Bankruptcy: 03-04-09 US Auto Sales Drop at Least 40 Pct

It is time for bankruptcy.

Major automakers’ U.S. sales continued their deep slump in February, putting the industry on track for its worst sales month in more than 27 years. (March 3)

Google: 02-25-09 What Can Detroit Learn from Google?

Complete video at: http://fora.tv/2009/02/18/Jeff_Jarvis…

Journalist Jeff Jarvis discusses how to make the auto industry “Googley.” “If [automakers] came out with an API for the car,” he asks, “what could people build on top of it?”

Auto: 02-15-09 No Car Czar will be Created

Class, would it have anything to do with specific knowledge or what Hayck would call “time and place”?

If we … agree that the economic problem of society is mainly one of rapid adaptation to changes in the particular circumstances of time and place … decisions must be left to the people who are familiar with these circumstances, who know directly of the relevant changes and of the resources immediately available to meet them. We cannot expect that this problem will be solved by first communi-cating all this knowledge to a central board which, after integrating all knowledge, issues its orders. We must solve it by some form of decentralization.

Full article here. Partial article below

WASHINGTON — The Obama administration will not name a “car czar” to help oversee the auto industry’s restructuring and will instead create an inter-agency task force to deal with the issue, according to senior administration officials.

Treasury Secretary Timothy Geithner and Lawrence Summers, who heads the National Economic Council, will jointly oversee the task force, with Mr. Geithner overseeing the $17.4 billion in federal loan agreements between the automakers and the U.S. government.

As a condition of receiving government aid, General Motors Corp. and Chrysler LLC are required to submit extensive restructuring plans and concession commitments from unions and bondholders by Feb. 17 to a presidential designee, commonly dubbed the czar.

The administration has decided to forgo naming one individual to oversee the process. Treasury is expected to bring in Ron Bloom, a special assistant to the president of United Steelworkers union and a former investment banker, as a senior advisor to help handle auto-related issues, these people said.

The hiatus, in which the industry awaited the car czar, slowed progress in restructuring talks between automakers, bondholders and the United Auto Workers union, according to people familiar with the matter. Without someone firmly in charge, the various stakeholders have not felt compelled to come to the bargaining table, these people said.

The auto companies were given the loans as a sort of bridge financing to help them through tough economic times and their own missteps while working on plans to make their industries more viable for the long-term. Government officials believe both GM and Chrysler may soon need more money.

Bankruptcy (Chapter 11): 12-28-08

What is a Chapter 11 bankruptcy? Below is short and easy to understand video highlighting Chapter 11 bankruptcies for corporations.

Specific to the Auto Industry

Two pages of Google Results (Articles cited is the number of articles cited within a ” Google Group” for Google Scholar for “corporate bankruptcy” I could not find the definition of “Google Group” but I am assuming the definition is a “Group of Related Articles” There were 136,000  hits, I have the first twenty below.  I will contact Google and attempt to determine exactly what these numbers mean.

PDF] ►Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy E I Altman – Journal of Finance, 1968 – acct.tamu.edu Page 1. Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy STOR Edward I. Altman The Journal of Finance, Vol. 23, No. … Cited by 2587 – Related articles – Web Search – All 3 versions

The Administrative Costs of Corporate Bankruptcy: A Note JS Ang, JH Chua, JJ McConnell – Journal of Finance, 1982 – ideas.repec.org The Administrative Costs of Corporate Bankruptcy: A Note. Author info | Abstract | Publisher info | Download info | Related research | Statistics. Author Info. … Cited by 170 – Related articles – Cached – Web Search – All 3 versions

The Corporate Bankruptcy Decision – ►ucsd.edu [PDF] MJ WHITE – Corporate Bankruptcy: Economic and Legal Perspectives, 1996 – books.google.com CHAPTER 14 The corporate bankruptcy decision* MICHELLE J.  WHITE** A central tenet in economics is that competition drives markets toward a state of long-run … Cited by 168 – Related articles – Web Search – All 5 versions

Bankruptcy and Corporate Governance: The Impact of Board Composition and Structure CM Daily, DR Dalton – ACADEMY OF MANAGEMENT JOURNAL, 1994 – jstor.org … tures and corporate bankruptcy. A logistic regression analysis of bank- … Boeker, 1991). We suspect that corporate bankruptcy is a unique context in which the … Cited by 148 – Related articles – Web Search – BL Direct – All 2 versions

