The Federal Government and Loan Guarantee Programs

The Comptroller General presented remarks on loan guarantee programs of the Federal Government. He stated that, while the Federal Government has no formalized industrial policy to deal with the Nations's economic problems, one of the most noteworthy developments of the 1970's was the occasional provision of large scale financial assistance to failing firms or municipalities. The Chrysler program is the most recent example of an ad hoc approach to providing assistance which began with the collapse of the Penn Central railroad in 1970, followed by the Lockheed and New York City loan programs. With the exception of the Penn Central/Conrail experience, the programs have been structured to restore financial health and avoid bankruptcy. They have all involved the exchange of a federally supported cash infusion for a financial and cost restructuring. In every case Federal involvement was designed to ultimately return the entity to self sufficiency. It was noted that the Government needs to accurately identify the type of financial problem facing a troubled firm or municipality. When the problem is brought to the Government's attention there is often only a short response time available to avert a crisis, but the Government should maintain the capability to rapidly assemble a team of experts to evaluate the situation. This capability most logically resides within the Federal Reserve and Treasury Department. Once the problem has been identified and the decision made that a Federal response is appropriate, legislation is needed containing a clear statement of the objectives sought by Federal involvement as well as the financial mechanism through which they will be achieved. Another key principle to be relied on in designing legislation is that the taxpayer's financial interests must be adequately protected by following prudent lending practices while still satisfying the Government's desire to preserve employment levels or meet national security objectives. Once an assistance program is authorized and aid is provided, Government oversight is also necessary. The Comptroller General stated that a loan guarantee board is the appropriate vehicle to provide this oversight.