If G.M. Was a Canadian Company It Wouldn't Be Asking for Help
Dean Baker Posted December 11, 2008 | 04:37 PM (EST)
The Detroit automakers have made many mistaken business decisions that have been important factors contributing to their current crisis. However, they are not responsible for some of the factors that have brought them to the brink of bankruptcy.
Most obviously, they are not responsible for the collapse of the housing bubble and the subsequent loss of more than $15 trillion in housing and stock wealth. This falloff in wealth has sent consumption plummeting. The auto industry has been especially hard hit, with sales falling by more than 30 percent year over year in the last two months.
The Big Three are also not responsible for the broken U.S. health care system. If we paid the same amount for health care as Canada, G.M. would have accumulated an additional $22 billion in profits over the last decade.
That would be the savings if we assumed that General Motor's health care expenditures were reduced by roughly 48 percent to be in line with expenses in Canada. Of course, not all the savings in this counterfactual would have gone to profits. Some of it would have gone to workers in the form of higher wages or to consumers in the form of lower car prices.
On the other hand, G.M. is also picking up the tab for many spouses and dependent children. It would not have to pay these health care expenses in a Canadian type system. So the $22 billion figure is probably not a bad first approximation of the additional money that G.M. might have today if the United States had a more efficient health care system.
Even with these additional profits G.M. and the other domestic manufacturers would still face serious problems. They have made some bad choices in betting their future on SUVs and other low-mileage vehicles. They also have lagged foreign manufacturers in producing high quality, reliable cars.
But the real reason that Big Three are on their deathbeds right now is the economic crisis created by the Wall Street crew and their friends in Washington. It will be tragic if the people of the Michigan, Indiana, and Ohio are made to suffer through a depression because of the failed financial dealings of the Wall Street crew.
This situation is made even worse by virtue of the fact that most of the Wall Street executives who are directly responsible for this disaster are still quite wealthy, in large part because of the generosity of Congress and the Bush administration. While they demanded that the auto manufacturers produce plans for returning to profitability in exchange for providing loans, no similar conditions were imposed on Citigroup and the rest of the Wall Street gang.
As the autoworkers at the Big Three look at their last paychecks before an indeterminate period of unemployment, they should think about the portion deducted for income taxes. With this money, they have helped to ensure that Robert Rubin and other Wall Street types continue to enjoy pay packages in the millions or even tens of millions of dollars.
Loophole in Bailout Provision Leaves Enforcement in Doubt
By Amit R. Paley Washington Post Staff Writer Monday, December 15, 2008; Page A01
Congress wanted to guarantee that the $700 billion financial bailout would limit the eye-popping pay of Wall Street executives, so lawmakers included a mechanism for reviewing executive compensation and penalizing firms that break the rules.
But at the last minute, the Bush administration insisted on a one-sentence change to the provision, congressional aides said. The change stipulated that the penalty would apply only to firms that received bailout funds by selling troubled assets to the government in an auction, which was the way the Treasury Department had said it planned to use the money.
Now, however, the small change looks more like a giant loophole, according to lawmakers and legal experts. In a reversal, the Bush administration has not used auctions for any of the $335 billion committed so far from the rescue package, nor does it plan to use them in the future. Lawmakers and legal experts say the change has effectively repealed the only enforcement mechanism in the law dealing with lavish pay for top executives.
"The flimsy executive-compensation restrictions in the original bill are now all but gone," said Sen. Charles E. Grassley (Iowa), ranking Republican on of the Senate Finance Committee.
The modification reflects how the rapidly shifting nature of the crisis and the government's response to it have led to unexpected results that are just now beginning to be understood. The Government Accountability Office, the investigative arm of Congress, issued a critical report this month about the financial industry rescue package that said it was unclear how the Treasury would determine whether banks were following the executive-compensation rules.
Michele A. Davis, spokeswoman for the Treasury, said the agency is working to develop a policy for how it will enforce the executive-compensation rules. She would not say when the guidance would be issued or what penalties it might impose. But she said the companies promised to follow the rules in contracts with the department.
