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Panel III of a Hearing of the House Financial Services Committee - Stabilizing the Financial Condition of the American Automobile Industry

Location: Washington, DC

REP. FRANK: We will now move on to the next panel with my thanks for their willingness to testify and for their patience in our reaching that. (Bangs gavel.) Let's break up the conversation over there on the left side of the room.

And let me begin by recognizing my colleague, the vice chair of the committee, Mr. Neugebauer, to make an introduction.

REP. RANDY NEUGEBAUER (R-TX): Well, thank you, Mr. Chairman.

It's my honor to introduce Annette Sykora from Slaton, Texas. She is the first woman to ever chair the National Automobile Association, and we are very proud of her. What an interesting year she picked to be chairwoman.

Annette is a third-generation car dealer. Her family's been in the Slaton area for a number of years. She and her husband Pat actually operate two dealerships which were represented at the table earlier. And she's not only an industry leader; she's a community leader. And it's a delight to have her testify today.

REP. FRANK: In addition we have Mr. James McElya, who's chairman and chief executive officer of Cooper-Standard Automotive and a return witness to this committee, although he's previously been here on a lot of international matters; Professor Jeffrey Sachs, who's director of the Earth Institute; and another individual with whom we've worked, Dr. Matthew Slaughter, now professor of international economics at the Tuck School, former member of the Council of Economic Advisers.

I did want to note -- I've already noted the presence of our colleague, Ms. Jackson Lee from Texas. I should note that Mr. Pascrell of New Jersey, who is very interested and I believe has (dropped ?) some legislation involving dealers today, is also here.

With that, Ms. Sykora, we'll begin with you, five minutes.

MS. SYKORA: Thank you, Chairman Frank, Ranking Member Bachus, and Congressman Neugebauer, members of the committee.

On behalf of the nation's 20,000 franchise automobile dealers, thank you for this chance to put a different face on the legislation we're discussing today. Maybe it's a face familiar to you.

Dealers are the public and local face of the industry in communities across our country. Our face is directly connected to our manufacturers, and the success of our automakers is directly connected to the success of our dealerships. I'm a Ford and Chrysler dealer in Slaton and Levelland, Texas, the third generation of my family to carry on this small business. My dealership and thousands like mine are going through very difficult times.

For decades, the nation's automobile dealerships have been a true indicator for the state of our economy. Typically, car sales go up in good times and down in bad times. But this is not a normal economic downturn. The meltdown on Wall Street and the real estate crisis have all but destroyed consumer confidence. Auto sales have fallen off a cliff, and they're at a 15-year low.

The sales slump is not only affecting the current bottom line but the future of my dealership and others. I've spoken with dealerships across the country that have had to cut costs. They've reduced their advertising budgets, support for the town's little league team. And unfortunately, many of them have had to make the difficult cuts in staff.

In my two dealerships, I've reduced my staff by 20 percent. Additionally, we're considering closing my dealerships earlier on Saturdays to cut costly overtime. Many of my employees count on this overtime to put money in their pockets to spend on their homes, at the grocery store, and on their children's college education.

Mr. Chairman, some members are considering voting against this legislation, suggesting that bankruptcy is a viable alternative for the auto industry, as it was for the airline industry several years ago. I'd like to explain how I see the difference.

We don't simply take a person from point A to point B for a few hundred dollars. A vehicle is one of the largest purchases a family will make, and customers depend on our local presence for warranty work, maintenance and repairs, like Mabel. She's a customer who's done business with my family for more than 50 years. And although she probably only buys a vehicle about once every 10 years, she counts on us for her warranty work to keep that car running good, to perform the safety recalls and front-end alignment to keep her safe. It doesn't make sense for Mabel to have to drive 40 miles to get this done.

We've also done business with four generations of another family. They've bought 70 vehicles from us, the same family over the years. And although we have this tremendous relationship with this family, they're not likely to buy a vehicle from a company who's gone bankrupt. Would you? Well, neither would most Americans.

Auto dealers are also feeling the pain of the credit crisis in their operations. We finance the inventory you see on our lot. These loans are usually in the millions of dollars, even for a small dealership. Many banks have already eliminated what we call floor planning loans to any domestic dealers, and this is just because of the uncertainty that their manufacturers are currently facing. Imagine how banks would react to a dealer who's asked for millions of dollars to finance new and used inventories from automakers going through reorganization.

Let me give you another example. Just yesterday one of our used car dealers who buys some of the vehicles that we don't keep on our lot, wholesale dealers, had to return a vehicle to us yesterday because his bank had tightened his floor plan credit and he was not able to keep it. So now I have to keep this truck, find a way to finance it, and that impairs my ability to make other purchases.

Furthermore, a bankrupt automaker could lose many of its dealers. I recently sat down with Jim Tolliver, Slaton's superintendent of schools. We started discussing what would happen if one or more of the dealerships in my hometown were to close. The loss of tax revenue would force them to cut programs and teachers.

Many displaced dealership families would most likely leave town in search of work in other places, compounding this loss. And I found out while I was sitting here in this hearing that this is a real possibility for one of the GMC stores in my town. This same scenario would play out in hundreds of communities across the U.S. Time truly is of the essence.

Well, according to NADA, 660 dealerships have closed in 2008. But I want you to remember that dealerships are not company stores. As independent businesses, we make significant investments in land, buildings, equipment and personnel that provide manufacturers a retail presence in hundreds of communities. We don't take vehicles or parts on consignment. We assume the risk of financing these inventories. We heard this morning no manufacturer has the resources to internalize the costs that dealers bear.

(Audio break.) Representative Pascrell from New Jersey introduced legislation, House Bill 7273, that makes interest payments on car loans and sales taxes deductible from a family's income tax. Senators Mikulski and Bond introduced similar -- this measure in the Senate earlier this week. This will help get people in dealerships.

We need immediate action --

REP. FRANK: Ms. Sykora, we really need you to wind up. We don't have jurisdiction over taxes, so there's not a lot to be said more about that.

MS. SYKORA: Well, we just urge you to move quickly.

I thank you again for your time, and I'll be happy to answer questions.

REP. FRANK: Thank you.

Next, Mr. James McElya. I'm sorry if I've mispronounced the name, but I mispronounce a lot of them.

MR. MCELYA: No, it's McElya. Good afternoon, Mr. Chairman and members of the committee. I'm the executive chairman of Cooper- Standard Automotive, and Cooper manufactures a variety of products for the auto industry and employs over 5,000 people across the United States.

I'm also the chairman of the Motor and Equipment Manufacturers Association, which represents almost 700 companies that manufacture motor vehicle parts with light-vehicle and heavy-duty original equipment and after-market industries.

Today's auto industry is interdependent such that it is economically impossible to separate the economic success of the suppliers from their manufacturer customers. A potential bankruptcy by a major vehicle manufacturer would cause serious disruptions and will directly impact the ability of the entire industry to function.

MEMA urges Congress to immediately pass legislation providing direct financial assistance to the automotive industry, including auto manufacturers and suppliers. Motor vehicle suppliers are the nation's largest manufacturing employer. Our high-skill jobs are critical to the industrial base of the country and are located throughout the United States. Every supplier job contributes an additional 5.7 jobs to a local economy, with a total of 4.5 million private industry jobs depending on the supplier industry.

We hear sentiments from people all across the country and today that the government should just let them fail. But just exactly who are they referring to when they say "them"? Well, let me clarify. The group that comprises "them" is a whole lot larger than the Detroit three that were just here at the table.

