An Inside View of the Economic Crisis

Corp! was invited to attend a multi-city live broadcast Nov. 13, 2008 of a panel of Congressional experts gathered together by the law firm of Dickinson Wright. Panelists included Thomas McCool, director for the Center of Economics of the U.S. Government Accountability Office (GAO); Jim Clinger, Chief Minority Counsel to the House Financial Services Committee; Ellen McCarthy, Minority Tax Counsel to the Senate Finance Committee; Daniel Flores, Chief Minority Counsel to the Subcommittee on Administrative and Commercial Law of the House Judiciary Committee; and Cynthia Martin, Chief of Staff for Michigan Congressman John Conyers.

The idea behind the program, which included participants in both Troy and Grand Rapids, was to provide DW attorneys and clients with some insight into where the economic crisis was headed and how it might further impact Michigan business.

Nothing exemplified the fluidity of the situation more than the events of the previous day when U.S. Treasury Secretary Henry M. Paulson,Jr. “called an audible” and changed the emphasis of the distribution of funds from the purchase of “toxic” securities by the Troubled Asset Relief Program to the acquisition of preferred stock in troubled banks. According to Jim Clinger, this would provide a more direct infusion of cash into the marketplace and increase liquidity in the credit system. However, cautioned Tom McCool of the GAO, it would be very hard to audit the infused funds and track them once they became a part of the banks’ capital assets. “Would it be possible?” he was asked, “Yes, but with a staff of only 20 to oversight all of the eligible banks, it will be a challenge.”

The result of Secretary Paulson’s efforts so far has been difficult to measure as the eight banks that have been beneficiaries of the stock acquisition have so far seemed to be reluctant to make any significant loans.

Daniel Flores suggested that the Congress may suffer from “buyers’ remorse” as the Administration keeps changing what they’ve “bought.” “It’s a squishy concept,” says Flores. It will all be subject to some sort of judicial review, he pointed out.

Ellen McCarthy felt that there would be strings attached to any further expenditures of TARP funds, particularly in the area of executive compensation. There should certainly be some sort of cap, perhaps $1 million. After all, she pointed out, all that is our money and we want it used to solve problems in the economy and not go to salaries and bonuses. She also pointed out that Congressman Barney Frank was questioning whether the Treasury Department was exceeding its authority by deviating from the original intent of the TARP legislation.

That’s how confused and liquid the situation is.

Some bright spots were pointed out, however. John Lawrence, an international banking expert with DW, reminded the audience that the preferred stock would be paying dividends of 5 percent back to the Treasury and that the first payments were due in the next month or two.

That brought up a little-noticed aspect of the TARP legislation itself. Approximately two-thirds of the language in the authorization bill deals with tax matters -“ ranging from a $20/month tax credit for employees who ride a bicycle to work, to a reinstitution of the tax credits for renewable energy development and usage, to limited but significant credits up to $15,000 per vehicle if a commercial truck met certain energy efficiency standards.

Additionally, leasehold improvements -“ the kind of thing that happens when a restaurant, for instance, moves into an empty shell of a building and turns it into an intimate bistro -“ can be accelerated. This provision, however, expires at the end of January 2010.

There was considerable concern on the part of the audience in both Grand Rapids and Troy that the automotive sector was going to be left out to dry until the next Administration and Congress addressed it in January. Cynthia Martin anticipated that the lame duck Congress would take up some sort of loan guarantee program, particularly for General Motors, during its session the week of November 24, but according to published reports there may not be enough votes in the current makeup of the Senate to pass that kind of legislation and without senatorial support Speaker Nancy Pelosi might not even bother calling the House into session.

With media reports saying that General Motors’ cash position by the end of December would be below its ability to continue operations, and some Wall Street analysts no longer issuing buy/sell/hold advice to clients on GM stock, and the market on Nov. 13 closing up more than 500 points, the meeting with the expert Congressional staff served to reinforce the need for business people to have expert counsel on their speed dials because ‘fluid’ doesn’t begin to describe the nation’s -“ and the world’s -“ economic situation.