community planning@@@ @ @ @ @ å4 he's a founding partner of the investment firm, banking firm of keilan and bloom. mba from harvard. ed montgomery, dr. montgomery, joins us as president obama's director of recovery of auto communities and workers. formally left his post as dean of the college of social

sciences at university of maryland. earned a ph.d. of economics from harvard and we're delighted to have both of you with us. we'll be begin in the order i introduced you. try to keep your remarks relatively brief. testimony, evidence, supporting documents will all be included as part of the record. >> yes, sir. good afternoon. chairman dodd, ranking member shelby, members of the senate banking committee, thank you for the opportunity to testify before you today. first let me apologize for the snafu with getting the material to you late and appreciate your indulgence on it and to commit to you it will not happen again. over the past several months, the obama administration has been working to manage an historic crisis in the auto industry. president obama inherited an auto industry that lost 50% of its sales and over 400,000 jobs in the year before he took office. two companies, general motor and chrysler had received

substantial loans from the prior administration and were requesting substantial additi additional assistance that only the government could provide. without this assistance, both of these companies faced uncontrolled bankruptcies and almost certain liquidation which would have cost significant job loss with a ripple effect throughout our entire economy. even so, president obama was unwilling to put additional taxpayer dollars on the line unless these companies and their stakeholders were willing to fundamentally restructure, address prior bad business decisions, and chart a path towards long-term financial viability without ongoing government assistance. therefore, the president decided to give both gm and chrysler a chance to work with their stakeholders to make them stronger, leaner and more competitive in a way that would tough an investment of additional taxpayer dollars. in only a few months, both gm and chrysler, working with their stakeholders have achieved a elevel of restructuring that many thought impossible.

positioning both companies for future viability. as a result as a result, the president has decided to stand behind these restructurings with additional financial assistance. consistent with prior administration's actions, this assistance is being provided from the u.s. treasury out of the t.a.r.p. program. after proceeding through a fair and open bankruptcy process, the new chryslerfiat alliance closed its merger today. its future is in the hands of its executives, managers and workers as it would be for any private company. while general motors is likely to take somewhat longer to move through the bankruptcy process, we're confident it, too, will emerge quickly as a stronger, viable company. because gm needed the amount of capital only a government could provide and because we were committed not piling on irresponsible amounts of new debt on top of the new gm, the u.s. government will become a reluctant shareholder in general motors. the administration did not seek this outcome, but arrived at the conclusion that it represents

the most responsible way to protect taxpayers while giving gm an opportunity to succeed. as the president made clear, we will manage this investment commercially and exit our position as quickly as is practical. both the gm and chrysler structurings have required deep and painful sacrifices from all stakeholders including workers, retirees, dealers, creditors. but the steps the president has taken have not only helped to stabilize the auto industry and saved hundreds of thousands of jobs, but for the first time in decades, they have also given gm and chrysler a chance to become viable, competitive american businesses, with bright futures. before taking your questions, i want to give a brief overview of the process the administration has taken in addressing these issues. on february 15 of this year, the president appointed an auto task force to oversee his administration's efforts to the task force's co-chair, treasury secretary geithner and

lawrence summers and representatives from a broad range of -- is staffed by a joint team of which i am a senior member which reports to the task force which reports to the president. from the beginning of this process the president gave the auto task force 2 clear directions. the first was refrain from intervening in the management of these companies day to day. our role has been to act as a potential investor for sources, and mike where to open a new plant or which dealers to close. this is the job of management. we have been engaged in dialogue and discussion, we have not substituted our judgment about specific decisions. second, the president was clear that he wanted us to behave in a commercial manner. that is to be sure that all stakeholders are treated fairly and receive neither more nor less than they would have simply because the government was

involved. because investments were made by the prior and current administrations to support the auto companies, have come from tar, the task force and its staff activities have been subject to the full range of disclosure and reporting requirements. this includes oversight by the gao, financial stability of sideboard and special inspector general for tarp and congressional oversight panel established under esa. in a better world the choice to intervene in these companies would not have been made. but the worst economic crisis in 3-quarters of a century, the administration's decisions avoided a potentially devastating liquidation and put a stop to the long practice in the auto industry of kicking hard problems down the road. difficult for all stakeholders involve these restructurings provide a new lease on life and a chance to fundamentally

