Return to Transcripts main page
CNN Newsroom
Big 3 Bailout Loan
Aired December 04, 2008 - 12:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
TONY HARRIS, CNN ANCHOR: Trying to drive home their point. The CEOs of the big three automakers left the corporate jets at home this time, arriving in Washington in fuel-efficient hybrids. They're asking a skeptical Congress for billions of dollars again.
(BEGIN VIDEO CLIP)
SEN. CHRISTOPHER DODD (D-CT), BANKING CHAIRMAN: At a time when the average Americans are sacrificing mightily for the sake of our nation's economic recovery, we must, I believe, insist that companies benefiting from those sacrifices act as if they deserved them. At the same time, I believe we need to take action to help our domestic auto industry in order to protect our nation's economy and America's workers.
(END VIDEO CLIP)
(BEGIN VIDEO CLIP)
SEN. RICHARD SHELBY (R), ALABAMA: At our last hearing I asked whether this was the end, or was it just the beginning? We now have an answer, I believe.
In just two short weeks, the price tag has jumped from $24 billion to $34 billion -- $25 billion to $34 billion in two weeks. I'm interested to hear what changed and why we should believe that things will get better as our economy continues to contract.
(END VIDEO CLIP)
HARRIS: And right now they're trying to convince the Senate Banking Committee of the need for a $34 billion rescue loan, up from $25 billion.
Here's a quick look at what they want.
General Motors seeks $12 billion, and says it needs $4 billion immediately. GM says it has just enough money to make it through the end of the year. GM also seeking a $6 billion line of credit.
Chrysler says it needs $7 billion by the end of this year. Ford is requesting $9 billion for a standby line of credit. For all three, $34 billion big ones.
Our correspondents are all over the story. Brianna Keilar on Capitol Hill. Brooke Baldwin in Warren, Michigan, with reaction from autoworkers. And Chief Business Correspondent Ali Velshi joins us. He is in New York.
Let's see what kind of impression the CEOs are making. Our Brianna Keilar is on Capitol Hill.
And Brianna, the senators have been doing most of the talking. Are they still thinking about a loan, money from, perhaps, the TARP program?
BRIANNA KEILAR, CNN CORRESPONDENT: Well, that's certainly what Democratic leadership is pushing. And I should mention that what we're looking at right now is the beginning of the second panel. This is the panel we've been waiting for, the CEOs of the automakers, who are basically going to be making their case again to Congress about why they should get this money, and they're going to be pushing these plans that they unveiled on Tuesday.
For instance, to do things like cut CEO pay to just $1 per year, and basically retool their car line, get rid of some that aren't working for them and get rid of some -- and move towards fuel efficiency.
Let's listen, Tony.
(JOINED IN PROGRESS)
RICK WAGONER, CEO, GENERAL MOTORS: ... It is something that we want to extend our thanks.
I also wanted to thank the speaker and the Senate majority leader for their very specific direction on what was being requested in the plan. It helped us to think more broadly, and we appreciate that direction.
As we put our plan together, it happens to be, somewhat ironically, GM's centennial year this year. We thought about our past and what that should mean for our future, and we obviously have a lot of things that we're proud of. There's a lot of great accomplishments on the company's behalf, and there are also mistakes during our -- during our history.
What we're trying to do as we put this plan together, which we submitted earlier this week, was to learn from both of those. Learn from our contributions, our successes, and learn from our mistakes to make sure we didn't repeat the mistakes and we built on the contributions.
And so as we thought about things like developing a comprehensive plan, we said, boy, we have done best in our history when we focused on technology leadership and technological excellence, when we've kept our focus on being cost competitive every day, when we've kept close alignment between the goals of the company and the goals of the country. And so the plan that we're submitting to you is one that I think does those, and many other things, and it's a plan that I and my General Motors team believe very strongly in.
The plan shows why GM needs temporary government funding, how that funding will be used, how we intend to repay taxpayers, and why funding is beneficial to the U.S. government. In some ways the plan accelerates the restructuring that's been under way for the past several years, but in many ways it radically expands it, and I think it's fair to say creates a blueprint for a new General Motors.
The key elements, first of all, it's based on what we think is a realistic, although quite a bit more conservative, view of the market than we've traditionally used. And it's also comprehensive. It considers the need to address operating issues, as well as to address our financial structure.
Key highlights include a renewed and expanded commitment to new technologies, especially advanced propulsion and green jobs; increase production of fuel-efficient vehicles; a reduction in the number of brands, models and retail outlets so we can focus our resources; further manufacturing structural cost reductions; working with our UAW counterparts to ensure full labor competiveness with foreign manufacturers here in the U.S.; significant restructuring of our balance sheet; and sacrifices by all parties involved, including continued suspension of our common stock dividend and changes in executive and board compensation, including reducing our board's compensation and mine to $1 a year; and cessation of our corporate aircraft operations.
These and other tough but necessary actions will position our company for long-term success, and this success is achievable if we can weather the global financial crisis and the lowest level of U.S. auto sales on a per-capita basis in over 50 years.
To that end, our plan respectfully requests $12 billion in short- term loans and a $6 billion line of credit. We are seeking an immediate loan of $4 billion and potentially a second draw of up to $4 billion in January, reflecting the current very weak state of automotive production and demand.
The intent is to begin repayment as soon as 2011, and fully repay by 2012 under our baseline industry forecast scenario. Warrants would allow taxpayers to benefit if GM's share price increases. We also propose a federal oversight board that would facilitate restructuring negotiations and protect taxpayers.
GM has been an important part of American culture for 100 years, and most of that time as the world's leading automaker. We're here today because we made mistakes, which we're learning from, because some forces beyond our control have pushed us to the brink, and most importantly, because saving General Motors and all this company represents is a job worth doing.
Thank you very much, and I look forward to your questions.
DODD: Thank you very much, Mr. Wagoner.
Mr. Gettlelfinger, welcome.
