|The White House
President George W. Bush
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For Immediate Release
Office of the Press Secretary
October 5, 2001
OMB Director Mitch Daniels
the Dwight D. Eisenhower Executive Office Building
4:21 P.M. EDT
MR. DANIELS: A very short opening statement, and I'll take any and all questions.
I've just signed and sent to the Federal Register regulations governing the loan guarantee sections of the airline rescue legislation passed by Congress two weeks ago.
The record speed with which the people of OMB and the relevant federal departments have addressed this complex and nationally important topic provides, I think, further evidence of this government's ability to move quickly and decisively when necessary.
Speed notwithstanding, we believe we've also moved thoughtfully. These regulations were prepared after extensive consultation with the airline industry, the financial community, and many members of Congress. They were written with careful fidelity to the underlying statute and to the express intent of those who voted to pass it.
The goal of that statute in its loan guarantee section was to promote a viable commercial air system, one that will deliver safe and efficient service to the American public in the years ahead. Secondarily, its aim was to protect the American taxpayer by maximizing the likelihood that any loans the taxpayer guarantees will be repaid.
The legislation provided assistance to the airlines in several forms, including: limitations on liability, direct cash subsidies, and the possibility of loan guarantees. The purpose of the first two categories was stabilization of a situation then in crisis. The cash payments, in particular, were intended to compensate airlines for direct losses tracing to the terrorist attacks, and to provide continuity of service for a reasonable amount of time.
The loan guarantee authority has a different purpose. Its objective is not merely a further extension of time to nonviable companies in hopes that a better business climate may come along. The goal of the guarantees is a viable system in the new and even more difficult environment now facing the industry.
The rules we have written are inclusionary and neutral. All of today's carriers are eligible and welcome to apply. The board, led by the chairman of the Federal Reserve, will not pick winners or losers, but, instead, will follow clear guidelines in giving preference to the strongest applications.
It's important to note that the strength of an application under these rules may have little to do with the current financial strength of the applicant. Much more important will be the showing by the applicant and its partners of that airline's ability to succeed in tomorrow's marketplace and to honor its obligations without passing the bill to the American taxpayer.
All questions welcome.
Q Some of the carriers that are in severe financial stress, what would they -- would they have to show something different than, let's say, a Southwest, which has had no layoffs and actually is still making money?
MR. DANIELS: Actually, a first criterion under the act must be to show the unavailability of other credit. So the very strongest airlines may be actually the only ones precluded at the outset, maybe. Credit is very unavailable in general, in the industry right now, it appears. But the last point I made I think applies here, that the important showing will be of a viability going forward.
And an airline that may be in some -- may be in extremis now, might bring forward, for instance, a plan that shows concessions from stakeholders, a plan that shows a new partner -- financial, operating or both -- who is expressing confidence in the business plan that accompanies the application. So those may -- under the preferences we've laid out -- may be those that come to the top of the list.
Q You say something less than 100 percent -- is there a max? Is it 95, for example, 100 percent or 99 percent?
MR. DANIELS: Right. The question goes to the point that it will -- the board will not be authorized to offer 100 percent complete guarantee, complete protection to the lender; that there must be at least some participation -- and the more, the better; the stronger the preference the board -- the greater the participation by other investors or other partners, the stronger the preference to be given to that application.
Furthermore, the board is asked, directed to prefer private partners to public. There may be that other public entities -- states or localities, for example, may step forward to seek to guarantee part of the loan. That would certainly be of advantage to the applicant, but not as much advantage as a private sector party taking risk.
Q If I may just follow up. Seven years is the maximum?
MR. DANIELS: Seven years is the maximum. And you have really just touched on the only two bright lines in these regulations. Other than that, they are expressed in terms of preference and, in essence, creating a competition among applicants.
Q Is the bond program, is it a rolling kind of program, where as large carriers pay off their loan guarantees in two to three years, the $10 billion will -- you can re-lend out, re-issue --
MR. DANIELS: It's not seen as a revolving fund; it's a $10 billion limit.
Q So once you hit the $10 billion, that's it?
MR. DANIELS: That's correct. I think that's the way to read the statute.
Q -- 100 percent issue? I mean, could someone put up concessions from their union or concessions from other stakeholders as the 2 percent or the 4 percent or whatever?
MR. DANIELS: That's really -- they were conceived of as alternate showings, John. The 100 percent really goes to the amount guaranteed, so the lender really must be at some risk, or some other party must be at risk. But a showing of concessions by employees, for example, or by management, or by preexisting creditors, would be an important factor and would strengthen an application.