Corporate bankruptcy and conglomerate merger RC Higgins, LD Schall – Journal of Finance, 1975 – ideas.repec.org … [Downloadable!]; Martynova, Marina & Renneboog, Luc, 2006. “The performance of the European market for corporate control : evidence from the 5th takeover wave … Cited by 133 – Related articles – Cached – Web Search – All 3 versions

The Costs of Corporate Bankruptcy: A US-European Comparison MJ White – Corporate Bankruptcy: Economic and Legal Perspectives, 1996 – books.google.com Page 482. CHAPTER 30 The costs of corporate bankruptcy: AU. S.-European comparison* MICHELLE J. WHITE** Both Britain and France have … Cited by 100 – Related articles – Web Search – Library Search – All 5 versions

An Analysis of Risk and Return Characteristics of Corporate Bankruptcy Using Capital Market Data J Aharony, CP Jones, I Swary – Journal of Finance, 1980 – ideas.repec.org An Analysis of Risk and Return Characteristics of Corporate Bankruptcy Using Capital Market Data. Author info | Abstract | Publisher … Cited by 91 – Related articles – Cached – Web Search – All 3 versions

[BOOK] Corporate bankruptcy in America EI Altman – Heath Lexington Books Cited by 101 – Related articles – Web Search – Library Search

Corporate Bankruptcy and Insider Trading* HN Seyhun, M Bradley – The Journal of Business, 1997 – UChicago Press … Michael Bradley Duke University Corporate Bankruptcy and Insider Trading* I. Introduction … Page 3. Corporate Bankruptcy 191 that file bankruptcy petitions. … Cited by 75 – Related articles – Web Search – BL Direct – All 6 versions

Is corporate bankruptcy efficient? FH EASTERBROOK – Corporate Bankruptcy: Economic and Legal Perspectives, 1996 – books.google.com CHAPTER 26 Is corporate bankruptcy efficient?* FRANK H. EASTERBROOK** Corporate bankruptcy has two functions: 1. to deliver the penalty for failure by forcing …
Cited by 45 – Related articles – Web Search – All 2 versions

Corporate Bankruptcy as a Filtering Device: Chapter 11 Reorganizations and Out-of-Court Debt … – ►ucsd.edu [PDF] MJ White – Journal of Law, Economics, and Organization, 1994 – Oxford Univ Press … V10 N2 Corporate Bankruptcy as a Filtering Device: Chapter 11 Reorganizations and Out-of-Court Debt Restructurings … Corporate Bankruptcy as a Rtering Dwtce 271 … Cited by 61 – Related articles – Web Search – Library Search – BL Direct – All 9 versions

Predicting Corporate Bankruptcy and Financial Distress: Information Value Added by Multinomial Logit …
T Johnsen, RW Melicher – JOURNAL OF ECONOMICS AND BUSINESS, 1994 – ideas.repec.org Predicting corporate bankruptcy and financial distress: Information value added by multinomial logit models. Author info | Abstract …
Cited by 49 – Related articles – Cached – Web Search – BL Direct

[BOOK] Rescuing Business: The Making of Corporate Bankruptcy Law in England and the United States BG Carruthers, TC Halliday – 1998 – Clarendon Press Cited by 47 – Related articles – Web Search – Library Search

Corporate bankruptcy and managers’ self-serving behavior CF Loderer, DP Sheehan – Journal of Finance, 1989 – ideas.repec.org … Corporate Bankruptcy and Managers’ Self-Serving Behavior. Author info | Abstract | Publisher info | Download info | Related research | Statistics. Author Info. … Cited by 42 – Related articles – Cached – Web Search – All 3 versions

[BOOK] Corporate Bankruptcy: Economic and Legal Perspectives JS Bhandari, LA Weiss – 1996 – books.google.com
… Page 2. This collection is the first comprehensive selection of readings focusing on corporate bankruptcy. … Page 3. Corporate bankruptcy Page 4. … Cited by 36 – Related articles – Web Search – Library Search

Using options to divide value in corporate bankruptcy – ►nellco.org [PDF] LA Bebchuk – European Economic Review, 2000 – Elsevier … reserved. Using options to divide value in corporate bankruptcy. Lucian … 1990).
4. The options procedure for corporate bankruptcy. Let … Cited by 33 – Related articles – Web Search – Library Search – BL Direct – All 15 versions

