, the 21 Subcommittee will give serious consideration to. 22 • Now I have been in the embarassing position, Mr. Hinson, Senator Long. Thank you very much. 23 Mr. Reuss here, Mr. Chairman. 24 judgment on your amendment. 25 explained. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis I'm pleased to see I'm not in a position to pass I just haven't heard it 704 90 02 13 mgcHEE 111 I appreciate that. 1 Mr. Reuss. 2 Mr. Moorhead. At this point, the Chair would like to 3 recognize the presence here of the Chairman of the full 4 Banking, Finance, and Urban Affairs Committee, the 5 distinguished gentleman from Wisconsin, Mr. Reuss, for a statement. 7 Mr. Reuss. Thank you very much, Mr. Chairman. I had a written statement which I have circulated to members of the Committee, and I would like to ask unanimous consent that my 10 Nithout objection, so ordered. 11 Mr. Moorhead. 12 (The complete statement follows.) 13 • statement be included in the record. 14 15 16 17 lb 20 21 22 • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 705 0 02 14 mgcHEE Mr. Moornead. 1 I want to apologize. you down there, Carroll. Mr. Hubbard. 3 111 I just aid not see I would have recognized you. Mr. Chairman, I accept your apology and no I listened as carefully as I coula, as I was in 4 problem. 5 and out of the Committee Room this morning. arriving. 7 I was late in I am a Kentuckian who has been called to the phone numbers of time to give praise this morning to Phyllis George and John Y. 3rown, Jr. 9 10 411 • (Laughter.) Mr. Hubbard. And during Senator Long's testimony, I was 11 trying to hear as much of it as I could in order to have 12 some intelligent questions. 13 primary in Kentucky and having been overwhelmed by the 14 beauty of Miss America and Phyllis George and the 15 multimillions of George Y. Brown, Jr., and having witnessed 16 the overwhelming landslide yesterday in Kentucky of John 17 Y. Brown, Jr. for governor, I would say to my dear friend Id and colleague on the Subcommittee, Jim Blanchard of 19 Michigan, who is doing his best to convince all of us to 20 vote for this legislation, that having seen what I have in 21 Kentucky, that I would recommend to Jim Blanchard that he 22 seriously recommend to Chrysler that they replace Chairman 23 of the Board, Lee Iacocca, with Colonel Harlan Sanders of 24 Kentucky Fried Chicken fame and that they advertise Chrysler 25 as being "finger—lickin' good." https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Having run for governor in the 706 YO 02 15 mgcHE 1 (Laughter.) 2 Mr. Moorhead. 3 4 Committee. 3ack to the Chairman of the full Excuse me. Mr. iReuss. Thank you for the very jolly intervention. Sometimes in the course of legislative events, he respect for the members of this Subcommittee should compel me to 7 give my views in a timely way on the legislation before the Subcommittee, which I commend you all for working so hard on and for getting ready to mark up in the next day or two. IC In a nutshell, I am compelled to oppose H.R. 5805, the 11 Administration's Chrysler Bill, in that it proceeds on the 12 theory that what is good for Chrysler is necessarily good 13 for the country. 14 If the bill can be turned around so that what is good • 15 for the country is the main purpose and if Chrysler wants to 16 qualify and get aboard that train, it is more than welcome 17 to, then I think it would be a bill I could entirely Id support. I think we nave to look at this legislation in the light of the country's economic problems -- why at one and • 20 the same time we are faced with terrible inflation and 21 oncoming unemployment, our existing economic programs. 22 Fighting inflation by super—tight money simply seems to 23 increase unemployment, and fighting unemployment by spending 24 increases or tax cuts simply seems to make inflation worse. 25 And when you combine both of these macro policies, what you https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 707 YO 02 16 mgcHEE 1 get is the kind or low growth, low productivity stagnation 2 that ails us. So I suggest that what this country really needs in 3 111 4 addition to sensible macroeconomic monetary and fiscal 5 policies is an all out government/business/labor cooperative team effort to reform our economic structure in scores of 7 different sectors ranging from food to health, to housing, 6 to transportation, which is what concerns us this morning. A reform of our economic structure which would enable us 111 10 to get a grip on inflation and recession will take some H time to achieve. 12 getting on with the job, it is all the more reason to start 13 at once. 14 avoid is taking further interventions which will simply make 15 our structure worse. JO And meanwhile, one thing that we should certainly Now the Administration's $1.5 billion loan guarantee 17 essentially says to Chrysler, whicn has suffered from its lo attempts to emulate General Motors and offer a full line of 19 automobiles, "Keep on doing what you have been doing." 20 111 But far from this being a reason against file Chrysler plan, as I understand it, is to expand its 21 Omni and Horizon production and to keep on making on about a 22 two to one ratio, as Mr. Ricardo told me, non—sub—compact 23 cars on the ground, among others, that that is where it 24 makes the money. 25 conducting an energy program, $1.5 billion worth, in which https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Vell, that puts us in the position of 708 ,C) 02 17 mgcHEL • I we are making possible Chrysler's current subsidy, $300 to 2 everYone who will buy a non—sub—compact car from them, and 3 provided the dealer will promise in the future to keep up an 4 entire line of sub—compacts and cars that aren't so gas economical. 6 7 So the question is, shall Congress go along with that kind of a loan guarantee? In my judgment we should not, but I hope it will be possible to fashion an altered Chrysler 9 rescue mission -- one which combines federal planning and 10 financial help with a program designed to provide jobs for 11 Chrysler's workers and which takes into account their human 12 needs and the production of useful equipment: 13 economical sub—compact automobiles, mass transit equipment 14 including buses and commuter rail possibly, the kind of 15 energy saving cogeneration equipment which Fiat of Italy has 16 evolved which consists simply of a sub—compact automobile 17 engine. ld This is practical. I've seen it. super gas They are making it in There is now one on demonstration by the Brooklyn 19 Turin. 20 Gas Light Company, to its eternal credit, and why we sit 21 atrophied here when there is a great oppotunity to combine a 22 real attack on the energy/transportation shortage and in the 23 process see that Chrysler workers get useful employment, I 24 don't know. • 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The amendment which I hope the Subcommittee will 709 190 02 01 mgcHEE 1 seriously consider and which I herewith offer for your 2 consideration has the following outline: 3 One, the bill's purpose on the amendment would be twofold -- (A) to maintain employment for Chrysler 5 Corporation employees under acceptable conditions, and (B) 6 to produce goods which meet national transportation and 7 energy goals -- in a nutshell, those that lessen our dependence on oil imports. Ehose include not only real gas saving automobiles but mass transit buses. 11 of Transportation put out bids for mass transit buses, it 12 turns out that no American manufacturer bid on them. 13 14 15 16 17 16 19 20 21 • Just the other day when the Department 10 24 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 710 190 03 01 Another very real possibility is commuter self—propelled mgcHEE 111 2 rail cars. 3 makes these. Very substantially, not American company now Again, Fiat of Italy is the sole manufacturer, and as with its cogenerator, Fiat of Italy is very eager to get into a :o—venture with some American company. 5 So it is perfectly possiole to put together a package of energy saving transportation which Chrysler could be 3 proaucing. 9 motor cars. I don't see why they can't concentrate on 13 fuel—efficient motor cars and such other energy saving ii devices as is thought in the national interest. 12 • They now produce tanks and trucks as well as So the amenament I propose would fortify the Se:retary 13 of the rreasury when he wor:cs out this plan oy °ringing into 14 the team the Secretaries of Transportation, Energy, lp Commerce, Defense, and Labor, as well as the recipient of 15 the loan guarantees. Secondly, the $1.5 oillion matching loan guarantees in 13 the oill ougnt to be mace atonable to Chrysler Corporation, 19 in my judgement, if it qualifies for this kind of a plan, if 20 it is willing to sit down and concentrate on the national 21 interest rather than just on the Chrylssr Corporation's 22 alleged interest. 23 111 And I hope they would. President Iacocca, I am assured by -- Pete Rodin° is a 24 tiger, and I am sure that he could sit down with Miller and 25 Miller's colleagues, and something worthy of the nation https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis a 711 190 03 02 mgc9EE 111 If Chrysler doesn't qualify, if I could come forth from that. 2 .Ar. Iacocca is not a tiger, then the amendment would permit 3 any other entity or entities, any other corporation which 4 the Secretary determines is better able than Chrysler to carry out such a program which has, as its aim, the provision of decent jobs for the men and women who now worl< for Chrysler ano the production of products which help solve 3 our transportation and energy problems. Third, if the Secretary at any time ouring the four year 13 period of the loan guarantees determines that amendments are 11 needed in the law, ne is as'<ed to tell the Congress that. 12 He shouldn't just suffer in silence and keep to himself the 13 fact that one or another amendment might be needed. 14 sorry that my colleague, Mr. Hinson, should attack my little 13 baby before it was even born because it really isn't 13 terribly radical to ask the person directed by the Congress If to carry out this plan, the excellent Secretary of the 19 Treasury not to keep mum, not to keeo it all to himself if I'm ne finds that in order to keep the nation from losing its 23 111 ante, additional amendments are needed. 21 Fourth and last, the amendment would require that the 22 Administration report to Congress every year on how it is 23 doing. 24 here it is that people make mistakes. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis If there's one thing I've learned in my years around Even the Federal Reserve, whom I thought was impervious to that human ailment 712 190 03 03 mgcHEE 1 made a $4 oillion one in the money supply figures last month. 3 4 So we of the Congress, I think, should keep abreast of what is going on. So there, in a nutshell, Mr. Chairman, is the amendment which I respectfully propose to your Suocomnittee. 6 essence, what it does is to take the emphasis out of doing just what Chrysler wants an 111 In 5 puts the emphasis on doing what 9 is good for the 150,000 men end women who work for Chrysler 9 and those associated with them and the country, which is 10 seized with very serious energy and transportation problems 11 which are, in large part, responsible for our ramshackle 12 economic structure which is causing, in my judgment, much of 13 . the inflation and recession from which we are now suffering. 14 So I know that I can rest the matter in your capable 15 hands, and I would conclude oy saying that with such a 13 turnaround of the bill, I will vigorously support it. 1, without it, I will have to oppose the bill. 13 pledge I have earlier made because of the importance of the 19 subject matter. 20 full Committee and to the floor 21 legislation -- so that the full House may vote on it even 22 though I may be constrained to vote against it myself. I will do my best to qt it through the •••••=1 the Chrysler 23 Thank you very much, Mr. Chairman. 24 Mr. Moorhead. 23 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis But I repeat a Thank you, Mr. Chairman, and I know that the members of the Subcommittee will give your amendment a 713 190 03 34 mgcHE i great deal of attention, and I, for one, want to thank you for getting it to us early so we would have a cnance to loo'‹ • at it and study it and so it doesn't just aopear on the 4 D first day of markup. The Chair received a letter from one of the members of the 'Subcommittee objecting to the hearing of the Secretary of the Treasury at this time because the testimony wasn't in 3 at least 24 hours in advance. Does the memoer want to pursue that position. 10 Mr. Kelly. Yes, Mr. Chairman, I do want to raise this 11 point of order because I think that it is quite clear that 12 if we are going to undertake to invest S1.5 billion of the 13 taxpayers' money that the Secretary of the Treasury who has 111 set forth the parameters of the plan and is going to 1D administer it at leust ought to have his act together well 15 enough so that he can give us the testimony the 24 hours in 1J advance that our rules call for, 13 obvious that we are in a better position to evaluate the 1) statement if we have an opportunity to examine it and 20 consider it. 21 ecause I think it is I think it is a reasonable request, and it is the rules, and I think they should be abided oy. 23 110 Mr. 'iloorhead. The Chair is ready to rule. The Chair 24 appreciates having tne letter in •advance because the Chair 23 was able to discuss the matter with counsel for the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 714 190 03 05 1 mgcAEL: Subcommittee, and the legislative history of this particular rule, Number 7(b), was originally drafted to say that each 111 3 witness who is to appear befnre a S'iocommittee shall file with the Clerk of the Committee at least 24 hours in advance 3 of nis appearance 100 copies of his testimony. On a motion of a member of the minority, the words, "so far as practical", were added, whicn I think was intended to give the Chair of the various subcomlittees some leeway. are :oming to the end of a Congressional session. 13 Ne ihe Chair nad a great deal of difficulty in arraniing with the Secretary about coming here on this day because the 111 originally scheduled to testify on Thursday 12 Secretary 13 before this Committee and on Ylednesday oefore the ivays and 14 Means Committee at the reauest of the Chair, and thanks to 1J the :ooperation of the Chairman of the Aays and Means 1J Committee, we have changed this date. W35 In view of the time, I think that the Chair will rule 111 13 that the Secretary has acteu, insofar as practicable, and we 1 would now like to -- 20 Mr. Stanton. 21 Mr. 'Aborhead. 22 Mr. Stanton. Mr. Chairman. I would yield to the gentleman from Ohio. I appreciate the Chairman yielding, and 23 may I sinply say on that ruling that I would back up the 24 ,:hair's ruling in that regard, because I was responsible for 2D it a couple of years ago, with the Chairman working out that https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 715 90 03 06 1 mgcHEE' language that the gentleman just -1'ioted. But I would lie to add further in regards to the rulind, thought, that of course the judge's idea and motivation oehind his reouest 111 goes far deeper than just the listening or the hearing of D the Secretary's forthcoming 48 page statement and then additional naterial. It does °other me consi.Jerably, though, and perhaps the thing could oe resolved to the judge's satisfaction if we ouli get some assurance from the Secretary that he will 411 1.) come bacK at the time the full Committee meets and if any of 11 the memoers of the full Committee that they want to ask -- 12 and I'm sure they will at that particular time -- of course, 13 it is out of the realm of the Chairman's jurisdiction to 1; answer that question, but I would hope sincerely that the 15 Secretary would make himself avail3ole to t.le full Committee 13 when the time comes for further mar'cup of this legislation. ld Mr. :stoorhead. That would oe the jurisdiction of the Chairman of the full Committee and the Chairman of the 1 411 Subcommittee. 23 Mr. 31anchard. 21 Mr. Moorhead. 22 Ar. Blanchard. Mr. Chairman? .4r. Blanchard? I understand all members of the full 23 Committee have been notifed of this hearing today. 24 correct? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Mr. Moorhead. Is that It is the Chair's intention after navinq • 716 10 03 07 mgcHE 1 3 first round of memoers of the Suocommittee to recognize memoers of the full Committee who nave come here. 3 ..tr. Stanton. I appreciate the gentleman's comments from 'Aicnigan, but my question was, if we have any further 3 information we desire from the Secretary after today's nearing -- we don't know how it's loinq to proceed -- but if that is the case, and I think it is in the oest interests of 9 the legislation and those woo are for it, to have full and complete hearings, and so that they would oe held on this 1) legislation, and that's the very minimum that we owe the taxpayers of this country. 12 Mr. .400rnead. The Secretary has always peen very I'm sure he would do so again, out 13 ,:ooperative in the past. 14 I would have to. defer, of course, to the Chairman of the lp full Committee. 13 Mr. dIcKinney? Mr. McKinney. 'Ar. Chairman, I apologize for the Eastern I just want to welcome the Secretary and 13 Airlines shuttle. 1) state that there are many differences between the Blanchard 20 3ill and the Administration Bill. 21 Administration Bill by request, but I am particularly 22 interested, and I hope in his testimony or in his synopsis 23 of his testimony, the Secretary will address the questions 24 of the Secretary alone rather than the Board making https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis I listed my name on the decisions, the time limit on the guarantees, and the 717 190 03 08 disposition of assets ouestion. mgcHE:i fhanK you, Mr. Chairman. 111 4r. Aoorhead. J 4 Aow the 3uocommittee looks forward to hearing from the -fonoracle G. William Miller, Secretary of the Treasury, and we welcome you, anj if you want to D introduce any of your associates, Ar. S?cretary, you may do so. 3 13 12 13 • 14 13 20 21 22 23 • 24 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis (The complete statement follows.) I 718 90 03 09 STATEMENT OF mgcHEE HE HONORA3LE G. AILLIAM MILLER, SECREI-ARY OF THE TREASURY OF THE UNITED STATES. • 3 4 Secretary Miller. will as Than you very much, Mr. Chairman. I you to bear with me for a moment to test the mikes, and I hope you can near. satisfactorily? Are you ale to hear me Is everyone able to hear? Mr. Chairman, let me first offer my personal aoologies 3 to the Committee, Mr. Kelly, and to all of you for the fact 9 that we were not able to suomit the testimony earlier. 13 was working on it last evening at eight and left my 11 associated who worked late into the night, anJ it was printed overnight. I Of course, we were working on a schedule 13 that originally contemplateJ my testimony tomorrow and that 14 was :hanged. 13 that we continued to obtain the best and latest up—to—date 1) information and give you the fullest possible report that we 1/ have been so tardy. 13 allow me the time to review this testimony and to call your 19 attention to the supplements to it and that I can say 23 certainly for myself personally that I, as always, would be 21 halDdi to be availble to any member of the Committee or to toe 22 on call to respond to any further information that will oe 23 needed. 24 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis But it is only because we felt it so important I hope you can understand that and can I have noted Chairman Ruess/ proposal and his comments this morning. I would hope that this might be taken up in 719 190 03 10 mgc'AE 1 the course of our discussion, and at the moment, I will try not to turn to that subject but rather to stay with the 3 primary tasK of presenting to you the reasons for and the 4 particular aspects of the Administration's proposal on the Chrysler loan guarantee program. ',Ir. Chairman, with your permission, I would like to sudgest that my statement along with the three appendices be 3 included in the recora. The appendices include a Treasury staff analysis of the economic impact of a shutdown of 10 Chrysler Corporation, number one; number two, some material 11 on historical patterns of Chrysler and of the auto industry 12 in the United States; and number three, a review toy Ernst 8, 13 Whinney, a major public accounting firm retained loy the 14 freasury, of the Chrysler Corporation proposal and their 1J analysis of the cash requirements. 1.5 Those documents are before you, and I would like, with 1/ your permission, to have them in the record, but to 13 summarize them and then turn to your questions. 1) 23 21 Mr. Moorhead. ilithout objection, the attachments to /our statement will be made a part of the record. I think, Mr. Secretary, that you had better cover your 22 relatively brief statement substantially in full because we 23 did not have it to read last night. 24 23 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Secretary Miller. Yes, I shall do so. Mr. Chairman and members of the Committe, I would like this morning to 720 90 03 11 mgcHEE I discuss with you the Chrysler loan guarantee program, ana I would like in the process of doing it, 35 my statement does, the reasons for suggesting aid for 3 to cover four points: 4 Chrysler first, and second, the Chrylser situation; third, a review of the Chrysler financial needs 35 we see them; and fourth, the Administration Proposal itself. Now, the reasons for considering aid for Chrysler are 3 numerous, out I will summarize the main features which we 9 oelieve justify considering a federal assistance program. 10 One, of course, is the impact upon employment and the rise 11 of unemployement that would result from a shutdown of 12 Chrysler or for a major interruption of its production. 13 This not only is a question of the impact upon the 113,000 14 Chrysler employees themselves but there are some equal 13 number of employees or more in the Jealerships who see! ID Chrysler products. 1/ supPliers who sell components to the Chrysler Corporation, 13 and it would be our analysis, as you will see from the There are 150,000 employees and materials we have submitted, that if Chrysler were shutdown, • 2D if it went into a reorganization ana was not able to 21 continue, the unemployment would increase somewhere between 2 /5 to 100 thousand jobs -- unemployment lost jobs -- in the 23 1980-1981 period. 4 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Now, this is the overall impact, some of which would be offset by later employment in other producers to ma'<e up for 721 190 03 12 mgcHEE 1 the lost output of Chrysler, but there would be this I. mmediate ilpact, and it would persist until such times as 111 J the production facilities could be reordere.,:l. rine local aspect of this falls very heavily on Detroit and the 'ylicnigan area, although other areas are imoacted. Over half of Chrysler's employees are in the Detroit area. fhat is, over 60,000 of Chrysler's ,Jresent employees are in 3 that area, and there are somewhere between 20 and 43 thousand employees of suppliers in Michigan who also feed 10 into this stream of production. 