It starts with the manufacturers, of course, the big three and others, but it also rolls down to the suppliers, our sub-suppliers, followed by the many professional services that serve the industry. After that, it hits the local level in the small towns across the country where all these manufacturing plants are located that will affect the owner of the diner across the street from the plant, the barber, and even the schools, as school tax revenues diminish or even go away.

Motor vehicle manufacture and the supplier industry are leaders in the development of safety and energy technology critical to today's vehicles and those of the next generation. Suppliers account for over 40 percent of the total automotive investment in research and development and continue to take on a greater role in the design, the testing, the engineering of new vehicle parts and systems, a role that is expected to grow significantly over the next five years.

Some analysts have indicated that as much as half of the supply base is in financial distress. U.S. light vehicle sales dropped to 12.8 million units this year, far below the 16.15 million average over the last decade. It is critical to resolve the financial crisis and return credit availability to the consumers and turn the economy around.

The dramatic and sudden contradiction -- excuse me -- contraction of the auto industry will directly impact the supply base, but the failure of the supply base will impact a wide range of car manufacturers. Vehicle manufacturers, including Toyota, Honda and Nissan, will likely have to close or limit production while waiting for new sources of supply.

It is the inability to get credit that has pushed these seemingly unrelated factors into a crisis. There have been recent and serious repercussions. On November 13th, 2008, Standard & Poor's rating service took an unprecedented step of placing 15 North American auto suppliers on credit watch based on their significant exposure to Ford, General Motors and Chrysler.

The bottom line is that all automakers, not just the Detroit three, will be dramatically impacted if consumers cannot access credit to purchase new vehicles. Without sales, even the healthiest vehicle manufacturer cannot survive a prolonged sales slump like the one we are currently experiencing.

The country is faced with two interwoven dire conditions in the auto industry. First, a potential bankruptcy of a major automobile manufacturer will cause a chain reaction of unpaid payables, with subsequent additional bankruptcies that will severely and negatively impact the entire sector.

Secondly, on a parallel course, the inability of automotive suppliers to get sufficient working capital from its traditional sources will have a similar impact. Congress must pass the legislation that addresses both of these challenges. Thank you.

REP. FRANK: Professor Sachs

MR. SACHS: Thank you, Chairman. This is the fourth financial crisis that I've dealt with with this committee over 25 years, starting in Latin America, Eastern Europe, East Asia, and now it's our turn.

REP. FRANK: One of us may be a jinx.

MR. SACHS: Pardon me?

REP. FRANK: One of us must be --

MR. SACHS: No doubt we're -- right. Bad luck. But we are facing something that we have not faced since the Great Depression, as this committee knows better than any other committee of this Congress. And so the normal business of this committee is not to be a bank. No one here wants to be a bank. No one here wants to think like a bank or grill the Big Three CEOs like a bank. But we have no functioning banks right now. That's why we're here.

This is the most intense financial crisis we've had since the Great Depression. If there were capital markets they would much prefer to go to the capital markets than to go to you. I'm sure of it. It was no fun doing a loan request this morning for them. The only reason they're here is that we have no financial markets for the moment. All of the rhetoric we've heard about let the markets work would be fine if we had markets right now. We have no financial markets. This is the essence of the moment. In a year we're going to have financial markets working again. TARP will be working. We'll have a president that'll have a strategy. The markets will be working again. When they need more money, which they will, they'll go the markets -- they won't come to you -- because there will be financing available. So this, I think, is the essence of it.

Believe me, this is not the only Congress or Parliament that the auto industry is going to. It's all over the world right now. This is a global contraction the likes of which we've not seen since the Great Depression and you're going to see bailouts necessary everywhere. The industry is a long-term viable industry. They would not have been here but for September 15. Had Lehman Brothers been handled differently -- not by the textbook of Chapter 11 but differently -- we would not be with a $700 billion TARP and they would not be here today asking for 3.7 percent of that from the TARP. But Lehman was Lehman. Panic worldwide ensued. Now the idea of using 3.7 percent of what you voted is absolutely the right thing to do. In fact, it's to me unthinkable not to do it. I can't even imagine it not being done.

Let me say that Chapter 11 is completely unworkable in this context. That's -- the New York Times had one of those "duh!" stories today where it says advantage of corporate bankruptcy shrinks. You can't do Chapter 11 when there are no financial markets and survive. Section 364 -- debtor in possession of financing -- is a fantasy of my free market ideologue colleagues in the economics profession. There's no financing even for non-Section 364, much less for bankrupt companies. It's a fantasy this idea -- put it through bankruptcy, let them do that. And when you probe just a little bit they say, oh, no, no, no -- under bankruptcy the government is going to have to do it anyway. So try explaining to your constituents you're not going to do it now but only when they go bankrupt, then you're going to give them $25 million. I like that explanation. That is absurd, in my view, frankly.

The only thing I would add is whether you want to have in the board that you're setting up some more public representation in addition to the cabinet. That would be my only question -- for the Congress to represent you, to represent the broader interest, to bring the National Academy of Engineering in -- somehow to have a couple more voices than only the executive branch when this gets deliberated so that you just are able to get the rounded issues. Other than that, I think you're on exactly the right track. I can't imagine, frankly, a little bit why we're here because you already voted the money. It's only using it -- 3.7 percent of it -- for some -- what happens to be the leading industry of the United States. Other than that, you know, it just a -- it's a little bit hard to -- hard to figure out.

So please do this before we turn a recession into a depression. That's my request. No, it's for all of us. There's nobody that will not be affected and this idea let markets work when there are no markets is the idea of how Lehman Brothers triggered the biggest worldwide crisis in generations. Don't do it again with this industry. Two in a row, we're really into depression. Thank you very much.

REP. FRANK: Professor Slaughter.

MR. SLAUGHTER: Committee Chairman Frank, Ranking Member Bachus, and fellow members -- thank you for inviting me to testify on these important timely issues. Let me start by saying that the Big Three automobile companies have very dedicated and hardworking executives and fellow workers and that they have a lot of collective talents and strengths. I base my testimony to you today on two deeply-held convictions. One is that although the dynamic forces of globalization and technological change have generated and has the potential to continue generating very large gains in the United States overall, these gains do not flow to every single worker, company, and community. The other, given this first, is that one of the paramount policy challenges facing America today is how to share these gains more broadly across the full spectrum of American workers.

Despite these convictions, or rather, as I will explain in my testimony largely because of them, I do not believe that automobile companies merit any new bailout assistance from the federal government. Any such assistance would actually incur large costs to the American economy in different ways. Let me list three such costs. First, and perhaps most importantly in the long run, it would -- would be the economy wide cost of substituting product market competition with resource allocation set by political rather than economic forces.

A bailout of automobile companies could set a precedent to be followed for many years by many other companies in many other industries. These bailouts would displace productive investments in firms elsewhere in the economy and thereby impede economic growth and rising standards of living. I acknowledge that this is indeed a long- term cost but that does not make it any less important. If anything, it makes the cost all the more important given the many long-term challenges facing our country such as the slowdown in educational attainment and the unsustainable growth in entitlement spending.

A second important cost of any bailout would be damage to America's engagement with the global economy. Here, let me highlight the costs that would fall on U.S. headquarter multinationals of all kinds -- key U.S. companies which employ over 22 million Americans and account for a remarkable 78 percent of all private sector R&D. The success of these companies depends critically on their ability to access foreign customers. It is unlikely that U.S. government bailouts will go ignored by policy makers abroad. Instead, U.S. bailouts will likely entrench and expand the protectionist practices already underway in many countries that we have been discussing here. This would erode the foreign sales and competitiveness of U.S. multinationals and would thereby reduce their U.S. employment and other activities.