[BOOK] … Approach to Sovereign Debt Restructuring: Lessons from Corporate Bankruptcy Practice Around the …
P Bolton – 2003 – books.google.com … Issue © 2000 Inrernarional Monerary Fund Toward a Statutory Approach to Sovereign Debt Restructuring: Lessons from Corporate Bankruptcy Practice Around the … Cited by 34 – Related articles – Web Search – Library Search – BL Direct – All 5 versions

[BOOK] Security Pricing and Deviations from the Absolute Priority Rule in Bankruptcy Proceedings AC Eberhart, WT Moore, RL Roenfeldt, College of … – 1990 – ideas.repec.org … Franken, S., 2003. “The debtor-oriented model versus the creditor-oriented model of corporate bankruptcy law : a US-Dutch comparison,” Discussion Paper 14 …
Cited by 157 – Related articles – Cached – Web Search – Library Search – All 3 versions

[BOOK] Corporate Bankruptcy in India: A Comparative Perspective O Goswami – 1996 – Development Centre of Organisation and Development Cited by 17 – Web Search – Library Search

Auto Bailout: 12-17-08 Franks to Paulson – Do It

Frank Urges Paulson to Adhere to Auto Industry Bridge Financing Agreement

Washington, DC – House Financial Services Committee Chairman Barney Frank (D-MA) sent a letter today to Treasury Secretary Henry Paulson, regarding bridge financing to the U.S. domestic auto industry. Chairman Frank urged Secretary Paulson to adopt accountability protections identical to those contained in H.R. 7321, the auto rescue legislation negotiated with the White House, and passed last week in the House of Representatives. “Given the serious mistakes that senior auto industry executives acknowledge they have made in the past, such safeguards are absolutely necessary to ensure that taxpayers are protected and that the retooling of this critical industry proceeds as quickly as possible,” wrote Chairman Frank.

The full text of the letter as follows:

December 16, 2008

Letter is below

The Honorable Henry Paulson
Secretary of the Treasury
Department of the Treasury

Dear Mr. Secretary:

In the absence of final Senate action on legislation to assist the “Big Three” U.S. automobile manufacturers, I am pleased that the Administration will provide critical bridge financing for these companies to help them through their current financial difficulties and restructure their operations.

As you know, the House-passed auto industry bill contained strong provisions to protect taxpayers and ensure that the companies engage in the kind of fundamental restructuring necessary for their long-run viability and success. One of the bill’s most important safeguards required each company receiving bridge financing to inform the President’s designee of any proposed asset sale, investment, contract, commitment or other transaction valued in excess of $100 million, and allowed the designee to prohibit any such transaction that would be inconsistent with or detrimental to the long-term viability of the company. This provision, negotiated with the White House, would provide an important check on management and make sure that the companies stay sharply focused on restructuring.

As a condition of aid to this industry, I strongly urge you to adopt accountability protections identical to those contained in H.R. 7321. Given the serious mistakes that senior auto industry executives acknowledge they have made in the past, such safeguards are absolutely necessary to ensure that taxpayers are protected and that the retooling of this critical industry proceeds as quickly as possible. They will also ensure that no stakeholder will be singled out to make any further commitments until a viable plan involving all stakeholders has been approved.

Sincerely,

Barney Frank

Source is here.

Auto Industry: 12-12-08 H.R. 7321 (The Auto Bill that passed the House.)

Comment: First,  read a comment from Robert A Sunshine, the Acting Director of the CBO. You can find his blog here.

Since this is an important topic, I am reproducing Robert’s comments below.

Loans to Domestic Automobile Manufacturers

Today, CBO released a cost estimate for H.R. 7321, the Auto Industry Financing and Restructuring Act, as passed by the House of Representatives last night. We estimate that enacting H.R. 7321 would increase net direct spending by $1.7 billion over the 2009-2018 period, mostly for loans to domestic automobile manufacturers. An additional $7.0 billion in potential costs would be subject to future appropriation action.

The act would provide sufficient funding to cover the costs of up to $14.0 billion in “bridge loans” to the auto manufacturers. It would make available for that purpose $7.0 billion of federal funds previously authorized to cover the cost of loans to automobile manufacturers and component suppliers for the manufacture of advanced technology vehicles (often labeled “section 136 loans,” referring to the provision of law that authorized them).