11 It is our estimate that the unemployment rate in the 12 Detroit area would increase oy some four percent if Chrysler 13 were to shutdown, and the unemployment rate in that area is 14 already high, higher than the national average, so there 13 would be a particularly heavy imoact upon Detroit, 'Aichigan, 15 and many other areas of the Aidwest. 1/ 13 Aow, a shutdown of Chrysler means tnat while other U.S. suppliers might make uo the lost production an provide the Jroduct, because of the production schedules, because of 411 20 trie availability of stepping up production, and because of 21 consumer preferences, it would be our expectations that some 22 of the Chrysler production would be displaced by foreign 23 imports. 24 impact on the balance of payments. ?3 would lose some SI billion to overseas purchases, which https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis So a shutdown of Chrysler would have a negative Our estimate is that we 722 190 03 13 1 means an increase of $1 Pillion in our deficit, and that of 2 course comes at a time when we are oarticulurly anxious to 3 return ourselves to balancing the international accounts. mgcHEE 4 Now, in addition to these kinds of issue, we also have the question of competition. important industry. The automobile industry is an It is important that we maintain an important snare of that marKet as 411 3 world—wide mar'<et. 3 Following World War II, the United States was the major 9 producer of automobiles. At one time, about 80 percent of 10 the automooiles in the world were produced in this country. 11 That has declined substantially, and the loss of Chrysler as 12 a producer would not only reduce the competitive forces 13 insia, the country, reducing. us to two major competitors, 14 out it undoubtedly would lose market share oermanently for - tates. the United S 1 And so, the impacts on poth domestic competition and on world competition and America's share of that competition 13 110 would be adverse. 19 Now, quite apart from these considerations, there is 20 perhaps an even more important consideration in terms of the 21 alternatives to an aid program. 22 continue, snould be shutdown because of its inability to 23 finance itself, there would be from the unemployment, from 24 the lost production, some cost to tne economy. 25 be an increase in unemployment compensation costs. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis In case Chrysler should not There would There 723 190 03 14 mgcHEE There would be 1 would be an increase in welfare payments. 2 costs in retraining workers. 3 revenues because of shrinkage of the local economic activity 4 and the tax oase. There would be a loss of local There would be a loss of federal revenues because of the loss of income. And all of these plus the balunce of payments would add up to a substantial impact on our economy. 3 It is our estimate that the federal deficit or the 9 federal budget decision, just federal, not local, we would 13 lose in revenues -- or on the one hand, lost revenues or II increased expenses on the other -- some $2.75 billion in the 12 years 1980-81, should Chrysler shut down on January 1, 1980, 13 so that the cost of not continuing Chrysler would be far 14 greater in terms of direct impact on federal revenues and 13 expenses than the risk involved in an appropriate loan 1.5 guarantee program or an appropriate financial assistance 1/ pac(age. 19 So now I have discussed Some of the reasons why we feel Let me turn to the second 19 that this proposal is justified. 2J major point, and that is just to discuss briefly the 21 Chrysler situation. 22 why is it that contrary to our general philosophy, we would 23 consider this a case deserving of federal assistance? 24 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis How did it get in this condition, and In the first place, there has been a substantial market shift for a number of reasons. There is a long term 724 190 03 15 mgcHEE 1 transformation of the automooile industry, snifting from what was previously the preferred American automooile, a 111 3 large family automooile, a luxury automobile, towards 4 smaller, more fuel efficient cars. 5 automobiles held 16 percent of market share in 1968. These kinds of They are now up to 35 percent of market share, and by 1985 they will be somewhere Petween 60 and 80 percent of the market 9 share. Now this major transition which has teen 13 oecause of the problems of availability and cost of energy H and because of other strains on resources and money is a very expensive transition. 411 rought about The industdi capital needs in 13 the United 3tates -- that is, the main producers in the 14 United States -- between now and 1995 will need to expend 13 $80 billion in capital investment to make this transition. 16 The Chrysler needs to retool are estimated at $13.6 the period 1980-1985. Now these financing 1/ pillion 19 needs are beyond what Chrysler has peen able to finance 19 itself from retained earnings and from its other resources. 20 And the particular financing needs now come at a difficult over time because with the recent gasoline shortages and increase 110 22 in gasoline prices, there is an acceleration of the trends 23 and there is a mismatch of production facilities with market 24 needs. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis There is also an economic slowdown, a recession, that 725 190 03 15 mgcHEE 1 will impact the cesh flows and profit opportunities of all 2 of the automooila industries during this period. You notice the very dee° decline in profits for the other major manufacturers in the third quarter and the very substantial loss suffered by Chrysler. •J 3 ‘,) 10 11 12 13 14 13 16 1/ 13 23 21 22 23 • 24 26 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis CR8190 HEER rmg 1 • 726 1 2 a more than proportionate slowdown in automotive sales. 3 have seen this recently in the October sales figures -- 4 September was aided by promotions and rebates. 5 But this slowdown means that that is an additional burden of a cash requirement to make the transition during hard times. 7 And of course the efforts to increase sales through rebates 8 merely increases the amount of cash strain that is required 9 to finance the company. So let us turn now from the financial situation of 11 Chrysler itself to looking at the financial needs as we analyze 12 them, and to our adaptation from the figures submitted to us 13 by Chrysler itself. 14 You will recall, Mr. Chairman, that when I was sworn in 15 as Secretary of the Treasury on August 6, one of my first tasks 16 was to respond to a then request by Chrysler for assistance. 17 O We 6 10 • In addition to the economic slowdown, we are experiencing After discussing this with the President, the Administra- 18 tion took the view that we would not be interested in or 19 willing to recommend unconditional tax credits to Chrysler, 20 but that we would consider under certain conditions as a 21 unique exception to normal practice a program of assistance 22 through loan guarantees, provided we could see a program 23 that would bring Chrysler through this transition period and 24 return it at an early date to a condition where it could be Ace-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis a viable private corporation with the capacity to finance 727 rmg 2 1 2 • This was a It did include the $13.6 6-year business and financial plan. 4 billion of capital spending that I mentioned a moment ago. 5 did include the absorption of operating losses through 1980 6 of some $1.5 billion. 7 period of time, peaking in 1983, of $2.1 billion over existing 8 resources. 10 11 12 It It did show a cash flow need over this It did indicate the source of the $2.1 billion would be from the following sources: First, $850 million from asset disposition, financial institutions, state and local grants, and other sources. 13 $500 million from constituents and employee participation. 14 And $750 million was requested from federal loan guarantees. 15 Shortly thereafter the consultants for Chrysler Corporation, 16 Booz-Allen & Hamilton, submitted additional information in which 17 they expressed the opinion that as much as $700 million 18 additional was needed to assure that the company would have 19 adequate financing. 20 21 • On October 17, Chrysler presented a plan. 3 9 • itself without federal aid. 22 That their view was that with that additional cushion, the total financing needs would be about $2.8 billion. I might add that in addition to Booz-Allen, that Chrysler 23 had retained the investment banking firm of Salomon Brothers 24 to assist them in looking at their financial requirements Ace-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis and trying to organize a plan of assistance. 728 rmg 3 • 1 2 a major accounting firm, so that we would have professional 3 resources to examine this. 4 from Chrysler, Ernst & Whinney, under the direction of their 5 senior partner, Joe Keller, organized a team of 25 professionals 6 who worked very long and continuous hours in Detroit to dig 7 into the plant, to analyze it, and to consider whether it 8 covered all of the risks in financing Chrysler through this 9 period. 10 • As soon as we received the plan In addition, we retained John Secrest, a former financial 11 vice-president of American Motors, who had experience in this 12 kind of problem, to assist us. 13 staff, which is fortunate in having many highly professional 14 officials, was able also to work on it through its own. 15 And of course, our own Treasury One of the first observations I would make about the 16 period of our examination is that during this period itself, 17 it became obvious that the outlook for the industry was not 18 so favorable as had been contemplated. 19 forecasters during this period indicated softer market conditions 20 and lower sales. 21 411 On our part at the Treasury, we retained Ernst & Whinney, A number of independent So, as a result of all of these examinations and reviews, 22 we tried, as professionally and as objectively as we could, 23 to bring forward a series of possibilities, looking at various 24 options and risks, that would show us the true needs of Ace-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis financing for Chrysler during this period, the more reasonable 729 rmg 4 1 level of needs that would assure that we would achieve the 2 objective of Chrysler becoming a self-financing company. 3 • It would be, it seems to us, a disservice if the 4 Administration should recommend to the Congress a program for 5 aid to Chrysler that was not up to the task. 6 an insufficient program, that if we inaugurate it, it would 7 result in failure and disappointment. 8 9 None of us want It would be better for us to face the reality of the needs and the likely needs, and decide on the merits whether 10 it is justified to provide that, and if not, it would be best 11 not to go into an inadequate program that would only come back 12 to haunt us. 13 I will remind the Committee that Chrysler's plan indicated • cash requirements at these levels during the period. 15 peak requirement would have been in 1982 at $2.116 billion. 16 17 18 O The 14 In the case of our analysis, we developed three cases to vary from these figures. Base Case 1 does several things -- Incidentally, as you will notice, in each of these cases 19 we have tested it against achieving 100 percent of the sales 20 outlook; what would happen if only 95 percent was achieved; 21 and what would happen if 90 percent was achieved, so that 22 we would have a range of possibilities in case there were any 23 marked conditions in the future where the company did not 24 achieve the sales level which supported these figures. Ace-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Base Case 1 assumptions projected that industry sales 730 rmg 5 • 1 for the next two years would be less than the Chrysler case, 2 and this is based upon many independent projections. 3 particular, we decreased the outlook for the industry from 4 10.5 million auto sales in 1980 to 9.3 million, and we decreased 5 the outlook for 1981 from 11.1 passenger automobiles to 10.3 6 million. 7 1110 So there was a downgrading of the market outlook. On the other side, we did include $200 million additional 8 for the recent settlement between Chrysler and the UAW, so 9 we put $200 million back in to cover that. 10 And we did make some adjustments in certain of the Chrysler 11 cost savings, but we incorporated the substance of those savings 12 in the base case. 13 As you will see, if the 100 percent volume were achieved, 14 then the maximum cash requirement would be some $2.3 billion. 15 If 90 percent of the volume were achieved, then almost $4 16 billion would be required. 17 • In The second Base Case makes an analysis of the cost 18 savings projections by Chrysler and makes certain adjustments 19 in reductions by referring back to their existing programs. 20 The history of success in acheiving objectives looks at both 21 the variable margin improvement and the fixed cost production 22 program, and makes some judgments as to the pxcentage possibility 23 of achievement and gives, in our view, a realistic outlook 24 for those achievements. Ace-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis In addition, there is an adjustment in the advertising 731 rmg 6 410 1 and sales costs to reflect the level of volume that would be 2 involved, and it does assume that some additional sales rebates 3 might be required during this period in order to meet the sales 4 targets. 5 In Base Case 2, you see that the requirement could go up 6 on a 100 percent sales achievement to some $3.3 billion, and 7 could be as high as -- that is a mistake, I am afraid -- that 8 should, I think, be $4.8 instead of $3.8 -- so that it could 9 be as high as $4.8 billion. 10 I am sure the figures in our tables here are correct. 11 Yes, it should be, the second base case, that should be $4.789; 12 these are reversed. 13 here and this one should be over there. 14 adjustments. That is all. This figure should be over So those are the • 15 Now, let me turn to the adjustments to Base Case 2, Let me just point 16 which we believe the more realistic look. 17 to these for a moment, a realistic look at what would actually 18 be required, the adjusted base case. 19 We believe that the most reasonable approach leads up Where we get to that $3 billion 20 to this $3 billion number. 21 number is, this is a repeat of the same figures you were just 22 looking at. • 23 24 And if you assume 95 percent of the sales volume achieved, then the peak cash requirements will be just over $3 billion. Ace-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis We arrive at that figure by taking the Base Case 2 and assuming 732 rmg 7 1 that capital expenditures of $1 billion out of $13.6 billion -- 2 • 3 Mr. Kelly. corresponding 4 5 on the financing needs for Chrysler. Having done these studies, it was our judgment that Chrysler could, in the years 1982 and 1983 -Mr. Kelly. 13 Mr. Miller. Mr. Kelly. 15 Mr. Miller. 19 • You have just changed the form, is that it? Well, this is only the same figures, right here, that appear here (indicating). 17 18 Adjusted Base Case 2 appears on page 10 of my statement. 14 16 Mr. Chairman, I still can't identify the data that is being displayed with the chart on page 10. 12 • In the testimony on page 10, you will But let me just focus for a moment on where we come out 10 11 Yes. find the same information. 8 9 chart to the ones being displayed? Mr. Miller. 6 7 Mr. Chairman, could we inquire is there a Mr. Kelly. 1593, 1994, 2196 -- I have been able to identify it now, thank you. Mr. Miller. But the point I was trying to make is that 20 looking at the various adjustments and probabilities and the 21 possibility of forecasting future markets, it is our best 22 judgment that this level of requirement is the most reasonable,, 23 because it represents adjustments from the levels of forecast 24 that Chrysler had made itself, that are reasonable in relation Ace-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis to current economic outlook, and reasonable in relation to 733 rmg 8 • 1 current market outlook, and which provide the possibility if 2 there is any shortfall, of, in these two years, deferring or 3 cancelling $1 billion of capital expenditures out of a total 4 of $13.6 through the period to 1985 -- which would result in 5 a net saving of cash of some $600 million. 6 7 is because the $1 billion itself would generate some income, 8 and the deferral of $1 billion and the loss of $400 million 9 of revenue would net out to $600 million, a cushion that could 10 11 • be used in case this turns out not to be the optimum track. So our analysis for this process leads us to the view 12 that under current conditions and current outlook, the most 13 probable needs for financing Chrysler during this transition 14 will be $3 billion, rather than $2.1 billion. 15 O The reason that it would not be a saving of $1 billion Chrysler, in its proposal, had indicated that it could It seems 16 raise from nonfederal resources some $1.4 billion. 17 reasonable to us that under today's conditions and with the 18 additional support from guaranteed loans, that the proper 19 balance in achieving this $3 billion cash needs, would be to 20 achieve it 1/2 from nonfederal financing sources, and 1/2 21 from guaranteed loans, up to $1.5 billion. 22 Mr. Chairman, I would like to pause for a moment to point 23 out that this analysis comes to the conclusion that the most 24 likely financing need for Chrysler's $3 billion, that does not Ace-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis mean that Chrysler would currently, or at any time would borrow 734 rmg 9 It means it must get $3 billion of cash over and 1 $3 billion. 2 above the sources it had on October 17th from various areas. And it must get them in a timing which fits its operating • 4 5 If any of the $3 billion is to be borrowed, the concept 6 would be to create a total financing package and the actual 7 borrowing would be made only if and when Chrysler needs the 8 funds to carry out its plan. 9 • plan. The main point being that the company needs a complete 10 financing package in place so that it can make the steps and 11 can make the capital commitments along the way to achieve 12 this transition. 13 14 Where will the money come from for the nonfederal financing? It can come from a number of sources. 15 It can come from banks and financial institutions who 16 already have a financial stake in Chrysler and to have a reason 17 to see that it makes this transition to a self-financing 18 corporation rather than going through the process of re- 19 organization. 20 It can come from Chrysler's suppliers. There is a very 21 large amount of purchases made by Chrysler each year, and 22 even more favorable payment terms can generate very large 23 amounts of additional capital. • 24 It can came from labor unions and employees. The UAW Ace-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis settlement recently completed with Chrysler does reduce cash 735 rmg 10 • 1 requirements by some $200 million from what was included in 2 the October 17 plan, so that part is more or less already 3 available. 4 It can come from state, local, and other governments. 5 And these governments have a stake in this situation because 6 they, too, will lose revenues if Chrysler fails. 7 If Chrysler shuts down, various states and cities will 8 lose revenue and will have increased costs, so they have a 9 stake in providing some assistance. 10 11 12 It can come from Chrysler dealers who have an interest in the continuity of their business and their product lines. It can come from shareholders. Shareholders will be 13 required to forego dividends, but there could be possible other 14 inputs from shareholders. 15 And very importantly, it can come from asset dispositions, 16 the sale of assets which Chrysler does not need to carry out 17 its core business. 18 this nature. 19 sold many of its overseas operations which are not primary to 20 its business, and it has some other properties that it is 21 considering for sale and could be offered for sale. 22 Chrysler has already made some sales of It has sold the real estate business. It has So through all of these sources, based upon Chrysler's • 23 own analysis and our analysis, it would appear reasonable 24 that $1.5 billion could be achieved. Ace-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The other $1.5 billion for the financing package would 736 rmg 11 • then come from federal guaranteed loans. 2 loans would have to have a series of safeguards because we 3 obviously are not interested in a program in which there could 4 be an ultimate cost to the taxpayer. 5 will be well designed enough so that it will work, and if it 7 works there will be no cost to the U.S. taxpayer. 8 there is a risk that if it does not work, there might be some 9 losses. Of course, But to minimize the risk of loss, not only do we need 11 an adequate financing package, but we need a series of safe- 12 guards to make sure that we have a handle on the future plans 13 and programs and operations of the company. 14 First, we need to be sure that in order to make our 15 commitment there is a sound operating and financial plan for 16 the period ahead, and that it will be revised from time to time 17 as we make actual loan guarantees. 18 So that we are constantly monitoring the progress of 19 the company and do not add more financing if the program is 20 failing or is not meeting its targets. 21 O It is our plan that this program will be sound enough and 6 10 O These particular 1 There needs to be a continuation of the present financing If they were pulled out, then of course the 22 commitments. 23 company would not have enough resources. 24 assurance that waivers and commitments from those who are So we must have Ace-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis providing the present financing, that those will be continued. 737 7mg 12 • 1 There must be reasonable prospect for repayment of these 2 guaranteed loans. 3 Of course, we must make the terms of repayment and the 4 telms of maturity reasonable in relation to the cash earnings 5 and other cash generation of Chrysler in future years so that 6 it can reasonably repay them. 7 We need to design a series and will design a series of 8 restrictive covenants that restrict what the company can S. 9 and make it committed to sticking to its last, and carrying 10 out this plan and not taking on new areas of responsibility 11 or risk while we are involved in this financing program. 12 We need to maximize the position for guaranteed loans in 13 terms of collateral and priority among creditors so that if 14 there is for some reason a failure of this plan, that there 15 is a high probabty of minimizing or eliminating any loss 16 to the government or to the taxayers from paying off 17 guaranteed loans. 18 And we must receive resonable compensation during the 19 period of guarantees to cover the costs we will have, and to 20 cS ver some compensation for the risks assumed by taxpayers 21 in making this kind of commitment. 