restructure. thank you. >> dr. montgomery, welcome. >> thank you, members of the committee. i appreciate this opportunity to discuss assistance as provided to and sought by communities and workers suspected of job losses. the current recession is the most severe since the great depression and has had a profound impact on our businesses, workers, homeowners and homeowners throughout the country. striking as this decline has been for the country as a whole is even more severe in the auto manufacturing hard-line. as mr. bloom discussed the challenges to our biggest auto companies, and the steps we're taking to meet these challengess, i want to discuss the process that has begun to help the hundreds of auto communities struggling to deal with rising unemployment. when president obama named me the director of recovery, my mandate was to cut through red tape and ensure the full resources of the federal government are leveraged to

assist workers, communities and regions that have relied upon the auto industry. the administration is developing a comprehensive effort that will lift up the greatest, hard hit areas by using unprecedented levels of resources and funding provided by the recovery act. we have been engaged in efforts to identify new initiatives that may be helpful going forward to support auto communities. to directly hear from affected workers, businesses and the communities, town halls, meeting in michigan, ohio, indiana, stakeholders identify ways in which the federal government can be helpful. we continue these sessions in a broad range of communities in the weeks and months ahead. these have been more than listening tours, we established an interagency team, including representatives from the department of labor, energy, small-business, transportation, justice, health and human services and treasury that

accompany the needs of these meetings to hear firsthand what works and what doesn't. they have started steps, working with local officials in how to address problems and issues that are raised. to cover it -- the recovery act made possible a wide range of investments and other communities, the current economic developments began to transform our economy for long-term growth. for ways agencies have targeted support for auto agencies, including general service administration, accelerated purchase of 17,000 efficient vehicles, $280 million in the man for new cars. $50 million, targeted green job-training initiatives targeted for the auto communities. in january the department of labour announced, since january, $16 million in emergency grants to support the autoworkers.

secretary duncan announced $7 million in competitive grants, to prepare autoworkers' for second careers. he can replicate across the country. small business administration announced extensions to its lending program and announced development of financing program for auto dealers. epa has announced millions of dollars to revitalize industrial and commercial sites in other communities. michigan was the largest recipient of those funds. one of the most pressing challenges has it been to ensure auto communities have access to existing federal programs and new funding. we have taken steps to ensure auto communities have an equal chance to access federal funds. examples included a promise of energy for county and local municipalities to train leaders

and energy efficiency conservation block grants. the department of energy held meetings with local businesses and financial officials to talk about how to make sure small business can access their loan guarantee program. the commerce department and manufacturing extension, economic development administration held numerous workshops in the ottawa region to help companies diversify, provide assistance as well as to help with strategic planning. the department of labor convened the rapid response coordinators' to provide a consistent level of service to help states with their planning efforts. the administration approach realizes there is no agency that holds the key to economic growth and there's no magic bullet. the challenges we face do not appear overnight and will not be resolved overnight. properties, transportation issues, job-training schools, public safety and health care are interval parts of the

solution. we have begun to find ways to reach out to them, state and local governments play a central role in these efforts reflecting choices that each area must make about how to use their assets. our comprehensive recovery strategy will not only recognize, but will support these efforts. families and workers face challenges unlike many of us have faced in our lifetime. i share the president's commitment to help those in these communities in the near term as we get to recovery and over the long term to make sure they fully share in economic prosperity. i look forward to working with members of this community. >> i am going to ask the clerk to put us on 5 minutes and follow it fairly religiously. we have a lot of members. the second round fins out the membership. i will leave the record open. some will be coming and going.

we will remain open for questions to be submitted. i would ask that you respond in a timely fashion. let me begin with you, mr. bloom and dr. montgomery, i will give both of you chance to respond. the administration has taken bold action and it has been controversial, as you heard in senator shelby and by opening comments across the spectrum. there are a lot of job losses associated with this restructuring, had you not taken this action or tried this section, the job losses and the effect on our economy would be far more calamitous than it is even when accounting for erosion. 90,000 jobs in automobile manufacturing, 40,000 only months ago, not to mention the impact on retiree pensions. it has been a major blow to the economy.