And a third and more important direct cost would be the likelihood that any new taxpayer assistance would go largely or entirely unpaid. So the relevant question I would like to pose in my remaining time for taxpayers becomes whether a different deployment of any public funds could support the workers and communities affected by the struggling Big Three. Here, I would point out in response to Professor Sachs' comments I think it's fair to say there's a more diversity of opinion among at least academic economists and finance (books ?) on the viability of various bailout -- various bankruptcy schemes that could go forth for one or more of these companies.

That said, let me in my closing time comment on what are three important areas that I believe the federal government could offer assistance to the struggles to the American economy that are presented by the Big Three automakers. First, the federal government could help expedite any bankruptcy proceedings. One important role that has been discussed in this committee already could be ensuring warranties on new and/or existing cars to help maintain the demand for the products of the Big Three.

Second, the federal government could extend targeted aid to workers and communities deemed to be adversely affected by bankruptcy filing or other industrial restructurings. The Big Three are geographically concentrated in certain Midwest communities and states. Many of these areas already face hardships from the national economic slowdown in general and from falling home prices in particular. Plans could be laid now for extending supplemental benefits beyond standard unemployment insurance amount. In light of the size of the bailout funds currently being proposed, the potential pro-worker supports are extremely large. This could be allocated per worker across several years of unemployment income benefits, of wage loss insurance upon reemployment, of retraining and relocation expenses -- whatever combination we as a country might deem appropriate for these and perhaps other affected workers.

And third and perhaps most importantly, the federal government could use this auto industry crisis as an impetus for meaningfully expanding the economy wide social contract that I mentioned at the outset to better distribute the gains of our dynamic economy. We as a country could do this in many ways -- through a more progressive tax code, through a fundamental overhaul of our unemployment insurance and trade adjustment assistance programs, and through new insurance mechanisms that would allow communities to smooth out their tax revenues.

There's no time like the present to begin deliberating and hopefully implementing such policies. Let me close by thanking you again for inviting me to testify today and I look forward to answering any questions you may have.

REP. FRANK: Thank you. Let me begin -- Professor Sachs, one side point -- on putting other members on the board we run into the problem of the appointments clause. You cannot give a board that has any power any membership other than a presidential appointee. We could add a presidential appointee that was not in the Cabinet but it couldn't be a congressional appointee. That's why in the TARP we have two boards -- one that's congressionally appointed -- that is, oversight but no power, and then one with power but it's all in the administration and doesn't do us much good.

But beyond that, part of your mandate at Columbia in which you've done such a good job on this is the whole question of sustainability, and I -- one of the criticisms we've got in the auto industries has come understandably from people upset about the environment because of their past record, and one proposal we got -- in fact, it's the Bush administration's approach -- which is to take away from the 25 billion (dollars) that was already voted. The conditions on that that were aimed -- that said it had to be used to promote energy efficiency; that is, their view is, all right, we gave them 25 billion (dollars) for the specific purpose of retooling for energy efficiency, but let's just take those conditions off. What would your response be to that?

MR. SACHS: First, before getting into the specifics of Section 136, we should not ease the conditions. We should see this as an opportunity to enforce the conditions. I actually am more optimistic than the three CEOs that we heard that they can be accelerated even more because when you consider that the Chevy Volt promises to be a leapfrog technology, in fact, because will go from hybrid to plug-in hybrid, we're on the verge in my opinion of getting back to U.S. technological leadership. GM also has invested more than a billion dollars in hydrogen fuel cells and Chrysler, I think very impressively, is looking at extended-range electric vehicles. Don't ease the conditions -- that's for sure.

My only question would be, you know, Section 3 -- Section 136 could be a bridge. We could see the money as a bridge to the Chevy Volt, to the EREV, and so forth, so it doesn't seem to me to be contradictory in that way. I think the approach this committee has taken is the right one though. The TARP really fits, in my opinion, this financial crisis. The money is there. Adjust it in a modest way and get a very pragmatic result. Section 3130 -- Section 136, if it had to be a fallback position seems to me to be a viable one but not by easing the conditions at all. Indeed, by seeing the money is precisely to get us to that Chevy Volt. It's to get us to the EREV. Please don't ease the conditions that would send every wrong message for the country.

REP. FRANK: Page 3 of the bill we, in fact, have a section that says, "No provision of this title shall be construed as altering, affecting, or superseding the provisions of that -- the environmental -- (inaudible)." Professor Slaughter, I appreciated your testimony as I've admired much of your work and I have to say in your closing comments about the need for a safety net you immediately qualified as my favorite witness that the Republicans ever suggested that we have. I wish you would send us more like that. And -- but I do have one question, and I would like to do that. There's no question. I think you make a good point. Had we in the past done that on the social safety net. this would be an easier decision to make -- that people won't face the loss of the healthcare and indeed healthcare has been built into the cost of the car.

But I do want to say there's one argument you made, with all due respect, that seemed to me a little bit of a make weight and that was that if we do this, other countries will get indignant and be more protectionist. It is not my impression that they have a morally superior position to us today in the automobile industry on the whole with regard to openness to automobiles; that is, I think -- no, I don't think anyone -- we have about as open an automobile market as you can have. A number of other countries -- Korea, China -- (inaudible) -- have less of one. I am skeptical that this would be any basis for them being any tougher on our automobile industry than they already are.

MR. SLAUGHTER: I (really ?) none of this may not be a matter of morals. I think of it as a matter of, first and foremost, of dollars and sense. So --

REP. FRANK: But you really think this would motivate -- what country is now open without -- better than us in access in automobiles that would suddenly tighten up -- and it's also the case, by the way, we would hardly be unique in the world in subsidizing our auto industry in some way.

MR. SLAUGHTER: I fully agree. It's not that other countries are more open. I think, Mr. Chairman, it is that many other countries have become more closed in inward FDI policies, and -- (inaudible) -- of U.S. companies to establish and expand operations there.


MR. SLAUGHTER: And the likelihood that the response of our policies that we take will be to further make it more difficult for our U.S. --

REP. FRANK: Well, there I disagree. You might argue that it won't get them to change but they haven't been changing anyway. But I -- it seems to me that the argument that this would motivate them to get tighter, as I said, I just -- to be honest with you, it smells like a make weight to me. I think there are better arguments to be made.

MR. SLAUGHTER: If I could -- a two-hander on that. When you look at U.S. headquarter multinationals overall, for every dollar in exports that the parent operations send abroad in terms of servicing foreign markets they last in 2000 --

REP. FRANK: No, you're making a different point than mine. I'm not contesting the economic value of multinationals. What I'm suggesting is that there are very few countries I can think of that can say, oh, you stopped your Big Three autos from failing, therefore, we're going to -- we're going to stop being so open to you. I just don't think that's a likely reaction.

MR. SLAUGHTER: If I may, CEO Wagoner earlier commented on the important role that China plays for General Motors. They have been the largest share of the Chinese market for several years running. Last year, they sold over a million units.

REP. FRANK: And he noted that he has to do a joint venture in China, which the Chinese do not have to do here. The only point I'm making is that there is already a lack of reciprocity to our disadvantage, so I'm not prepared to be told that we can't do anything that's in our own legitimate economic interest if you think it is -- if you don't think it is different because they'll get mad at us. The gentleman from Texas.