22 Mr. Chairman, to summarize what I have tried to cover 23 this morning, let me say that it is a general principle of this 24 Administration to respect the merits and the vitality of our Ace-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Srivate enterprise system, and to minimize government 738 Lmg 13 • intervention. 2 unusual case that government financial aid should be considered 3 or granted. 4 this assistance is justified as an exception to the general rule 6 and is justified because of the unique conditions and because 7 of the impact upon out economy and because of the impact upon 8 various regions of the country and because of the impact 9 upon competition, and because of the impact upon the balance 10 of payments, and because of the cost for the government of a 11 failure of Chrysler. We have done so carefully. estimates of the financial needs. 14 And we believe we have a plan that good management can carry 15 out successfully to achieve a return of Chrysler to a successfup. 16 self-financing company. We believe the proposal we have made is responsible, and 18 one that responds to the conditions that we now have, both 19 in terms of the proper role of government, and in terms of 20 the timetable we have to respond in order to be of assistance. 21 end #4 We believe we have made reasonable and professional 13 17 • We do believe, for the reasons we have outlined, that 5 12 • We do believe that it should be only in an 1 And I appreciate very much your attention, and would be 22 pleased to try to answer now any of the questions that you or 23 others may have. 24 1,ce-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 739 /I 90 05 01 gshHEE III 1 Mr. Moorhead. Thank you, Mr. Secretary. 2 the full committee has asked me to recognize him because he 3 has to leave. 4 Ar. Reuss? D Mr. Reuss. Thank you, :oir. Chairman. felcome, Mr. Secretary. 41O As you know, Mr. Secretary, I i hvae a little different view on the form and structure of 3 the aid which we ought to give to the people who work for ) Chrysler and the people who pay the taxes in the United 10 States. 11 III The chairman of And I sent to you yesterday my proposed amendment, which 12 basically takes your bill, H.R. 5805, and makes a vary small 13 though crucial amendment in it, which really has two 14 aspects: One, instead of accepting Chrysler's full line 13 strategy and thus subsidizing further waste of gasoline, it 15 requires that the plan concentrate on energy conservation, li real gas—saving automobiles, mass transit equipment, perhaps 13 automobile—related cogeneration; an 19 the amendment says that the aim of this is not primarily to 20 benefit Chrysler stockholders and Chrysler's banks, but to 21 benefit the people who work at Chrysler and the people of 2. this country who are confronted with a terrible energy and 23 transportation crisis. 24 23 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis secondly, it says that Thus, under my amendment, while Chrysler Corporation would have first dibs and sort of veteran's preference in 1 740 90 05 D2 gshHEE the whole deal, if Chrysler isn't able or willing to do it 1 all, then you, as Secretary, and your consulting cabinet 411 3 cohorts would have an opportunity to bring somebody else in. 4 5 5 rhat, in essence, is the amendment. All else remains in HR-5805. You have shown a remarkable ability to put your excellent mind on complicated propositions in a hurry. 8 Chrysler's proposition just came to you, as I understand it, on October 1 111 i. 1J ilhat is your feeling about my proposed amendment? 11 Mr. Miller. 'Ar. Chairman, we would certainly welcome an I, philosophically, I certainly 12 opportunity to review that. 13 have no dispute with the idea of moving Chrysler or American 14 productive capacity in the direction you in,:icate. 1_) I would make a couple of points. 15 At the moment, Chrysler is more concentrated in small cars than the other major producers. 13 this point is generally known. I don't think that It was among the first and certainly the first American manufacturer to move into the 20 21 front—wheel drive kind of sub—compact. The Omni Horizon line is, of course, just the kind of 22 direction that we need to go for fuel economy. 23 cars have been very popular and have sold well. 24 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis And those One of the problems is, of course, tnat Chrysler has limited capacity to produce them. 741 90 05 33 gshHEE So that those are cars that they sell all they can make 1 2 while other cars that are of more traditional lines, they 3 naven't Peen able to retool yet and they need to retool over 4 to their new K—body to carry this out through their program. As time goes 0y, their commitment has to be and will be and we certainly will want it to oe in this operating plant moved toward fuel efficiency cars. 8 Thether or not Chrysler, with its financing needs that I nave outlined, would be able to take on a new major project, 13 tooling up for a mass transit or other things, we would have 11 to examine. 12 And I would hope in your amendment you would bear in 13 mind just the possioility that we might have to get them 14 healing oefore we put them into another area, or that if we 13 divert funds from here to some other manufacturer, Chrysler 15 might not have enough to get by. 17 18 if we may, and see if we have a way to accommodate your 1) thoughts because they certainly are consistent with where 23 the nation should go. 21 111 But I think that we would like to examine that with you, Mr. Reuss. Nell, I appreciate your sympathetic 22 opservations and just responding briefly to your statements, 23 on your second point, my amendment would contemplate, and I 24 refer here to the statement of it, that loan guarantees to 2.) Chrysler in carefully controlled amounts may be granted https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 742 190 05 04 gshHEE 1 oefore completion of this plan if the Secretary determines there is emergency need. 3 4 3 Thus, I would not want to come around and seize Chrysler if they were on the verge of showing the world the way. On your first point, that Chrysler is less awful than 3eneral Motors and Ford, in its past gas—guzzling addiction and sitting by while the nation's suocompact business went 9 to Volkswagen, Fiat, Renault, Datsun, Toyota, Honda, et al, that is true. 13 • We are talking about Chrysler. And if the nation is 11 Ford. 12 to put at hazard $1.5 billion of the taxpayers' hard—earned 13 dollars, I would hope that we wouldn't just ratify what 14 Chrysler management dreams for itself is another full—line 1D producer. 16 But anyway, I am delighted at your sympathetic reaction, Ii and thank you, Mr. Chairman, for giving me this opportunity. 18 Mr. Moorhead. In view of the fact that the Chair was 1,) recognized, I think it only appropriate to recognize the 20 ranking minority member of the full committee, Mr. Stanton. 21 110 But here we are not asked to aid General Motors or Mr. Stanton. Thank you very much, 'Ar. Chairman, and I 22 appreciate the courtesies of the suocommittee, and I will be 23 extremely snort. 24 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis My first question, Mr. Secretary, and more out of curiosity, it was by coincidence, I think, on Thursday 743 90 05 05 gshHEE III I morning early that I was reading in the New York Times an 2 article oy a Mr. Rattner, quoting you 3 oefore that no decision had been made on Chrysler. 4 as saying on the day And adjacent to it was an Associated Press story from the Nashington Post that on that afternoon, the day before, 5 the president of the United Auto Workers had appeared at the / ithite House and tnat a decision was made on Chrysler to go 3 forth. 9 III 10 roughly, that the decision 11 or Wednesday eyeing? 12 Mr. Miller. as made on Nednesday afternoon, Mr. Rattner's statement was correct. I 13 can't rememoer the days, but at the time that I had lunch N with the New York Times, some of the officials and 13 journalists of the New York Times, we had not presented a lp position paper to the President, and no Administration 11 decision ha.1 been taken because it is ultimately a 18 presidential decision to approve this proposal. 19 that had not been done, and so it was aosolutely correct 20 that no Jecision. 21 decision. 2: 23 III My question, number one, is is that the time s hedu13, And the President might have made another So at that point, it was uncertain what the Administration's position would be. 24 As to Mr. i=raser being in town and meeting, there has 2 been, as this decision was tenatively made oy the President, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 744 90 05 06 gshHEE 1 a round of consultations with banks, with Chrysler, with the consultants, with the labor unions, to inform them of the 3 direction of the decision and the timetable for any meeting 4 with Mr. Fraser would have Peen after the President had made a decision and to inform him that this was going to be, and to seek to Tiake it clear that this ,dlan would contemplate $1-1/2 billion in contributions from nonFederal sources that would have to include all of the constituents, including 9 10 employees. Mr. Stanton. As I say, my question is out of curiosity and having deep respect for you in your former position in 12 the Pusiness world, and knowing how difficult it is, really, 13 for you to appear before this committee or to reach the 14 conclusion that you have reached. 13 I was mainly curious and just from a casual reading of 15 the papers as to whether or not the decision was made and 1/ then subject to the approval of the United Auto 4orkers and 13 what they brought in in consultation. 19 changed from the time of the President's decision? 20 Mr. Miller. And was the plan From the time the President approved our After he 21 proposal, no changes were made in it of any 'Kind. 2z approved it, we had to go through the clearance of the 23 actual draft language with OMB, which is a regular procedure 24 and with interagency groups to clear the language of the 2d proposed legislation. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 745 190 05 07 And we consulted and informed various constituencies gshHEE that were directly involved and who would be called upon to 3 make contrioutions that this was a forthcoming decision, so that they would oe aware of it. And nobody changed the decision, varied it, or negotiated it. It was a decision made oy the Administration. 8 It was recommended oy the Treasury. It was unanimously supported by the economic advisors to the President and he approved it. I) Ii 12 111 Mr. Stanton. Thank you very much and I do appreciate the courtesy of the Chairman. Just one last quick question to follow up on our On page 6 of your testimony, you stat -? 13 Chairman's question. 14 that the company's strategy is to remain a 13 automobile, truck, and car producer. And the Chairman has either put forth a very meaningful If amendment or one that could be taken very lightly, and then 13 down the road, done away with. 1) 23 hope that it is possible to fashion an alternative Chrysler 21 rescue measure. 22 111 But the Chairman states in his statement that I would Would you look upon the Chairman's amendment as a major Nould it not require an 23 amendment to this legislation? 24 additional plan to oe submitted by Chrysler? 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Mr. Miller. Ne are already doing additional work to see 746 190 05 08 gshHEE I what the alternatives are. And one of the comments in my presentation was to suggest that at least one billion 3 dollars in capital expenditure might be deferred in this 4 time frame and to minimize the number of models and to have a slightly smaller line in order to minimize capital 6 commitment. And we are looking at those and other alternatives. 8 Our objective, the company's objective, when you talk full line in the future, is a full line of cars in terms of their 13 appointments and the degree with which you might consider 1i them a luxury car. 12 410 But they will all be smaller in They will all be They will all be much different cars than 13 fuel efficient. 14 you are used to now. 15 SiZ3. 3ut Mr. Stanton, we are looking now at whether or 16 changes could be made and part of our effort if this 1i legislation is enacted is a continuing process on our part 13 to optimize the company's plan in terms of national 19 objectives, in terms of how the company can work and 20 succeed. 21 Mr. Stanton. 22 Mr. Moorhead. Thank you, Mr. Chairman. Mr. Secretary, obviously, the number one 23 question we have to ask ourselves is, if we go through this 24 exercise, will it succeed? 23 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis And some of your testimony gives me a little concern. 747 190 05 09 gshHEE 1 2 3 4 At page 4, you say that our conclusion is that Chrysler can recover. Not that they will recover, but can. on page 10, you say that the plan has the potential of assuring the company's viability. And on page 11 , you say, even with the $3 billion, Chrysler's situation will remain very tight. Those are little disturbing words for those of us who 8 want to support this legislation, if we can be reasonably assured that it is going to work. 13 Secretary Miller. Mr. Chairman, it is our opinion that I 11 there is a reasonable probaoi lty of this plan working. 1) don't think that anyone can give a guarantee because none of 13 us can predict what will happen. 14 I think that we have to present to you the reality that 1_3 this is our best judgment in today's conditions, and what we 1j know today, that we wouldn't present it if we didn't believe 1/ it was adequate to accomplish the task. 13 3 ut we now that even today there is interruption of And if there were another 19 pumping and loading oil in Iran. 20 oil interruption and another major impact on the automobile 21 industry a year from now, two years from now, I think we 22 just don't know what that would mean. 23 And to guarantee that this would work, regardless of 24 future events I think would be imprudent because none of us 23 can tell that. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 748 190 05 10 gshHEE 111 1 fie have tried to put in variations from volume. fie have And we have 2 tried to put in a harder view of the potential. 3 tried to cost it out. 4 rose—colored glasses and put on just plain old glass, D "plainos," to look at the world as it really is and to 5 our best. And we have tried to take off the Q0 3ut we cannot give you a guarantee. 8 Mr. Moorhead. ',Ir. Secretary, on page 13, you talk about asset disposition, saying the company owns several large 13 II 411 assets which are marketable. I wonder if you could give us some idea of what they 12 are and particularly whether they include such things as 13 Huntsville, Alabama or Chrysler Financing? 14 Secretary Miller. Nell, there are some more obvious The company, ID assets that I think might come first to mind. 15 as a result of disposing of some of its European operations, le owns 15 percent of Peugeot's stock, which has no mission in 13 its strategy. 1) And it would seem to me that that stock being marketed I think whether or not 20 could raise quite a bit of money. 21 the company would feel that its cash needs in this $1-1/2 22 billion could be best served by selling off their tank 23 operation or one of their gear plants. 24 think, is a decision that we're going to have to face later. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Or Huntsville, I I think, Mr. Chairman, the problem will be one of 749 190 05 11 gshHEE 1 deciding whether the continuity of a particular operation does play a role in the general strategy or Nhether the 3 raising of money oy disposition, which means non—interest 4 bearing money -- you know, it is money that doesn't have to D be paid bacK and it is money that does not oear interest -isn't worth stretching pretty far and making sure that you 0 are sticking to your core business and not doing peripheral 8 things that aren't important. 9 They have a marine 10 dispositions and see some possioilities. 11 operation tnat is small. 12 dollars will help and will get management back to its 13 primary tas< and not divert it to other activities. But even a few tens of millions of 14 There is also the possibility of either selling the 13 finance company, which I think should be treated cautiously 16 because that is an important arm of marketing. If sold, it would have to be coupled with some long—term plan 19 for that financing company to handle Chrysler product, or it 19 might be possible to sell an interest in that company and 20 continue to have it but have a partner, and thus, lessen the 21 commitment without losing the primary mission. 22 23 110 One could look at the own company's list of potential 24 26 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis If it were So I think that there are many options the company can look at. Mr. Moorhead. Obviously, we want to look first at, let's say, the opportunity as to how this plan will work. 750 90 05 12 gshHEE 111 I And then I suppose we shoulJ say what it is the protection 2 of the taxpayer in case the automobile industry is much 3 worse than your predictions, and how is the taxpayer 4 protected if you have exercised your federal priority of waiver rights under Section 107(f). Secretary Miller. Mr. Chairman, this is one of the cases where we are asking because of the circumstances, approval for a plan that is reasonale in the sense that the government goes into the program and makes commitment for 10 a loan guarantee only if the other constituents have come 11 forward. 12 111 3 Ne cannot yet tell you just what role each of the And because we cannot 13 constituents can or will play. 14 present to you X—amount from the banks, X—amount from the 15 suppliers, X—amount from the dealers, X—amount from the 16 employees, we need the flexibility to negotiate the best arrangement we can. 18 19 that in case it is only possible to put this program 20 together by putting some of the federal loan guarantees on a 21 carry pass—through oasis, it might be better to do that than 22 to have the whole thing abort. 23 111 And the reason to give the authority for a waiver is so Now you notice that while we can waive priority, we 24 cannot become subordinated. 23 other creditors. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Ne could never be less than 751 190 05 13 gshHEE 111 1 3o the only question is, if the last $200 million you 2 need, would it be better to carry pass—through, and that 3 would be the view of the total picture. 4 And with your blessing, we would li'<e that flexibility. 5 Mr. 'Aoor`lead. 5 Thank you. My time has expired. Mr. :AcKinney? Mr. McKinney. Mr. Secretary, welcome. Ne are adhering 3 very strongly to the five—minute rule, so I will sort of 9 jump around in my line of questioning. 10 Chrysler had four very profitable divisions, or at least II three verY profitable -- Chrysler Finance, New Process, and 12 Huntsville, Alabama. 13 say, is an ongoing federal commitment. An also the tank operation, as you 14 Has any thought been given, or wouldn't it be right to Ii have the Federal Government put a priority collateral lock 15 on those four divisions so that should something happen, the 11 Federal Government would have the priority to sell it? 18 ;)f course there is a difficulty. My feeling is, and I 1) believe Salomon Brothers agrees with this, that Chrysler 20 Finance is so tied to Chrysler's operations in floor 21 planning and dealers that its probable worth, functioning as 22 it is now, of $600 million, might drop to as low as S'300 23 million. 24 But would that be a consideration? 25 Secretary Miller. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis I think that we ought to look at all 752 90 05 I 4 gshHEE 1 of those assets as possible collateral for federal guaranteed loans. 3 4 ;Alhat we have suggested here is that we seek collateral, again, with the possibility of waiving it or foregoing it on all or part, depending upon the circumstances. 3 'Nhether those properties would completely collateralize the loans remains to be seen. 9 Ne might also want to look at some of the plants and other activities because, after all, physical facilities do 13 have resale value, even if there is a failure of the 11 company. 12 ID Mr. 'AcKi nney. One of the things that bothered me, in 13 looking through the Department of Transportation-'s figures 14 and meeting with them in Boston — is that one of the Ii reasons that Chrysler is having a tremendous problem, is 15 because its variable unit margin is very susceptible to 11 outside suppliers rather than being vertically integrated 13 with such as General Motors and Ford. 1) And I would hope that the Secretary, or whoever finally 23 administers this plan, would think very long and hard about 21 selling anything that would require Chrysler to go further 22 out into the supplier, sub—supplier market to affect that 23 very limited profit. 24 I would agree. I dory't see why Chrysler should stay in 2i the bank business. I don't see why Chrysler should stay in https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 753 190 05 15 gshHE 111 But I would defy anyone to try and 1 the marine ousiness. 2 sell it at this particular point in time. 3 Secretary Miller. 4 Mr. McKinney. Yes. It may not raise much money. I'm afraid not. One of the things that interests me is a lot of talk has been made about cRISA's 5 prooable long—term, cumulative deficit of about $1.1 zillion in pension guarantees should Chrysler go under. 8 Has any actuarial study been made as to -- ERISA, for instance, is 13 II 411 already, as I understand it, $130 million in the hole. Has any actuarial study been made as to what the 12 increased cost per employee would be to other corporations 13 in this country should this $1 14 they're already in the hole, have to be met? 13 la billion plus the $130 million Secretary Miller. Mr. McKinney, we nave not made that actuarial study in the Chrysler case. r:or everyone's benefit, I should mention that if Chrysler became insolvent 18 and the pension plan were terminated, that contingent 1) liability of $1.1 billion would fall on the Pension 20 3uarantee Corporation. 21 to go into cost for other employers in premiums. 22 111 And the recovery of that would have So that would be another impact on the economy which I 23 did not mention in my presentation, which is another factor. 24 Mr. McKinney. Well, this is one of the problems. It 2i https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis really bothers me. And, for instance, in talking to Doug 754 190 05 16 gshHEE 1 c7raser, this is one of the problems, that you talk to business men on one side, and he says, the per capita cost • 3 of a new employee is too much. So, therefore, we have overtime and we have all of these other methods of avoiding putting more people back to work, particularly in a recessionary period. And I have made rough estimates that I believe the 3 employee cost -- the cost per employee is now $2 and something cents, and that would probably jump as high as 411 10 double, say to $4.65 to $5.00, which is just one more 11 impetus not to have employers go out and hire new employees. 12 And that would be, I think, a tremendous concern. 13 In all of this talk of creditors, and I guess we've 14 talked to all of them, there has been a dull silence and I 13 accuse the banks of that. 15 and now there has been a dull silence from one of my 1/ constituents; namely, the insurance companies. 