The final legislation contained unprecedented restrictions on executive compensation for firms accepting money from the bailout fund. The rules limited incentives that encourage top executives to take excessive risks, provided for the recovery of bonuses based on earnings that never materialize and prohibited "golden parachute" severance pay. But several analysts said that perhaps the most effective provision was the ban on companies deducting more than $500,000 a year from their taxable income for compensation paid to their top five executives.
That tax provision, which amended the Internal Revenue Code, was the only part of the law that contained an explicit enforcement mechanism. The provision means the IRS must review the pay of those executives as part of its normal review of tax filings. If a company does not comply, the IRS can impose a tax penalty. The law did not create an enforcement mechanism for reviewing the other restrictions on executive pay.
If a firm violates the executive-compensation limits, department officials said, the Treasury could seek damages, go to court to force compliance, or even rescind the contracts and recover the bailout money. "We therefore have all the remedies available to us for a breach of contract," Davis wrote in an e-mail.
Legal experts said those efforts could be complicated if the Treasury outlines the penalties after companies have received bailout money. David M. Lynn, former chief counsel of the Securities and Exchange Commission's division of corporation finance, said courts have sometimes placed limits on the government's ability to impose penalties if there was no fair warning.
"Treasury might find its hands tied down the road," said Lynn, who is also co-author of "The Executive Compensation Disclosure Treatise and Reporting Guide."
Congressional leaders are also concerned that the Treasury might simply choose not to enforce the rules or be unwilling to impose financial penalties that could further weaken a firm and send the economy deeper into a tailspin.
The Bush administration at first opposed any restrictions on executive pay, congressional aides said. The original three-page bailout proposal presented to lawmakers in September contained no mention of such limits. "Treasury was pretty clear that they thought doing this exec-comp stuff would limit the effectiveness of the program," said a Democratic congressional aide involved in the negotiations, who, like others interviewed for this story, spoke on condition of anonymity. "They felt companies might not take part if we put in these rules."
Congressional leaders disagreed. By the morning of Saturday, Sept. 27, the final day of marathon negotiations on the bill, draft language relating to taxes and containing the enforcement provision applied to all companies participating in the bailout programs, Democratic and Republican congressional aides said. But then Treasury Secretary Henry M. Paulson Jr. and his deputies began pushing for the compensation rules to differentiate between companies whose assets are purchased at auction and those whose assets or equity are purchased directly by the government, the aides said.
Congressional leaders from both parties thought Paulson wanted the distinction for extraordinary cases like American International Group, which the government seized in September. He wanted to be able to push executives out of companies that the government controlled and have the flexibility to bring in strong new executives, said one senior congressional aide.
"The argument that they were making at the time is that the direct investment was going to be used only in circumstances where the company was AIGed, so to speak," said a senior Democratic congressional aide.
Davis, the Treasury spokeswoman, confirmed that the Treasury pushed to place fewer restrictions on executives at companies receiving capital infusions, but she gave a different explanation. She said many of those firms are more stable and are being encouraged to participate in the bailout to strengthen the overall system. "The provisions for failing institutions should come with more onerous conditions than those for healthy institutions whose participation benefits the entire system," she said.
Lawmakers agreed to the Treasury's request that the measure apply only to executives at companies whose assets were bought by the government through auctions. In the executive-compensation tax section, a new sentence saying that eventually was inserted.
Meanwhile, Paulson repeatedly told lawmakers that he did not plan to use bailout funds to inject capital directly into financial institutions. Privately, however, his staff was developing plans to do just that, Paulson acknowledged in an interview.
Although lawmakers hailed the rules as unprecedented new limits on executive pay, several were unhappy that the law was not stricter.
Under pressure from Congress, the Treasury issued regulations in October on executive compensation and applied the tax-deduction limits to all companies receiving bailout funds, although the legislation did not require it for firms that received direct capital injections. But the Treasury failed to issue guidelines requiring the IRS or any other agency to enforce the rules, and it also failed to explain how the restrictions would be enforced.
The Treasury's regulations also instructed firms to disclose more compensation information to the Securities and Exchange Commission. But officials at the SEC do not think they have the authority to force companies to disclose the kind of pay information required by the bailout law, according to people familiar with the matter, though they hope companies will cooperate. John Nester, an SEC spokesman, declined to comment.