REP. NEUGEBAUER: Thank you, Mr. Chairman. Annette, I want to go back to your testimony about the financing piece of it because there's so many pieces to this, and I think what our committee has to look at is those areas where we probably have some jurisdiction in the financing piece. How many -- do you have a handle on how many people are coming to your dealership, would like to buy a car, but you're not able to arrange financing for them? I mean, is that 100 percent of the time, 90 percent of the time, 20 percent? I mean, what -- what did -- can you give me a handle on what you're facing on a retail financing contract?

MS. SYKORA: Congressman, the first problem we have is --

REP. NEUGEBAUER: You've got to hit your --

MS. SYKORA: -- the first problem we have is getting the people to come to the showroom because there's a lack of consumer confidence and they begin with the feeling that there is not credit available. So even if they come to the showroom they're already feeling like credit might not be available. Now, retail credit is available. You've got to have a stable job and you've got to have good credit, but because there are many -- and we heard that earlier today -- there are many banks and credit unions that do have money to lend on the retail side. The problem is there's kind of three pieces here. You got working capital for the dealer, you got the inventory financing or what we call floor plan, and then there's retail. And what -- working with Treasury because of the tightening and elimination of the securitization on a line, that's what's impacting the availability of retail credit. So, you know, I think that's where we need immediate and urgent help.

In fact --

REP. NEUGEBAUER: See my concern is that, that when you look at the burn rate of these three companies that were testifying here today, I mean they're losing billions per quarter and they're asking for 25 billion (dollars). At the current rate that they're losing money that's basically maybe a quarter or two. I don't know that that fixes your problem. That may somehow prop them up but the question -- the concern I have is --- if we are going in to, as some economists say, into an economic slowdown where consumer spending is going to be down, that this request that the auto industry is making is not, is really not a fix, it's a postponement.

I think, from a congressional standpoint, I'm interested in, you know, fixing things and not necessarily, you know, postponing things. So I think we have to --- and I think certainly I know that the financing arms of the three (captive ?) finance companies are trying to -- we had Chairman Bernanke and Chairman Paulson, and Mr. Paulson here, Secretary Paulson here yesterday --- they're -- I think, they've been working with the industry to be able to allow them to come to the Fed window which would hopefully work on the retail side. Maybe also help some on the floor plan side as well. Okay.

MS. SYKORA: Can I address that?


MS. SYKORA: I think you're asking me, are we delaying the inevitable? And I don't -- I wouldn't be here -- I wouldn't be sitting here today if that's what I believed. And I'd kind of like to make my point that dealers are independent businesses. As you can see, I'm sitting here by myself. The manufacturers, they're not here, so I'm representing the dealer and I'm giving you the opinion that, you know, I do think it's viable and we need this help.


MR. SACHS: Congressman, we are in a downturn for sure, and it's going to be a very bad one. And even with all the emergencies, this will be the steepest recession that we've had in decades. And the fight is to keep it from turning into a depression right now. So your question's a very good one, but as I heard, all three of the CEO's testified what they're doing is assuming a burn rate based on sales at about 11 million units all through 2009. That's a collapse.

We've gone from 17 million units down to 11 (million) like that because this is a freefall. We've not seen this, Congressman, for decades. What they're assuming in their assumptions is not a further collapse but what is a collapse. And so I don't think that it's a wildly optimistic assumption. But the main point that I would stress is the following. We'll have a deep recession and then the question is, are we coming out of something? Or was this just an industry in decline?

Now first, I don't believe it was an industry in decline. And I don't think the evidence suggests that it was an industry in decline. Second, I think they have a bridge to actually a whole new set of technologies and a post SUV era --- everybody loved their SUVs. But now everyone's reconsidering and it takes a lot of retooling and that's what's happening right now. And so I think we're -- in terms of make and model and technology, we're actually going somewhere. But there's a third point for Congress that I think is very important. They're going to come back to banks, not to you, because we are going to have a banking system working again in this country. And that's going to be very important. They do not want to come back to you for the next round. They'll go back to the bond markets. They'll go back to the banks. And they will have a viable business.

REP. WATT: The gentleman's time has expired. I recognize myself for five minutes.

Ms. Sykora -- Sykora -- are there any banks out there that are still providing the floor planning financing or is all of that now being done by the industry?

MS. SYKORA: There were only a handful of banks that were providing this type of inventory financing in the beginning.

REP. WATT: Well, I got a call from one of dealers -- actually from Florida -- I'm not even from Florida --- and I got a call earlier this week saying that Bank of America had pulled out of that market, pulled out of loaning anything to any automobile dealer. Not -- not the buy -- not retail --- not customers to buy cars --- they want out of that too he said but they just wanted out of the automobile industry altogether. Is that what you're experiencing or is it different than that?

MS. SYKORA: No. We've heard from dealers from across the country that have experienced the same thing, where one dealer whose been with the same bank for 40 years and never had a problem, weren't having a problem, they're balancing is fine. No more. No more floor plans inventory financing with that bank. And yet this is a GM dealer so he didn't have the alternative to go to GM.

REP. WATT: Okay. Professor Sachs, I notice you're nodding your head and I want you to weigh in on that. But what I'm really more interested in having your assessment of is a world without a domestic U.S. automobile manufacturer, where all of our product comes from other -- from manufacturers in other countries, or based in other countries even though some of them may be making the automobile.

I'm just trying to imagine the implications of that. And I think you're probably --- maybe Dr. Slaughter would want to comment on that too, as the two economists on this panel. Talk about that world for me. I just -- it is so -- it just seems like it would be so alien to everything we've experienced and have so many dramatic consequences on, not only the existing manufacturing base but our whole concept of who we are in the world.

MR. SACHS: Let me just talk first about the transition if we went there. If there's a major failure, if GM goes down and it is busted apart, the cascade effects, as Mr. McElya, thank you, as Mr. McElya said are absolutely real. Cascading failures will run through thousands of enterprises because this is a big business, many percent of GNP. And what's interesting about it also is because of the machining in this industry, you lose a supplier you could actually interrupt production, not even of the failing companies, but of all of the companies.

There are real risks of cascading bankruptcy and then supply side seizures. If one says, well that's a worst case scenario, you're just frightening us, that's what they said about Lehman Brothers on September 15th. We'll show how markets work, let's close them down. Then you add cascading failures that have shocked the world like we've not seen for 75 years.

Now with our economy absolutely on its back, if we tried that --- that's one of those things that I would not try at home. I've spent a career watching financial crises. We do not want to let a major company go bankrupt right now, like this. This would be a disaster, just a disaster.

So we'd end up with certainly double-digit unemployment rates in this country. We'd end up with 15 (percent) to 20 percent unemployment rates throughout the Midwest. I never thought I would live to see us approaching a depression. I was trained for and I've taught for 30 years at Harvard and Columbia that we've learned all the tricks. You know, that doesn't have to happen. We're flirting with that right now.

I thank you for voting the legislation, as painful as it was politically, the TARP, because we're going to need that and it's going to get designed better and done better over the next few months, that's for sure. It had to be done in a panic because of the way that the panic was set off on September 15th. But don't do this one on top of that mistake of Lehman because we'll trigger things we don't even know right now.

So I know your question, Congressman, is about the long term sense of the United States but I'm worried about the next year, two years, three years, four years -- I don't want to have a depression in this country, and I want us to take minimum responsibility to use 3.7 percent of what you voted to avoid a depression.