13 But we have solved the problem I believe Aetna, per se, which is a kinetic corporation, 19 is into Chrysler for more than anyone else at this point 20 practically, as an individual. 21 22 23 • 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Has your department talked to the insurance companies? 755 190 06 01 mgcHEE 111 Secretary Miller. i No, I do not oelieve we had talked The 2 diractly, out I suspect that Salomon Brothers has. 3 financial advisors, Mr. McKinney, have tarced to them. 4 have decide Ne not to sit down with that group until we had a program because we did not want to precommit you to some program until we new what /our wishes were. But we will be sitting down with all of those groups, out principally 3 relying on the company and its financial advisors to line them up because I think it is their tas'< to do so. 13 'Ar. McKinney. question. 111 My time has expired. Just one last short Has any contemplation oeen made of asking the 12 large lenders to think in terms of, say, a one year 13 moratorium on interest and principal? 14 3ecretery Miller. Yes. I think we have to look at all 13 of the concessions possible -- possible lower interest rates 1.5 on oart of this, possible moratoriums. 1i maturities will have to be nandled so that we do keep these 13 credits available underneath the new program. 1,7) will not hold together. 20 21 Mr. 'AcKinney. Certainly the Otherwise, it Thank you very much for a very thorough presentation. 22 Mr. :400rhead. 23 'Ar. Blanchard. Mr. Blanchard? Thank you, Mr. Chairman, and thank you, 21 Mr. Secretary, for a very thorough report and testimony. 25 am especially pleased with all the work and analysis you https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis I 756 190 06 02 have put in on this matter, and we also here are aware of mgcHEE the time considerations you have worked under which make 3 111 4 this presentation all the more impressive. Secretary Miller. 6e will have to charge Chrysler a fee to make up for our expenses. (Laughter.) Mr. Blanchard. 3 I am especially pleased also that you underscored Chrysler's role in making small fuel efficienct cars, especially on page three and four of your testimony. 111 13 You indicate the potential balance of trade losses if 11 Chrysler were to go out of business. 12 because there really isn't a U.S. competitor to the 13 Omni/Horizon four—cylinder front wheel drive cars. 14 correct? 13 Secretary Miller. I take it that is Is that I think several reasons, One, I donJt think other U.S. manufacturers 15 :Ar. Blanchard. 17 could pick it up immediately, an d I think the natural 13 inclination would oe for the market to be supplied from 19 abroad, and then once that oegins to happen and dealers 23 oegin to take up foreign lines, I think there would be a 21 permanent loss of business overseas and a permanently loss 22 of jobs to overseas suppliers. 23 4r. Blanchard. So you would agree with the Department 24 of Fransportation people who have said that if Chrysler were 23 to shut down, at least for a couple of years the United https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 757 190 06 03 mgcHEE • 1 States would lose a major producer of small, fuel efficient 2 cars? 3 Secretary Miller. I think for a short time we would In the long term, we woulJ make them up, 4 lose quite a bit. 3 but there would be some net loss permanently, I would think. 5 r. Blanchard. Along those lines, Chairman Reuss, I am 7 pleased with your suggestions, and I hope, assuming there is a reasonable flexibility as the Secretary has outlined, that I can offer such an amendment that you have suggested, as long 13 as there is flexibility for the Secretary and for the 11 government to meet all the conditions that are necessary to 12 make this plan work. 13 • 14 13 important matter. ',Ir. Secretary, I would like to ask you a question about As you know, everyone is 15 problems that recession can cause. 1, trying to predict exactly what direction the economy will 13 tak3. 1') consultants, who were very helpful to me, and they indicate 20 that the $1.5 billion figure or the $3 billion figure was 21 reasonably recession—proof, if you're talking about a 22 moderate recession. 23 111 But I tnank you for your reconsideration of this I had a chance to talk with the Booz—Allen I take it you probably would agree with that, but you 24 don't state it flat out in your testimony. 25 about that? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 0 How do you feel 758 190 06 04 mgcHEE 1 Secretary Miller. 4e covered that, Mr. Blanchard, by indicating a reduction in the market, the total automotive 111 3 mar.(et, for 1980 and '81, so we accounted for recessionary 1 effects by reducing the forecast from what were in the Chrysler plan, and we would agree therefore that the plan p presented accomodates to a moderate recession in this time frame. 3 It does not take account of a possible 'nother recession in '83 or '84, which I think would be at this moment unli'Kely and difficult to predict. 10 Mr. Blanchard. Thank you. Also, in your testimony, you 11 outlined early on that the auto industry in the United 12 States was going to need about $80 billion in capital in the 13 near future. 14 expenditures required to downsize automobiles, not only of 13 course to meet the law that we have enacted, but also it 15 appears to ce the substantially changing market demand. 1/ that a correct assumption of mine that most of that $80 13 billion is for those costs of downsizing automobiles? 1) From what I understand, that is largely the Secretary Miller. Is Most of it would be in connection You could, I suppose, argue that a 23 with the downsizing. 21 good deal of it would be needed to make some of the changes 22 in fuel economy, even if you continued present lines, but 23 the fuel economy requirements plus the market snift requires 24 both the downsizing and the retooling for tne new models, 23 and that's where the $80 billion comes from. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Yes, sir. 759 190 06 05 mgcHEE 111 1 Mr. Blanchard. Regarding commitments, I have a letter 2 from the Governor of Michigan, Governor Milliken, that I 3 would like, Mr. Chairman, to be made part of the record, and 4. also I will send copies to my colleagues. Mr. Moorhead. 5 Nithout objection, it will be made a part of the record. (COMMITTEE INSERT.) 3 13 12 13 • 14 15 13 13 19 20 21 22 23 • 24 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 760 I 90 06 06 mgcHEE 111 1 He Michigan's role which should be significant with you. 3 outlines a proposal which apparently ends up with a total 4 package of approximately $150 million from the state 5 available to Chrysler. .5 carefully and decide whether that would be a significant -- I whether that would qualify on the $1.5 Pillion contribution? Secretary Miller. Have you had a chance to review that Mr. Blanchard, I had heard that the ) Governor was talking in terms of some aid package that might 10 be $150-200 million. 11 colleagues. 12 so you will probably be furnishing them to us with that 13 letter, and we will certainly take a look. 14 deny the great State of Michigan the opportunity for its 13 fair share of this financing. I was just checking with my own I believe we have not received the details yet, 15 (Laughter.) li Mr. Blanchard. I'm sure you don't. Ne don't want to He isn't that 13 specific, so I assume that this general offer of $150-200 1') million -- 20 Secretary Miller. Ne have that problem with the Most of them are very general, and we are 21 constituencies. 22 going to have to get some of them very specific very soon. 23 111 He has been discussing the State of 2 3 111 Mr. Blanchard. Mr. Blanchard. Nell, I hope you are able to firm up 24 exactly what the details are, and if this will, in fact, 25 qualify, but I appreciate having that in the record. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1 761 90 06 07 mgcHEE III Finally, regarding the criticism often heard that I 2 Chrysler ought to restrict its operation, to reduce its 3 operations, as I 'Inderstand it, up until recently they have 4 been operating with five basic body frames, and they 3 basically call them platforms. 5 they're going to move to three, and they will essentially be i small, smaller, and smallest. Basically, in their future, Do you get that same impression in terms of their ) management plan? Secretary Miller. 13 III Definitely by 1985, this H company is going to be highly directed toward the small 1.. automobiles. 13 operations you should bear in mind that I did not touch on 14 enough in my presentation, and that is, they have had a 13 position in vans and light trucks which has been impacted by 15 the gasoline and economy requirements, and they are either 1/ going to have to suffer some loss there, or they have got 18 some possibilities of retooling and downsizing those kinds lY of vehicles also. 20 III Yes. Now there are other features of Chrysler's That has to be looked at in more detail, but 21 fundamentally their passenger automooile business is going 22 in the direction of up to 80 percent in the small lines by 23 1985. 24 needs to be held together with their continuation of their 25 lines, because otherwise you lose the market. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis And in the meantime, I think their whole business fou lose the 762 190 06 08 mgcHEE You lose the dealerships that are the ultimate I service. 2 need to move your product to the market. 3 Mr. Blanchard. My time has expired. I want to thanK 4 you again, Mr. Secretary, for your very strong testimony. 5 ThanK you. Mr. Moorhead. Mr. Kelly. 3 Mr. Kelly? Thank you, Ar. Chairman. Ar. Secretary, it doesn't seem to be very ooscure that what we are doing here is starting a new welfare program on 111 ID this basis, that the cost to the country will be so heavy in II welfare if Chrysler goes under that we can't afford to let 12 that happen. 13 program that nopefully won't cost us quite as much. 14 So we're going to institute another welfare 3ut I think it is an important thing to ask, °Nell, who And as I understand the 13 is going to get the welfare?" 16 situation, the tenth largest corporation in the United 1/ States of America will benefit from the welfare, and the 13 highest paid industrial wor4ers in the United States will 1) oenefit from the welfare program, and that these same 23 workers that you testified this morning, as I understood it, 21 had made a reduction in Chrysler's cash flow, didn't Jo tha t 2) at all. 23 that they did is they increased the casn flow problems They got a pay raise. 24 oy 3700 million, not reduced it. 23 you can't turn a pay raise into a sacrifice when they are https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Now t 763 90 06 09 mgcHEE I already oeen paid more than the other production workers in 2 the United States. rhen we get down to, well, what will the cost be, and 3 111 that is what I want to ask you some questions about. 4 As I understand the situation here, the risk is so heavy that all 5 of the best minds, industrial and financial, in America have said, "We will not take the risks on a voluntary basis with I our money." ) asking those of us on this Committee and th is Congress and 13 the people of the United States to take. 11 411 And that is the kind of risk that you are 3 :'tow I got this a minute ago, and today or tomorrow, I'm 1) going to have a yes—or—no decision without any opportunity 13 even to know what is in here. 14 Is it not just as I have said, that all of the people who 13 are supposed to kno4 what they are talking aoout with regard 13 to the financing industry have said no to Chrysler, ana that 17 is why Chrysler's here? 13 Secretary Miller. Do I misunderstand the risk? I do not think, Mr. Kelly, there is 1 the prospect in the private sector to assemble a $3 Pillion 23 financing package. 21 the elements we are talking about, relying solely on private 2. institutions. 23 this financing plan of $3 billion includes contributions and 21 additional contributions from employees. 23 contributions from suppliers, from dealers. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis That includes contributions from all of That is correct. And you will notice that It includes These are the 764 90 06 10 people that are normally financed businesses -Ar. Kelly. 111 'Ar. Secretary, I understand that. But all 3 of those things are a possibility, and you nave already 4 testified to them. 3 your judgment, that the money is not available in the D private sector on a voluntary basis? But what I want to know, is it true, in Secretary Miller. 3 In my opinion, adequate financing to see .'i-lrysler through this period is not available in the private sector. 13 :w1r. (elly. Fine. Now much of the rationale that we have received on this Committee for why we should take this 1) risk is because of women and children. 13 talK to you a little bit about that. 14 Now, I would like to I understand that you have a background in finance and 13 in industry, and you are the Secretary of the Treasury. 15 do you really think that Chrysler constitutes the finest Now investment to improve the economy of the United States And if you Jo, then why is it the private sector 13 today? 1) the guys out there that really are hardball players, that 23 knows what makes it go around -- that they say no, and you 21 say yes? 22 Secretary Miller. Mr. Kelly, my view of government is find the best 23 not to take the taxpayers' money an 24 investments in America, but to look at the total purpose of 2J government. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis In this case, the government has a purpose in 765 190 06 11 mgcHEE 111 1 terms of joos, in terms of communities, in terms of a whole 2 network of an industry, in terms of permanent loss of jobs 3 overseas, in terms of a major position in a major industry in the world, and it has a problem that regardless of what 5 you and I Jo, the taxpayers will lose over $2.5 billion in the next two years if Chrysler goes bankrupt. 3o in terms of whether we are seeking the best 3 investment, the government isn't to collect taxes to make 9 investments, but the government should oe rational. 13 have looked at two options -- to help Chrysler and not to H help Chrysler -- and not to help Chrysler costs the taxpayer 12 more. 13 411 And we Mr. Kelly. Do you mean today or when we collapse the 14 whole economy by making investments in failing industries, 13 instead of investing in the most efficient sector of the 15 economy. The decision before us is the 1, Secretary Miller. 13 decision of Chrysler. 19 exception. 20 sector, and I would not suggest it to this Congress. 21 think most American businesses are well-managed, and the 2; great American industrial capability has been generated by 23 successful enterprise, successfully managed and profitable. 24 rhis is an exception, which lists the reasons I have 25 given -- why it is https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis It stands on its own merits as an I do not favor general aid to the private I better for the federal government to be 766 190 06 12 1 mgcHEE • a part of a refinancing plan rather than not to be. 'At-. Secretary, my time has expired. 2 'Ar. Kelly. 3 Mr. :400rhead. 4 Mr. Lundine. Ar. Lundine. Thank you, Mr. Chairman. .4r. Secretary, you made a comment just awhile ago that everybody has been very general, and it is time for people to oe specific. 3 And we often analogize these kind of pro,00sals to a package. It strikes me that we see some strings and we see some wrappers and maybe even some I don't see any of the 13 cartons, but I don't see a package. II contents of a package here. 12 are oeing asked to approve is sometning, yes, that is 13 flexible. 14 it. 15 go into the $1.5 billion in private sector concessions or And it seems to me that what we It is so flexible I can't even get my arms around I can't even understand precisely what it is that will investment. 17 Jo you not think that it is a fair statement that 13 the debt. 1 we are oeing asked to approve something that is very, very 23 general? 21 110 And on tne other side of it, I'm not quite sure even of Secretary Miller. Mr. Lundine, there is one overriding 22 specific here that will become statutory if you approve this 23 proposal, and that is, assuming the color of money is green, 24 there will oe green mone of $1.5 billion as a precondition, 25 out whether it comes from a bank or a dealer or a supplier https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 767 190 06 13 mgcHEE 1 or a shareholder is not identified to you. that there 111 3 But the fact as to be $1.5 billion oefore the government makes its commitment is the controlling condition. And I do agree with you that it would be preferaole if 3 Congress were to oe in session over the next two or three months for us to go back now and say, "This is the amount of need." 3 Ne 'lave just discovered the $3 billion after considerable work and effort, and we would love to go back and line up whether so much of it is coming from banks and 13 come back to you and say, "Fhis is now the plan, and here 11 are all of the people." 12 13 that before the Congress adjourns, and I'm afraid oefore the 14 Congress could address this in the next session, the problem 1.) would have oecome moot oecause Chrysler would have gone past lj the point where aid would be successful. If And so we are faced with that problem. 4e have tried to 13 solve it by saying we don't want to give you a pig in a 19 poke. 23 half bucks from non—federal sources. 21 111 I am afraid that we do not have the time to accomplish You have got to know that there is a billion and a Ar. Lundine. I restrain myself from using that There are two conditions that I would 22 expression myself. 23 insist upon seeing here. 24 side, it seems to me terribly important that there is an 23 employee stock ownership program, first because it will make https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis One, on the government guaranteed 768 90 06 14 mgcHEE 1 the repayment of that loan more likely by having an 2 incentive to improve productivity, and second of all, 3 because this won't oe just the other stockholders. 1 then be the employees who would benefit from it, and I am 3 ,iisappointeJ in not seeing that. 5 It would Secondly, it seems to me terrioly important that we put some kind of a requirment on that $1.5 billion private 3 sector money, that some of that comes in equity and not all of it in terms of debts or sales or other kinds of sales of 13 assets or other kinds of concessions. ;Arould you comment? 12 • Secretary Miller. Well, on the first one, I certainly 13 have no philosophical objection to a stock ownership plan. 14 I would think it is better to be worked out between the 13 corporation and its employees. 15 ownership plan in which part of the billion and a half 17 dollars would be a concession from employees for which they 13 could get stock, that would give them a real incentive to 19 make the company successful, to get back the give—up in pay 20 that they otherwise would have received. 21 fine. 2, If you mean a stock And that would be If you mean using part of the federal funds to subsidize 23 or give a grant to employees for no concessions, I don't 21 think that is good public policy. 23 question of whether people have an incentive to earn back. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis I think this is a 769 190 06 15 I mgcHEE After all, this program would protect the joos and the incomes of lots of people, and I think if they want to make 3 concessions to make this successful, that rewards to them 4 through stock would be excellent. It is just that I wouldn't want to see our suosidies used for that purpose. And I favor that if it can be accomplished. Fhat would, of course, add equity, if tne employees 3 would take over the next two years $250 million less in pay, which is quite a small percent, and take it in stock. That 10 would add quite a bit of equity and generate that much more H cash from our plan, and that would be very desirable. 12 rhe question of putting in a specific amount of equity 13 is difficult, although part of the thinking is that there is 14 a so—called family stock plan where stock subscriptions 15 might come from dealers and those who have a stake, and I Ii think the company has been thinking of at least $100 million 1/ from that source, but I don't know that we can guarantee 13 that. 1 dealers and other members of the family, so to speak, the 23 Chrysler family, could subscribe to some stock. 21 They were thinking along the lines of seeing whether I would love to have that all before you and say that 22 the company has got a program that will raise $150 million 23 that way, because you are aosolutel/ right. 24 is raised by equity, the more that is raised by disposal of 23 unneeded assets, the more the company has cash without the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The more that I 770 90 06 16 mgcHEE 111 1 debt burden and the amortization burden and the interest 2 burden. 3 term, the more infusion of equity capital we can obtain. And to the degree that this company succeeds long On a stock ownership plan, one thing to bear in mind 5 that if we were to dilute down the present equity too much, 5 we might foreclose the input of an outsider with fresh equity who would feel that the dilution of stock would make 3 it unattractive to make an investment. So ae have to weigh those kinds of problems. 1J Ii • I would love to see that, too, Mr. Lundine. Mr. Secretary. Thank you. 12 ,Ar. Moorhead. 13 Mr. Green. Mr. Green? Mr. Secretary, in the course of your oral 14 testimony although not in your written testimony, there is 1J soma suggestion that the $200 million from the UAi'd is 15 already in nand toward the $3 billion. 1i accurate, is it, because on page eignt you indicate that 13 you have already considered that $200 in determining that 1) there is only $3 needed, so that you would really be 20 counting it twice, wouldn't you? 21 3ecretary Miller. That is not really I must point out something we should 22 have made clear in the testimony in making that adjustment. 23 We were able to offset it with a $250 million cushion that 21. was just built in unidentified, so it netted out, and 23 actually there is no double counting. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 771 190 06 17 mgcHEE 1 Mr. Green. The point I'm trying to make is that we 2 can't look toward that $200 million UAW concession as 3 helping us reach the $3 billion because you have arrived at 4 the $3 billion figure, already assuming that $200 million in hand. Secretary Miller. No. That I am saying is, while we said that in our testimony, we omitted the line that said 3 that the figure was then further adjusted, out there is a $200 million cushion of additional cash requirement that 13 more than offsets the UAW $200 million, so that the net 11 effect in the figures we have shown you is not to double 12 count. 13 411 14 13 Mr. Green. I understand that. But that $200 million is no longer available towards the $3 billion. Secretary Miller. In arriving at the $3 billion, while 15 we have not made it clear, we have not taken into account ii the $200 million from the UAN. 13 Mr. Green. So that the statement at the bottom of page 19 eight is not correct? 