On Wednesday, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled “The State of the Domestic Automobile Industry: Impact of Federal Assistance. The following witnesses testified at the hearing:

  • Ron Bloom, Senior Advisor on the Auto Industry, U.S. Department of the Treasury; and
  • Edward Montgomery, White House Director for Recovery of Auto Communities and Workers, The White House.

Committee Chairman Christopher J. Dodd (D-CT) opened the hearing by stating that “getting the United States government out of the automobile industry yesterday would not be soon enough,” but acknowledged that “failure of any of Detroit’s Big Three poses grave and systemic risk to the economy.” Senator Dodd stated the Committee’s objective at the hearing to be five-fold:

  1. to determine how taxpayer dollars are being used to restructure the auto industry;
  2. to discover why the United States government is taking large ownership stakes in the companies;
  3. to learn what the United States government is doing to protect American jobs;
  4. to learn about federal assistance to communities directly affected by failures of auto companies; and
  5. to learn when the U.S. government will see a return on their investments in the automakers.

Ranking Member Richard Shelby (R-AL) questioned previous statements by auto industry executives that the present financial crisis was the primary “reason for their troubles.” Shelby also criticized the Obama administration for “choosing to bypass the normal bankruptcy process,” and presiding over the restructurings in “an alternative ad hoc process.” Senator Shelby suggested that the recent transaction in which Chrysler Group LLC, backed by Italian carmaker Fiat S.p.A., acquired substantially all of the assets of Chrysler, may have been avoidable if the Administration had sought a merger between Chrysler and General Motors to address the industry’s “excess capacity” in the United States. Senator Shelby also expressed concern over the potential conflicts between the federal government’s investments in two competing entities.

Mr. Bloom defended the Obama administration’s actions, arguing that “without additional assistance, both of these companies faced uncontrolled bankruptcies and almost certain liquidation.” He pointed to failing credit markets as a primary factor behind the collapse of both Chrysler and GM, and suggested that “having the capital markets recognize the stability of the value of domestic automobiles as collateral will be the most effective mechanism for improving the provision of credit to automotive dealers and consumers.” When questioned by Chairman Dodd, Mr. Bloom stated that the administration chose to take an equity stake in the companies because one of the core problems with the industry is that it is “too highly leveraged.” Throughout the hearing, Mr. Bloom repeatedly emphasized that President Obama has directed Treasury “not to interfere” in the day-to-day management of the two companies. With regard to the federal government’s role in the bankruptcies, he stated that “in each case the companies did better that they would have had the government not intervened,” and that the companies “were treated in a fair way, given the commercial realities of the marketplace.” Mr. Bloom then suggested that “there is a reasonable probability” that the federal government will recover most of its investment” in Chrysler and GM, but declined to estimate when the federal government would exit ownership.

Mr. Montgomery noted that the three largest automobile states, Michigan, Ohio and Indiana, have among the highest unemployment rates in the nation. He stated that under the American Recovery and Reinvestment Act of 2009, funding has been allocated to help automobile communities in the form of training programs and grants. He argued that “the programs represent an investment in transforming our very economy.” Mr. Montgomery also discussed the Employment and Training Administration’s extension of unemployment benefits and support for state unemployment agencies, and the provision of National Emergency Grants to support struggling auto dealers.