How does the $7.0 billion in previous funding relate to the $14.0 billion in loans to be made under this legislation? Under federal budgeting procedures, most loans and loan guarantees issued by the federal government are not recorded in the budget on a cash basis. Rather, estimates of the various cash flows (including, for example, disbursement of the loan principal, interest and principal payments received, and recoveries on defaults) are netted and discounted to the year of disbursement so as to show a net cost or savings to the government on a present-value basis; the amount of funding needed is not the total amount of the loan, but rather the net cost, if any, on that present-value basis. That net cost, as a percentage of the loan principal, is called the subsidy rate. For example, if the subsidy rate for a $1 billion loan is 50 percent, its net subsidy cost and the amount of funding necessary would be $500 million.

CBO estimates that the subsidy cost for $14.0 billion in loans would be about $7.0 billion (an average subsidy rate of 50 percent), the amount of existing funds made available for that purpose.

In CBO’s judgment, the subsidy cost of the bridge loans authorized in this legislation could fall within a wide range depending on estimates of potential interest income, a significant probability of default (which could be different for different firms), and possible recoveries in the event of default. Under the Federal Credit Reform Act, the Administration determines the estimated subsidy cost of loans based on the procedures specified in that act. CBO’s point estimate of 50 percent represents a weighted average of many possible outcomes and takes into account the possibility that subsidy rates assigned by the Administration could fall within a wide range.

There is, however, some likelihood that the net costs of the subsidy for the bridge loans would be higher. To the extent that the Administration assigns subsidy rates to loans that exceed CBO’s current estimate of the average subsidy rate, total funding available for bridge loans would exceed the $7.0 billion reallocated from existing funds. Such an outcome would result in greater spending for bridge loans. If, on the other hand, the Administration assigns subsidy rates lower than 50 percent, there would be no corresponding reduction in spending for loans under the bill because any amounts not required for bridge loans would remain available to the Department of Energy for section 136 loans. As a result, there is a possibility that the total loan costs resulting from this legislation could exceed the $7.0 billion in existing funds, but no possibility that they could be smaller. (We sometimes label such a situations a “one-sided bet.”)

Reflecting the significant uncertainty and the possibility that the Administration might assign subsidy rates other than 50 percent, authorizing the Administration to spend higher amounts if necessary yields about $1.0 billion in estimated additional spending for bridge loans in 2009.

Another $500 million in costs arises because the act would provide, out of the indefinite “such sums” appropriation, $500 million in new funding for the original section 136 loans to auto makers (for advanced-technology vehicles).

The Congress could, in the future, decide to provide an additional $7.0 billion in funding to replace the $7.0 billion that had previously been appropriated for section 136 loans and that, under this legislation, would be used instead for the bridge loans. This act would authorize future appropriations for that purpose, but would not provide such funding.

The remaining almost $200 million in new costs stem from provisions that would provide government insurance for certain financing arrangements made by transit systems and authorize a cost-of-living increase for federal judges.

A link to the paper can be found here.

Auto Industry: 12-09-08 Rescue Package?

Article here.

The White House and top Democrats on Capitol Hill reached agreement in principle on a sweeping rescue package for the nation’s auto makers, hoping to propel action this week on billions of dollars in aid, a senior administration official and congressional aides said.

The legislation would provide billions in loans to the car industry in return for the U.S. government taking a potentially substantial ownership stake and a direct role in the industry’s restructuring, setting the stage for one of the most far-reaching government interventions in American industry in decades.

The bill would provide short-term funds, expected to total about $15 billion, and would kick off discussions about longer-term taxpayer financing.

The final pieces of the legislation, which could begin to be debated and perhaps voted on as soon as Wednesday, came together late Tuesday after several hours of dickering over terms from taxpayer protections to what the industry should give up in return for loans. A senior administration official said line-by-line drafting of the legislation was still taking place Tuesday night, but added the core elements of the plan have been decided.

“We think we have achieved an agreement that is consistent with the president’s goals and principles,” the official said, stressing the president’s commitment to a return to financial viability for the companies. “We have an agreement in concept.”