RON GETTELFINGER, UAW PRESIDENT: Mr. Chairman, members of the committee, on behalf of the men and women of the UAW, I appreciate this opportunity to present our views on the state of the domestic auto industry.
The UAW believes that it's imperative that the federal government act this month to provide an emergency bridge loan to General Motors, Ford and Chrysler. Without such assistance, General Motors and Chrysler could run out of funds in the very near future and be forced to liquidate. The collapse of these companies would inevitably drag down numerous auto parts suppliers, which in turn could lead to the collapse of Ford.
The UAW supports conditioning any emergency bridge loan both on strict accountability measures and on the companies pursuing restructuring plans that will ensure their viability of their operations in the coming years. For such restructuring plans to succeed, we recognize that all stakeholders, equity and bond holders, suppliers, dealers, workers and management, must come to the table and share in the sacrifices that will be needed.
The UAW and the workers we represent are prepared to do our part. We are continuing to negotiate over ways to make the operations of General Motors, Ford and Chrysler more efficient and competitive.
Workers and retirees have already stepped forward and made enormous sacrifices. Thanks to the changes in the 2005 and the 2007 contracts, the labor cost gap with the foreign transplant operations will be largely or completely eliminated.
The UAW recognizes that the current crisis may require workers to make further sacrifices. For example, we recognize that the contributions owed by the companies to the retiree health care VEBA fund may need to be spread out and that there may need to be adjustments in other areas. But the UAW vigorously opposes any attempt to make workers and retirees the scapegoats and to make them shoulder the entire burden of any restructuring. Wages and benefits only make up 10 percent of the cost of the domestic auto companies.
The UAW also submits that it is not feasible for Congress to hammer out the details of a complete restructuring plan during the coming week. There's simply not enough time to work through the many difficult and complex issues associated with all of the key stakeholders, as well as changes in the business operations of the companies.
What Congress can and should do is to put in place a process that will require all of the stakeholders to participate in a restructuring of the companies outside of bankruptcy. This process should ensure that there is fairness in the sacrifices and that the companies will be able to continue as viable business operations.
This process can begin immediately under the supervision of the next administration. By doing so, Congress can make sure that the emergency assistance is indeed a bridge to a brighter future.
Contrary to the assertions by some commentators in the present environment, a so-called prepackaged Chapter 11 bankruptcy is simply not a viable option for restructuring the Detroit-based auto companies. Research has indicated that the public will not buy vehicles from a company in bankruptcy. In addition, a test to our testimony is a detailed analysis, prepared with the assistance of experienced bankruptcy practitioners, explaining that a prepackaged bankruptcy is not a feasible option for the domestic auto companies because of the size and complexity of the issues that would be involved in any restructuring, including the relationships with thousands of dealers and suppliers and major changes in business operation.
The UAW believes that the recent actions by the federal government to provide an enormous bailout to Citigroup reinforces the case for providing an emergency bridge loan to the Detroit-based auto companies. If the federal government can provide this type of a blank check to Wall Street, it should also be able to provide an emergency bridge loan to General Motors, Ford and Chrysler, especially since these companies would be subject to strict accountability and viability requirements.
In conclusion, the UAW strongly urges Congress to act this month to approve an emergency bridge loan to General Motors, Ford and Chrysler, to enable them to continue operations, and to avoid the disastrous consequences that their liquidation would involve for millions of workers and retirees and for our entire nation.
Thank you very much.
DODD: Thank you very much, President Gettelfinger.
And Mr. Mullally, welcome back to the committee.
ALAN MULALLY, PRESIDENT & CEO, FORD MOTOR COMPANY: Thank you.
Mr. Chairman, Senator Shelby, and members of the economy, since the last hearing I have thought a great deal about the concerns that you expressed. I want you to know I heard your message loud and clear.
On Tuesday, you received Ford's detailed and comprehensive business plan. Now, I appreciate the opportunity to return here today to share Ford's vision and progress in becoming a profitable, growing company.
You were clear that the business model needs to change. I couldn't agree more. And that's exactly why I came to Ford two years ago to join Bill Ford in implementing his vision to transform our company and build a greener future using advanced technology.
Let me share with you what we have done to change from how it used to be doing business to how we do business now.
It used to be that we had too many brands. Now we have a laser focus on our most important brand, the Ford Blue Oval.
In the last two years, we have sold Aston Martin, Jaguar and Land Rover, and we reduced our investment in Mazda. And this week, we announced we are considering a sale of Volvo. It used to be that our approach to our customers was, if you build it, they will come. We produced more vehicles than our customers wanted, and then slashed prices, hurting the residual values of those vehicles and hurting our customers. Now we are aggressively matching production to meet the true customer demand.
It used to be that we focused heavily on trucks and SUVs. Now we are shifting to a balanced product portfolio with even more focus on small cars and the advanced technologies that will drive higher fuel economy in all of our vehicles.
It used to be that our labor costs made us uncompetitive. Now we have a groundbreaking agreement with the UAW two reduce our labor costs. And we appreciate the UAW's continuing willingness to help close the competitive gap.
It used to be that we had too many suppliers and dealers. Now we are putting in place the right structure to maximize the efficiency and the profitability of all of our partners.
It used to be that we operated regionally -- European cars for Europe, Asian cars for Asia, American cars for the U.S. market. Now we are leveraging our global assets, innovation, technology and scale to deliver world-class products for every market.
It used to that our goal was simply to compete. Now we are absolutely committed to exceeding our customer's expectations for quality, fuel efficiency, safety and affordability.
This is the Ford story. We are more balanced. We are more efficient. We are more global. And we are really focused.
In short, we are on the right plan to becoming a profitable, growing company.
We have moved our business model in a completely new direction, in line with the most successful companies and competitors around the world. And as a result of our progress, we made a profit in the first quarter of this year, 2008. Unfortunately, we all are facing the severe economic downturn that has slowed our momentum.