20 Secretary Miller. 21 22 23 24 41/ 2_) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis It is incomplete because it should have said there is an offsetting item. 772 190 07 01 kapHEE 1 2 3 111 Mr. Green, ihat market penetration did you assume in your 100 percent base volume projections? Secretary Miller. In the 100 base volume case and 4 I'll ask one of my associates to give me quickly the market 5 penetration -- 6 (Pause.) 7 Here it is, on Exhibit C, page 24, you see the car U.S. industry volume, the October 17th plan, the first and 9 second base case, the penetration shows here -- first, you 10 see right under "car" it shows 10.5, 11.1, 11.6, 11.9. 11 then -- 12 Mr. Green. And I do see page 24, and I guess the point I'm 13 trying to get at is that in each instance you are assuming 14 that Chrysler, which I understand currently has about 10 15 percent share of market, that Chrysler is going to be able 16 to increase that share of market somewhat. 17 rosy a market as Chrysler has projected because of the 16 impending recession, but you are at least, in each of these 19 instances on page 24, apparently, assuming a penetration at 20 the end greater than at the present time. 21 It may not be as And I was wondering, shouldn't we have a projection 22 which assumes that Chrysler cannot increase its share of 23 market? 24 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Secretary Miller. Look at the bottom of the page where it shows the share of U.S. market. If volume adjustment is 773 190 07 02 kapHEE 1 due only to lower Chrysler market penetration, so that there 2 was an analysis both from lower share or lower units. 3 111 Mr. Green. 4 Chrysler will have achieved what is, I gather, in the 5 industry, a significant improvement in volume over the 10 6 percent they now have. 7 Secretary Miller. Mr. Green. 9 I'm saying, shouldn't we have a projection which shows what the needs are if that doesn't occur? I'm sure Chrysler is optimistic, but there is every reason to 11 believe other companies are going to be competing vigorously 12 also. 14 15 Secretary Miller. We did that by assuming they did not meet their volume objectives. Mr. Green. We went to 95 and 90. I understand that, but we have had testimony 16 here that it would be an extraordinary result for them to go 17 from 10 to 12 percent penetration. lb 19 20 21 22 1 That is correct. 10 13 11 But you are contemplating that by 1983 You are apparently here assuming a penetration of 10.7 percent. Secretary Miller. But in our adjusted base two case, we assumed that they reached 10.9. Mr. Green. Again, don't you think it would be prudent 23 to look at what happens if they only get to 10 percent, 24 where they are now? 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Secretary Miller. Well, we did one that gets to 10.3. 774 /1 YO 07 03 kapHEE 1 We did not consider that the most prooable, but we show you 2 the figures. 3 111 Mr. Green. I would like to see a projection that 4 assumes they can't do any better than they are doing now, 5 that the markets stay the same. And I would really like to see what happens if things get a little worse, because I 7 think those are things we ought to be addressing if we are 6 going to operate in a prudent way, committing the taxpayers' Y credit. 10 11 that nowhere in here do I see any debt service repayment 12 schedule, and it would seem to me that if this committee is 13 going to act in a prudent way we certainly ought to have 14 that kind of projection, so that we can see that this 15 enormous load of debt which we are adding on the company. is, 16 in fact, something they will be able to pay on a reasonable 17 economic projection. 18 Secretary Miller. In the Chrysler plan that I was lY furnished -- to the committee, there is a debt repayment 20 schedule for the existing debt. 21 testimony because that was the Chrysler plan. 22 • The other thing that concerns me about this is the fact Mr. Green. That is not part of my You're now assuming that -- your plan 23 assumes that they have been optimistic in their assumptions, 24 and I would really like to see how it works out under your 25 plan. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 775 90 07 04 kapHEE 111 Secretary Miller. 1 We have assumed, for the purposes of 2 our plan, that they continue to meet the contracted 3 maturities of existing debt, and for new debt, of course, we 4 don't know the terms yet. Mr. Green. I would like to see some projections as to how that new debt would be handled, particularly if you're 7 selling off profit centers to get to the $3 billion. I think this committee is entitled to have some projection as 9 • to how that is going to happen. 10 My time has expired. II Mr. Moorhead. 12 Mr. 13 Mr. Secretary, I think your statement is an excellent Vento. Mr. Vento. Thank you, Mr. Chairman. 14 statement, and I really want to commend you and your staff. 15 It obviously anticipates many questions that each of us had, and that were brought out during the hearing, and I think 17 you really make a definitive effort to address some of 16 those, especially with regard to the projections and insofar 19 as the marketing forces. 20 the regulatory bugaboo type of question that had kept 21 cropping up. 22 more so than any other cost and no more so than as it 23 affects other industries. 24 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis And I think that you do address I think it is important, obviously, but no Let me just take a little different tack, I think that needs to be addressed. One of the concerns is there has I 776 O 07 05 kapHEE III 1 really been a new bankruptcy law which has been passed and I 2 understand is effective October 1st. 3 it, ana I don't expect that you are, Mr. Secretary, but I 4 know that you are aware of it, probably more so than 5 myself. 0 III But is this corporation, the size of this corporation 7 and the nature of the proble:n and the way that it came about o -- really speaks to writing special legislation that 9 provides for a means to execute its debt and meet its In other words, why doenslt it fit into 10 responsibilities. 11 the bankruptcy question, which has so often been the base 12 line here? 13 III I'm not an expert on 14 15 Nhy should we do anything unusual? Why not let the current bankruptcy law solve this particular problem? Secretary Miller. Mr. Vento, it is, I believe, our 10 opinion that if we do not have a financing package, that in 17 fact Chrysler would end up in a reorganization under the 18 bankruptcy laws, probably Chapter 11. 19 felt that that is not a proper or an appropriate way to go, 20 and would not solve the problem, is because Chrysler really 21 depends upon one business and that is the automotive and 22 light truck and van business. 23 franchise, and if they go into bankruptcy, it is probably 24 likely that that consumer franchise would be eroded and that 25 the possibility of their returning to being a viable https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The reason we have And that is a consumer 777 90 07 06 kapHEE 1 2 3 4 producer in this industry would be highly unlikely. Mr. Vento. Mr. Secretary, are you saying our bankrupcy laws are imperfect as the affect large corporations? Secretary Miller. Nell, I would say that if you are 5 talking the reorganization of a purely industrial company o that sells to limited industrial customers, there is more 7 likelihood of understanding the roblem and continuing to buy their product. But whether Mr. and Mrs. America will continue to buy Chrysler products when they understand the 10 company is in bankruptcy, and they don't know about future 11 service and parts and whatnot, I think that is a question. 12 Mr. Vento. In other words, if I could try to interpret 13 what You're saying, you're saying that as it applies to a 14 large corporation that it actually assesses a greater 15 penalty on a product, the consumer—based product such as lo automobiles and trucks than it might on other types of 17 businesses -- especially the nature of this particular 15 business? 19 Secretary Miller. I would not over—generalize because 20 there are some large corporations that sell products that 21 could be handled anyway, whether they distribute or sell 22 branded products or other distributors. 23 But here, you are talking about a company whose product 24 goes through a large number of dealers that are identified 25 with their name. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Their name is on the door, all over 778 I0 07 07 kapHEE 411 It is a high value item for the consumer. America. 2 consumer doesn't buy a bottle of aspirin and say, 3 the next bottle isn't there, what difference does it make?" 4 He buys something he expects to own for a long time, and to 5 have service. So I do think that is a unique feature. 7 that reorganizing a toiletries company selling soap and going to wash with it today. 10 They're If they don't get that brand next week, no harm. H That's not the way they buy automobiles. 12 Mr. Vento. Well, I just wanted you to address that And it 13 because I think it is a fundamental difference. 14 makes a unique -- I notice you did refer to it on page four, 15 but I thought some elaboration was necessary. 16 111 if I would think whatnot -- I mean, people buy soap off the shelf. 411 The 1 So much of this does hinge upon the projections and I 17 think that this does not imagine sort of a catastrophic id event. 1 auto sales right now. 20 occurring because, apparently, of just instability in terms 21 of the supply of energy. 22 at the same time not address the concern about the stability 23 of automotive fuel supply? 24 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis I mean, we can witness the diminution in terms of Secretary Miller. I mean, it is a phenonena that is Can we really rescue Chrysler and We need to address the energy problem with a complete application. There are bills pending in this 779 90 07 08 kapHEE 1 Congress which will be the most important legislation passed 2 in many a Congress in dealing with the fundamental problem 3 of reducing our dependence upon oil as a source of energy 4 and reducing our dependence upon imported oil. 5 critical to the future welfare of our nation. It is also critical that we move rapidly to adjust the 0 7 size ana fuel economy of our automobile and that we use all 8 the productive capacity we have to make that adjustment as 9 rapidly as we can. one major source of making that transition, that will not be 11 replaced easily. So I think your point is well taken. We need to address 13 the whole thing. 14 are being looked at by Congress, and I think with a very 15 constructive attitude. 10 Mr. Vento. This is part of it, and other parts of it Well, my time has expired, but I would like 17 you to comment on the leverage, the one—to—one leverage in 18 the $1.5 billion asked and the $1.5 billion of outside 19 credit. 20 combination? 21 private money? 22 • If we lose one major producer, that is, 10 12 • Those are Why wasn't it a one—to—two or different Wouldn't it be better to leverage even more Secretary Miller. It seemed to us, from the work that 23 had been done over the last three months, that it was 24 unlikely that sources could be identified for unguaranteed 25 loans greater than this $1-1/2 billion. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The company 780 190 07 09 kapHEE 1 stretched very nard to come up, previously, with such 2 sources, and had hoped to accomplish about $1,350 billion 3 with less federal aid. 4 With more federal aid we think they could get up to the 5 $1-1/2 billion, but our judgment is that is about as far as O they can go. 7 here is to guarantee up to $1-1/2 billion, so if we can get 8 more from other sources, we would be able to take less from We can go further. You notice our proposal the goverment sources. 10 Let me just clarify that, if I could have You're saying it has to be $3 11 the indulgence of the chair. 12 billion, but if we can do it for less federal government 13 money it is your intention to do so? 14 15 411 Mr. Vento. Secretary Miller. Obviously, if we could get $2 billion from other sources we would not need as much guarantee. Thank you. 16 Mr. Vento. 17 Mr. Moorhead. 18 Mr. Shumway. Mr. Shumway. Mr. Secretary, through the entire course 19 of these hearings I have gained the impression that none of 20 the witnesses who have testified before us have really given 21 very much attention to the value -- or attributing some 22 price tag as value, to what we may accomplish in terms of 23 easing federal regulatory burdens and providing tax 24 incentives, or something of that sort. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis For example, in your chart this morning, where you 781 90 07 10 kapHEE 1 depicted the forms of non-federal financing, there was no 2 mention of any value attributable to producing these 3 regulatory burdens. Now, my question would be: 4 isn't it possible to put a And wouldn't that value, plus 5 price tag on those burdens? 0 some increase, perhaps, in employee sacrifice, together with 7 some tax incentives -- advance tax credits or somthing of o that sort -- be instrumental as part of the financing package which we have referred to repeatedly here this 10 morning? Secretary Miller. II • 12 we did point out that this has been a subject of 13 aiscussion. 14 quantification of what could be contributed in this period 15 of time to any reduction of the regulatory matters that are 16 primary. 17 agencies over which we have no control, and the 10 administration has no control. 19 locked in statute where there seems to be little desire to 20 change. 21 We have not been, ourselves, satisfied with any Those, of course, are subject in many cases to And in many cases they are So I think we have felt that it would be unrealistic to 22 expect to generate quantifiable funds from the regulatory 23 side that we could bring to you in this time frame. 24 111 On the regulatory side, Mr. Shumway, 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis As far as tax credits are concerned, they are most useful, obviously, to corporations that are profitable. 782 90 07 11 kapHEE 111 1 Chrysler has a particularly heavy burden because all of the 2 benefits of the appreciation deductibility of interest, all 3 of those things are lost to it when it is not making any 4 money. 5 while for profitable companies every dollar of interest cost 0 it 54 cents. 7 with when you have an unprofitable company. Every dollar of interest it pays cost it a dollar, And it is that kind of problem we are stuck That is why it is so important, as others have pointed out, to get as much equity infusion as possible and 10 not to just add unused tax possibilities. Now we have not felt that it was appropriate for the taxpayers of the nation 111 111 12 to give an unconaitional tax credit to Chrysler or any other 13 corporation, because then there is no control over the 14 company, there's no assurance that it will ever become 15 profitable, there's no assurance of whether it gets all of 16 its other financing together, and there is no assurance that 17 the benefit will ever roll back to the federal government. 18 So I think it is much sounder to put the whole package 19 together -- to do it in a conventional way and not try to 20 use the tax code for something that, really, it isn't well 21 designed for. 22 comPanies, but to use it for incentives for non—taxpaying 23 companies is awfully hard. 24 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis It could be used for incentives for taxpaying Mr. Shumway. It seems to me if Chrysler were able to go to its sources of private financing and indicate, Look, in 783 190 07 12 kapHEE 1 the future we are no longer going to have these burdens, 2 these requirements which cast a cloud over our ability to 3 capitalize and retool now, wouldn't they then have a better 4 footing, a better presentation, a better loan package, as it 5 were, to make to those private financers? Secretary Miller. 7 If they could show some actual cost reductions, cash reductions that would be beneficial. The company had told us that throughout this year it has discussed this issue in the Congress, with members of 10 Congress and with various concerns, and it has decided 11 itself that it look fruitful that it could make any gains in 12 this area. 13 • So the request that Chrysler made to us was with its own 14 conclusion that it was not likely that it could make gains 15 in that area at this time. 16 Mr. Shumway. As I understand the administration's 17 program -- and you did not touch upon this in your testimony 18 here today -- perhaps it is in your prepared testimony -but in addition to the matter of loan guarantees, you 20 likewise indicated that you would be requiring matching 21 participation from Chrysler. 22 110 We have discussed that. You have indicated that you You 23 would review their financial program in the future. 24 have indicated that, indeed, you would even require the 25 ability to make management changes to oversee some of the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 784 190 07 13 kapHEE 111 Now that, coupled with the fact of 1 personnel in Chrysler. 2 making a large investment as the federal goverment would do 3 under your proposal -- haven't we essentially nationalized 4 the company? 5 Chrysler is concerned? And what remains of free enterprise as far as o I mean, assuming the very worst and being the most 7 skeptical, would we be willing in the future to allow this company to sink or swim on its own, once we have made that kind of investment and once we have asserted those 10 H Let me go from the back of your Secretary Miller. On the back, the bottom line, I 12 question to the front. 13 would think, is this is a one—time program. 14 personally assume that this has to work or that Chrysler in 15 the future will be a failure, or it will either be 16 successful or a failure and it should not become a permanent 17 load of support. lb 411 prerogatives? And I would It is a one—time transition program. Now, on the other part of your question, there may be a 19 misunderstanding, because in any major financing, 20 particularly for a company with uncertain prospects, the 21 same kind of covenants we talk about here are normal in any 22 financing. 23 They are required by insurance companies when they lend 24 money to a company. 25 you have to do. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis They have nothing to do with nationalizing. They list certain kinds of things that fou have to file your financial plans to 785 YO 07 14 kapHEE you you have to stick to them; 1 approve where you're going; 2 can't make acquisitions; 3 anything happens where you're not making -- the right to 4 elect some directors from the creditor. you can't pay dividends; if These are creditor's terms that are very normal in major 5 financing, which I've been on the other side of on 7 occasion. And so they don't seem strange to me to have creditors saying, Hey, if we're going to give you money to build your company, we want you to come, prove to us that 111 10 you are on track, and that if you are off track you have 11 some corrective rules and you won't do some things to 12 squander your resources. 13 go buy some other company and take money we thought was 14 going to build a plant and use it for something else. 15 won't go throwing out dividends and depleting your cash 16 before you have done the other things. You That is all very normal, and I don't think you are 17 lo You will stay on track, you won't nationalizing, to have the same terms in a program where the goverment has a guarantee as when you have a program in the 20 • goverment that doesn't have a guarantee. Thank you. My time has expired. 21 Mr. Shumway. 22 Mr. Moorhead. 23 Mr. Ashley. 24 Mr. Secretary, I want to pursue Mr. Vento's line of 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Mr. Ashley. Thank you, Mr. Chairman. questioning for a moment. And let me say first that I think 786 YO 07 15 1 that the methodology that you have employed is very 2 pursuasive, because it seems to me that you have tried to 3 examine the question of whether or not it is in the public 4 interest as an exception to provide assistance in this given 5 situation. kapHEE 111 Having arrived at the conclusion that it is in the 6 public interest, you have then examined the question of: 7 what kind of remedies are appropriate to the situation? Your testimony assumes, really, that there are two fundamental alternatives involved here. 11 in bankruptcy, having recourse either to Chapter 7 or 12 Chapter 11 of the Bankruptcy Act, or a Chrysler that would 13 be the beneficiary of a federal plan in lieu of bankruptcy. 14 Do you think that the Chrysler operation could continue 15 16 in Chapter 11? Secretary Miller. I believe, Mr. Ashley, that in 17 Chapter :1, the company would not survive as an independent 18 automotive producer. 1 parts of its operation might be picked up. 20 would be permanent losses, both in terms of U.S. production 21 and in terms of market share and market competition. 22 • One is a Chrysler 10 Mr. Ashley. I think parts of it might survive, I think there I wonder if you could furnish for the 23 record some back—up information on your assessment of the 24 cost of a Chrysler demise. 25 unemployment compensation and welfare payment and local and https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis You spoke in short term of 787 190 07 16 kapHEE 1 federal revenues and balance of payments. 2 111 It would be interesting if we could have that back—up 3 information together with any projections you might have as 4 to the somewhat longer term. 5 Secretary Miller. Yes, sir, we would be happy to do that. 7 10 12 13 • 14 15 16 17 Id 19 20 21 22 23 • 24 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis (Information to be furnished.) 788 190 07 17 kapHEE Mr. Ashley. 1 I've been interested in looking at the 2 Bankruptcy Act and the testimony we have had from people who 3 are very knowledgeable with respect to the new bankruptcy 4 act, because it seems to me that the plan that you have 5 advanced really does track the Bankruptcy Act in many respects, and satisfies the basic provisions and objectives 7 of the Bankruptcy Act. And I specifically am referring to the testimony which points out that Chapter 11 raises the following questions: 111 who will operate the business? 11 addresses itself to that. 12 available? 13 11. 14 debtor's pre—position contracts? 15 that. 16 What sources of credit will be Your plan addresses that, just as in Chapter What effect will Chapter 11 proceedings have on the Again, you have addressed There are other questions, similiarly. It was pointed 17 out that in bankruptcy there would be an examination of 18 Chrysler's past management practices. 