It's a no-brainer in my view. This is not a hard one. It's hard for you to be a bank but you already voted 700 billion (dollars). Get the Treasury to be the bank and get on to avoid a disaster. This is not an industry, by the way, that's in collapse -- we're not saving the "buggy whip" industry. This is an industry where world production rose from 60 (million) to 70 million units per year in the last eight years, 62 (million) to 70 million units. This is an expanding global industry.

REP. WATT: Dr. Slaughter, briefly because I'm way out of my time.

MR. SLAUGHTER: Very briefly Congressman. Just to echo what Professor Sachs said, this industry's already becoming very global.

It was The Big Two for awhile, in the sense that, as -- (inaudible) -- Daimler owned Chrysler for some number of years.

The other thing I would emphasize comes back to what Congressman Green talked about, is the importance of jobs. The industry has continued to grow, in part, because of the stunning productivity growth it's realized, in large part because of the global engagement. Meaning The Big Three today in the U.S., they directly employ only a little over 200,000 workers. That number is likely to continue to go down in terms of the number of the people that work for them.

So one of the big public policy challenges we all face, again, is thinking about where the good jobs and good wages are going to come from in the future, because one of the things productivity growth does in those companies is it takes it away from those firms themselves.

REP. WATT: I guess that's another discussion for another day, where they're coming from, but -- The gentleman from California.

REP. CAMPBELL: Thank you, Mr. Chairman.

I wanted to make -- first, just to comment a little bit, something that you said, mentioned, Mr. Sachs, about the CAFE regulations, and so forth. Let's remember the Chevy Volt may be a great car, but they're not going to make any money with it, at least not right away.

Toyota has not made any money of the Prius. In fact, they've lost money on every single copy in spite of its enormous success in the marketplace. Toyota is having profitability problems now because the Sequioa and the Tundra, the big trucks and big SUVs -- where they make all their money too, aren't selling.

Now, eventually maybe these higher-technology mileage cars will become profitable, but they're not now. And maybe the model of the MINI Cooper, which is a small but expensive car, which is very profitable for BMW, can be adopted by other automakers.

But that also is not going to happen in the next two months, or three months, or six months or a year because of the lead times in the auto industry. So, I just hope that, as we all are looking at this thing, that we don't take from one hand, from the auto -- give with one hand to the auto industry, and take from the other.

And let's remember where the -- we can't get out of this thing unless car companies make money. And right now they can't make money on hybrid vehicles. They may be able to eventually, but right now they can't do it. So, let's not -- I hope we don't make them sell something that they can't make money on, and not sell something that they can; and have some transition involved in this as this whole thing goes forward. That's just a comment I wanted to make.

But, then I wanted to ask Ms. Sykora, you know, I remember after 9/11. I remember how the aftereffects here -- nobody went, nobody bought cars, nobody bought houses, nobody went on airplanes, nobody went to restaurants. Everything was shut down. I still think that we -- that we don't give enough credit to it, but that General Motors actually pulled us out of that.

When, in December of 2000, they came out with their 0 percent financing on every car and truck they'd offered -- for 60 months, and everything; that people were afraid at that time -- they had fear. It was a security fear -- different than the fear now. Now it's financial fear. There was a security fear.

And people said, well, I'm scared, but that's a heck of a deal. I better go -- I better go check that out. Ford matched it; Chrysler matched it, and we went from there. In my 25 years in the car business nobody has ever offered a deal like that -- anywhere close to that, and it got people out.

Obviously, we wouldn't be here today if it weren't for the fact that General Motors is not strong enough to do that anymore. But, the federal government may be. I think, in your testimony that you didn't get to, you talked about a refundable tax credit, or some other things. What can we do, or what should we be doing? -- because, eventually, for anything to work we do have to have consumers back in showrooms at least looking at cars, and then, hopefully, we can get them financed and they can buy them.

MS. SYKORA: I think the point you make about an economic stimulus to get consumers in the showroom is very important. And the legislation that was introduced today -- the H.R. 7273, making the interest payments on car loans and sales tax deductibles, is a great way to start that. Senators Mikulski and Bond have that same measure in the Senate.

The other thing that Congress could do would be to fund safe programs, or cash-for-clunker type programs like the ones in Texas and California that encourage vehicles -- to trade their older vehicles in for more fuel-efficient models. And I think there was a Representative here earlier today that -- his 1999 Jeep might qualify for something like that.

But, these types of programs, that's what stimulates the economy and then yet still provides that environmental benefit as well.

REP. CAMPBELL: You talked about the sales taxes. I mean, my concern is that that's not immediate enough; that it's not -- as you well know, people -- you know, cash in their pocket. When you're -- when you're selling a car you need to put all the numbers together: the down-payment, and the payment, and make sure it works for the customer or they don't buy the car.

And to say that -- and tax deductibility, that's great, but to say that you might get the money back on your tax returns 12 months from now doesn't help, doesn't help somebody buy a car today.

MS. SYKORA: You're right. We are seeing consumer confidence at a record low. And failure to act to restore confidence -- failure to do anything is going to have severe consequences. I don't think we can take the chance of further eroding consumer confidence.

REP. CAMPBELL: Okay, thank you very much. I yield back my time.

REP. WATT: The gentleman from Texas, Mr. Green.

REP. GREEN: Thank you, Mr. Chairman.

Mr. Slaughter, and everyone, welcome. I'd like to visit with you for just a moment, if I may. I have a summary of the draft of the rescue bill before me, and I'm interested in knowing what part of it do you find deficient?

MR. SLAUGHTER: Congressman, I don't have any particular comments on the bill, per se. I guess it's the idea of whatever federal taxpayer dollars we're going to allocate to supporting the automobile industry, broadly defined -- thinking about whether we want to use it to support the companies themselves, or use it to support their workers and their communities in whatever eventuality is going to play out in the product market in terms of mergers, in terms of --

(Cross talk.)

REP. GREEN: Permit me to ask you this, if I may, because time is of the essence. This is a loan, so it's not a bailout. It may be considered as a means of "helping them out," but it is a loan. The bill specifically indicates this. And it indicates that there are terms -- seven years; 5 percent the first five years, 9 percent thereafter; no prepayment penalty; we have a superior position with the obligations that are accorded us.

But, what part of this loan creates the problem? We did lend to Chrysler before. They did repay. We did make money. What part of the loan is a problem?

MR. SLAUGHTER: I would put out, Congressman, that the operating losses of the companies this would be extended to have been large and accelerating in the past few -- recent times.

So, if you look at calendar year 2007, and the first nine months of 2008, for Ford and General Motors, between the two of them, their total operating losses were $76.1 billion over that 19-month -- over that 21-month period.

REP. GREEN: Did you support the loans to AIG?



MR. SLAUGHTER: -- I'm sorry, could you repeat the question?

REP. GREEN: AIG has received loans from the government.

MR. SLAUGHTER: I do support the extension of loans --

(Cross talk.)

REP. GREEN: You support 85 billion (dollars), September 16th to AIG? You support 37.8 billion (dollars) October 9th to AIG?


REP. GREEN: You support an additional 40 billion (dollars) on November 10th, 2008 -- all of this is in 2008, to AIG?


REP. GREEN: Why would we assume that AIG is more deserving than The Big Three? AIG, Big Three -- all in need. Why AIG and not The Big Three? Why an entire industry? Why would we neglect an entire industry?

AIG is a privately-held company. This was the largest bailout of a privately-held company in U.S. history. Why would we bailout AIG and not The Big Three?