Industrial policy experts compared the scale of the proposals to bailouts of Lockheed Aircraft Corp. and Chrysler Corp. in the 1970s, but noted that the auto rescue would impose far stricter conditions.

Government attempts to set strategy for individual industries are unusual, said David Hart, an associate professor of public policy at George Mason University, noting that “the last big effort” in which President Harry S. Truman tried to seize steel mills was declared unconstitutional.

Auto Industry: 12-09-08: Bailout?

Article here.

The proposed $15 billion rescue plan that drew lawmakers back to Capitol Hill this week gives Washington a strong hand in shaping the future of the US auto industry.

In sharp contrast to the relatively lax terms of the recent $700 billion bailout for the financial services industry, the auto rescue plan sets up a level of government oversight and control not seen since World War II.

George Bush: 12-08-08 Discusses the Economy

Article here.

THE PRESIDENT: Today’s job data reflects the fact that our economy is in a recession. This is in large part because of severe problems in our housing, credit, and financial markets, which have resulted in significant job losses. I’m concerned about our workers who have lost jobs during this downturn, and I’m — as we work to — as we work to address the problems of this economy, we’ve extended unemployment insurance benefits to those who have lost their jobs during this downturn.

We are focusing on the root causes of the economic downturn in order to return our economy to health. The most urgent issue facing the economy is the problem in the credit markets. Businesses and consumers need access to credit at affordable rates to spend and invest. And so we’re working to stabilize the markets and make credit more affordable and available. We’re working with the Federal Reserve and FDIC, and credit is beginning to move. A market that was frozen is thawing. There’s still more work to do. But there are some encouraging signs.

A root cause of the slowdown is housing, and so we continue to take actions that will avoid preventable foreclosures and speed a return to a healthy housing market. Interest rates help the housing market recover, and interest rates, mortgage rates, are going down. And plus there’s a number of programs in place to help Americans stay in their homes, to limit the preventable foreclosures.

I am concerned about the viability of the automobile companies. I’m concerned about those who work for the automobile companies and their families. And likewise, I am concerned about taxpayer money being provided to those companies that may not survive. Put out a detailed plan recently that uses money that Congress appropriated last fall for the auto industry — money that can be used so long as the companies make hard choices on all aspects of their business to prove that they can not only survive but thrive.

It is important that Congress act next week on this plan. And it’s important to make sure that taxpayers’ money be paid back if any is given to the companies.

It’s going to take time for all the actions we have taken to have their full impact. But I am confident that the steps we’re taking will help fix the problems in our economy and return it to strength. My administration is committed to ensuring that our economy succeeds. And I know the incoming administration shares the same commitment.

Bridge Loan: 12-05-08 CBO, Robert Sunshine, Federal Deficit

Letter here.

December 5, 2008

Honorable Steny H. Hoyer
Majority Leader
U.S. House of Representatives
Washington, DC 20515

Dear Mr. Leader:

This letter responds to your request for information about how alternative proposals to provide financial aid to the automobile industry would affect the federal budget. Specifically, you asked CBO to analyze the budgetary effects of two legislative proposals: S. 3715, the Auto Industry Emergency Bridge Loan Act, as introduced on November 20, 2008; and draft legislation released by the House Committee on Financial Services (and posted on that committee’s Web site) on November 17, 2008.

Both proposals would authorize up to $25 billion in “bridge loans” to support ongoing operations of automobile manufacturers and component suppliers. Provisions related to the administration and financial terms of such loans are similar under the two proposals, but significant differences arise regarding their budgetary treatment and potential net impact on the federal budget.

For each proposal, you asked CBO to discuss:

• How proposed bridge loans and repayments would be recorded in the federal budget;
• The amount of subsidy budget authority that would be necessary to fund the loans;
• The total amount of bridge loans that CBO estimates could be provided; and
• The estimated net impact on the deficit.

The table below summarizes key features, costs, and net budgetary impact of
the two proposals you asked CBO to evaluate.

Draft Legislation Posted by the House Committee on Financial Services This legislation would require the Secretary of the Treasury to provide $25 billion in bridge loans to eligible automobile manufacturers and component suppliers. The loans would be administered under the Troubled Assets Relief Program (TARP), which authorizes the Secretary to purchase, insure, hold, and sell up to $700 billion in troubled financial instruments.