19 addressed yourself to that. 20 supervision of Chrysler's feature operations would be 21 available, that again is implicit in your plan. 22 • Your plan pretty well 10 Well, you have That bankruptcy court So I just think that it should be pointed out that we 23 are talking more form than substance here, as far as whether 24 there are positive advantages, it seems to me, to proceeding 25 on the basis of a plan in lieu of bankruptcy, for the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 789 N0 07 01 kapHEE I reasons that you have articulated in your previous 2 responses. I am interested in the Reuss amendment because it raises 3 111 a fundamental question that I want to put to you: 5 of a control -- how is the Treasury Department, as the lead o department for the government in this matter, going to 7 exercise its position with respect to the operation of the Chrysler corporation? question: 44( 111 The Reuss amendment raises the do we, at this juncture, begin to play a 10 management role by virtue of the proposal of guaranteeing of 11 credit? 12 telling the company the kinds of products it should be 13 making and so forth? 14 15 16 17 1d 19 20 21 22 23 • what kind 4 24 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Are we going to put ourselves in the position of CR 8190 HEER t-8 mte 1 • 790 1 Secretary Miller. 2 to do that, because in 3 did do that, then we would be taking on 4 beyond the kind of reorganization, without the uncertainties 5 of bankruptcy that you have just described. 6 then doing would be taking over accountability for the result, 7 and if the result was poor, I think many claimants would then 8 say, well, it is because of what you the Government did, not 9 because of what the company did. 10 • • Mr. Ashley, I would be very reluctant the way you state it, because if we a responsibility What we would be I think it is a dangerous path to go down. I would point 11 out, however, that any major creditor has a say in the sense 12 that the plan has to be reasonable, it has to meet criteria. 13 And the nice thing about this kind of a program is that the 14 $3 billion will be raised only if a very large number of consti- 15 tuents agree that the plan is reasonable. 16 be just the Government and just Chrysler 17 banks and some dealers and some suppliers and some employees 18 and some others are going to have to agree before they put up, 19 or the State of Michigan is going to have to be satisfied that 20 the plan of operation is sensible and is going to lead them 21 into a viable condition. It is not going to management, but some 22 And that will dictate very much the choices of product 23 over the short term, even if you have a long-term desire to 24 maximum fuel economy cars and small cars, which I think we Ace-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis should have. But we have to go there, down a path that gets 791 mte 2 • 1 us there and doesn't leave us short of resources at any point 2 along the way. 3 So I think we are one of a partnership of interests which 4 in its cumulative effect will, I think, represent a very intel- 5 ligent judgment of the right way for this company to go. 6 Mr. Ashley. 7 forebearance and get to a part 8 unanswered that I think is important. 9 10 11 • of the question that remains The Blanchard bill, as I recall, assumed the creation of a Control Board, and I don't believe that your proposal does so. And I wonder if you would talk to that and tell us how, 12 in the absence of a Control Board, the position of the 13 Federal Government and the taxpayers can be protected? 14 • Mr. Chairman, I wonder if I might have your Secretary Miller. I should have included that in my 15 answer, Mr. Ashley. 16 center this in one department is because it is very difficult 17 in the Federal Government to coordinate and take accountability 18 and responsibility of you involve too 19 we would do is set up a special office. 20 put a very knowledgeable person full-time, with appropriate 21 staff support, to make this project the function of that 22 office; to not only be involved in working out the financing 23 plan, which will take some time, in seeing that it is completely 24 done, but then to do the monitoring on the continuity of The reason we believe it is best to Ace-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis relationship that is essential. many departments. What We would certainly 792 mte 3 • 1 So we would have an interface built into our structure 2 and with, I think, the right kind of accountability to make 3 sure that the Government's position was always looked after 4 with care and professionalism. 5 Mr. Ashley. 6 Mr. Moorhead. 7 • • Thank you, sir. I think we had better go off the record for a moment, just to get our plans arranged. 8 (Discussion off the record.) 9 Mr. Moorhead. Mr. Hinson? 10 Mr. Hinson. 11 Mr. Secretary, from the standpoint of mechanics, I would Thank you, Mr. Chairman. 12 be interested in having a little more specifics on the way 13 that the Treasury would expect to use its authority under this 14 legislation, particularly in the area of direct loans as 15 provided for by the Blanchard bill, and I would be interested 16 specifically in knowing what use is envisioned, if any, of 17 the Federal Financing Bank. 18 Secretary Miller. Mr. Hinson, our preference -- our 19 preference in our proposal is that we approach this through 20 guaranteed loans. 21 the possibility that the Federal Financing Bank might acquire 22 some of these securities at some other time. 23 start 24 it financed outside of the bank and accomplished as guaranteed https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis believe we would not want to foreclose But we would off from the proposition that we would prefer to see Ace-Federal Reporters, Inc. 25 I securities. mte 4 793 1 2 • 3 4 5 6 7 8 9 10 11 12 13 • 14 15 16 17 18 19 20 21 O 22 23 24 Ace-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Mr. Hinson. Did I understand that you would not foreclose the possibility of a direct loan from the Federal Financing Bank to Chrysler? Secretary Miller. Cr to having the Financing Bank acquire these loan positions. Mr. Hinson. Can you say with any personal degree of confidence that you won't be back under these circumstances, with the need to request an additional loan guarantee or more direct loan authorization? Do you feel comfortable with what you are asking for, and maybe along with the other private arrangements, that it may be adequate? Secretary Miller. Mr. Hinson, from my business experience I feel very comfortable with this. I think this is a sound financing package that is appropriate to the needs and to the outlook. I can probably guarantee that a year and a half or so I won't be back. I can't guarantee you another Secretary of the Treasury won't be. MR. Hinson. On another matter, I would be interested in just finding out whetheb or not -- what attitude the Treasury Department would have toward the possibility of trying to work out some additional arrangement with the UAW in the matter of its strike fund. I understand it has some sort of constitu- tional prohibition in its own constitution against the use of these funds for such purpose as, say, a loan or assistance to Chrysler. 794 mte 5 1 III it seems to me it would be much easier for the UAW to amend 3 its own bylaws and constitution and provide this assistance 4 than it would be to ask the federal taxpayer to underwrite 5 an additional $100 million or $500 million or however much 6 additional funds would be required. Secretary Miller. As you know, our plan contemplates We 8 additional concessions or contributions from employees. 9 certainly believe it is legitimate to consider what additional The possibility of them making some loans 10 the UAW might do. 11 from the strike fund and changing their constitution is per- 12 fectly proper to look at, because after all, Congress, if this 13 works, will pass a law which is an effort, I think, asking 14 employees directly involved to change their law, so to speak -- 15 is not unrealistic. 16 III not -- I mean, 2 7 III What I would like to know is whether or Now, I don't know whether that fund -- I don't know how 17 much that fund could provide and I don't know whether that 18 could be accomplished. 19 area, putting together the billion and a half dollars, as I 20 see it, and I don't see it as cutting into the other billion 21 and a half dollars of guarantee we still need. But that is part of the legitimate Thank you very much. 22 Mr. Hinson. 23 Mr. Chairman, I yield back the balance of my time. 24 Mr. Blanchard (presiding). Let me mention for the Ace-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis record, Congressman Hinson, that I am pleased to be a co-sponsoit 795 rnte 6 • • of the Administration bill. 2 the Blanchard bill, it may be considered the Moorhead-Wright- 3 McKinney-Miller-Blanchard bill. 4 Congressman LaFalce? 5 Mr. LaFalce. 6 Mr. Secretary, my initial thought was that the bankruptcy Thank you very much, Mr. Chairman. But then, after I considered 7 laws would be most applicable. 8 the consumer psychology involved -- and this was even prior 9 to our hearings -- I concluded that, given the public awareness absolute desire on 10 of the Chrysler financial dilemma and the 11 the part of 12 he buys, both insofar as its maintenance and its resale value 13 and trade-in value, et cetera, that bankruptcy is not a 14 viable option. any potential purchaser for security in the car 15 However, one of the advantages of bankrutpcy is that 16 there can be an arrangement of creditors, and what I have been 17 seeking is an arrangement of creditors as you would have under 18 the bankruptcy laws, without the stigma of bankruptcy attached 19 thereto, but as a legislative condition prior to the drawdown 20 of any guarantee. 21 411 So at this point, when you say 1 I don't know if this is going to be possible. I hope so, I don't know if we are talking that far apart, because 22 though. 23 you are talking, amongst other things, about the lowering of 24 interest rates by the present creditors, Ace-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis maturity, et cetera. an extension of mte 7 796 1 • It is very loose. 2 And we are engaged not just in economic discussions; we are 3 engaged in political discussions. 4 in 5 Dead," we might be dealing with President Ford today. 6 when you are negotiating with all of the parties involved, 7 whether or not there will be implementation of any legislation 8 that we pass, political pressures will come into play and you 9 know it. 10 • I do have some difficulties, though. If there were not a headline the "New York Daily News," "Ford to New York City: So what should we do to Drop And minimize the political pressures 11 and to ensure that any loan guarantee does have coupled with 12 it some arrangement for creditors and some things that are 13 legislative preconditions rather than just 14 in your hands, subject to a great amount of discretion? 15 have got some problems, though. 16 You said there would have to be agreeing up front as far as 17 this $1.5 billion. 18 flexible options I You talked about specifics. I don't think something is too green when you're talking 19 about not getting what you asked for, not getting what you 20 wanted. 21 It is not too specific. Secondly, I do think that the interested parties should 22 have something definitely at risk prior to any governmental 23 money at risk. 24 a precondition, that there be some employee investment in the And so I think it would be wise to demand, as Ace-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis company, which investment would not be guaranteed and which mte 8 • 797 1 investment 2 How we would structure this, whether it would be called an 3 ESOP or something else, is up in the air in my own mind. 4 I think that it is necessary and I would like to work with 5 your office on an amendment along those lines. 6 • take a loss prior to any governmental loss. But Secondly, when you talk about giving you the pass-through 7 option, the problem is, when we give you that option, 8 the other creditors come in that becomes the starting line. 9 You're going to throw that on the starting line immediately. when 10 You're not going to have a prior position over anybody unless 11 we legislatively give you a prior position for the total 12 amount or at least in part. 13 legislatively we should give you a prior position, so that 14 you don't have to give everything all at once, as you most 15 surely will do under the pressure of having the Federal 16 Government act. 17 • would And that is why I think that And I will be chatting with you about that. But what I want to get to now is, assume that we do call 18 for some arrangement of creditors, some renegotiation. 19 the present creditors have a prior position to the 20 United States Government, or could we demand that in this 21 new renegotiation of existing debt, that the present creditors 22 in the renegotiation take, at the very 23 with the Government, 24 require as a precondition for any federal guarantee, the new https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis least, an equal position and any new loans which we would also Ace-Federal Reporters, Inc. 25 Would loans could take a secondary position? mte 9 798 1 • But as I under- with our general counsel that I am correct. 3 stand our bill, it provides that existing loans would be 4 subordinated except with one exception. 5 existing liens, we will not be able to wipe them out. If there are any Do you mean anything that is collateralized? 6 Mr. LaFalce. 7 Secretary Miller. Most of the credits(of Chrysler are They are general credits, and they would 8 not collateralized. 9 have to be subordinated to our new $3 billion in financing or 10 to the new Government guarantees, excuse me. 11 required to be subordinated. Mr. LaFalce. They would be What if these were renegotiated? Would they 13 then also be included within that category of loans that would 14 have to be subordinated? 15 Secretary Miller. We are talking about requiring that 16 all existing credits be continued, that they be subordinated, 17 and they would be reduced only at maturity dates that are now -- 18 that were existing on October 17th. 19 20 • I'm just going to check and make sure 2 12 • Secretary Miller. Mr. LaFalce. Is this presently mandated in the bill or is it discretionary? It is, I believe, mandated in the bill. 21 Secretary Miller. 22 My counsel points out that there is a provision that the So you are correct that if the 23 Secretary could waive it. 24 Congress felt that that waiver authority was giving me too Ace-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 0 much authority, that could be taken away and you could require mte 10 799 1 • There was a phrase later that said that the Secretary, if he found it 3 necessary to get the financing together, and found that 4 repayment cE the guaranteed loans was reasonable, that he 5 could waive the subordination. 6 to other creditors, either existing or new ones. He could never give priority I agree with you, this is a legitimate area of concern, your judgment and your ideas in this area. 8 and we will welcome 9 We are trying to shape this in a way that is workable and yet 10 does give the greatest protection and safeguards. 11 Mr. LaFalce. 12 Mr. Moorhead (presiding). 13 Mr. Evans (Indiana). 14 111 existing credit be subordinated, period. 2 7 • that all Thank you. My time is up. Mr. Evans? I have no questions at this time, Mr. Chairman. 15 Mr. Moorhead. 16 Ms. Oakar. 17 Thank you, Mr. Evans. 18 Mr. Miller, I wanted to certainly commend you for your Ms. Oakar? Thank you, Mr. Chairman. 19 testimony. 20 not been convinced yet from the testimony 21 throughout these hearings about one special point. 22 am concerned about the fact that we have a tremendous number 23 of individuals who will be potentially unemployed, and I under- 24 stand the unemployment problems and the ripple effect in our Ace-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis economy. I am concerned, and I want to be honest. I have that I have heard I mean, I 800 mte 11 But I just wonder if we are prolonging a terminal illness. 1 • 2 And on that note, because I haven't been convinced by the 3 testimony, I decided to go out in the field and see a little 4 bit of the grassroots individuals who will be affected and do 5 influence policy, or try to, anyway. 6 Chrysler plant, but there are some in Ohio, and obviously it 7 would have a devastating effect to an extent on my state. 8 I visited a plant where there are 3700 employees. They said 10 And let me tell you some of the things they said. 11 the workers said there is no suggestion box -- and this may not 12 seem like, you know, the ultimate when you are trying to assure 13 that the management of a company will be adhered to in a very 14 disciplined fashion, but I think it is kind of indicative of 15 what has gone on in the past. Ford and Chevy plants in my district, they have a sugges- 16 • So I went out to the dealerships in the areas and so on. 9 • So I don't represent a 17 tion box for employees whereby they can say how they can save 18 the company thousands of dollars. 19 offering a viable suggestion, they are rewarded. 20 in this particular plant and they don't look forward to having 21 one. 22 And if they succeed in There is none The managers of the plants, they had very little to say I'm not trying to get them in trouble, but 23 about policy. 24 obviously they must have some ideas about what the problems Ace-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis are and whether or not they ought to be making various other mte 12 411 801 1 parts and whether or not they are using the kinds of products 2 and are being supplied products viably. 3 be that kind of input. 4 It's these kinds of people that daily live this experience, And I really wonder, has the Treasury Department been have. 6 out in the field? 7 union, we have heard from the president of the Corporation. 8 Have you been out in the field to see the dealerships, for 9 example? I mean, we have heard from the head of the Tell me that they can't -- I mean, they are, after all, 11 where it's at in terms of selling the cars. 12 in and they know what their customers want, and they see the 13 potential for what the American public needs and wants. 14 it is a cold day in hell for getting these kinds of cars that 15 they need. 16 them. They put orders And And as a result, their competitors are out-marketing 17 And I'm just wondering, is Chrysler going to operate 18 business as usual or are there going to be some changes on the 19 local level to really assure that their past management prac- 20 tices will change? 21 O seem to 5 10 • There doesn't Secretary Miller. Ms. Oakar, I hope the latter. Let me 22 say, your inputs are very helpful, because I do believe that 23 the involvement 24 to shape its future. of the whole company is going to be required I can sympathize with the employees who Ace-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis feel they don't have a place to make a contribution, and I'm 802 mte 13 1 • 2 dealers, because, for example, the cars of Chrysler, 3 and the Horizon are in great demand, and they can't produce 4 them. 5 decided some years ago to buy them from Volkswagen. 6 only get 300,000 a year. 7 and that is in this program. 8 That's because they can't get the engines because they They can So they have to build an engine plant But it is that kind of task that we do -- what we're trying to do in our role is look at their program to overcome that 10 and to be sure that they have control over their destiny so 11 that they can produce the cars that can sell. They have, as you know, decided to go away from the sales 13 bank idea, where they produce cars they wanted to produce and 14 then hope the dealers could later sell them. 15 producing only to dealer order. 16 have -- 17 Ms. Oakar. Now they're Unfortunately, they don't But if you will pardon me, they have to have 18 some kind of prophetic notions about what is going to sell in 19 a couple of months from now, also. 20 • the Omni 9 12 • I can sympathize with the sure that needs to be corrected. Secretary Miller. Absolutely. They have to have marketing 21 that feeds in the market requirements, so they can set up their 22 lines. 23 capacity, and particularly following the gasoline shortage. 24 It was in the wrong place at the wrong time. But part of it is their fundamental base production And the cars Ace-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis that have been selling last year don't sell, and the cars that 803 mte 14 1 • will sell they are not able to produce, and that is one of the problems. 3 And one of the efforts here is to get them, as fast as possible. 4 the resources to make the tooling and do the capital expendi- 5 tures which will get them into the production of the kind of 6 cars that not only the market should want in the future, but 7 which as a nation we have got to produce. We cannot afford to 8 produce anything else in the future. 9 • Ms. Oakar. Do you have assurances that they are going to 10 change their ways? 11 I'm asking -- I mean, I didn't see that, frankly, in the 12 testimony. 13 I guess that is putting it simply. What And I don't see that in the field. Secretary Miller. They have as the head of the company 14 now, a man who has testified here, I believe, Lee Iacocca, who 15 was the President of Ford and is very experienced as an 16 automotive executive and has very great experience. 17 been there for a short time. 18 a very short time. 19 III And we can't duck that problem and we can't hide it. 2 He has He has been chief executive for I think, based on his track record, we would have to say don't know who you would hire in America, who would be a 20 we 21 better automobile operator than he is. 22 have to go with that for the moment. 23 other executives who have had many years experience elsewhere. 24 And on the record, they look So we just, I think, He has brought in some like very competent people. Ace-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis But unfortunately -- I will not kid you -- in a business this mte 15 • 804 1 big, you do not in one month or two months change direction or 2 change course. 3 4 and make sure that they are on the plan and on the program. 5 And I'm sure there will be some other strengthening needed in 6 the company to carry this out, and we will expect it as part 7 of our program. 8 Ms. Oakar. 9 • Mr. Chairman, my time has expired. But I certainly have a few questions along that line to pursue. 10 Mr. Moorhead. 11 Mr. St Germain. 12 And I want to thank the Secretary for his very, very 13 14 • We will have to evaluate this quarter to quarter and see Mr. St Germain? Thank you, Mr. Chairman. helpful presentation this morning. I would say to my colleague from Ohio that the complaints 15 that dealers of Chrysler have about not getting the right 16 cars are not unique to Chrysler. 17 are General Motors dealers, and for instance, the new X-car 18 that is being produced by General Motors, they are yelling and 19 screaming because they are five and six months behind in their 20 orders. I have very good friends who 21 Unfortunately, I have a lot of friends who are automobile 22 dealers, and all I ever get from them are complaints about the 23 way they are treated by General Motors and Ford, let alone 24 Chrysler. So it is not unique to Chrysler. Ace-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Mr. Secretary, as far as Chrysler Finance is concerned, 805 mte 16 • 1 am I correct in my understanding that they indeed financed the 2 floor plans for their dealerships? 3 Secretary Miller. 4 Mr. St Germain. General Motors stopped doing that a number of years ago; is 6 that not correct? 