Detroit Needs A New Business Model, Not A Taxpayer Funded Bailout

Press Release

As you may know, the Detroit automobile industry - Chrysler, General Motors, and Ford - recently came before Congress to request $34 billion in loans and lines of credit. As a member of the House Financial Services Committee, I had the opportunity to hear first-hand from the CEOs of the three companies, as well as United Auto Workers (UAW) President Ron Gettlefinger.

No one doubts the Big Three are in trouble. Chrysler, by their own admission, will only have $2.5 billion in cash on hand by January 1, 2009, but has $11.6 billion in liabilities that need immediate payment during the first three months of 2009 alone. General Motors is teetering on the edge of bankruptcy. Ford, which is in the best health of the three, is worried that a failure of either Chrysler or General Motors will have severe detrimental effects to its supply chain.

While the financial crisis has exacerbated these problems, it did not create them. Lack of foresight made them vulnerable to the dramatic increase in gas prices between 2003 and 2008, and poor corporate governance led to a series of bad decisions stretching back thirty years. As a result, nearly one million American jobs may now be at risk.

Many commentators say a loss of the domestic automobile industry will have a severe impact on the economy, and I agree. However, the recent history of taxpayer funded bailouts calls into question whether a bailout of the Detroit Big Three will work. Two months ago, Congress passed a $700 billion bailout. The money spent under this program has not gone into the economy as planned, but instead is sitting in bank vaults across the country. In September, the Federal Reserve (the "Fed") stepped in to bailout AIG to the tune of $85 billion. A month later, the Fed increased that to $122.4 billion. A month after that, the number grew to $152 billion.

The bailouts of the financial industry, which I have consistently opposed, have put taxpayers in debt for $8 trillion. Similar to AIG, I doubt this will be the last time the automobile industry comes before Congress to ask for money. Giving the industry $34 billion now will simply be a beginning rather than an end. The loan does not solve their long-term liquidity issues, overcapacity in the market, and poor corporate governance.

However, at the same time, millions of retirees rely on their pensions from Chrysler, General Motors, and Ford for their well-being. The Pension Benefit Guaranty Corporation, though, protects these pensions. The Big 3 auto-makers have also indicated their pension systems are currently fully funded.

I have carefully weighed the arguments for and against a bailout of the Detroit automobile industry. I have consulted with car dealers in my district, retirees, and financial experts. After much deliberation, I voted against a financial bailout for the automakers when it came before Congress on December 10, 2008. The bill, H.R. 7321 introduced by Rep. Barney Frank (D - MA), would have provided $14 billion in loans to carry the automakers through the first three months of next year. However, the bill did nothing to protect the American taxpayer in case of a default, which is a very real possibility. Moreover, the bill allowed the automakers to ignore the dire problem that is facing them; merely sweeping the problem under the rug will not solve the situation.

One also cannot expect the federal government to invest in a privately owned entity such as Chrysler, which is managed by a very large New York hedge fund called Cerberus Capital. Cerberus Capital has been unwilling to invest even one extra dime in Chrysler, which begs the question: if the owners of Chrysler are unwilling to invest in it, why should the American taxpayer?

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