Q Do you anticipate, going forward, that the board will have any role in business decisions going on at the airlines?
MR. DANIELS: Absolutely not. The goal here is to honor the authority as it was conferred under the statute, but not to have the board in the business of, as I said, picking winners and losers, and certainly not to have the board involved in the ongoing operations of the airline.
The statute did direct the preference is to be awarded to applications offering the government a chance to share in any upside, through warrants or other such vehicles. But we do not view those as an investment to be held, but rather to be liquidated if it ever has any value, and we expressly preclude any voting rights on the part of the government.
Q Can carriers use the guarantees to financed purchases of other airlines? Are there any provisions in here that --
MR. DANIELS: That would certainly be possible. It is entirely conceivable that the guarantees may be extended to a partnership of two of today's airlines. Some degree of consolidation in this industry was deemed highly likely prior to September 11th. There is no reason to suspect that the chance of that has been diminished by that event.
So, yes, it's entirely possible, for instance, that an applicant might come forward on its own, and not be successful in making a sufficient showing under these regs, but could return with a partner, perhaps a merger partner, and satisfy the conditions here.
Q If I may just -- that's a long and lengthy process if you go through the antitrust procedures. Do you envision the anti-trust procedures not taking place?
MR. DANIELS: The anti-trust procedures will have to take place, but we envision them taking place in -- with the same sense of urgency that applied to this process so far, and allowed us to deliver these regs in 14 days.
Q So the state, any state that the government -- if the governments have a stake in a carrier, that's not required?
MR. DANIELS: It is not required. It would strengthen an application, be seen as a preference factor, but it's not required.
Q What's the time frame that you think will occur, as far as the loan guarantees being issued? Because the deadline is June 28th. There's no specified data that I see on the evaluation process. So what kind of time frame are you looking -- and as you get applications, will you issue loan guarantees as they roll in, or will you wait until June 28th to start making decisions?
MR. DANIELS: First, let's be careful about the pronouns. "You," meaning "we," won't be involved at all. This is a separate and independent board that will make these judgments under Chairman Greenspan's chairmanship. But we've tried to build this for speed. We know this is a situation of some immediacy. It is certainly to certain carriers. And we hope it will be streamlined and as efficient as such a system can be.
In fact, from some of our conversations, one would reach the conclusion that the delays in the process will not be on the part of -- will not be occasioned by the board or by these rules, but by the time that the financial marketplace may take to make up its mind.
Q Forgive me, if you could just explain a little bit further your comments about the 100 percent -- if Airline X, for example, were to apply and they have a 50 percent backing from someone else, they would be more likely to get it than an Airline Y?
MR. DANIELS: Absolutely.
Q -- 90 percent --
MR. DANIELS: One hundred percent is not permitted, but 99 percent, in theory, would be. But 98 beats 99 and 95 beats 98. And two applicants each at 90 percent, but one with private backing -- that is to say, people, a partner or partners with the confidence to take a risk with private money would be stronger than a 90 percent guarantee request where the balance is socialized by a different group of taxpayers.
Q So it would be the same for two airlines --
MR. DANIELS: Yes. Although, two airlines, by definition, gives you a private partnership and, presumably, if it were some sort of merger, a very significant stake on the part of the partner.
Q Is there any provision in here that would allow cities or states to be the other agency that is involved?
MR. DANIELS: Yes, they're not precluded. That's exactly what I mean when I say that private partners, under these rules, are a stronger factor in an applicant's favor than public entities.
Q Were you at all concerned that the -- loans would actually encourage mergers that would not have occurred otherwise -- mergers?
MR. DANIELS: No. No, but it wouldn't necessarily be an unhealthy thing. The goal of this legislation, and we believe the assignment of this board, is to promote a strong system, a viable, safe, efficient system that serves the public well. It is certainly not to promote or perpetuate any given company or management.
Q Going back to her earlier question. If the applications are in by June 28th, how soon could the loan guarantees go out to carriers?
MR. DANIELS: Actually, we see that as sort of an end point. We rather anticipate, and several airlines have indicated to us, they would move very quickly to get an application in front of the board. I think we would anticipate the first applications happening within weeks.
Q Do you think it could be approved by the end of the year, possibly?
MR. DANIELS: Hard to guess, but I can only say that we have tried to design a system that is as flexible and nonbureaucratic as possible. So the board will, in its due diligence, will I know have to deliberate carefully. And if there is a flood of applications at the very beginning, weighing them one against the other will not be an easy thing to do. But I would hope that we're dealing in a deliberation process that's measured in weeks, not years.
Q But you do plan to issue loan guarantees before June 28th?