it would have been worse. the liquidation of gm and chrysler would result in hundreds of thousands of leaded jobs being lost. equity stakes at gm and chrysler, as you heard already, 2 opening statements that senator shelby and i have made. why did the treasury take such large equity stakes rather than providing more loans? explain how the treasury determines the size of these stakes we have taken, and given the treasury's large stakes in these companies, how will the united states government extricate itself? i would like us to be out of this business yesterday. that is not going to happen but a lot of us would like to see us get out of it, get businesses function on their own. how easy will it be to achieve? for you, dr. montgomery, i admire you taking on this job.

we have confidence in you. you have no budget to operate with. all of us, our colleagues from detroit and michigan and ohio, senator brown, all of us are being adversely affected by job losses, some more than others. we want to help our communities during times of adjustment. what an initial tools will you be asking of us, be helpful to perform your job? wonderful things to do. i suspect they want to know what kind of help is they're as they try to find a new economic path for themselves and their families. we need to get some initial specificity as to what you are asking of us, how to minimize

the economic blow the community is facing. >> let me try to adjust your 3 questions. in terms of the equity stake, let me answer this way. the size of this state and determination was done through the following process. the first thing that happened is the companies put forward a business plan which we vigorously reviewed and challenge, he eventually came to a business plan and through that, a financial need was determined. we saw how much money they needed to right size their business to take the necessary steps. in the case of general motors, to pay off the secured debt. there was a whole variety of needs the company had. that determined the starting point. the second step was directly on your point, how do you determine how much should be dead and how

much should be equity? as i said in my opening comments, the president did not start out wanting to be a shareholder but the dilemma we faced, one of the company's core problems for a lot of years was it is too highly leveraged. for us to try to fix general motors with more debt would not have fixed the problem. general motors's key competitors, companies like toyota and volkswagen's have minimal levels of debt, approximately equal to the amount of cash on the balance sheet or one year profit. we were very mindful of general motors, a competitive balance sheet, that is one of the competitive weapons in the marketplace. if we were not going to burden the company with debt, the only remaining security would be equity. and we did not want to give this money away, this is the taxpayers' hard-earned money. the determination was to take equity.

in terms of the size of the stake and how that was determined, that was determined in feelings with other stakeholders to the company also wanted to the owners. that included bondholders where we had a vigorous debate and on behalf of retiree trusts. they wanted more equity than we wanted to give them. on behalf of the taxpayer the objective should be to get as much as you can to get as much value as you can out of the enterprise. it was really determined through negotiation. the other shareholder is the canadian government who is making a sizable investment but in that case they are investing side by side with us so they are getting the same amount of equity that we are. that part of it was just straight out. to the others it was simply arm's-length bargaining. on the question of how we get out, obviously this is a key issue. the president has been quite clear that he is a reluctant

shareholder and he wants to exit as soon as practical. that does not mean tomorrow morning. when this company comes out of bankruptcy it will be a private company, the new general motors will not be publicly listed. it will take some time for it to achieve a listing on the stock exchange and begin to trade its shares publicly. we would expect that to happen sometime in 2010 and that would be our bowl. after that, there will be an orderly process where the shares will be disposed of. but it needs to be orderly because these are taxpayers' dollars. the president didn't want to be a shareholder, once we have become a shareholder we want to achieve value so taxpayers can get past this investment. >> the initiative we are undertaking is using the current resources providing the recovery

act which really provides an unprecedented level of dollars that we can use to support, as mr. bloom pointed out, to make sure the companies are liable. to talk about how we support the suppliers, and the treasury for its supplier support program, the small business administration, through the 7 day loan program and the dealer program, efforts to support suppliers and keep that part of the sector viable. as far as workers are concerned, there are over $1 billion in additional funding, multiple billions of dollars for retraining. we have extended an expanded unemployment. the growth potential in the department of energy to make new investments, to grow different areas of the economy. everything from smart grids to

alternate energy. there are a variety of available resources, my job is to make sure people in these regions have full access to those dollars. it may turn out in vessel -- additional investments unnecessary. we want to make sure current investments are fully utilize. >> i'm sure my colleagues will have additional questions. let me turn to senator shelby. >> how many years do you think the government will be involved in general motors as far as their investment? would it be in your judgment 3 years, 5 years, 10 years, 12 years or what? you say it is not going to be quick to get out. >> as i indicated, the legal framework, which is to say a private company, a certain amount of a runway period.

