Financial Reform Watch

Stocking Filled with TARP

Just in time for the holidays and for their survival, General Motors and Chrysler will get $13.4 billion in short-term (three year) financing from the Troubled Asset Relief Program (TARP) as announced by President Bush this morning. Another $4 billion in loans will be available for the companies in February, if necessary. By March 31, 2009, the companies must demonstrate they are financially viable or else immediately repay the loans. Treasury Secretary Hank Paulson issued a statement asserting that, "As a result of this decision, Treasury has effectively allocated the first $350 billion from the TARP." He went on to urge Congress to release the "remainder of the TARP to support financial market stability." News outlets are reporting the automakers will sign the loan agreements later this morning. The term sheets can be downloaded here (Chrysler, General Motors).

The money comes with several conditions:

  • warrants for non-voting stock;
  • executive compensation limits;
  • no dividend distribution until TARP loans are repaid;
  • government approval required for transactions over $100 million;
  • labor agreement modifications; and
  • debt reduction by two-thirds.

Another controversial requirement is that automakers must be competitive with foreign automakers by December 31, 2009. This date certain issue was one of the major tripping points that sunk the Congressional bailout effort.

Legal and financial experts note that the terms of these loans can easily be changed by the incoming Obama Administration once the President-elect assumes office. Perhaps the only certainty in the auto bailout is that it will continue to be an ongoing issue throughout 2009.

In other related news, the Obama regulatory team is coming into shape with the picks of Mary Schapiro to chair the Securities and Exchange Commission and Gary Gensler to lead the Commodity Futures Trading Commission. Schapiro is the CEO of an industry self-regulatory authority, FINRA, and Gensler was part of the Clinton Treasury team that oversaw the beginning of some of the "innovations" that later contributed to the current crisis. Neither is a slash and burn regulator, and it appears their appointments are an effort to step up regulation while still allowing the financial services industry in the United States to adapt and grow over time.

At the other end of Pennsylvania Avenue, the head of the Emergency Economic Stabilization Act’s Congressional Oversight Panel, Elizabeth Warren, expressed frustration at the Treasury Department for not sharing with her their plan for the TARP program. She implied there might not be a plan to share but made it clear she believes there should be one, and it should be shared with the public. We expect Congress to be insistent that the Obama team immediately flesh out a plan for using the remainder of the $700 billion.

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