8 9 III Which is again unique, in that Ford and 5 7 • Yes. Secretary Miller. I believe that is correct. I believe they finance consumer paper, but not the floor plans. Mr. St Germain. I wish most of my colleagues were still 10 here, because 11 Mississippi about whether or not you felt that, should this 12 plan be approved, what in your own judgment -- what did you 13 think as to the success of this plan, your words were that, as 14 a businessman yourself, that you felt, after studying this 15 very thoroughly, that the chances of success were very strong. in answering a question of Mr. Hinson of 16 Secretary Miller. 17 Mr. St Germain. Reasonably. And of course, you have to say reasonable, 18 because one never knows in these days. 19 '73 and '74, and we have had things happening to us ever since, 20 that no businessman, even with a crystal ball, could have 21 predicted. 22 I mean, we go back to But I would like to emphasize that, as one who has 23 observed the Secretary over a number of years prior to his 24 coming to serve his government and his country in Washington, Ace-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis that I would rank him -- and ! I am not alone or unique in this -- mte 17 e-8 806 1 as 2 year in this country of ours; and that in this particular case, 3 in this instance, he certainly is calling upon his expertise 4 over a number of years as the head of one of the nation's or 5 the world's largest businesses. 6 7 8 9 10 11 12 • 13 14 15 16 17 18 19 20 21 • 22 23 24 Ace-Federal Reporters, Inc. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis perhaps one of the outstanding businessmen in many, many a 807 190 09 01 pv HEE • For that reason, I would say your testimony is 1 2 compelling, knowing of your past experience, and when you're 3 willing to stand up here answering the questions you have. 4 And I think they have been very clear answers, very direct 5 answers, and you haven't attempted to in any way equivocate. And I think that we all have to take this into consideration as we reach a final conclusion. 3 9 O one point where you say "continuation of present financing Now, does that mean that if banks X, Y, and Z 10 commitments." 11 have loan commitments to Chrysler, that one of the 12 preconditions is that they will honor these commitments into 13 the future and you would not call some of these loans in 14 ahead of time? 13 Secretary Miller. 15 Mr. St Germain. 11 18 O Mr. Secretary, on page 14 of your statement, there is That is correct. And that is solid as the rock of Gibraltar as far as preconditions are concerned? That is correct. Secretary Miller. And we are talking 19 in our proposal that these be the commiemtns and not the 20 takedowns. Lines of credit commitments as well? 21 Mr. St Germain. 22 Secretary Miller. 23 Mr. St Germain. That's correct. I am pleased at that, because there has 24 been some concern on the part of some that on the one hand 25 these banks would not honor these commitments and yet come https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 808 190 09 02 pv HEE 1 in under the loan guarantee and collect a rather hefty 2 interest rate for these loans with the full faith and credit 3 of the United States Government behind these loans. 4 this certainly, I think you would agree, would be rather 3 unfair. 3 And These commitments are needed for Secretary Miller. their continuing financing olus the seasonality and 8 intra—month. 9 takedowns. 10 • So, you need those commitments even with the Mr. St Germain. Now, let's say, particularly because a 11 it's $1.5 billion that you need or are requiring 12 precondition, let's say that a particular set or one or two 13 large financial institutions that do have these commitments 14 say, "No, we are not going along with it," out yet on the 15 other hand the $1.5 billion is achieved and the loan 15 guarantee is in place from the Federal Government. 17 as Now, what would the attitude of the Treasury be about 18 those same oanks that don't honor those commitments coming 19 in and saying, "Well, yes, we will be happy to loan the 20 money under a loan guarantee." 21 Secretary Miller. Would they be precluded? Nell, if we don't get the 22 continuation of the commitments, of course, there will be no 23 loan guarantee. 24 23 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Mr. St Germain. _Well, it could be, Mr. Secretary, that if there is X number of banks that didn't honor these 809 [90 09 03 pv NEE 111 1 commitments, that nonetheless you would still reach $1.5 2 billion. 4 But you would not have met the Secretary Miller. 3 condition of continuing the present financing. Mr. St Germain. 6 So, in other words, if one ban'; says "No," the conditions aren't met? 8 they will fail to meet the conditions. ) 111 Mr. St i3ermain. So they get a substitite and 10 subsequentl/ after this goes into place can that bank that H aid not go along, would you condone that banl< that did not 12 go along? 13 Secretary Miller. 14 Mr. St Germain. 1D I wouldn't. Is there anything in here that would preclude that? 16 Secretary Miller. There is no statutory preclusion. I li would think that we would certainly disqualify that bank if 13 it failed to meet its one commitment and then looKed for a 1) guarantee. 20 wOULJ have no objection to it. 21 411 They will have to get a substitute or Secretary Miller. i But if you felt that would be in the statute, I ',fr. St Germain. Well, if not in the statute, I think it 22 should be very strong in the language of the report, 23 Mr. Secretary and Mr. Chairman, because what's fair is fair. 24 )3 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Secretary Miller. That's right. If the report could show that, that would certainly be helpful to us to clarify 810 190 09 04 pv RE • I that it would not be proper for a oank to cut out of the 2 present lines and then seek a position in the guaranteed 3 lines. 4 Mr. St 3ermain. committee. the chairman and the My time has expired. Mr. Bethune. Mr. Moorhead. Mr. Bethune. 3 I than Thank you, Mr. Chairman. Mr. Secretary, you referred to this as one—time program," in that we are making an exception that you found 10 to oe in the public interest, and language has been used 11 tnat this is a "plan in lieu of bankruptcy." 12 main reason tnat you give for fashioning the plan in lieu of 13 bankruptcy, it seems, is that the aspect of consumer 14 psychology. 13 And tnen the Now, if we do this for Chrysler, what are we going to 16 tell the otner poor devils out there in the country, the 1/ small businessman or middle—sized businessman or someone who 18 is not a giant in business in this world who is faced with 19 taking oankruptcy? 20 manufacturing and marketing consumer goods; he is also in 21 the business of servicing sales and honoring warranties; and 22 he has employees and stockholders. 23 I mean, he is in the business of And they plead to us as members of Congress; they say to 24 us, "Nell, this business of consumer psychology is going to 25 ruin me if I am forced into bankruptcy. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis There is no way I 811 1 90 09 05 pv HEE III It's going to hurt my business." And i can rehabilitate. ) they say tnat they are taxpayers and they want a plan in 3 lieu of bankruptcy. Aow, Mr. Secretary, what do I say to those people? 4 Secretary Miller. I think we have to point out that our general rule is tat government aid to private corporations i is not a sound way to go. 3 reasons I have outlined. And I would point out, on the question of the consumer ›) III In the 13 franchise, that we have a number of factors here. 11 first place, this is a major industry with only three major 12 proJucers, and we have a nationwide business, distribution 13 of a product that is expensive to acquire, expensive to 14 maintain, and for which after—service is very critical. I don't know that you can find many small businessmen, 15 16 who, even if they have consumer products, have all of those 1/ conditions: 18 country, that their product is nationwide, that it is 19 expansive, that it needs service. 23 III This is an exception, for the where there are only two other suppliers in the I think what you will find is most of those kinds of 21 people have products that can continue to be sold even if 22 thei're going through reorganization because they don't 23 require the after—service or the tremendous investment in 24 facilities to support the product that is required for 2'_) something like the automobile business. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 812 90 09 06 pv HEE 1 If there is a consumer product that goes into housewares, I am sure that most householders buy the product 111 3 expecting it to last for its life and they don't care 4 whether the company that sold it, as long as it has got 3 good value, is in business next week. That's not true with the automobile. 3o, I think there are a lot of differences, and I think 8 we do have to stick to the point that there are some basic considerations here in the public interest. Ae don't want to make a precedent -- I don't want 1J unique. II to make a precedent -- that this now means the government 12 should undertake to assist or underwrite every business. 13 111 They are 14 :Ar. Bethune. Now let's just assume for a moment that we can sell that political explanation -- because that's what it is -- let's assume then that the same poor devils are 15 drug into the bankruptcy proceeding either oy force or oy Ii voluntarism. 13 Justice Department; have you had an evaluation of what this 1) is going to do to the credioility and integrity of the 20 bankruptcy law and the processes that are carried out there? 21 And I wonder, have you checked with the I wonder what is going to happen when the people that 22 are pulled into oankruptcy court raise these points that I 23 am raising, and the cry that they are being discriminated 24 against or they are denied equal protection of the law. 2D wonder, have you explored that with the Justice Department? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis I 813 190 09 07 pv 1 I had not explored it with the Secretary Miller. We do have a study under way into the 2 Justice Department. 3 bankruptcy laws as tney apply to Chrysler, which we will 4 nave ready soon and submit to you. 3ut I would suggest that, you know, in most reorganizations under bankruptcy, tne present bankruptcy law, the new oankruptcy law does allow a system for 3 continuity in the business; it does allow for a system of accommodation of creditors; it does get away from the one 13 group being able to block the final resolution of the ii proolem for all the others. 12 flexibility and does avoid the kind of hangups that we had 13 under the prior law. 14 And it does give more And I think, for the businesses that you are talking 13 about, that kind of reorganization in which the people who 15 have a financial interest will also have an interest in 1/ seeing the company come out successfully, would serve the 18 needs. 19 Mr. Bethune. But you say the main reason that we can't 20 apply this particular law to Chrysler is the consumer 21 psychology angle. 22 can't apply that law other than the consumer psychology? 23 Can you give me any other reason why we Secretary Miller. I believe that the main reason that 24 ChrYsler would not continue as a separate major producer if 2 we want through a bankruptcy reorganization is because its https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 814 190 09 08 pv HEE • I mar at and its product would be permanently impaired during 2 the process of that reorganization, and that permanent 3 impairment would mean that we would lose these other 4 objectives of maintaining a U.S. position in automotive 3 production of adjusting our total productive base to the .-11.DuJcivul,Jift 5 product 3 tl UI iete1L oi this to overseas producers and the loss of American jabs permanently. I think it is so unique that I just cannot imagine in my 10 own mind the small businesses that could indicate that they 11 have the same impact and the same public effect. 12 hard—pressed to find an analogy. 13 411 So, I am I do believe Congress has the authority to make this I do not believe that impairs the rights of any 14 exception. 13 other enterprise. 15 protected by the laws, the bankruptcy laws, from undue and 1/ harsh treatment and liquidation, and they will be entitled 13 to work out a plan if they can show how to do it. 19 will continue to have that, and I think that's the test we 20 can do. 21 Mr. Bethune. 2) Mr. Moorhead. And other enterprises will continue to be Thank you. And we My time has expired. Remembering the committee's commitment to 23 the secretary to try to have him finish by 1245, are there 24 any members who would submit their questions in writing? 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Mr. Green. Mr. Chairman, could I raise a question? I 815 90 I. S. pv HEE 1 am perfectly happy to submit questions in writing, but 2 obviously I would like to have answers before we mark up 3 this bill. And I am concerned about what the schedule is going to be for maricup. Ne have been given this very complicated document, where 3 5 under questioning there was at least one point that needed 7 clarification. 3 to the numbers that are used here if we do have a projection 9 of no increase in market share. And I would really like to see what happens I might also point out that three weeks ago in this room 13 I asKed Mr. Iacocca to supply us with a full report on the 12 battle tank program, including its cash flow prospects and 13 the mechanical problems that have been encountered. 14 agreed, but I have not yet got 13 dublished reports of severe problems with this that might 13 cause the Department of Defense to delay the production 14 schedule, and I would like to know what impact that mignt 13 have on the cash flow. 19 .In And he there have oeen So, I think there is a lot of work to be done, and I And under 20 hope that we're going to have the time to do it. 21 those circumstances, yes, I would certainly be happy to 22 submit my questions in wrng. 23 24 23 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Mr. Moorhead. Nell, unless they are too complicated, you can get answers back very promptly. Secretary Miller. We will respond as rapidly as we can, 816 11 90 09 10 pv HEE 111 We know, and we appreciate, 1 and we want to do so promptly. 2 /our indulgence in allowing us to do this in—depth study. 3 Ne just did not feel comfortable making a proposal to you 4 until we knew this much, and now we're going to respond to you very rapidly because we have the base. Mr. Green. 5 4 leadership of the committee have the same indulgence to the 3 minority members who wish to examine this very complicated 9 report and go through it. 10 12 Secretary Miller. Mr. Green. Mr. Chairman, I guess what I am asking is are we proceeding to mark up tomorrow? Mr. ifoorhead. 13 I doubt that we will have time. We go But I do want to get to it 15 into session at 10:00 o'clock. 1/ promptly, but not conclude it promptly, but get started on 13 it. 19 Mr. Green. With the assurance that we are not going to 20 trY to ram this thing through tomorrow, then I am certainly 21 quite pleased to submit the rest of my questions in writing. 22 23 • Mr. Green, if you can let us know the questions, we will respond post—haste. 13 14 And we want to get additional data from you. 11 III All I ask is that the administration and the 24 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis (COMMITTEE INSERT.) 817 90 09 11 pv HEE Mr. Kelly. 1 Mr. Chairman, I can submit my questions in writing. • 3 Mr. Moorhead. 4 As. Oakar. D As. Oakar. Mr. Chairman, I am more than happy to submit my questions in writing. But if we are going to proceed in that manner, then I would assume that we would all proceed that way unless we have an agreement among one another that 3 all of us would do the same thing. V.r. Kelly. Mr. Chairman, I have questions I want to ask now, rather than depend upon some misunderstanding. 11 ask a question and they respond with a funny answer, then I have got to submit another question. 111 effective way to do this is to do it right now. 11 are 13 long time. 30 13 1) 2) 21 And if we busy that we can't g3t to it, I am willing to wait a (Laughter.) Ms. Oakar. • And I think the 13 13 If I Mr. Chairman, may I suggest, since it is 12:43 aria we did say we would respect -Mr. Moorhead. Well, I think the secretary has indicated he would just as soon continue. Secretary Miller. If we are down to a few questions, 22 then I would serve you well by completing them so your 23 schedule would not oe tied up this afternoon. I do have one more question. 24 Ms. Oakar. ), Mr. Moorhead. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ell, I would recognize Mr. Blanchard I 818 90 09 12 pv HEE 1 first. Mr. Blanchard. 2 III Mr. Secretary, I am curious as to 3 whether you have any plans to help Chrysler retain its 4 credit commitment to at least those prior to October 17, 3 which I understand will be important. 3ecretary Miller. 5 We have called upon all of the creditors to stand still. ;le believe it is in their I believe they will because to go 8 self—interest to do so. 9 in another direction when this committee is acting 10 affirmatively, as long as it is toward passage, I think they H likely will stand still. Mr. Blanchard. 12 And then, regarding the concessions and 13 commitments that are going to be required here in order for 14 you to trigger the loan guarantees, which I think is an ID excellent idea and only understandable, especially in light 13 of Jew York's experience and others, is there any special 11 reason why you picked October 17 rather than like September 13 15? 19 Secretary Miller. 4e picked the date of the plan 20 because we thought if we have a baseline we should start 21 with the base and then make adjustments. 22 to be the day they filed the plan, the date they 23 represented. 24 accomplished after that is a favorable impact upon that plan 25 and would be counted; anything before that had already taken https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis That just happened So, we said anything that could be 819 190 09 13 pv HEE And that is the reason that is the date of the I place. 2 Chrysler plan itself, for which we have done the figures and done out footings, and it is a variation from those footings 111 4 that we are looking at. I understand they have several plans, Mr. 31anchard. and r don't know whether there were any commitments or concessions they received between plan 1 3 3ut I would assume that if there were, that might be a bone of contention. 13 II 111 111 and plan 2 or 3. I don't know that there is. Secretary Miller. I think everybody is happy with the date we have selected as being fair. ell, that is helpful. Thank you. 12 Mr. Blanchard. 13 Mr. Moorhead. 14 Mr. Kelly. 13 Mr. Secretary, as I understand, what is happening here Mr. Kelly. Thank you, Mr. Chairman. 13 is we are saying that the financiers and the industrialists 1/ do not deal besically in human terms; they jeal in money. 19 But it is an obligation of those of us in government to be 1) concerned about the people, about wives and children and the 20 impact of disruption in business and in the economy. 21 understand that there is a further obligation, and that is 22 that this is the government of all of the people, that we 23 represent everyone. 2 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis low, my question to you as a financier is: Now, I isn't it more in the interest of all of the people to invest a 820 190 09 14 pv HEE 1 billion and a half or $3 billion or whatever we're getting 2 reauy to do in the most efficient industry we can find to 3 nelp us produce the best goods of highest duality, cheapest 4 price, to help us with inflation, rather than to start another welfare program for a company that has not succeeded? And the only reason we are doing this is in the name of 8 women anu cnildren, but what women and children? The women and children of the highest-paid industrial workers in the 10 United States. 11 onl/ reason. 12 And why? For politics. And so, my question to you is: That can be the to serve all of the 13 people, if we're going to invest any money, shouldn't we 14 invest it in the most efficient operation and not the one 13 that has been rejected by every volunteer in the entire 15 financial and industrial world? 1/ Secretary Miller. All of those efficient producers, I have taken 13 Mr. Kelly, do not need government assistance. 19 an oath that I will perform for the good of all the American 20 people to the best of my ability. 21 case that this plan has a high probability of assuring that 22 we create over time an efficient producer of the kind of 23 automobiles that our nation needs, sustaining the level of 24 production, output of jobs, and wealth generation that our 25 nation needs and which contributes to the well-being of all https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis It is my judgment in this 821 190 09 15 pv HEE 1 Americans. And I oelieve that the alternate to doing this is to • 3 have an involuntary tax upon all Americans from the losses 4 that will come from not doing it. And the fact that the revenues and the out—gos of the Federal Government will oe greater without doing this means that every American will contributing to the failure of Chrysler. I would rather have every American contribute to a guarantee as a reasonable risk to avoiding that alternate cost. Mr. Kelly. 13 O Aell, Mr. Secretary, let me ask you this. Chrysler is a principal 11 You are a principal player. 12 player. 13 neophyte or that you just fell out of a Christmas tree. 14 think that what you 1D same kind of responsibility to those in Chrysler. No one can attribute to you the fact that you are a JO I is deliberate, and I attribute the Now, between October 17 and November 7 we have gone from 15 Fhis is a 1/ a $2.1 Pillion estimate to a $3 billion estimate. 13 42 percent error. 1) reflects not a lack of quality in judgment of financiers anJ 2) industry, but I think this is a political judgment. 21 Senator Proxmire has said that this thing is greased, it's 22 going to go, and there is nothing that anybody can 23 it. 2 political judgment that we can just up the ante. 2D https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Now, it would seem to me that this JO about So, I think, since it is going to be so easy, it is a And in connection with that, I want to ask this. If 822 190 09 16 pv HEE 1 Chrysler went on the market today and was going to get 2 money, going to borrow money, going to borrow the $3 3 billion, what kind of interest rate would they pay? 4 3 Secretary Miller. I don't believe they would be able to raise the money, Mr. Kelly. Mr. Kelly. But they would come somewhere in the area of junk bonds, like 15 percent? 