we do not have a specific target in terms of years. factors that will influence that will be many. how the market is doing, how the capital market is doing. we are going to be a very large shareholder. for a large shareholder to be selling shares can be destructive to the other shareholders. we want to be mindful of that. at this point the president's direction is to get out, his phrase, as soon as practicable. beyond that, we do not have a defined time frame. >> will you put together a plan that you can operate, some architecture? you got in, how long will the government be involved in running a huge manufacturing facility? >> that is a fair question. i want to appreciate your point. we are not managing it.

that is important. the president has been clear on that. to your question -- >> you are involved as a stockholder. >> there will be limited involvement. the president has issued a series of guidelines of how he intends us to act as a shareholder. we do not intend to involve ourselves in day-to-day management. shares will only be voted on core governance issues, the election of directors or a change of control transaction. there will be some involvement but it will not be onerous or overbearing involvement. there will be a strategy to get out, it will be to access the public markets and sell when it is determined that the market is appropriate for selling but i do not anticipate there will be a detailed blueprint because the mere issuance of that blueprint with the market disruptive and would cause an overhang in the

stock which would defeat the very purpose we are trying to achieve which is to get out quickly but to do it in a way that maximizes chairs for the benefit of the taxpayer. >> they believe the government has put as much money in gm and chrysler as they are ever going to put in? do you anticipate more down the road as mr. mcgovern -- the don't know what to say -- >> it is a fair question. it is our absolute intent that this be the last assistance provided these 2 companies. we have spent a lot of time to assure ourselves that this is the last visit. never say never in this world, but the basis of our analysis has been that this is a 1-shot affair. we are going to do this and

construct an orderly exit and it will be back to your business as usual. >> what if it doesn't work out as you anticipate? will you then recommend more money just to keep it going? to keep a few people employed? >> it is hard to speculate about a hypothetical. >> that could be more than a hypothetical. >> i believe it is a hypothetical because we have a conservative plan. what we call stress test, we look at cases where the recovery is slower than most economists believe it will be, the company is not capable of executing its turnaround. we have looked hard at this question and it is our belief, are confident belief, that this will be the last trip. >> what i'd been conflict of interest, the federal government is the principal labor,

environmental and safety regulator, a customer, tax collector, finance year, and pension guarantee your of 2 of the 3 domestic auto manufacturers, unprecedented. it also holds considerable equity positions we are talking about. and managing these varied responsibilities will engender conflicts. other conflict will rise by way of the government investment into competing entities. what process and you put in place, if you have, to help identify, to manager and report such conflicts in congress, especially is this committee? >> let me talk about the president's admonition. he has been very clear that the policy directives regarding things like the environment for health and safety-not within our purview.

you do not expect to have any authority. whenever the congress passes and the president signs, we would expect would apply to all companies to do business similarly. there are no special accommodations in those areas. a passive shareholder is trying to get money back to give back to the american people. we will leave to others to determine what the proper policies are regarding other matters. >> thank you, senator shelby. i am senator bennet of colorado. >> thank you, mr. bloom, for being here. i want to say congratulations on the speed in which the chrysler situation, someone who used to make his living restructuring companies in bankruptcy, nothing this complicated. this has been lightning quick. lot of people say it couldn't be

done. you are not going to come in in 30 days, you came pretty close to a. in my view that is a major step forward to try to create some credibility on these matters. congratulations on that. with all that said, i want to echo the chairman's view that the american taxpayers want to be out of these companies as soon as practical, the language you have used. i hope you are successful as you have been getting this bankruptcy accomplished. my first question is whether or not you would be willing, or could shed some light, i am sure it is in the bankruptcy documents, on the underlying assumptions on the arms length negotiations you were talking about. what were some of the assumptions relating to the

sales of automobiles, the cash flow, the company's, the other parties, how did you think about the value of the enterprise itself and distributed to the constituencies of the bankruptcies? >> thank you for those kind words relative to the speed. benjamin franklin said the eminent hanging, that is what we have in the case of chrysler and it was a good tonic. relative to how we went about our business in this bargain, the process was as following. the company in each case came up with the business plan. the management is responsible. we view ourselves as a potential investor of the taxpayer money. as an investor we went and criticize that plan. what ever they said, did you