Despite this downturn, Ford does not anticipate a near-term liquidity crisis. In fact, we expect our automobile business to be profitable in 2011. But we do support a government bridge loan, because it is critically important to the United States automobile industry.
Specifically, Ford requests access to $9 billion in bridge financing, something we hope we will not need to use. Instead, we continue to drive change in our company. This line of credit will serve as a critical safeguard, if events require it. And if we did need to access this loan, we would use the money to continue our aggressive transformation and restructuring.
Ford is an American economy and an American icon. We are woven into the fabric of every community that relies on our cars and trucks, and the jobs our company supports. The entire Ford team, from our employees to shareholders, suppliers to dealers, is absolutely committed to implementing our new business model and becoming a lean, profitable company that builds the best cars and trucks on road for our customers.
There is a lot more work to do, but we are passionate about the future of Ford. In fact, we invite you to visit us in Dearborn to kick the tires, look under the hood and talk to our employees. We hope you will join us and see for yourselves the progress we are making to develop the vehicles of the future.
Thank you very much.
DODD: Thank you very much, Mr. Mullally.
Mr. Nardelli.
ROBERT NARDELLI, CEO, CHRYSLER: Mr. Chairman, members of the panel, I appreciate the opportunity to present to you again today, and I'm here representing the one million people who depend upon Chrysler for their livelihoods. Before I answer your questions regarding our loan request, let me be very clear and state why we are here.
Chrysler is requesting a $7 billion loan to bridge the current financial crisis. In an exchange, Chrysler is committed to continue our restructuring, including negotiating cost-saving concessions from all constituents, invest in fuel-efficient cars and trucks that people want to buy, and begin repayment of the government loan in 2012. I also want to reinforce the need for Chrysler Financial to receive immediate assistance from TARP, as they're continued vitality is a critical assumption in our plan. Chrysler requires this loan to get back to the transformation that began one year ago, gaining our independence.
As a newly independent company in 2007, Chrysler was on track for financial profitability. We eliminated more than 1.2 million units, or 30 percent of our capacity. We reduced our fixed costs by $2.4 billion. We separated more than 32,000 employees, including, unfortunately, just 5,000 last Wednesday before Thanksgiving.
And at the same time, we've invested more than a half a billion dollars in product improvement in our first 60 days. We improved our JD Power's quality scores and we reduced our warranty claims by 29 percent. As a result, through the first half of 2008, Chrysler met or exceeded its operating plan and ended the first half of the year with $9.4 billion in unrestricted cash.
We're here because of the financial crisis that started in 2007 and accelerated at the end of the second quarter of 2008. As consumer confidence fell and credit markets remained frozen, the lowest U.S. auto sales in more than 20 years has put tremendous pressure on our cash position.
The U.S. industry sales fell from $17 million a year in 2007 to a monthly-annualized rate of $10.5 million just last month. That's 6.5 million units of decline. So what is the impact on Chrysler from that result? With a 10 percent market share, it would translate to Chrysler to a loss of 650,000 vehicles, or roughly $16 billion of lost revenue opportunity this year alone.
With such a huge hit to our sales and revenue base, Chrysler requires a loan to continue the restructuring and fund our product renaissance. Chrysler has a sound plan for financial viability that includes the seeking of shared sacrifice from all constituents.
We've identified approximately $4 billion of potential cost savings and improvements that have been included in our plan, and we're committed to negotiate with all constituents to achieve those savings. Our plan also includes producing high-quality fuel-efficient cars and trucks that people want to buy, while supporting our country's energy security and environmental sustainability goals.
For 2009 model year, 73 percent of our products will offer improved fuel efficiency compared with our 2008 models. We plan on launching additional small fuel-efficient vehicles. Envy is our breakthrough family of all electric vehicles, and range-extended electric vehicles similar to the one I drove here today.
Chrysler's long-range product plan is robust, it's realistic and it's green. The plan features 24 major launches from 2009 through 2012. It includes a hybrid Ram truck, our first electric drive vehicle in 2010, with three additional models by 2013.
A key feature of Chrysler's future is our capability as an electric vehicle company. Through our (INAUDIBLE), which is our neighborhood electric vehicle division, Chrysler is the largest producer of electric drive vehicles in the U.S. today. Combined with new products from our Envy group, we expect to have 500,000 Chrysler electric-drive vehicles on the road by 2013.
Chrysler will continue to aggressively pursue new business models that include alliances, partnerships and consolidation. This model is currently successful in helping Chrysler increase the effective utilization of our manufacturing capacity.
For example, in North America today, Chrysler manufactures all of Volkswagen minivans, and beginning in 2012, will produce all of Nissan's full-size trucks. With government collaboration, our industry can accelerate how America drives cutting-edge technology. And an automotive energy security alliance would coordinate public and private spending, which is already devoted to advanced technologies, produce basic technology available to all manufacturing, drive private investments to meet our national energy environmental goals. Such an alliance would help ensure that as a country, we do not trade our current dependence on foreign oil for dependence on foreign technology.
So in closing, I recognize that this is a significant amount of public money. However, we believe this is the least costly alternative, considering the depth of the economic crisis and the options that we face. Thank you very much.
DODD: Thank you very much, Mr. Nardelli.
James, welcome. Welcome to the committee.
JAMES FLEMING, PRESIDENT, CONNECTICUT AUTOMOTIVE RETAILERS: Thank you, Mr. Chairman.
DODD: Is that microphone on?
FLEMING: Thank you, Mr. Chairman, Senator Shelby, members of the committee.
As president of the Connecticut Automotive Retailers Association, I represent 300 dealers in Connecticut and their 14,000 employees, all of whom have good jobs with great wages and benefits. Our dealers are small business people and entrepreneurs. And some of them are sitting behind me here today to let you know how important this legislation is to them and to our dealers.