3 9 10 11 1) 13 Secretary Miller. Well, I am sure that any money they could raise would be high—cost, but I do not believe they could raise the $3 billion. Mr. Kelly. And if they were going to get it, though, it would cost 15 percent or more? Secretary Miller. Well, it depends. If they could 14 raise money by selling the company and merging -- I think 13 you are asking me a question, if you are asking me what it 15 would cost for Chrysler to raise money -- a lot. 1/ Mr. Kelly. All right. Now, if we go forward with this 13 just like you recommend to the American people for the 19 benefit not of the American people but just these few people 20 in Detroit, what is going to be the interest rate that they 21 will pay? 22 for with your plan? 23 24 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis What kind of rates will Chrysler get the money Secretary Miller. They will have to pay a reasonable rate of interest plus the fees that we will charge them. Mr. Kelly. Well, give me some figures. J 823 190 09 17 1 pv HEE Secretary Miller. I believe it would be impossible to tell what the market will be when we make the financing 3 agreement. Mr. Kelly. 3 Nell, what will be the criteria? How will you arrive at it? Secretary Miller. The criteria will be the market. The guaranteed loans will have to bear an interest that the 3 marklt will pay. .4r. Kelly.that is the market, though, tnat the 1J government can borrow the money at? 11 corporation? 12 3ecretary Miller. Correct. Not a aefunct And that -- you would have -N 13 to add to tnat the fees that we charge for our guarantee. 4 14 Mr. Kelly. Well, by any standards, that is a super bargain, isn't it, the difference between wnat they could 15 get it for through voluntary action in the marketplace and what we're going to compel the American people to invest in 18 1 29 ? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Chrysler whether they like it or not? 824 190 10 01 gshHEE 1 Secretary Miller. Remember, this is the same American people that if they don't invest, will have an involuntary 111 Ana don't forget that while you can 3 cost imposed upon them. 4 saY this saves a few people in Detroit, doesn't it aid every 5 American to maintain a viable automotive industry? 6 7 Doesn't it aid every American to avoid a billion dollar balance of payments deficit each year? Doesn't it aid every American to avoid transferring jobs overseas? 9 aid every American to avoid a billion dollar cost to the 10 Federal -- not mentioning Detroit and New York and other 11 states next year? 12 13 14 • Doesn't it I think we have to weigh the benefits and our judgment is -Mr. Kelly. Mr. Secretary, my time has expired. I'm And I think that the 15 hoping to have another opportunity. 16 next question would indicate an answer to your question. 17 Mr. Moorhead. ld Ms. Oakar. 19 20 Ms. Oakar? Mr. Chairman, I'm just going to ask one quick question. Mr. Secretary, you did mention the third quarter results And it is my 21 concerning Ford and General Motors. 22 understanding -- I could be wrong -- but from my memory, I 23 recall that Ford would have really had a more devastating 24 show had it not been for their foreign assets. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis This is a two—fold question: One, what guarantee do we 825 190 10 02 gshHEE 111 1 have that other automobile companies are not going to come 2 before this Congress; and secondly, are we contributing to 3 an unfair competition by assisting Chrysler, and at the same 4 time, providing those kinds of loan guarantees which, in 5 effect, will, I believe, anyway have some kind of o ramification as it relates to Ford and General Motors and 7 American Motors? Secretary Miller. I believe Ford and General Motors have the capacity to finance themselves. Chrysler is now a domestic producer. For all 10 producers. 11 practical. purposes, they do produce some in Canada and some 12 in Mexico. 13 111 They are muli—national But their main business is U.S. General Motors and Ford have international operations, 14 which is beneficial because that means the American designs 15 can reach around the world and help support the research for 16 our base. 17 earnings in different markets, support the overall 16 investment. Even when there is a downtake in this market, 19 some other market may be good and it creates the same cash 20 flow that supports the corporation. 21 And it does strengthen the companies and the I don't believe that we can be accused of unfair 22 competition in trying to prevent us going to a very 23 non—competitive, two—producer situation. 24 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis I think we really are pro—competition by maintaining a major third U.S. producer, and we are pro—consumer in doing 826 190 10 03 gshHEE 411 1 so over the long—term because as you shrink and shrink and 2 shrink until you become almost a monopoly in this business, 3 and I think that that is not the right way to go from the 4 point of view of not maintaining the total competitive structure. But I 0 Of course we do have competition from overseas. 7 think we have an interest in maintaining the competition within our own structure and to maintain a greater 9 10 giving us outlets to foreign markets through some of those H producers, at least. 12 13 14 111 Ms. Oakar. So you don't see that we will be dealing with Ford or American Motors? Secretary Miller. I don't believe so. They have high They have adequate resources. They are 15 credit ratings. 10 going to make major capital investments in the next few 17 years. lb I believe that they can finance them. 19 Ms. Oakar. 20 Thank you very much, Mr. Chairman. Mr. Moorhead. 22 Mr. Green. 24 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Thank you, Mr. Secretary. 21 23 111 possibility of that compeition, either offsetting imports or Mr. Green? Has the Treasury taken a look and done an analysis of the British Leyland experience? My understanding is that there's an example of a similar effort with government intervention to save an automobile 827 190 10 04 gshHEE 1 company for many of the 2 so eloquently. 3 same reasons that you've expressed And that was a disaster. Secretary Miller. Mr. Green, that is an example of what We don't want to take over and run 4 we don't want to ao. 5 Chrysler, and we don't want to take that responsibility over. 7 We must say to you, frankly, we believe that this is a reasonable financing plan and we'll be in the role of 9 10 creditor. If we fail, then we will lose some money. don't think that we should take over Chrysler and try to run it as a government. 12 13 But I We would probably fail just like the British government did. Mr. Green. Let me ask you another question. It is 14 obvious -- and I agree, you are correct that this is 15 probably an amount of capital that Chrysler could not get in 16 the capital markets. 17 almost certainly be a venture capital type of deal. lb But if it were to get it, it would Ana in any venture capital kind of deal, normally, the 19 investor -- and in this case, the investor is the United 20 States Government -- gets more than a 1 21 plus loan guarantee fee. 22 percent or 1 percent Now I realize that we give benefits and externalities 23 that you have been discussing, but aren't we really entitled 24 in this kind of situation to some major participation in the 25 upside directly, if we, in fact, cause this capital infusion https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 628 190 10 05 gshHEE 1 2 111 that turns Chrysler around? Shouldn't we perhaps get a major stock position in 3 Chrysler and make it non—voting stock if you're concerned 4 about the ideological problem of our getting involved in the 5 day—to—day management? o Secretary Miller. I would have no objection, Mr. Green, 7 to us taking compensation in the form of some sort of 8 kicker, some equity kicker or some other. I would have no objection to us turning a profit for the If we are too successful in 10 U.S. taxpayer in this process. 11 that, it might encourage Congress to want us to take over 12 other companies. 13 make it to the government. 14 15 16 17 So we have to be careful how profitable we And so we will have to balance that and not tempt you for putting investments into other companies. Mr. Green. But in any case, the Administration has no objection to the principle? 18 Secretary Miller. 19 Mr. Green. 20 Mr. Moorhead. 21 Mr. Bethune. Not at all. Thank you, Mr. Secretary. Mr. Bethune? Mr. Secretary, I'm still worried about the 22 other poor devils who have to take bankruptcy and their 23 employees and their stockholders and their creditors, who 24 generally get ripped off in a bankruptcy proceeding. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis But presently, I'm more concerned about the fact that 190 829 II. gshHEE 1 we have put you through a couple of hours of questioning. And I think I would yield back the balance of my time. 2 Moorhead. 111 Mr. Kelly. 4 Mr. Kelly? Thank you, Mr. Chairman. Secretary, I nope I didn't understand this right. •But 7 • 9 10 in your last answer to my question, did I understand you correctly that eI-st way for the American public, our II vernment, our economy, our country, to avoid a balance of payments deficit and to avoid high welfare costs and foreign competition would be to invest in Chrysler? Secretary Miller. 12 13 111 That is not the best or only way. is a factor that comes about from this plan. One consequence of this plan is to avoid what we feel 14 would be a reorganization of Chrysler, probably leading to 15 its elimination as a major producer. lo Mr. Kelly. Mr. Secretary, I think maybe you 17 misunderstood the question because it had to do with lo Mr. Bethune's question. lY for profit. 20 It He was talking about the prospect Is the proposition that we are making here that although 21 the rest of the world can't see how much profit there is in 22 Chrysler, that we in government can see the profit. 23 And so this is really going to be a zinger in the 24 economy, and we are going to IS a lot for the balance of 25 payments with Chrysler, and this is the best investment we https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1 830 10 10 07 gshHEE IP 1 can make to solve all of these problems, balance of payment, 2 welfare, and foreign competition, is with Chrysler? 3 Chrysler is the answer to our problem in each of these 4 regards. 5 Secretary Miller. No, it is a consequence of the plan that we gain certain things. 7 8 Y 10 11 12 111 purpose. Our primary urpose is to look at the alternatives. one alternative is Chrysler goes down. The other alternative is we save it. The one about saving it is more profitable to all of the American people. Mr. Kelly. There is one other thing that I wanted to In the media and in your testimony, in 13 try and clear up. 14 both places it appears that there is some indication that 15 the United Auto Workers have made a sacrifice and have 16 helped the cash flow problem. 17 Now do I misunderstand that as we are here right now, 18 Chrysler is in the process of negotiating a pay increase of lY about $700 million? 20 wage and price guidelines of the Administration. 21 III It is not the primary That totally violates the voluntary The Administration has not complained and the UAW is They are not making a 22 getting a pay raise right now. 23 sacrifice compared with what exists now and compared with 24 what is being negotiated. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Right as we sit here, they are negotiating a pay raise. 831 190 10 06 gshHEE 1 2 3 4 Secretary Miller. I think they have completed that negotiation before we ever made a proposal. But it had not been approved by the Mr. Kelly. membership. Secretary Miller. It has been ratified, I believe. And I can only tell you facts. I 6 They have a new contract. 7 cannot make a value judgment. 8 value judgment. You will have to make the The facts are they made a contract that defers increases 10 and changes in their compensation for six months, thereby 11 generating savings for the company. 12 13 14 program, as negotiated with Ford and General Motors. So six months later, Chrysler people will start getting The 15 the same pay increases as General Motors and Ford. lo second year there will be a 4-month delay and the third 17 year, a 2-month delay. 16 Those delays, which means a permanent reduction from the 19 figures included in the Chrysler plan, means $200 million 20 less of cost than was in the plan. 21 111 The six months/ deferral of increases in the first-year I ao not give you a value judgment of whether that is I do not give you a value judgment of whether 22 sacrificial. 23 that should be more or less. 24 Those are the facts. 25 Mr. Kelly. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis But Mr. Secretary, this is a pay raise of 832 190 10 09 gshHEE 1 enormous proportions after the company came to the 2 government bankrupt. 3 Isn't that a fact? 4 Secretary Miller. It is a fact that we have private And it is a 5 collective bargaining in the United States. 6 fact that Chrysler and the UAW made a contract. 7 fact that if Congress felt that that contract was not 8 consistent with this proposal, they could turn it down or And it is a require something else. 10 Mr. Kelly. But it is a pay increase negotiated after 11 they came to the government saying that they were bankrupt, 12 that they needed money. 13 14 It was a pay contract entered into after they had first started asking for federal aid. Let me ask you another question. 15 Mr. Kelly. 16 You mentioned the loss of U.S. production. Chrysler has 17 a plant in Detroit that is 30, 40, 50 years old, or 18 something like that. 19 to go, wouldn't it? 20 111 Secretary Miller. Secretary Miller. That would be one of the first things Chrysler operates a number of plants 21 in the Detroit area, and at least I think two of them are 22 phasing out in this procedure and others are being 23 rehabilitated. 24 Mr. Kelly. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Now that is a loss of production. But the question I have for you is -- the loss of production that 833 190 10 10 gshHEE 1 Chrysler would sustain would be the loss of the least 2 efficient portions of its complex. 3 Isn't that so? 4 Secretary Miller. Well, what happens when this plan is 5 completed is that Chrysler, for whatever reasons in the 6 past, may have been, and in the future, will have gone 7 through the tooling and restructuring and re—equipping and then have plants that can produce competitively the kinds of 9 10 I wouldn't suppose that we should go back and look at And it has 11 other automobile companies have made mistakes. 12 been better that they have turned around and rehabilitated 13 and moved on to other models. 14 111 cars. And it is true here that we believe it is wise to do We do not endorse 15 the same. We do not condone the past. 16 the past. We look at a prospective program which will end 17 up with production output that the nation needs in places 18 reasonably consistent with where they now have employment 19 and with the least social harm and the least loss 20 economically to the nation. 21 Mr. Kelly. What I was suggesting, Mr. Secretary, was 22 that this is kind of a scare tactic about the loss of 23 production because I haven't heard anyone that appeared 24 knowleageable to indicate that the efficient departments of 25 Chrysler, the good departments would be lost. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 834 190 10 11 gshHEE 411 1 Every indication I have is that those departments would 2 carry on and whether they went through bankruptcy -- for 3 instance, the Omni and Horizon departments. 4 forward. 5 Chrysler. They wouldn't collapse. They would go And they are the best of 6 That is what the country needs now, isn't it? 7 Secretary Miller. Mr. Kelly, let me just say in our analysis, which you will want to look at, we do not suggest that these facilities will be permanently out of the 10 11 We suggest that in a failure of Chrysler there will be a 12 transition in which some new owners, some transfer, some 13 retooling is required and you will lose that period of 14 output and you will never gain back the full amount because 15 that would be lost permanently to other suppliers. 16 So what you are saying is true, but there is a gap 17 between the operating company today and the reformed use of 18 some facilities in the future and the effect on the market 19 and the process. 20 410 economy. So there is both a short—term loss, which we have priced 21 out for two years to be over $2-1/2 billion to the economy, 22 cost to the taxpayer. 23 that will attenuate in time because there will be, as you 24 say, the recycling of these plants into other uses. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Mr. Kelly. And we have more permanent losses Mr. Chairman, my time is up. I have some 835 190 13 12 gshHEE 110 1 additional questions. 2 Mr. Moorhead. 3 Mr. Blanchard. 4 Let me just state for the record that it would appear 5 Blanchard? Thank you, Mr. Chairman. most of the questions that have been propounded in the last few minutes have already been answered by previous 7 non—Chrysler, non—UAW witnesses. Ana that, essentilly, our dear judge from Zephyr Hills wants to put words in the mouth of the Secretary that have 10 11 not been stated. And I think for the record, I would want everyone to 12 recognize that it is somewhat interesting to see the judge 13 paraphrasing Ralph Nader, however. 14 amusing. 15 And I find that rather I don't have any other questions other than, again, to 16 restate my appreciation for very strong testimony by the 17 Secretary, testimony that has been well worth waiting for. 18 Thank you. Mr. Moorhead. 20 Mr. Kelly, for what I hope will be a last round. I hope so, too, Mr. Chairman. 21 Mr. Kelly. 22 Throughout the course of the presentation that has been 23 made here in support of this charity program for Chrysler, 24 there has been some suggestions by Mr. Fraser of the UAW 25 that the government buy a billion dollars' worth of stock, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4 836 1Y0 10 13 gshHEE 100 1 by Nader that the government acquire a 30 percent equity 2 ownership in Chrysler, and that the government then start 3 and control the product that would be produced by the 4 company. That also, I think implicit in that suggestion is the 5 o proposition that the government will also be determining 7 what Americans will buy because when you produce a product, 8 it doesn't necessarily mean the people are going to use it. 9 So if you produce it by government mandate, then you 10 have got to establish by mandate that the people will use 11 it. 12 I think this is a marked direction that we are 13 taking. You in your presentation suggested that you would be 14 able to control the management, that if the management did 15 not produce correctly, as I understand, that you would have 16 some control over the personnel. 17 The Chairman of the full committee suggested that the 18 government ought to be able, through the process of this 19 program, to be able to control the products that Americans 20 will be able to use. In other words, we in Congress are going to tell the 21 410 22 American people what kind of cars they are going to drive 23 and what they are going to ride in, whether they like it or 24 not. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Then you suggested that the lender has a lot of control 837 190 10 14 1 suggested that the lender has a lot of control in the normal 2 sequence. 3 government ownership and control are not so unique. gshHEE 3ut the thing I want to ask you is when you have control 4 1 So, really, all of these suggestions of by the private sector, do the big bankers on Nall Street • 7 8 billion decisions the way we're making them here make today? In other words, if we mark this up tomorrow, I want to have a yes or no vote on $1-1/2 billion on Chrysler. 10 got this document a few minutes ago'. And I Is that the way they do it on Wall Street? 12 13 14 15 • 410 Secretary Miller. Yes. As a matter of fact, it is not far different. If you look at the months in which the Congress has looked at this problem and heard from many, many witnesses and had many, many presentations of financial data and 17 looked at the many, many man—years of effort that we have 18 put into this analysis and look at the data that we have 1 given you, you would have a report in the aggregate that 20 certainly would be as extensive as a loan committee of a 21 bank would receive, and having the judgment and 22 recommendation of management that the loan was reasonable, 23 that the repayment was reasonable, and that the terms were 24 reasonable. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis And I hope that you will decide that this is a 838 I0 10 15 gshHEE fir 1 reasonable proposition and this loan committee will vote 2 yes. 3 Mr. Green. Would the gentleman yield? 4 Mr. Kelly. Yes. Mr. Green. I really don't think that a financial on Wall Street would proceed without a debt payment or debt service 7 schedule keyed to the assumptions upon which the loan 6 guarantee is being made. 9 111 And we do not have that yet. Et cetera. 10 Mr. Kelly. II Secretary Miller. 12 Mr. Kelly. Pardon me? I just said "et cetera," and that means that 13 there's a whole bunch of other things that have not been 14 produced as well. 15 Secretary Miller. This is a loan where the loan lo committee would say, we authorize you to do your part of it 17 if others do their part, and the other part to be done is 18 $1-1/2 billion of credit from other people. 1) 20 21 22 23 And I think that that would be a not abnormal way to approach it. Mr. Green. But I think that they would want to see some projection of how they would want to get paid back. Secretary Miller. Nell, I think that they would do 24 that, or want to trust their management in the program, 25 since there is a requirement that the Secretary of the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1Y0 10 16 gsh'ciEE 1 Treasury find that there be reasonable assurance of 2 repayment. 3 agreement, of the financing agreement, rather, we would have 4 to have that assurance. 5 That means in the final negotiation of the loan Mr. Green. I guess my problem with waiting for that is 6 that I know that next year is divisible by four and that is 7 something that a loan committee does not have to take account of, but I as a member of Congress do. Mr. Moorhead. 10 11 12 • Mr. Secretary, do you favor making this a direct loan program? Secretary Miller. No. guaranteed loan route. 14 of those equity suggestions. 15 Kelly. ie would prefer to go in the And incidentally, we do disfavor any 13 Then let me ask you this. Then implicit in 16 this position that you have just announced is the 17 proposition that the Federal Financing Bank will absolutely 18 not be involved. lY Secretary Miller. As I mentioned before, our 20 contemplation is that that not be the way this be financed. 71 Vie would not use the Federal Financing Bank, but we would 22 not want to foreclose the use of it at some subsequent time. 23 24 Ilk Mr. Kelly. Mr. Kelly, for one last question. 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Mr. Kelly. Okay. Now if the Federal Financing Bank is used, then this becomes a direct loan. Secretary Miller. If it ever is used, yes. 840 90 10 17 gshHEE 1 Mr. Kelly. It then becomes a direct loan and that is a 2 very real possibility under the terms of the legislation 3 that is before us. 4 5 Secretary Miller. If the paper were later acquired by that bank, yes. Thank you, Mr. Chairman. 6 Mr. Kelly. 7 Mr. Moorhead. Thank you, Mr. Secretary. The subcommittee stands adjourned. (Whereupon, at 1:10 p.m., the subcommittee adjourned.) 10 Q., 12 13 14 15 16 17 19 20 21 22 23 24 25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis