Panel II of a Hearing of the House Financial Services Committee - Auto Industry Stabilization Plans
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REP. BRAD SHERMAN (D-CA): Thank you, Mr. Chairman. I think these hearings show that we ought to pass a bill. Our best chance to pass a bill is to write one that's got tough standards to protect consumer warranties, to make sure that the U.S. government is involved in deciding which plants get closed and which stay open, and to deal with executive compensation and perks and deal with a number of the other issues that have come up.
Clearly everybody's got to give something. Now, the shareholders are going to give. We're going to dilute them if we get sufficient warrants. And if time permits, I want to ask the witnesses about how many warrants that ought to be. The executives -- I think I joined several of my colleagues in torturing them, and that's just a taste of what we'd like to put in the bill.
The unions have made substantial concessions, have indicated they're going to make more. But we've been talking here about the creditors and not just making the loans senior, our debt senior to theirs, but to actually write down the liability.
Right now people are buying GM debt for 15 cents on the dollar. And if everything goes swimmingly, should they get a dollar on the dollar, if things go swimmingly, only because the taxpayers ride to the rescue.
Professor Altman, do you see a way not only to make the taxpayers' debt senior, but to actually provide for a reduction in the amount that GM, for example, has to pay on its unsecured debt?
MR. ALTMAN: Yes. What you're referring to is something known as a distressed exchange. And the creditors are offered, let's say, 20 cents on the dollar in new securities, equity, preferred stock. And they have to evaluate whether or not it's to their interest based on --
REP. SHERMAN: So this would only be voluntary? Is there a way for us to write a statute that makes it mandatory?
MR. ALTMAN: Well, as Chairman Frank said, you can do whatever you want. (Laughs.) But I wouldn't recommend that.
REP. SHERMAN: I'm a little concerned about the takings clause.
MR. ALTMAN: Yeah, I wouldn't recommend that. It's much better -- and I think GM has a good plan in that respect to write down the debt. Thirty billion dollars, I think, was in their plan to reduce it. And I think that makes sense. But I ran it through my model, and they still come up a bankrupt entity, even after doing that.
REP. SHERMAN: Okay. Mr. Sachs, a new line of questioning. Let's say the doubters are right, and all we can do is give a transfusion to a patient who's ultimately going to expire with regard to GM and Chrysler. One of the things about a business cycle is that companies fail at the very time that other companies are failing. It would be nice if we could arrange it so that companies only fail during good economic times.
How much higher will our GDP be if we do nothing but delay the dissolution of GM and Chrysler by 12 months?
MR. SACHS: Very slight. And that certainly can't be the goal of this exercise.
REP. SHERMAN: So if we were to spend --
MR. SACHS: This would not be the right way to do general stimulus --
REP. SHERMAN: No, I'm just saying worst-case -- if we put in the money, one of the reasons to put in the money is maybe the companies will survive.
MR. SACHS: I'd say more than --
REP. SHERMAN: Another reason to put in the money is maybe we can delay by 12 months their failure to survive. You're saying that second objective is of slight value to the United States.
MR. SACHS: I think that's right. It would be marginally present. But that can't be the point of this exercise. But I would not be so pessimistic to think that there isn't a trajectory out of this. That's the whole point.
REP. SHERMAN: Oh, I just started with a worst-case assumption. I'm not asking you to embrace it.
MR. SACHS: Yeah, absolutely.
REP. SHERMAN: Mr. Rohatyn, if I'm pronouncing that correctly, the chairman's draft calls for us to get warrants with a value of 20 percent of the money we're putting in. And the question is -- I mean, these are companies you could buy the whole company, according to today's values, for $2 (billion), $3 (billion), $4 billion, and we're talking about putting in $34 (billion).
When you use the standard approaches used to value warrants, would we end up, if we exercised the warrants, owning well over 90 percent of the outstanding shares, if you looked at what the value of the warrants would be?
MR. ROHATYN: Well, I think that if -- that you certainly would try not to wind up with 90 percent of the equity of the company.
REP. SHERMAN: I would disagree with you. If we're taking 99 percent of the risk, I hope we do end up with 90 percent of the company. And if the shareholders don't want to take that deal, they can seek money elsewhere.
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