We appreciate the fact that the dealers' perspective is being asked for, because we have something to say. And I want to talk a little bit about the ripple effect that we've heard a little bit about this morning here.
To our people, to these small business people, it is a tsunami. It is not a ripple. And I want to just relate what a dealer told me before I came down here to Washington to testify.
He indicated to me that last month, he had 30 people that came into his dealership. Those 30 people would normally have qualified to get financing to purchase a car, but because of how squeamish the banks are, just with talk of bankruptcy, he couldn't get these people financed. That is how serious it is.
Now, what does that mean to the state of Connecticut? I got an e-mail just before I came up here to talk about the impact that is having on the state's budget. Every one of the senators here, if you go back and talk to your state budget offices that are trying to deal with deficit situations, will find out what a big part automobile sales represent in that budget.
In Connecticut, it represents a loss of $65 million in our budget. Just in new car sales tax. That's what's been going on in our state budget.
Members, this is not a bailout bill for Detroit or for Wall Street. This is about investing in the future of our small towns and businesses.
The economies and the budgets of state government, as I said, ultimately are going to be affected by what you do here. If you go back to your constituents, as I've done as a state senator in my past life, and they ask you, "What did you vote for?" What you're voting for here, what you're supporting here, is keeping people employed in those small businesses in your district. That is what this is about.
If you say no, or if do you nothing, which is essentially no, and allow bankruptcy to occur, the impact on the dealers and the people that they employ in your home states will be dramatic. People will not buy cars from a bankrupt entity. They're afraid to buy cars as it is right now. This is the second largest purchase that they will ever make in their life.
This is not the same as a structured bankruptcy for an airline. This is a big -- this is a big expenditure on the part of people back in your districts. If you say no -- if you say yes to this financing package, it gives us some time to try to adjust to what is going on in the economy.
We've lost 25 dealerships in Connecticut in the last year. We've lost 700 jobs in Connecticut in the last year. Those people are not going to be able to contribute to the economy.
Another issue I would like to raise with you -- and I hope, Gentlemen, and Senator Dole, that you will ask me in detail about this -- when a dealer goes out of business, there is no golden parachute for that dealer. I know a dealer who last month lost his Chevy dealership. He had mortgaged his home, he had lost all of his personal wealth that he put into that business to try to keep it alive.
He doesn't want a piece of this money. He wants the manufacturers to survive so he can continue to compete at that local level, and to compete with these gentlemen that are here, because dealers are different than the manufactures in Detroit.
If you want to hold them accountable, do it. Hold them accountable. It's the public's money. But if you do not pass this bill, the affect on your constituents and on people that I represent will be dramatic. So I urge to you take that action, and do it fast, because just as we've been sitting here today, I know dealers who have had to lay people off.
So with that said, Mr. Chairman, I know I have a few seconds left here. I would just ask you to consider the human side of what's going on. And when you have an opportunity, go back to your districts, go into those dealerships, and see what these guys are doing.
It's tough work. They're writing the paychecks out. They do not have massive staffs. They have maybe 30 people in a dealership.
In Connecticut, somebody's making about $55,000 a year, on average, in a dealership. That's good pay. That will go away if we wait too long and you act negatively on what's before you.
Thank you, Mr. Chairman.
DODD: Well, thank you, Mr. Fleming.
I point out -- my colleagues, I'm sure, have done this as well -- but about a week or so ago, I had a long meeting and a good meeting with the dealers of my own state, and good conversations with them about the implications of this as well. So it's a worthwhile visit to make, to hear their perspective on this. And I know my colleagues probably have done the same.
But I want to thank Senator Fleming for organizing that and my state giving me a chance to hear from my dealers as well.
Mr. Wandell.
KEITH WANDELL, PRESIDENT & COO, JOHNSON CONTROLS INC.: Chairman Dodd, Senator Shelby, and members of the committee, thank you for the opportunity to provide testimony on the state of the domestic automotive industry.
My name is Keith Wandell, and I'm president and chief operating officer of Johnson Controls Incorporated. We are a global multi- industry company with sales of $38 billion in 2008, and approximately 37 percent of our sales involve the supply of systems and services to improve the energy efficiency of non-residential and residential buildings worldwide. We are also the largest supplier of automotive batteries to the automotive after market, as well as the original equipment manufacturers in the world.
In addition, our company is the seventh largest automotive supplier in the world. We're the third largest supplier in North America, behind Magna International, which is a Canadian company, and Delphi, a U.S. company which we all know has been in bankruptcy since 2005.
Our global sales of seats and other interior products to the automotive industry totaled -- and I apologize. There was a typo in our document. It's $18 billion -- $6.7 billion of that were to the North American markets specifically.
We supply every automaker with a presence in the U.S., with just under half of our sales to the Detroit three and the balance to the transplants. Johnson Controls has 43,000 employees in the U.S.; 22,000 of those are in the states represented by the members of this committee.
While Johnson Controls is a key supplier to the global automotive industry, we are somewhat atypical of most automotive suppliers because we're much larger than most. We're more diversified by our products, our geographies and our markets. Being a supplier of interior systems, we're probably less capital intensive than many other automotive suppliers. We are profitable and we have a strong balance sheet.
We do, however, share the same issues and concerns about the domestic automotive industry as those suppliers which are solely dedicated to the automotive industry. A Detroit three failure would have a dire economic ramification for the vast inner-connected supply chain of companies that provide parts and components which enable the U.S. automakers to assemble vehicles. Our main concern is that once cascading supply chain interruptions begin, many suppliers will fail due to the interdependence of that supply chain. And many of those companies, which would be impacted, are small, women and minority-owned businesses.
During 2008, Johns Controls (ph) purchased $1.7 billion of goods and services from minority and female-owned businesses. The Detroit three had a combined purchase of approximately $12 billion from these same businesses. Should any one of the U.S. automakers suddenly fail, the vast majority of these women and the minority-owned businesses will fail and will fail quickly.
Let me share an example with you. Recently, earlier this year, a minority supplier to Johns Control, and a supplier that really supplied a vast part of the auto industry, Plastec (ph) Engineered Products, failed and went into bankruptcy. Plastec had $800 million of revenue, they shipped 6,200 different part numbers to 52 vehicle assembly plants in North America, supplying 121 vehicle lines and 12 customers -- General Motors, Ford, Chrysler, Volkswagen, Mercedes, Honda, Toyota, Nissan, Honda Kia, AM General, Mazda and Mitsubishi.
Had Johns Controls in the first-year lending group not acquired Plastec assets out of bankruptcy, had we not assembled and operating team to manage the process, and had we not provided the bridge financing necessary to avoid liquidation, all 52 of those assembly plants would have been affected, to one degree or another, for varying durations. That is one small microcosm of how interconnected the supply chain is.
A year ago, approximately 20 percent of our Johns Controls automotive suppliers, part suppliers that provide parts to us that allow us to provide complete seed (ph) assemblies and cockpits and et cetera to the Detroit three, were financially distressed according to third-party independent sources. Since the rapid deterioration of industry volumes, that number has grown to beyond 35 percent. So over 35 percent of our suppliers are financially distressed and on the verge of bankruptcy. And this number continues to grow.
This supply base has over 100,000 employees. Should one of the Detroit three fail, a significant number of supplier failures would occur and would become unmanageable. And I know that Mr. Nardelli and Mr. Wagoner and Mr. Mulally and their organizations today, there's an inordinate amount of time being spent by their supply chain people in trying to manage the number of bankruptcies in financially distressed suppliers that there are in this industry, just like we are.
And I can assure you that even though Toyota, Nissan, Honda and Mercedes and every other foreign car maker who assembles plants in America aren't here today, they, too, are deeply concerned about the viability of the U.S. supply base. I think that all of us here agree that major changes are need in the North American automotive industry. There's major changes that are needed in the supply chain as well. But we hope everyone here understands how important it is that these changes occur in an orderly fashion, which is unlikely if we allow even one of these companies to fail. There will be an implosion of the supply base that will affect all of the car companies.
It is extremely important that we have a sound, healthy and sustainable U.S.-owned automotive industry that is competitive globally. And I do not believe that Americans, in spite of the CNN poll that came out this morning that said 60 percent of the Americans are not in favor of some sort of financial aid, I do not believe that Americans want to yield an industry that impacts the millions of jobs and invests billions of dollars in technology that will help secure our energy independence through new, innovative and environmentally-friendly transportation.
The supply base provides 70 percent of the value added components that go into a vehicle and spend over 40 percent of the total R&D dollars in the automotive industry. The plans that have been submitted here address many of the issues that have been burdensome to the health of the industry. And I think given the opportunity, the Detroit three, in their own way and each one, are on their own way to resolving a lot of these issue. And I think given, you know, an opportunity to address these challenges, I think we'll be on our way to bringing to the market consumer desired, fuel-efficient, environmentally friendly (ph) vehicles that the consumers are desiring.
I was also asked to comment on the potential impact of a Detroit three failure on our company. Earlier I said that we're diversified, profitable and we have a strong balance sheet. Unlike many suppliers, we would weather the storm, largely due to our strong, non- automotive businesses.
A Detroit three failure would have a short to midterm impact probably on our cash flow or access to capital, maybe, and possibly our cost to borrowing. One of the biggest impacts would be the curtailment of our investments in new technologies in all of our businesses, including the hybrid vehicle technology that we're working with all the big three on.
So in conclusion, we believe that the industry has a long and proud heritage. It's played a significant role in developing this country's strong, economic position in the world. And speaking for our company, I'm sure all of the auto suppliers, we would respectfully urge the members of this committee and Congress as a whole to provide the financial support that the automakers need at this critical time.
Thank you very much for your attention.
SEN. CHRISTOPHER DODD (D) CONNECTICUT: Thank you very much.
Dr. Zandi, thank you.
MARK ZANDI, CHIEF ECONOMIST, CO-FOUNDER, MOODY'S ECONOMY: Thank you, Mr. Chairman, Senator Shelby and the rest of the committee for the opportunity to speak here today.
My remarks represent my personal views, not those of the Moody's corporation, which is my employer.
I will make four points in my remarks.
Point one, the federal government should provide financial help to the domestic automakers. Without help, the automakers will quickly be in bankruptcy, resulting in liquidations and hundreds of thousands of layoffs at a time when the broader economy is suffering its worse recession since the Great Depression. If the automakers file for bankruptcy anytime in the next few weeks or even months, then this would be very damaging to the sliding economy.
The big three employ fewer than 250,000 people in the United States, but given their broad links into the rest of the economy, as we've seen, closer to 2.5 million jobs would be immediately at risk. Hundreds of thousands would lose their jobs when the economy is already set to lose several million. The hit to already record-low consumer business and investor confidence would be devastating.
Point two. Under the most likely outlook for the economy and auto industry, the $34 billion in loans requested by the big three will not be sufficient for them to avoid bankruptcy at some point in the next two years. It would ultimately need, in my view, somewhere between $75 billion and $125 billion to avoid this fate.
This cost estimate is based in part ono the expectation that light vehicle sales will average close to 11 million units in 2009 and 13.5 million units in 2010. For context, vehicle sales averaged almost 17 million units annually between 1999 and 2006.
This extraordinarily weak sales outlook is due to three factors. First, the current sharp decline in employment. We will lose 2 million jobs this year, at least that many in 2009. The severe credit crunch, which is undermining the availability of vehicle loans and leases, and the significant amount of what I call spent up vehicle demand created earlier in the decade as the automakers used increasingly aggressive financial incentives to artificially support demand. Seventeen million units is not supportable by underlying demand.
The cost of keeping the big three out of bankruptcy also significantly depends on their ability to arrest the decline in their market share. Their share has been steadily falling, reflecting many factors, but most critically higher gasoline prices. The very recent decline in gas prices notwithstanding, vehicle buyers will not quickly return to buying the big three's less fuel efficient vehicles.
Whether their market share remains close to its current 50 percent, or declines to near to 40 percent in the next two years will determine whether the cost of avoiding bankruptcy will be $75 billion or $125 billion.
Point three. The big three's restructuring plans, if fully executed, could result in a viable, long-term, domestic auto industry. However, given the very difficult changes that this will require of the big three and their stakeholders, there's a considerable risk the plans will not be executed effectively. Each automaker has outlined laudable steps to return to long-term viability, it envisions deep cost cutting, producing more fuel effect cars, rationalizing their brands and retail outlets and refocusing their marketing efforts. And they have already made significant strides in restructuring their operations and reducing costs. The industries the labor costs have actually declined during this decade.
Moreover, given the considerable UAW wage and benefit concessions in '07, further substantial cost savings would soon occur. But despite this clear progress, it would be extraordinarily challenges for the big three to convince all of their stakeholders, including management and the UAW, their creditors, suppliers and dealers, to quickly make the very substantial concessions necessary to make their plans work.
Point four. I recommend that Congress provide the $34 billion in aid that the big three requested in exchange for warrants and restrictions on exec comp and dividend payments. This is necessary given the potential for the automakers imminent, disorderly bankruptcy at an extraordinary fragile time for the economy.
The aid should be disbursed in two (INAUDIBLE). The first pay out should be sufficient to allow the automakers to comfortably avoid bankruptcy when the economy is most vulnerable, over the next three to six months.
The seconds pay out should only occur if the automakers are hitting benchmark in their restructuring plans, which could be determined by the oversight board. Policymakers should be convinced that they are not throwing good money after bad.
Congress should, at the same time, make it clear that if the restructuring plans are unsuccessful, then no more government loans will be forthcoming. Instead, Congress will ensure there's an orderly bankruptcy process by providing financing in bankruptcy and guaranteeing warranties on new vehicles sold.
There is a reasonable concern that if the big three file for a pre- arranged bankruptcy, even a government supported bankruptcy, people would stop buying their cars. But getting a loan from the government, even one as large as $34 billion, won't convince anyone that they will be around for very long either.
There's also a worry that bankruptcy would further damage the fragile financial system. But debt holders have had a long time to adjust to this possibility.
A concerted, comprehensive and consistent government response to the economic crisis is vitally need. The economy needs a sizable economic recovery package and a substantive foreclosure mitigation plan. But the government's resources are not unlimited and must be used wisely. The federal budget deficit will easily top $100 trillion this physical year and again in fiscal year 2010. The automakers have come forth with a reasonable plan to restructure their businesses. But $34 billion in a plan may very well not be enough for them to become viable companies again. Policymakers must prepare for this eventuality.
Thank you.
DODD: Thank you very much, Dr. Zandi.
Let me thank all of you for your testimony. And we've got a large participation of members here. And I'm going to try to move right along with my questions and get as quick an answers as we can from you on these matters. And I'll ask my colleagues to do as well. There's an awful lot to talk about here.
Let me begin. You all are sitting here. I noticed all of you sitting here when the General Accounting Office was testifying and describing in effect the 1979 crisis situation, which I'm sure Mr. Nardelli and the other CEOs, and Ron Gettelfinger are very familiar with. The others maybe as well.
Just quickly, if you would, and I'll ask the CEOs, if you would, were we to craft something like that, whether it's a trustee or an oversight board that was described by the General Accounting Office, would you be willing to accept such a structure? (INAUDIBLE).
UNIDENTIFIED MALE: Yes, sir.
DODD: You would?
UNIDENTIFIED MALE: Yes. Yes.
DODD: Mr. Nardelli?
NARDELLI: Yes, sir, and we included that in our statement.
DODD: Anything you add to what has been said by him? That you would suggest in terms of the time constraints we're dealing with? If we were to take virtually the same model in '79 on an oversight board, which I think worked fairly well. I think it sort of covered what our colleagues raised earlier, it was more of a decision-making, rather than just oversight. Is that -- you'd add anything to that at all?
RICK WAGONER, CEO, GENERAL MOTORS: I would just reinforce the point about moving fast on this would enable all of us to understand the direction. There's nuances in this area. So for us faster would be better.
DODD: I read all of the reports you submitted on Tuesday. Did all of you read each other's reports? UNIDENTIFIED MALE: Yes, sir.
DODD: You're familiar with each others' reports? Familiar with Chrysler, GM and so forth? You had a chance to look those over as well?
UNIDENTIFIED MALE: Yes, sir.
DODD: But let me ask, and again, Mr. Zandi, your -- I appreciate your points. This is, for all the reasons you've laid out. But you also have, of course, a pretty -- a concern I'm sure all of my colleagues, they also read about your prediction that this number's going to increase. That we're (ph) talking $75 billion to $125 billion.
What else could be done, in your view, to mitigate that problem? One of my concerns, and something raised this. And it may have been Mr. Fleming (ph) in our meeting in Connecticut with the dealers where we spent three hours last week, is that ultimately none of this works until consumers buy cars. We do a lot of these actions at the top and so forth but the final test will be whether or not people show up in showrooms and buy cars.
Is there anything we can be doing from the bottom up approach on this thing? We're doing a lot of top down. We've certainly see it with the financial institutions, the injection of capital and the like. But any of us up here concerned (ph) that we've done very little bottom up to shore up consumer confidence, mitigation and foreclosure. You mentioned that as well.
But, obviously, support for consumers out there who would, frankly, like as Mr. Fleming pointed up, the 30 people who showed up who, under normally circumstances, would have qualified with FICA scores to purchase a car but were turned away because of the 780, whatever the number is now, that you must reach in order to qualify for a loan. Are there things that we could be doing up here, aside from what we're talking about, to mitigate that number?
ZANDI: Well, one obvious thing is, I do think the captive finance companies are a problem. They're a drain on the finances, particularly at GM. And moreover, because of their financial problems, it's making it difficult for borrowers to get loans and leases. Leasing has completely dried up. So I think one clear thing that could be done is to facilitate their move to bank holding companies so that they could become eligible for the TARP money and hopefully reestablish some viability in the credit markets. DODD: And that would help, in your view?
ZANDI: I think that would be very significant help. I think one of the reasons why people can't buy cars at this moment in time is because they can't get financing, particularly leasing. I mean there is no leasing.
DODD: I heard that over and over again from my dealers back in -- and the COs agree with this as well?
NARDELLI: Yes, sir. I mean, if one of the major points I made in my opening comments was the fact that Chrysler financial really does need access to liquidity and capacity.
DODD: You asked of the TARP money. And I was going to raise this in a question with you. And that sentence jumped out at me in your testimony.
NARDELLI: Sir, we've had a request in.
DODD: You know they've said no?
NARDELLI: Yes, sir.
DODD: So what happens? Even if we do what we're doing up here, are you telling me Chrysler fails anyway?
NARDELLI: Sir, if we don't -- to your question exactly, that's why I made the point in this oral testimony, and the last time we were here, that it is a tandem request that our captive financials, and if I read correctly both in General Motors and Ford, it's an integral part of the overall auto industry's success. We literally lost 20 percent of our volume overnight due to capacity constraints in the lease business. You know, our private equity group worked very hard to get a new conduit, but there were many new constraints put on that $24 billion of conduit that, for example, if we did go into bankruptcy, they would be restricted from providing any wholesale support to our dealers. Which immediately, as was said, would put unbelievable hardship. In other words, the dealers would have to go out and try to get wholesale financing.
DODD: I know. But I mentioned the point to you earlier. Obviously we're -- there a lot of things we may try to do up here. See, this is in addition to the $34 billion.
NARDELLI: Those requests are being handled outside this request. DODD: But it's in addition to the $34 billion.
NARDELLI: Sir, they are, yes. And those requests have been made to TARP. They've been remade to our ALC (ph) review . . .
DODD: You've gotten the same answer we've gotten.
NARDELLI: Well, sir, the request for the ILC (ph) has been in for three years.
DODD: Well, to the TARP?
NARDELLI: And to the TARP we've gotten no response.
DODD: They haven't said yes or no to you?
NARDELLI: Yes, sir. No, sir, they've not confirmed either way.
DODD: Let me there -- let me just jump to a couple of quick questions, if I can, and then so much to raise with you.
Let me say, Mr. Nardelli, I mean because I -- you know, as I understand it, that service paid $7 billion to buy Chrysler. You'll excuse me if the numbers don't sort of jump out at me that there's exactly the number you're looking for. And the question I raise to myself, are we merely just providing money because of a "business decision" that was made, but today that's $7 billion. I presume the value is a lot less than that. I mean, I'm more intrigued, in a sense, if there's a for sale sign out here with Chrysler. And looking for a merger or an acquisition, that that occur and then talking about restructuring, than pumping $7 billion into pick up the cost of the acquisition. You understand my question?
NARDELLI: I understand exactly. And let me just say, for the record, that, Cerberus, I couldn't ask for a better partner owner. They are absolutely committed and have been committed to returning Chrysler to viability and profitability.
DODD: You didn't ask for anything beyond that. You said, a one time infusion, $7 billion, nothing more. Now GM and Ford, Ford talks about a line of credit for 10 years, I think. GM talks about tranches (ph) of four or six and six down the road, depending on the economy. Chrysler says, just give me the seven. That's all.
NARDELLI: That's it. We have -- if I can go back to your first question. In addition to the original capitalization, we also drew down about $2 billion middle of this year. So there was another cash infusion from our privately held owners. But because there are private equity doesn't mean that there aren't the same investors that many of these banks have. We have some of the largest pension funds. Our contributors to this. And they're going through the same economic evaluation that the banks are going through and the other lenders in making these decisions, sir. So that's point number one.
Point number two, if you look at my submission that we made, we are, in fact, taking a much more conservative approach in our plan than was -- so our exit rate for this year will be about 13.5 million units. In 2009, we assume the industry to be at about 11.1 million. So we have intentionally taken a very conservative approach. And that volume doesn't grow over the period to about 13.5 until 2012. So we've tried to take as conservative approach, Mr. Chairman, to avoid having to come back and ask you again for support.
DODD: All right. Let me jump quickly to Ford. GM and Chrysler both placed the taxpayers in a primary position. You're asking for a line of credit of around, was it $10 billion to $13 billion over 10 years?
ALAN MULALLY, PRESIDENT/CEO, FORD MOTOR COMPANY: Nine.
DODD: And yet there's no indication in your plan here that the taxpayer would come in first as a result of extending that line of credit. Why?
MULALLY: No, I understand. And also understand the importance of protecting the taxpayer. And what we put in our submission to you was that in our current covenants with the banks today, that we would be in violation of those covenants which they could put us in default. So what we said in our transmission is that we would like to work with you on that because there's just got to be a way to work with the banks and you to address that issue. We understand the importance.
DODD: Let me jump quickly to one other point I want to make here, if I can, and that is the issue of the closing of some of the SUV plants and I -- that we're talking about. The big three obviously acknowledge some strategic errors in their business models, failing to realize the demand for smaller, fuel-efficient cars and the like. I appreciate your acknowledgment of that.
This committee with have this coming year, 111th Congress, the responsibility of a highway trust fund issue. The highway bill. And this committee's jurisdiction is over mass transit issues. Many of us here, including those who come from rural states, are deeply interested in what can happen in terms of mass transit.