MR. DANIELS: There goes that pronoun again, but -- (laughter.)
Q But the board plans to issue them before June 28th?
MR. DANIELS: Well, that was simply an attempt, I think, to establish some end to the process. Maybe you can see it as an encouragement to come forward sooner, not later. But that's a deadline for applications, not for a decision.
Q So in other words, when the applications -- you're not waiting to receive all the applications by June 28th the make your decision after that. But applications could be accepted and a decision made on a case-by-case basis before then?
MR. DANIELS: That's correct.
Q There was, I think, a perception, at least, in the industry a few days ago that what you were thinking about was going to be tougher on the weaker airlines than this seems to be on its face. Can you talk about what happened in the intervening time and, you know, particularly any kind of lobbying you got from people in Congress or elsewhere?
MR. DANIELS: It really wasn't a process like that. We simply tried to keep the statute in front of us all the way, and live up to the balancing of interest that I think it reflects. It is certainly true -- and maybe this is the source of really incorrect rumors, John -- that the rough precedence we have for this, we have an OMB circular on this that suggests an 80 percent lid on loan guarantees in very different contexts.
This is a more welcoming set of rules than we applied in those earlier cases.
Q The -- program?
MR. DANIELS: That's correct. But this is a very different situation.
That said, this does set up, in essence, a competition; this is not an entitlement program. Some of the early proposals for loan guarantees would have created a formulaic system like the one that governed the cash -- come one, come all -- and some expectation, or even entitlement that any airline applying would walk off with such a guarantee. That is not the bill Congress passed or the administration agreed to, and it's not at all what these regs say.
Q To follow up on that then, how do you avoid picking winners and losers? I mean, this does set up a competition and, you know, the first guy out of the gate makes a valid bid for half the money. I mean, what do you -- how do you avoid the winners --
MR. DANIELS: I think the regime the board will operate under will allow the market to indicate which are the strongest applicants, or applications; and to indicate which are the ones with the best chance of living up to their end of the deal.
Q If circumstances change after June 28th and there is a severe downturn in carriers, then decide they might need these, is there any provision for applying after June 28th?
MR. DANIELS: These regs could be amended at some point, I suppose.
Q You don't have -- you list at the end of your press release here the seven steps for a loan -- then you say in the last graph that none of this matters if you don't want it to. Does that sort of underscore how you plan to operate? There is that kind of flexibility?
MR. DANIELS: It's merely a way of saying that essentially any carrier operating today has an opportunity to come in. I would simply hazard the guess that an application that came in and made -- and failed to include several of these preference items is not likely to fare very well, and is likely to be turned down in favor of those which take their cue, and thereby strengthen their application.
Q In the two weeks since this legislation has passed, do you get any sense from the airlines about whether the level of the need -- has it increased or decreased as the situation has returned --
MR. DANIELS: I think it's still too soon to say. Obviously, ridership is coming back on an encouraging track. I hope it is seen as encouraging, but from such a low base, obviously the situation is still very severe.
But the cash infusion, I think the airlines said, themselves, and other observers feel was very, very substantial, and certainly ample to buy a lot of breathing space.
Q A lot of people in the industry wanted the length to be 10 years -- you have it in seven years. Can you explain the rational behind that?
MR. DANIELS: We just didn't see a rational for anything greater than seven.
Q What's magic about the seven number?
MR. DANIELS: Well, the shorter the time period, in general, we think the more likely repayment is. You'll also find in the regulations a strong inducement to a shorter term by the requirement that fees, as negotiated between the board and a successful applicant, must increase each year. So while there is a limit at seven years -- and there was a lot of input urging much shorter maximum term than seven -- but while terms up to seven years are permissible, we expect that the board will structure these arrangements in a way that induces applicants to want to pay these loans back quickly and get back into a standard business mode in the private sector.
Q So who gets those fees? The government?
MR. DANIELS: Yes. The act directs us to see that the government is compensated for the risk that it is undertaking, which is quite a substantial risk, and the fees are a principal means of doing that.
Q What about --
MR. DANIELS: That's the second means of doing that.
Q But also, could there be a spread, in other words, if you're guaranteeing nearly 100 percent risk to the commercial lender is going to be very low, they're going to charge almost a government interest rate, right?
MR. DANIELS: That's correct.
Q But you'd want to charge a high interest rate because --
MR. DANIELS: The greater the government risk, the greater the fees it should be demanding.
Q Right. So then the spread would be between that market interest rate the bank charges and what you would charge. Is that correct?
MR. DANIELS: It could be, yes.