Budgetary Treatment

In general, federal budget activities are recorded on a cash basis, with a few significant exceptions. In particular, the Federal Credit Reform Act (FCRA) requires that the budgetary impact of federal credit programs be measured in terms of the net present value of estimated cash flows for direct loans or loan guarantees. That measure is known as the subsidy cost. Under FCRA, agencies must receive an appropriation equal to the estimated subsidy cost before making or guaranteeing loans. In the case of direct loans, FCRA further specifies that repayments of loans are unavailable for spending and that new loan obligations may be made only to the extent that new budget authority
is provided in advance to cover anticipated credit subsidy costs. In other words, direct loan repayments are not available to “revolve” into new loans. Instead, such repayments are a means of financing the original loans, and the availability of repayments for that purpose is implicit in the usual subsidy calculation. The concept of revolving loan repayments into new loans, as proposed in S. 3715, is inconsistent with the budgetary accounting of FCRA.

Under FCRA, projected cash flows associated with direct loans or loan guarantees are discounted using the average interest rate on Treasury securities of similar maturity to the loan cash flows. A variation of that credit reform accounting was recently enacted in Public Law 110-343, the Emergency Economic Stabilization Act of 2008, which established TARP. That legislation requires that the federal subsidy cost of purchasing assets under TARP be recorded on the budget using procedures similar to those required by FCRA, but with an adjustment to account for the market risk associated with those assets. Public Law 110-343 provides an indefinite appropriation of whatever amounts are necessary to cover the estimated subsidy costs of purchasing financial assets under TARP. (The law authorizes the Secretary of the Treasury to purchase or insure assets and limits purchases outstanding at any one time to no more than $700 billion.)

Table 1 in original PDF file which can be downloaded here.

Ordinarily, bridge loans to the automobile industry would be recorded on the federal budget consistent with the requirements of FCRA. Both of the proposals you asked about would depart from that treatment:

• S. 3715 would credit repayments of bridge loans to a separate fund that would be available, without further Congressional action, to support new loans authorized under section 136 of EISA. As explained below under “Subsidy Costs of Bridge Loans,” CBO estimates that redirecting those payments to a purpose other than simply retiring the debt for the original loans would increase the estimated subsidy cost of the loans to
100 percent of the aggregate face value of the loans.

• Because, under the Committee on Financial Services proposal, the bridge loans to auto manufacturers would be administered through TARP, the cost of those loans would be calculated using the unique budgetary treatment that, by law, applies to activities conducted under that program.

Subsidy Costs of Bridge Loans

Estimated subsidy costs under both FCRA and TARP take into account the financial condition of borrowers and reflect factors such as default risk, anticipated recoveries in the case of a default, and statutorily specified terms and conditions of the loans. The estimated subsidy costs of TARP transactions are required to include an additional adjustment to reflect the market risk associated with the various types of financial assets acquired under the program. Accounting for such market risk means discounting future cash flows such as expected loan repayments at a higher rate than a Treasury rate. (Treasury borrowing from the public is often viewed as essentially “risk-less,” and as a result, carries interest rates lower than those for private-sector borrowing.)

Thus, under TARP, potential repayments would be credited with a lower present value, and the estimated subsidy costs that would be recorded in the federal budget for bridge loans would be larger than if those loans were administered outside of TARP. CBO believes that the TARP treatment —accounting for market risk—best represents the true economic costs of such loans.

The requirement in S. 3715 that would direct loan repayments to be used to make additional loans would raise the effective subsidy cost of the bridge loans made to automobile manufacturers to 100 percent. That result occurs because repayments would automatically revolve into new loans without subsequent appropriation of any additional funding to cover the subsidy costs of those new loans, as would normally be required under FCRA.

By making new loans with the repayments of the initial loans, the government would essentially be spending those receipts. Under those conditions, CBO estimates that fully funding the proposed $25 billion in loans would require the appropriation of $25 billion in budget authority to cover the subsidy cost. However, S. 3715 would provide only $7.5 billion in total subsidy funding for all auto company loans.