MR. SLAUGHTER: In principle, Congressman, it's because of the systemic risk that firms in capital markets face and present to the whole economy when they struggle.

REP. GREEN: I think that's a fair comment. What about the systemic risk that people who are working for The Big Three face if they lose their jobs to a Chapter 11 that becomes a Chapter 7 by virtue of a lack of credit?

MR. SLAUGHTER: I agree that The Big Three have linkages to other firms in the economy -- the suppliers and the dealers that we talked about. However, my belief that the degree of systemic risk, and the magnitude of that to the overall economy, is less than what is presented by the trouble we have seen in our capital market companies in recent times.

REP. GREEN: And one final comment. We have allowed AIG to go to the coffer -- the public trough, if you will, one, two, three times. If the auto industry does not succeed with this first offer of help -- as opposed to a bailout, because it's a loan, and we are talking about saving an industry -- is it abhorrent to think that there may be some additional help needed to save an industry?

It was indicated earlier -- and some things bear repeating: The Japanese are not going to allow their industry to fail; the Germans are not going to allow their industry to fail. And, by the way, I salute them. This is not said in a demeaning fashion, this is just a matter of fact.

We don't know the consequences of allowing this industry to fail. It may take historians, looking through the vista of time, to properly comprehend what happened, and what will happen to us as a result. If we must err, maybe it's on the side of trying to save an American industry that has an impact on every life in the United States of America.

Thank you, Mr. Chairman. I yield back.

REP. WATT: Mr. Manzullo is recognized.

REP. MANZULLO: Thank you, Mr. Chairman.

I appreciate you folks coming today.

As I go down the list of people who want money -- we start with the banks. And I find it interesting that the Bank of America would get $25 billion, and then cut off somebody's credit.

REP. WATT: Just $15 (billion).

REP. MANZULLO: Just $15 (billion). And, Mr. Chairman, I'd like to see us have another hearing, or bring in the chairman of the Bank of America and ask him what he's doing with this $15 billion.

But, that's the problem. Your problem is lack of sales. If you had sales you wouldn't be here, you'd be back home selling cars and taking care of the manufacturers. But, if you think that the federal government could be successful in helping you out, you can start first with the Bank of America -- on getting $15 billion, and then, Ms. Sykora, cutting out one of your own on a line of credit. That's how government programs work. They stink. They don't work.

And then, what you're proposing is that the dealers be included in that. So then some big guru in charge of dealers would make the decision on which ones get the money. And the ones that have worked all their lives, and paid off most of their debt, will probably be the least likely to get some type of a loan.

And then if you go down the line to the folks at (NAMA ?), you've got 700 suppliers, but tens of thousands subcontractors. Where do you draw the line, and who determines who gets the money there?

And sitting in the audience here we have people from cities, states, counties, the universities are here, California wants $5 billion a year for the next three years. The money's not there. It's not there. If it were there -- I mean, after awhile we're going to be like the old German Republic, and to buy a car you're going to go with a wheelbarrow full of currency, and the people who work at the dealership would get paid every hour, because of, because of inflation.

That's why I voted against the bailout -- because of the fact that people like yourselves would look to Washington to say, we want part of this. But, it's really not going to help.

Now, if you want to get something to help, the easiest thing to do is for Congress to pass a law -- we could do it today, the president would sign it -- is to say if you'd buy a new or a used car. Because if you have a tax credit that applies only to new cars, what's going to happen to your used car inventory? And that's where you guys make your money, is on the cars that are traded in.

But, if you have a tax credit that applies just to -- that applies if you buy a new or used automobile, then the intended source is immediate. In other words, if you buy a $20,000 automobile, but know you're going to get a $5,000 tax credit, that's quite a discount on the car. That infuses the money into it directly.

But, I have a question -- is it Sykora? Is that how you pronounce it? Who does your floor financing?

MS. SYKORA: Who does my -- ?

REP. MANZULLO: Floor financing, for your --

MS. SYKORA: -- my floor financing?


MS. SYKORA: I financed mine with Ford Motor Credit.

REP. MANZULLO: Ford Motor Credit. Have they cut you off?

MS. SYKORA: No, but they have taken a look at what they call "rate of travel" -- how quickly you're moving your vehicles, and giving us, you know, boundaries that we must -- (inaudible) --

REP. MANZULLO: Could you pull the mike a little bit closer. You're very soft-spoken. Thank you.

MS. SYKORA: Yes, they've restricted what we're allowed to finance, as to how much money we can have on that floor plan line by our rate of travel -- how often we're selling those vehicles. So, they've taken us from, on used, from a 60-day to a 45-day, and trying to get us to a 30-rate of travel. So, that restricts my ability.

REP. MANZULLO: Has that restricted your ability to sell automobiles to prospective buyers?

MS. SYKORA: What's restricting our ability to sell vehicles right now is the consumer confidence.

REP. MANZULLO: Right. Right.

So, even if you qualified for the bailout, and somehow this money found its way to -- how many dealerships are there across the country? Is it 5,000?

MS. SYKORA: 20,000.

REP. MANZULLO: 20,000. Even if it found its way to 20,000, you'd have the problem of: who among them gets the money; how much; who determines that; who metes it out? And then you go down the line to (NEMA ?), the subs, the sub-subs, and then the cities and the villages, and -- and I don't think that's going to work.

MS. SYKORA: Well, point of clarification: We aren't asking for any of the money. Now, some of the Representatives have proposed that as questions to the automakers, if they would be opposed to having some of that for the dealers. But, as dealers, we're not here asking for that.

REP. MANZULLO: Okay. Okay. (NEMA ?) is?

MS. SYKORA: (NAMA ?) is.

REP. MANZULLO: Okay. All right. Thank you.

I think -- I guess, Chairman, if you wanted to let him answer the question, but that's up to you.

REP. FRANK: (Let him ?) answer his question.

MR. (MCELYA ?): First of all, we've heard a lot from the supply -- from the car companies over the last two days. And one of the big concerns that the supplier industry had was if one of these car companies go bankrupt, and all the receivables that the suppliers have, it would be just a huge collapse in the supplier industry. We are on thin edge, as far as our financing and liquidity.

What we heard -- I think I heard, hopefully it's in the record -- was that the car companies said that if they get the bailout the one thing they'll do is pay their suppliers. That's how they are going to use the money. And that's the main concern for the supply base.

This is a huge, huge problem. Once one of these companies go, statistically, of the top 100 suppliers to Chrysler, 96 of those 100 are common to Ford and General Motors.

REP. MANZULLO: No, I understand that. But, Bank of America was supposed to take the money and infuse it into the line of credit and help people out. And they just -- they took the money, and they witthdrew the line of credit, and you have no guarantee --

(Gavel sounds.)

REP. FRANK: Time's expired.

REP. MANZULLO: Thank you, Chairman.

REP. FRANK: The gentleman from Colorado.

REP. PERLMUTTER: Thanks, Mr. Chair.

And Ms. Sykora, listening to you, and then also talking to some of my friends from Colorado, it's sort of a two-fold problem that you see at your dealership: One, your demand is down; and two, people who come into the stores, many who may have qualified at some point in the past, don't really qualify now. So, it's a credit and a demand, is that what you're seeing?

MS. SYKORA: Yes, especially in some certain regions where credit is already constrained because of other problems. In some regions that's not the case. So, that's why we're -- we're wanting customers to, you know, go to their local dealership, because if they have a good job, good credit, we're probably going to find credit available.