Q The regs talk about limiting the initial applications to make sure there is enough sufficient to go around. Is there any kind of a cap for application or overall cap?
MR. DANIELS: No. We looked at that and decided that was, again -- would be too inflexible. We just don't know what the marketplace is likely to look like here.
Q So the board will just determine at its own discretion how --
MR. DANIELS: That's right. It's limited only by the $10-billion total.
Q Can you discuss briefly the role that Wall Street has in providing guidance on the loan guarantees? There has been discussions about a handful of big investment banks that were providing some sort of consultation on this. Can you discuss the role Wall Street or investment banks had in helping --
MR. DANIELS: Advisory.
Q Advising, yes.
MR. DANIELS: You said briefly. (Laughter.)
Q Can you discuss it a little further and maybe tell us who was providing some of that advice?
MR. DANIELS: It was necessarily limited, and it was also limited by the appropriate ethics statutes, but we did welcome guidance of any kind from any party. And there was at least one group meeting at which firms ventured opinions about what would and wouldn't work.
Q How many firms? Were air carriers at all involved in any of these --
MR. DANIELS: I honestly don't -- well, air carriers were seen -- I'm sure we heard from every significant air carrier one way or another, many of those in person. We did all we could in the hours available.
Q While I have you here, I'd like to ask you a little bit to clarify something. The Senate Budget Committee and the House Budget Committee have come out with their principles for the stimulus package. And they talked about offsetting in the out years to pay for the stimulus now, and limiting it to one -- sunsetting it after one year. I'm wondering if you could just comment a little bit about those principles?
MR. DANIELS: Sure. I can do that because they were gracious enough to include me in more than one meeting on these. I chose -- I was invited to attend their press conference yesterday. I chose not to do that because I thought it was really their statement. But I thought it was, and observed what I thought was a very constructive contribution. They've pointed out the need to be aggressive and active, even to the point of going into unified deficit if need be in order to get the economy going in the short-term; but also to be careful not to sacrifice long-term fiscal discipline. And the administration supports that point of view.
I would point out that although they discussed as a principle offsetting, directly offsetting in later years stimulus in earlier years, I don't think that was part of the principles they released yesterday.
Q What was the final sentence? That they would offset --
MR. DANIELS: They didn't get the unanimity about saying it, so they made a gesture in that direction.
Q Does the federal government believe that some American airlines will go out of business.
MR. DANIELS: I don't know; wouldn't know.
Q Were you trying to avoid providing this financing to companies that went into bankruptcy? Were you trying to avoid debtor in possession type financing by the government?
MR. DANIELS: No. In fact, a company in bankruptcy is still eligible under these rules -- only, however, if the application is accompanied by a court certified emergence plan or recovery plan. So as I said earlier, essentially every company is eligible to try to fashion a successful application, even those who are now or might in the future enter Chapter 11.
Q -- if a loan is given to an airline that then files for bankruptcy protection under Chapter 11, does the government get some sort of preference in order to --
MR. DANIELS: The board will be encouraged to take measures to protect against the loss -- any loss in that case. The loan funds, under the terms of the rules, are not to be used for repayment of previous creditors. So that's one break, but this will be a subject, I know, for negotiation of anybody who might be in that situation.
Q It's not spelled out that way in the regs?
MR. DANIELS: Right.
Q If a carrier needs these loans to avoid bankruptcy, does that then become a strike against them under these regs in getting the loan?
MR. DANIELS: That's a hard question to answer. Again, the heart of their application must be a business plan that is persuasive. That will not be easy to do at a time when a dominant factor in such plans, namely future demand, is very hard to project, given the uncertainty -- setback in public confidence that we've suffered, and that sort of thing.
So the heart -- but the heart of the application will be the persuasiveness of that business plan and the extent to which the application incorporates these preference items. So I think by definition a plan that's going to come to the surface in that way ought to be one which suggests avoidance of bankruptcy, but it wouldn't be foreclosed.
Q Would you monitor, then, their adherence to the business plan once you granted the loan?
MR. DANIELS: Well, the board, once again. (Laughter.) I'm sure we'll be in close contact with developments at the successful applicant firms.
Q Is there a mechanism, then, for the board to go back in and say, wait a minute, you're not following the business plan that you presented to us.
MR. DANIELS: This is really for the lender. It's another reason, by the way, to insist on the involvement of at least some measure of risk on the part of other parties. In a typical situation in which the government wasn't involved, investors and lenders would be doing exactly what you're saying, and we want to keep some measure of private sector vigilance in the process, not simply have the lender off the hook and the airline free to do what it wants.
END 4:47 P.M. EDT