In contrast, CBO estimates that the average subsidy rate for bridge loans to automakers under TARP, as specified in the draft legislation proposed by the Financial Services Committee, would be roughly 70 percent of the face value of loans and that funding $25 billion of bridge loans would incur a subsidy cost of $17.5 billion. The estimated subsidy rate of 70 percent reflects market risk, as required for TARP accounting. If those loans were made from authority other than TARP, CBO estimates the subsidy rate following standard credit reform accounting would be about 50 percent. The difference represents the absence of a market risk adjustment for discounting the cash flows. These subsidy rates reflect a combination of interest rate and repayment terms, the risk that automakers will default on the loans, and the possibility of recoveries on defaulted loans.

Loan Levels

The total amount of loans that could be disbursed under each proposal would depend on the amount of subsidy budget authority that would be made available.

S. 3715 would appropriate $7.5 billion to cover the cost of bridge loans, but CBO estimates that bridge loans under that legislation would have a subsidy cost of 100 percent. At a result, we estimate that the funds provided would support loans totaling $7.5 billion—significantly less than the $25 billion authorized under the bill.

In contrast, the proposal from the House Financial Services Committee would require the Secretary of the Treasury to make up to $25 billion in bridge loans under TARP. The Secretary of the Treasury has an existing appropriation for whatever amounts are necessary to cover the subsidy costs of implementing TARP. Consequently, no further appropriation actions would be needed for bridge loans under this proposal. However, as described below, CBO estimates that enacting this legislation would lead to a net increase in the federal deficit because the cost of making bridge loans to the auto companies would likely be greater than the cost of other uses of the existing TARP authority.

Net Impact on the Deficit of Enacting S. 3715

The incremental cost of each proposal would be measured relative to current law. In the case of S. 3715, the appropriation of $7.5 billion for bridge loans would be offset by an equal rescission of funds previously appropriated for section 136 loans. Thus, CBO estimates that S. 3715 would provide no net increase in the funding levels—that is, no net change in budget authority. However, CBO anticipates that loans under section 136 of EISA will be disbursed gradually over the next several years. We estimate that the proposed bridge loans would be fully disbursed in 2009 and thus would result in a net increase in direct spending of about $7 billion this year. Under S. 3715, that increased spending would be offset by lower spending in later years, resulting in a net increase in outlays of $2.3 billion over the 2009-2013 period but no net
change over the 2009-2018 period.

If S. 3715 were modified to remove the provision directing re-use of loan repayments for additional loans, the estimated subsidy rate would drop from 100 percent to about 50 percent, CBO estimates. In that case, the amount of initial bridge loans that could be supported with the $7.5 billion of subsidy authority would double to $15 billion under CBO’s estimates. The estimated net effect on direct spending would be unchanged—an increase in outlays of $2.3 billion over the 2009-2013 period but no net change over 10 years. (Eliminating the repayment “revolving” provision would mean that any future loans under section 136 of EISA would require the Congress to appropriate new funds for the cost of those loans since S. 3715 would rescind the existing subsidy funding for such loans.)

Net Impact on the Deficit of Enacting the House Financial Services Committee’s Proposal

CBO estimates that requiring the Secretary of the Treasury to devote $25 billion of TARP authority to bridge loans would likely result in a net increase in the federal deficit when compared with how that authority would be used under current law. CBO expects that the net budget cost of those loans would probably be higher than the cost of alternative uses of TARP funds, which would likely involve firms whose credit risks are lower than those of the
automobile industry.

CBO estimates that the TARP subsidy rate for bridge loans to the automobile companies would be roughly 70 percent of their aggregate face value—reflecting the market risk adjustment required for TARP accounting. Thus, we estimate that funding $25 billion in such loans would cost $17.5 billion under the Financial Services Committee’s draft legislation. CBO further estimates that, under current law, the subsidy rate associated with using those funds to purchase troubled assets under TARP will probably average between 20 percent and 30 percent. As a result, we estimate that using $25 billion of TARP authority to acquire financial assets under current law will cost between $5 billion and $7.5 billion. Thus, the proposal to use those funds to provide bridge loans to automakers would increase costs above those anticipated under current law by $10 billion to $12.5 billion (the difference between the estimated range of current-law costs and the estimated $17.5 billion cost for $25 billion of auto company loans using TARP authority).

I hope this information is helpful. If you wish further details, we would be happy to provide them. CBO’s staff contact is Megan Carroll.

Sincerely,

Robert A. Sunshine
Acting Director
cc:

Identical letters sent to the Honorable Barney Frank and the Honorable
Carl Levin.
Honorable John A. Boehner
Republican Leader