Senators on the Finance Committee have expressed concern to Paulson and are now considering whether they should amend the law to apply the enforcement mechanism to all firms participating in the bailout.
Insurance industry lays down marker on health care
By RICARDO ALONSO-ZALDIVAR and ERICA WERNER June 23, 2009
WASHINGTON (AP) — The insurance industry Tuesday laid down a marker on health care, warning in stark terms that a proposed government insurance plan would dismantle the employer coverage Americans have relied on for a half century and overtake the system.
In a joint letter to senators, the two largest industry groups also said they don't believe it's possible to design a government plan that can compete fairly with private companies in a revamped health care market. That particular statement seemed to be aimed at lawmakers of both parties who are seeking a compromise on the contentious issue.
Release of the letter from America's Health Insurance Plans and the Blue Cross Blue Shield Association came as House Democrats pushed forward with a partisan health care bill. Meanwhile, key Senate Democrats were still laboring to achieve an elusive bipartisan compromise on President Barack Obama's top legislative priority of controlling costs and providing health coverage to 50 million uninsured Americans.
Recent media polls have found strong public support for the idea of a government plan. It would compete with private companies to offer coverage to individuals and small businesses, but eventually might be opened to large employers as well. The positive public reaction to the idea has emboldened liberals, who are arguing that Democrats shouldn't compromise.
The insurers suggested a government plan would run counter to Obama's promise that Americans can keep the coverage they have.
"A government-run plan no matter how it is initially structured would dismantle employer-based coverage, significantly increase costs for those who remain in private coverage, and add additional liabilities to the federal budget," said the letter from AHIP chief Karen Ignagni and Scott Serota, the head of Blue Cross.
Supporters of a public plan say just the opposite would happen — that competition would force private insurers to cut administrative overhead and profits, putting a brake on costs all around.
"We do not believe that it is possible to create a government plan that could operate on a level playing field. Regardless of how it is initially structured, a government plan would use its built-in advantages to take over the health insurance market," added the industry letter.
Instead, the industry says it is ready to accept close government regulation to protect consumers. Dated June 19, the letter was addressed to Sen. Edward M. Kennedy, D-Mass.
Kennedy's committee, the Health, Education, Labor and Pensions panel, has not yet finished its design for a government plan. Bogged down in delays and partisan strife, the panel jettisoned an end-of-week deadline for passing its bill.
Deliberations on both sides of the Capitol are continuing with lawmakers mindful of next week's July 4 congressional recess. Most will return home to face constituents with plenty of questions about their plans to overhaul the nation's costly health care system.
A sweeping bill unveiled in the Democratic-controlled House last week is being weighed in hearings that got under way Tuesday. The draft legislation, written without Republican help, would require all Americans to purchase health insurance and would put new requirements on employers, too.
Obama's goal for signing a bill in October appears in doubt.
But Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee, is doggedly pursuing a compromise. "We will get a bipartisan agreement," he insisted Monday.
Of the five House and Senate committees working on health care, Finance is the only one that appears to have a chance at a bipartisan agreement. Baucus planned to huddle behind closed doors Tuesday with a group of senators he's dubbed the "coalition of the willing." Others involved are top committee Republican Charles Grassley of Iowa; Republicans Mike Enzi of Wyoming, Orrin Hatch of Utah and Olympia Snowe of Maine; and Democrats Kent Conrad of North Dakota and Jeff Bingaman of New Mexico.
Looming large is the question of cost. Initial estimates had Senate plans topping $1.6 trillion over 10 years, and senators are working to scale back. Curbs on Medicare and Medicaid spending are assured, and a range of taxes are under consideration, along with the possibility of fees on employers who don't cover their employees.
The Senate's health committee is waiting for revenue estimates from the Congressional Budget Office on three scenarios for employer requirements, according to Sen. Chris Dodd, D-Conn., who's leading the committee during Sen. Edward M. Kennedy's treatment for brain cancer. They are a requirement that employers provide health coverage for employees or pay a fee; an approach requiring employers to chip in to the federal treasury for employees who are covered under public plans; and a scenario where employers who don't cover their employees would pay the government a set amount per employee.
AP Special Correspondent David Espo contributed to this report.
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