It's one of the reasons that dealers have multiple sources of financing available for customers. And, it's obviously a good thing we do.

REP. PERLMUTTER: This maybe goes more to the economists on the panel, but just -- it's almost as if demand for just about everything is falling off the table in the course of the last 45, 60, maybe 90 days.

I mean, what -- I was trying to ask the question, I don't think I asked it right, of the prior panel -- you know, how much are they going to need? What is it per month? Is $25 billion going to get us there? Is there some other way to approach this?

So, gentlemen, look into your crystal ball and tell me -- you know, you heard their numbers as to what they lost last quarter; this quarter's probably going to be about the same, I would imagine, or worse. I don't know. What do you think?

MR. SACHS: I think that there are two endpoints to this process -- successful endpoints. One is, that there is a recovery -- 2010. But, next year is not going to be a good year. It's going to be a very tough year. 2010, we should, if things are not in calamitous shape -- of which a GM bankruptcy, for example, would make a calamity -- we'll have a recovery.

The second thing that should happen -- and not just normatively, but I expect to happen, is that banks start working again. And that means that when they go for more, they'll go back to banks and they'll go back to the bond markets.

We're having risk spreads that have never been seen in history right now. So, they can't borrow in -- they can't even borrow 7-day, or 30-day, much less for five-year or 10-year notes, which would be a normal way for them to fund through a recession.

Recessions are not extraordinary. What's extraordinary is no banking sector. We're a $15-trillion, cash-and-carry economy right now. And TARP has not yet worked to really -- it's done for overnights, and it's brought LIBOR down a little bit, and it's gotten things starting to unstick. And it will work, especially with a new government with coherent vision, and so forth.

But, we don't have that yet, and there's no bond market for them to turn to either. So, the two ways out of this are: economic recovery; and financial market functioning again, because they'll go back to financial markets.

And I would say to the Congressman's question, it's not only the consumer demand, it's actually financing the new models. It's financing their several programs that they have in place, which is quite expensive -- a tremendous amount of tooling that needs to be done, and that's billions of dollars of spending.

REP. PERLMUTTER: Okay, so my question -- and then I'd like Dr. Slaughter --

MR. SACHS: And what they --

REP. PERLMUTTER: How long -- what do you think, in terms of how long is the $25 billion going to last?

MR. SACHS: I think you'll get through 2009. And I think that you'll start -- use Section 136 for some of this also. And I expect that they won't come back to you, I expect that they'll go back to the financial markets -- at least that's what I would hope.

REP. PERLMUTTER: Dr. Slaughter?

MR. SLAUGHTER: If you think of the $25 billion being applied to cover the operating losses the companies seem to be realizing in real time, added across the three companies -- given what information they put in the public domain and what information they've provided about the future, I would think something in the neighborhood of three to six months.

As Dr. Sachs said, there's a number of other intangibles then that feed into what's going to be the performance of these companies. I'll come back to -- for a lot of these companies it's their foreign sales and profits in certain foreign markets that have really been balancing out the sharp decline in the U.S. markets as they've seen in recent times.

So part of the answer to that question depends on what happens with economic growth all over the planet.

REP. PERLMUTTER: Are you optimistic on the thawing of the financial markets, so that there will be a place for them to borrow money if necessary?

MR. SLAUGHTER: I'm optimistic in the sense that it is thawing. I mean, some of the spreads that Dr. Sachs referred to have been coming down in the past several days and few weeks, relative to the levels they hit in mid-September.

I, like many other people, don't have great visibility about when we might get back to the type of lending activity we had 12 to 18 months ago.

REP. FRANK: I would ask indulgence.

I have two economists who just said what they said. Would it be fair for us to say that the passage of the $700 billion bill is some part of the reason why we're seeing the credit markets improve?

MR. SACHS: Absolutely. Without that, we'd be in disaster.

REP. FRANK: Professor Slaughter?

MR. SLAUGHTER: Yes, I fully agree.

REP. FRANK: Thank you. You have justified for me a very long day. (Laughter.)

REP. FRANK: The gentleman from Illinois.

REP. PETER ROSKAM (R-IL): Thank you.

First, I was wondering if you could give us some estimate of what you consider the aggregate overcapacity of the automobile industry -- and, just in normal economic times right now, in terms of the product --

REP. FRANK: (Off mike.)

REP. ROSKAM: -- the aggregate overcapacity.

REP. FRANK: (Off mike.)

REP. ROSKAM: I think there's a general consensus that even if things maintain, you know, relatively normal economic conditions, there was an overcapacity in terms of the number of vehicles built per year, the number of dealerships, the number of brands supported by the manufacturers, and so on. And you could -- you could talk about those in optimistic scenarios in which things returned to normal, or pessimistic ones in which they continue. And I was wondering if you have any numbers on that?

MR. SACHS: Let me say, first of all, at a global scale this is an expanding industry, and a pretty rapidly expanding industry, actually, because the car penetration in places like China and India remain very low. But, that's not inconsequential for American built automobiles, because if we have open markets we can also export from here. So, I would not discount that possibility. Of course, we have to break through trade barriers, but in terms of capacity -- as you asked, Congressman, it's a growing global industry.

Now, domestically, I think it's quite interesting. We have 240 million vehicles, more or less, on the road right now in the U.S. And if you just look at the replacement rates at a 15-year cycle for those vehicles, you're already up to 15 (million) to 16 million units a year, at least, not even taking into account further growth.

So, I don't view this as an industry in significant decline, where we're trying to break the decline. I don't view it that way. I view it as an industry in significant technological change, because we can't go on with the kinds of cars that we had before. The physical environment and our energy security won't permit it anymore.

So we're in a transformation, but I don't think we're in a terrible downward consolidation. That's my own --

REP. ROSKAM: Are any of The Big Three net exporters or importers? Are they all net importers?

MR. SACHS: Well, some models they're exporting, other models they're importing.

REP. ROSKAM: But, net?

MR. SACHS: Net, I don't know the most recent data.

REP. ROSKAM: Do you know, Professor?

MR. SLAUGHTER: Two things, just to build on what Professor Sachs said. One is, it's very hard to answer that question, and particular in the North American region. You've had integration between the automobile markets in Canada, the United States and Mexico dating back to the Auto Pact of 1965, and it was extended further with the North American Free Trade Agreement.

But that speaks to a -- one of the fine points Dr. Sachs made, which is, it's hard -- the other factor in trying to answer your question is, the productivity gains that The Big Three, like the foreign auto producers in the U.S., have made -- that the CEOs discussed earlier, part of what that means is, how much overcapacity there is.

It's really a moving target, relative to the productivity gains that they're making, and what seems to be happening with demand, not just in the U.S. but a lot of these foreign markets as well.


And then the issue of dealerships -- what you've just seen mentioned in the press is the disparity in the dealerships per car sold for the Detroit Three versus the imports. And I was wondering if you -- if there are any numbers worth talking about on that?

MS. SYKORA: (Off mike) -- because I talk a little slow -- I'm from Texas -- and I didn't get to some of that point in my oral testimony, but in the '50s we had 50,000 dealerships. And there's been an orderly decline in the number of dealerships due to market conditions. But, it's always come at a cost. It comes at a cost of convenience to the consumer and competition to keep the prices low for consumers.

But, I think what's real important to realize here is that dealers aren't a cost problem to the manufacturer. We bear the external costs of providing the distribution network, something that they don't have the resources to do; and that our dealer network actually does increase convenience and competition.