It just struck me when I looked -- and again, I don't claim deep, deep knowledge about this -- but looking at the wheel base and so forth of an SUV and what could also be constructed in minibuses and the like, we've got tremendous demands from some of our local communities and we have American-made requirements here. It seems to me we might be thinking about accessing a market that's emerging for minibuses, mass transit systems, railway cars and the like.
I know in my own state, we've had to go out of country to buy some of these things. We no longer produce them. Many have talked about what your industries did in the early 1940s in transitioning to the production of tanks and airplanes to meet the national security needs of our country.
Are any of you giving any thought at all to this emerging demand of mass transit vehicles, minibus, commuters? Today we got a 30 percent increase in demand for minibuses to deal with this car riding, car sharing approach to get people into urban areas outside. What's being done at all about thinking about that aspect of your industries?
NARDELLI: Sir, if you look at, again, my oral testimony and one of the charts we presented, if you look at the bottom half of the page, we do have a light duty commercial van that is being investigated and contemplated as par of our aggressive product renaissance in 2009, 2010 and beyond. It's on the lower half of the page. So we are looking at that and we are trying to be responsive. You know, I'm proud to say that I drove a hybrid here from Detroit and it performed -- the technology performed extremely well.
DODD: I presume it was a Chrysler.
NARDELLI: Yes, sir. Yes, sir.
DODD: Just wanted to check.
NARDELLI: Yes, sir.
DODD: But you all made buses. Used to make in your supply chain. Used to also do the rail cars, right? Am I -- you all made buses at one point, didn't you? WAGONER: Yes, we made buses. We made -- we were in the rail business as well. But those businesses . . .
DODD: Any thoughts about getting back into that line of work?
WAGONER: We continue to build a fairly large van, of which of applications of largely commercial. I'm making note of your comment about the increase in demand likely out of the trust fund because we have plenty of capacity and that van is a very competitive when it can be adapted to those uses. And we also have some adventures that we work in Europe where the product over there is a similar kind of van that gets better fuel economy. We have looked from time to time at whether there would be a market for that in the U.S. for tooling enough to build it in the U.S. So as that develops, we'd be very interested.
DODD: Mr. Wagoner, let me say, by the way, in reading the plans, and I'm not getting the editorial comment here, but I was impressed with the detail of the GM plan and how you laid things out.
But let me read something that was reported today and ask you to respond to it. It said if GM does reduce its dealership to 4,700 by 2012, as promised yesterday, it will still have almost four times as many as Toyota. It's suggested going from eight brands to five by unloading Hummer, Saab and Saturn, but it still plans to accept 40 of today's 48 models. Disappointingly, but not surprisingly, the GM plan contains no hint at a change in management, contrast to Ford and Chrysler, which are headed by newcomers, GM's top cadre (ph) has presided over years of decline. GM's board might find that acceptable. But if taxpayers are going to invest in GM, they're entitled to ask whether this is the right team to revitalize the company. I'd like to give you a chance to respond to that..
WAGONER: On the last point, I am doing this job because I'm committed to the future of General Motors and the people at General Motors. I don't have a golden parachute. I don't have any protections. I serve at the pleasure of the board. And I think the most important thing for us to do is to put forth a plan that we think puts us on the right footing for future. And I think the leadership team we have today is the right one. But as I said, I serve at the pleasure of the board and will always do what's right for the company.
DODD: How about one (ph) of these other points here, 40 of -- what did I say, 40 or 48 models? I know my dealerships, I mean, Mr. Fleming (ph) told me Connecticut, we've lost, I think of how many he told me last week, we're losing dealerships anyway. And I wonder if these numbers reflect just the attrition that's occurring as a result of the economic crisis?
WAGONER: Well, this year we've lost about 300 dealers, salvage (ph) an extraordinarily difficult year due to the radical reduction within the year of the production. So, obviously, the plan we have now basically would do about 1,800, 1,750, 1,800 over the next four years. So that's a significantly faster pace.
I would point out one difference. Because of our history, we have a huge number of dealers in rural communities, in small towns. Those dealers do a great job. WE have much higher market share in those communities. They don't, frankly, require a lot of support from the company. And so we let those dealers decide individually, do they want to stay in business or not. Some are, over time, due to the economics of the business, ramp down. But many choose to stay in.
So we actually think that part is a competitive advantage. We do, and a lot of the consolidation that we talk about in our plan, is in the metro areas where the over dealing is an economic disadvantage for the dealers that remain. So we will move more aggressively in those parts of the country.
DODD: I appreciate that. I have a lot more question, but let me turn it over to Senator Shelby.
SEN. RICHARD SHELBY, (R) RANKING MEMBER, BANKING COMMITTEE: Thank you, Chairman Dodd.
A lot of people believe sincerely that the restructuring plans that each of your companies has provided us are not a serious set of plans. That they contain few concrete details on how your companies will return to profitability. That they contain surely a lot of scattered facts but lack a systemic presentation on how your companies would use the money to return to profitability and pay back the taxpayers.
If you made this presentation to get a bank loan, I suspect that any sensible banker would summarily dismiss your requests. And for the committee here, with our responsibility, and to improve our understanding of how each of your companies plan a return to profitability. In other words, how are you going to compete and return to profitability? Would each of you agree to provide this committee with full, full pro forma financial statements prepared in a manner that shows how your restructuring plans will impact your businesses over the next, not three months, three years? Would you all be willing to do that? Mr. Nardelli?
NARDELLI: Yes, sir. In the 100-page document, as Chairman Dodd suggested that we submitted, there is a complete tab that gives a complete pro forma P&L income in cash by quarter for 2009 and by year for 2010, 2011 and 2012. So in response to your question, the answer is, yes. In response to the question that we got from the General Accounting Office as far as whether we would be willing to make data available, the answer is, yes. And we have embedded in that pro forma, in those financials, the targeted $4 billion, when that would have to take effect. We are looking at, for example . . .
SHELBY: What you would do with it?
