Paulson briefs lawmakers on AIG woes

The roller-coaster world of the American economy was on full display in the Capitol on Tuesday as the auto industry sought new federal credit and Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke came to the Capitol in the evening to brief lawmakers on new steps to invest in and try to stabilize the ailing insurance giant AIG.

In AIG’s case, Paulson and Bernanke weren’t seeking new legislative authority from Congress but clearly they wanted some political blessing from lawmakers. “It’s the government being asked to come to the rescue of the private market,” said House Financial Services Committee Chairman Barney Frank (D-Mass.).

Despite high costs, Michigan lawmakers and the U.S. auto industry appear increasingly confident of winning House approval of financing for up to $25 billion in new loan guarantees to help companies retool to produce more energy efficient vehicles.

The package has been assigned a 30 percent subsidy rate by the Congressional Budget Office, requiring about $7.5 billion in appropriations to cover the projected risk for the government. And it comes to the forefront in the wake of Treasury’s decision to let Lehman Brothers go into bankruptcy this week.

But the lesson of the AIG action is that the government is not done stepping into the private sector in this time of crisis. And despite the high costs, top Democrats remained sympathetic with the auto loans, and while some adjustments may be needed, proponents were hopeful of action next week on a year-end spending bill.

This so-called continuing resolution, which is required to keep agencies funded after the new fiscal year begins Oct. 1, could also be a vehicle for a second, more modest funding request by the Federal Reserve related to the current financial crisis.

The politics of the auto industry loan guarantees is rich and testifies to the importance of Michigan as a battleground state in the presidential race between Sens. John McCain and Barack Obama.

“Many factors contribute to legislative successes,” Rep. Dale E. Kildee (D-Mich.) said, smiling. And Speaker Nancy Pelosi (D-Calif.), who is scheduled to meet with top industry CEOs Wednesday afternoon, appears to be leaning heavily toward approval.

“The speaker is supportive of having this in the CR,” said Rep. Sander M. Levin (D-Mich.), a senior member of the House Ways and Means Committee. “It’s going to happen.”

The background to the loan guarantees is energy legislation enacted last year by Congress. The guarantees are still dependent on appropriations before the credit can be extended.

Manufacturers can use the loans to re-equip plants or establish new facilities to produce advanced-technology vehicles that are able to meet tougher emissions and fuel economy standards. And as credit has tightened, given the current turmoil in financial markets — as well as the auto industry’s own problems — there has been growing pressure to move ahead with the guarantees.

“It’s tough times, and they’re apparently confronting 25 percent interest to upgrade technology,” said House Majority Leader Steny H. Hoyer (D-Md.), who described himself as sympathetic to the funding. “We want to help,” said Illinois Rep. Rahm Emanuel, chairman of the House Democratic Caucus. “We have to figure out how and when.”

That chore was made more complicated by updated CBO estimates that have assigned the higher 30 percent subsidy rate to the enterprise. Prior calculations assumed 15 percent, or about half the cost.

But CBO said that “credit conditions for the auto manufacturers have deteriorated markedly — the market interest rates on their outstanding debt, for example, have risen dramatically.”

Another reason the subsidy is so high is a deferment feature of the authorized loan guarantees, as approved last year.

Under the program, which would be administered through the Energy Department, borrowers could defer payments of principal and interest for up to five years after putting into operation the new or modified plant funded by the loan.

“CBO assumes that most borrowers would take advantage of the deferment option, and our subsidy estimate reflects the resulting cost to the federal government — taking into account the time-value of money — of delaying loan repayments” CBO said this week.

Democrats are also preparing a new $50 billion economic stimulus bill to which the auto industry loans could be added. But for the industry, going with the CR is the better route because that measure has a much better chance of getting through the Senate and being signed into law.

Democrats have yet to decide how long the stopgap spending measure will run, but as one of the last legislative trains leaving before the elections, it is sure to attract more passengers.

The Federal Reserve request would allow Bernanke to expedite an initiative under which the Fed pays interest on money held in bank reserves. These payments were not slated to begin until 2011, but Bernanke is now urging a quicker startup that will also require appropriations in the range of $100 million.

“We have to put ideology aside, and I think the key to the government’s role here is a willingness to support flexible action by the Fed and by the Treasury,” said Sen. Judd Gregg (R-N.H.), a senior member of the Senate Appropriations Committee.

But the New Hampshire conservative had far less sympathy for a second stimulus bill or aid to the auto industry. “You never know in an election year,” he said. “People run scared awful easily.”