And, I guess, Professor Slaughter, there's, sort of, four work- outs that people talk about: There's the direct loan to avoid a bankruptcy, which I take it you're not a fan of; then there are work- outs that are comparable to Chapter 11, but actually have no bankruptcy filings -- it's, sort of, I guess, similar to what happened to Chrysler; then there's a Chapter 11, but with the government-backed debtor-in-possession financing to ensure that no liquidation takes place; and then, finally, a full Chapter 11 with no guarantee of not liquidating.

And I was wondering if you see that the medium -- the middle two things, the government's, sort of, a government-supervised guarantee of the -- to make sure no liquidation takes place, but a bankruptcy filing; or some government organized -- something that's a virtual Chapter 11, where you'd get everyone in the room and say, okay, everyone, you know, all the concerned parties do the same sort of negotiation as a Chapter 11, but not actually having that for all the market reasons that people are talking about?

MR. SLAUGHTER: I'd briefly respond by saying I think both those scenarios you lay out are possible. I could imagine another scenario, which is a firm being in Chapter 11 and the government guaranteeing some of the debt that someone might just have to provide, in the same way that Treasury, and to some extent our Federal Reserve, has been putting guarantees on certain debt instruments in recent times.

REP. ROSKAM: Yeah, Jim.

MR. MCELYA: Congressman, we're quite overwhelmed right now, in our economy and management, to be able to manage a very delicate operation, with thousands of firms and suppliers, and a catastrophic headline of a bankruptcy of one of these companies.

My view is, it would be an unbelievable gamble under normal times, and unthinkable right now. So, I just wouldn't go that way at all for this, under the conditions of recession verging on collapse. We don't have the bandwidth right now to handle another crisis of that magnitude, then, to negotiate that.

If in six months, or nine months the situation is spiraling downward, and the $25 billion was not enough, you're going to come to one of those. But, this is not the time to come to it right now.

REP. FRANK: The gentleman from Missouri -- and I apologize for overlooking him.

REP. CLEAVER: Thank you, Mr. Chairman. I have three questions, and I'll do it quickly. I know you are -- you've been here all day.

First, Ms. Sykora. I mentioned -- I raised this question earlier with the C.E.O. from General Motors, but I'm very concerned that even with an injection of cash, GMAC is not -- has not increased the number of loans to potential auto buyers. I mean, it's making me nervous because -- I mean, how much money do we have to put in to see that credit is unfreezing?

I mean, will you have -- or your Association have some indication when a thawing is taking place? And are you seeing anything right now? Now, I'm going to support this rescue package because I think god gave us a neck for a purpose -- to stick it out. So, I'm going to do that. But, I've got concerns.

MS. SYKORA: Well, you bring up a good point. And, no, we're not seeing that thaw for working capital, financing for dealerships, or the inventory financing for dealerships. But, I think what you heard also the GM exec say is that the Treasury funds haven't been used -- the TARP funds haven't been used for the finance companies yet, or they're not experiencing that yet.

And we are working with Treasury on proposals to help free that up so that -- so that it makes retail credit more available, which is, I think, what your intent was.

REP. CLEAVER: Yes. But they're not doing it.

MS. SYKORA: Not yet.

We feel very encouraged --

REP. CLEAVER: I mean, you can't answer the question about when, but I --

REP. FRANK: Well, if the gentleman would yield -- the secretary sort of indicated to us yesterday, he doesn't plan to use any of the additional money except if we were able to push him into mortgages.

He is talking about doing something -- a credit facility that he's talking about -- that would ultimately be helpful there, but that's apparently not until the next administration. So there does not appear to be anything that would be responsive to this need on the horizon until late January at the earliest.

REP. CLEAVER: Professor Sachs, this might be more philosophical than scientific.

But you had mentioned a hydrogen car earlier that Chevy has been experimenting with, and which also troubles me a little, because hydrogen is the most gregarious atom on the planet. It likes to have a lot of other things around it. And so therefore, a great amount of electricity is going to be needed if we're going to produce these hydrogen automobiles. And the amount of electricity may exceed the cost of using fossil fuel.

So is this a worthwhile venture for Chevy? Since we're going to probably end up giving some money, you know, we need to have some comfort with the first 25 billion (dollars).

MR. SACHS: Yeah. Let me be clear: What GM is going to bring out in 2010 is a plug-in hybrid, not a hydrogen. So the Chevy Volt is a hybrid technology, plus a lithium-ion battery. And it is -- it's specs are to get 100-miles-per gallon for a daily 80-mile drive. It's quite exciting.

Now, what they're also doing is investing on a time horizon that they think is a decade to look into so-called fuel-cell technology, which is hydrogen fuel cells. That's for something maybe in 2020. That's not the current, but they're investing a lot of money and I'm glad that they are.

I wish our government -- well, in fact, President-elect Obama talked a lot about a $150 billion research and development program for technology over the next 10 years. And one of the things of that will be fuel cells -- to look into it.

Your concern is a lot of engineers' concerns: Is this the right way to go or not? Now, how would you produce the hydrogen in that scenario? It would be produced in the Mojave Desert with solar power. It would be produced in North Dakota with wind power. It would not make sense to burn coal to produce hydrogen to put it into a fuel cell.

So the model of it is an effective fuel cell, combined with a renewable energy source to hydrolyze water or to get hydrogen some other way.

REP. CLEAVER: You're nice to spend the day with us. Thank you.

REP. FRANK: Since all members have completed, we do have our colleague from New Jersey, who is the author of the bill on the dealers. And I will recognize him for two minutes --

REP. BILL PASCRELL (D-NJ): Thank you, Mr. Chairman --

REP. FRANK: -- if there's no objection.

REP. PASCRELL: -- thank you, Mr. Chairman.

It's refreshing to have a panel talking about Main Street issues. And I must say, although the two professors are coming down different paths, they have been absolutely non-audiological. That's very refreshing, I'm sure. It's a salute to both you and the ranking member.

Mr. Chairman, I know that this committee does not have the authority to amend the Internal Revenue Code of 1986, but I think Ms. Sykora has made a very, very compelling argument that she feels -- and I'm not putting words in your mouth, so you correct me if I am -- to allow an above-the-line deduction against individual income tax or interest on indebtedness for state and local taxes, sales and excise, with the respect to the purchase of certain automobiles. Myself and Senator Mikulski had calculated that on a $25,000 car, that would be a savings of around $2,300-$2,400.

Do you personally feel, with all the data that surrounds this, that that would be an incentive enough for people -- and that, by the way, the bill only calls for one year for this to happen -- will that be an incentive to get traffic back at the places that you're interested in so that people can stay in business and people can buy cars?

MS. SYKORA: First of all, let me thank you for introducing that legislation, because we do so like it. That's beneficial.

And since I don't have a crystal ball, I'll just kind of take a look back in history and tell you, you know, that when that was phased out in '86, it was over a five-year period of time. And in those final months of 1991, we did experience, you know, a significant increase in traffic in consumers that wanted to take final advantage of that deductibility.

So it was something they were aware of. Many of the consumers that I talked to remember it. So I think it could be an important stimulus.

REP. PASCRELL: Mr. Chairman, in conclusion, I hope that you will communicate this. I think this is good data.

REP. FRANK: Excuse me, but are you no longer on the Ways and Means Committee?

REP. PASCRELL: Yes, sir.

REP. FRANK: So who am I supposed to -- you?

REP. PASCRELL: I don't know. After being here today, they might throw me off! I don't know.

REP. FRANK: The hearing is now adjourned.


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