Letter to Henry M. Paulson Jr., Secretary, Department of the Treasury, Ben S. Bernanke, Chairman, The Federal Reserve Board, and Neel Kashkari, Assistant Secretary for Financial Stability

Letter

Letter to Henry M. Paulson Jr., Secretary, Department of the Treasury, Ben S. Bernanke, Chairman, The Federal Reserve Board, and Neel Kashkari, Assistant Secretary for Financial Stability

WITH DETROIT RESCUE ON HOLD ... SCHUMER PRODS FED, TREASURY TO OPEN LENDING FACILITY FOR U.S. AUTOMAKERS

Senator Says Foreign Central Banks Are Helping Their Countries' Automakers Offer Financing Deals That Big Three Can't Match, Hurting Domestic Car Sales

Schumer Also Pushes Treasury To Quickly Consider Financing Arms' Applications To Participate in $700 Billion Rescue Plan

While Congress waits for U.S. automakers to present a restructuring plan before voting on additional rescue measures for the industry, U.S. Senator Charles E. Schumer (D-NY) called on the Federal Reserve Monday to begin lending to the companies' financing arms, and pressed Treasury officials to quickly consider pending applications from those financing units that wish to access assistance through the government's $700 billion rescue plan.

In a letter to Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson and Assistant Secretary Neel Kashkari, Schumer said the credit crisis has prevented domestic automakers from offering consumers the type of financing deals offered by their foreign competitors. This, Schumer said, is contributing to a severe sales slump for the Big Three. In response, Schumer stressed that the Fed should act to relieve tightening in this market, as it has in the mortgage-backed security and commercial paper markets, by lending to the financing units of GM, Chrysler and Ford against their existing car loans. Paulson has signaled that such a lending facility could be set up, but no action has been taken yet.

"These financing troubles are putting the Big Three American car companies at a serious disadvantage relative to foreign competitors with better access to credit markets," Schumer wrote.

"It is vital that this facility be established immediately and in sufficient size to allow consumers reasonable access to credit for auto purchases," he added.

Schumer also pressed for quick consideration of any pending or forthcoming applications by the auto companies' financing units to qualify for funds under the Troubled Asset Relief Program. Schumer said the applications should be approved where appropriate.

A copy of Schumer's letter appears below.

November 24, 2008

Henry M. Paulson Jr. Ben S. Bernanke
Secretary Chairman
Department of the Treasury The Federal Reserve Board
1500 Pennsylvania Ave NW 20th Street and Constitution Avenue, NW
Washington, DC 20220 Washington, DC 20551

Neel Kashkari
Assistant Secretary for Financial Stability
Department of the Treasury
1500 Pennsylvania Ave NW
Washington, DC 20220

Dear Secretary Paulson, Chairman Bernanke and Assistant Secretary Kashkari:

I am writing to urge you to act quickly under the authority that you have been granted by Congress to increase the availability of car loans for consumers and extend the financial rescue programs authorized under the Emergency Economic Stabilization Act (EESA) to the struggling American car companies.

The auto industry is a critical component of our economy that we cannot abandon in a time when economic weakness threatens us with an unusually severe and prolonged recession. The Center for Automotive Research has estimated that a major contraction of the Detroit Three—General Motors, Ford and Chrysler—could lead to job losses for 2.5 million workers. The Center also estimates that the combination of direct and "ripple effects" from a failure of a large automobile manufacturer could potentially lead to a loss of 3 million American jobs. This could single-handedly drive the unemployment rate to 8 percent, even as job losses in other sectors continue. These serious economic consequences are not confined to forecasts or estimates.

The credit crisis hit the American car companies particularly hard because their financing arms must rely more heavily, and in some cases, almost exclusively on external credit markets to obtain financing. According to reports, the financing arms for several of the Big Three have been forced to restrict lending to customers with credit scores of 700 or better. This restriction eliminates 40 percent of the U.S. car buying population, and up to 75 percent of the customers at some dealerships. At least two of the financing arms have also been forced to effectively cease providing auto leases due to problems in the asset-backed securities market. Currently, for example, less than 2 percent of GM new car sales are leases, as opposed to 16.8 percent one year ago.

These financing troubles are putting the Big Three American car companies at a serious disadvantage relative to foreign competitors with better access to credit markets. When Toyota sales dropped in September, Toyota was able to use access to secure funding to offer a 0 percent financing incentive and Toyota sales actually rebounded in October. In contrast, one of the Big Three was unable to provide financing incentives and sales plunged 40 percent in October, despite falling gas prices. Overall, that firm's sales dropped 45 percent from August to October, while Toyota sales dropped just 28 percent.

Given the importance of the industry to the overall economy, and the significant role that the lack of financing has played in the collapse of Big Three auto sales recently, it is critical that the federal government use the tools at its disposal to deliver immediate assistance to the sector. Specifically, I urge you to immediately create a medium-term securitization facility at the Federal Reserve, similar to those implemented for the frozen mortgage backed security and commercial paper markets, for consumer auto finance. The short-term nature of the existing commercial paper facility limits its effectiveness for auto-loans, which typically have longer maturities. It is vital that this facility be established as quickly as possible and in sufficient size to allow consumers reasonable access to credit for auto purchases.

In addition, I ask that you expeditiously consider and, where appropriate, approve any pending or forthcoming applications from the Big Three's consumer auto finance arms to participate in the Troubled Assets Relief Program's (TARP) Capital Purchase Program as an additional way to restore consumer lending activities. As you know, TARP was created with the explicit consideration of "providing stability and preventing disruption to financial markets in order to limit the impact on the economy and protect American jobs, savings, and retirement security." Preserving the continued flow of credit to auto finance fits squarely within the scope and purpose of TARP, and failure to act quickly to reopen the auto lending market would go against the express intent of Congress in authorizing the TARP.

Finally, I am troubled by reports that the Treasury Department does not believe that it has sufficient legal authority within EESA to provide emergency funding directly to the auto manufacturers themselves. The authorities granted in the legislation were written very broadly, at the Department's request, to ensure that it could react to almost any contingent threat to our economic stability. It is clear to me that the systemic impact on the economy should one of the Big Three go out of business justifies the immediate deployment of tools authorized by EESA. I urge you to reconsider your interpretation of the legislation and use a portion of the $700 billion authorized by Congress to provide emergency bridge funding to help the auto companies remain viable so that they can emerge from this credit crisis intact and build the innovative vehicles we will need to get our economy back on the road to recovery.

Thank you for your prompt attention to these matters. At a time when the economy is already in a recession, the country can ill-afford a delayed response to such a pressing problem. Too many American families are dependent on this industry to ignore its plight. I look forward to your action on these issues. If you have any questions, please contact my office at 202-224-6542.

Sincerely,

Charles Schumer
United States Senator

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