Thursday, March 30, 2000 202-224-0894


Sen. Phil Gramm, chairman of the Senate Committee on Banking, Housing and Urban Affairs, made the following remarks today at the opening of Senate debate on S. 2097, the Launching Our Communities' Access to Local Television Act:

At the end of the last session of Congress, we passed a very important piece of legislation establishing the legal framework under which local television broadcasts could be carried by satellite.

In the midst of that conference, a sizable majority of the conference committee members from the House and the Senate concluded there was a problem in rural America that the bill they were considering would not address: that there were substantial economic impediments to the development of systems that would deliver the local television broadcast into remote, isolated, and rural areas of the country.

In trying to deal with this situation, with all the time constraints in the midst of a conference, an effort was made to write a loan guarantee into that bill. That loan guarantee program has subsequently been offered in the House and is pending before the House committee. And when I talk about it again, I will be talking about the bill as introduced in the House.

There was great concern at that time about how the system would work and what it would cost. As a result of numerous negotiations and a lot of good will, a decision was made to drop that provision at the end of the last session with a commitment I made that, by the end of this month, we would report a loan guarantee bill from the Senate Banking Committee to address this very real concern. I am happy to say that on a bipartisan basis we reported such a bill by unanimous vote and we, in doing so, fulfilled the commitment we made at the end of the last session.

Rather than go through a fairly complicated bill in detail, I will focus in my opening statement on the problems we face: why there are economic perils involved in guaranteeing loans to do something that has never been done before using technology that is unproven; why it is so expensive to do this, and then how we have tried to deal with each of these problems.

It is important to remember that when the Congressional Budget Office looked at the loan guarantee program pending in the House of Representatives, they concluded that of the loan guarantees that would be made -- and to be precise, a loan guarantee is where the taxpayers are committed to stand in the place of the borrower should the borrower default -- roughly 45 percent of the $1.25 billion worth of loans made under that bill will be defaulted.

When I say defaulted, I am not saying just that the borrower would be unable to pay that face amount. I am saying that if one looks at the CBO estimate, what they concluded was, as the bill is structured in the House, we were looking at the potential of the taxpayers paying 45 percent of the cost of these loan guarantees as a result of their being defaulted and ultimately not being repaid.

The Banking Committee, in looking at this number, concluded that it presented an unacceptable risk for the American taxpayer.

Sometimes people get confused by these estimated CBO costs because the cost often looks low because it is the present value of a default that would occur 10 years, 20 years, even 25 years from now.

But basically, the CBO analysis of the House bill is that we are looking at a potential default rate of about 45 percent.

How did we try to deal with that?

We held a set of hearings where we heard from experts in industry, and we worked with the Congressional Budget Office. We decided there were two ways we could reduce the probability the taxpayer was going to end up paying off these loans.

One way would be to set up a board that would exercise independent judgment as to the quality of the project being proposed and the risks that were involved, and to put someone who was responsible, who had knowledge of financial markets, and who was responsible to the taxpayer, in a position to make that judgment.

We concluded we should have a board made up of the Secretary of the Treasury, the Chairman of the Federal Reserve Board, and the Secretary of Agriculture, or their designees -- but their designees would have to be people who were appointed by the President and confirmed by the Senate.

Our first line of defense is the good judgment and prudence of the three people on this board. The House would give that basically to a government agency, but we have rejected that.

Our second and, by far, our more important line of defense is that we do not guarantee the entire loan. The loan would have only an 80 percent guarantee.

What this means is, when a private lender makes this loan, they are going to be liable for 20 percent. The protection we get from that requirement is not just that they lose the first 20 percent, and then we lose the other 80 percent, if the loan goes bad -- that is important, and we guarantee that the taxpayer is protected first, unlike the House bill -- but what we get is far more important because with a private lender, if they are liable for 20 percent of the money, they are going to perform their due diligence, they are going to scrutinize this loan, and they are going to realize that if the loan goes bad, they are going to lose 20 percent of the money they have lent.

The language of the bill as reported out of the Banking Committee was that we would have a private lender. The language of the bill requires that they be FDIC insured, that they would make the loan, and that they would be liable for 20 percent of the cost.

Why is this so important? We are not talking about making a loan to deliver electricity to rural America, where we have a captive customer base, where someone cannot buy electricity from anybody else. We are not talking about making a loan to deliver telephone service to rural America where you either buy from the telephone co-op or you do not have a telephone.

We are talking about a very risky business where there will be no guaranteed ratepayer. Nothing in this bill -- nothing in law -- requires any American living in a rural area to buy these services. So there is no captive base.

The second important risk is, no one has ever done what we are proposing to do. We have one company proposing to use a satellite, which has a directed beam so that it would send a signal into a geographic area, and they are pretty confident it is going to work. In fact, they are going to invest over $1 billion to build such a system to basically service these top 40 markets in terms of viewership.

But the plain truth is, no one has ever used that satellite. So while we hope it will work, while we have reason to believe it will work, and while the fact that somebody is willing to invest $1 billion in it suggests to me it might very well work, we do not know it will work. It has never been proven on the scale we are talking about.

But there is a second and more fundamental risk. It is one that I think, in our rush to do something here, we want to look beyond. It is not the risk that the technology does not work.

Let's say we are talking about a satellite -- and our bill is neutral in terms of technology -- but let's say someone comes in and asks for a loan of $1.25 billion to build and launch and put into orbit a directed beam satellite. Obviously, you have the risk that somehow the system does not work, it is not launched into orbit. Maybe they would buy insurance. I assume a lender would require that. Maybe it would work; maybe it wouldn't work.

But let's say it does work. The biggest risk you face in dealing with new technology is we have no guarantee, that if someone borrowed $1.25 billion and we guaranteed 80 percent of it -- and it worked perfectly -- that 2 years from now some young computer genius, getting a degree in computer science at Texas A&M, might not develop a technology that would use the Internet to deliver the local TV signal and would do it at one one-thousandth of the cost of this satellite.

I say to my colleagues, if that happened, obviously, it would be a godsend for rural America because then everybody would have local television, and they would have it inexpensively, but it would not be a godsend for the taxpayer because we all know that if that happened, which would be the answer to someone's prayer, it would not be the answer to the taxpayer's prayer. The company that launched that satellite and invested $1.25 billion in it would lose every customer they had to someone who could sell for one one-thousandth of their cost.

Let me say, this isn't just theoretical, this is happening every day in America.

The taxpayer would be on the hook for over $800 million of losses.

We have tried to deal with this by establishing a loan board to exercise due diligence, requiring a private lender, as it is now written, and an FDIC-insured lender, so basically we are talking about an institution that is in business to make money, and they are going to be making loans. They can make loans to anybody. They know as the bill is now written, they are going to be liable for 20 percent of that loan. If it goes bad, they will lose that money.

I think we have put together a well-crafted bill. To this point, this bill costs $100 million less than the House bill. It is still risky business. Let's remember that if this loan is defaulted, rural America is probably going to lose its television service.

I thank all members of the Banking Committee, Republicans and Democrats, for the bipartisanship we had in committee.

I thank Senator Conrad Burns. I thank him for his leadership. There is no question that we would not be here today were it not for his persistence. I also thank him for not only trying to get television signals to rural America but trying to do it in the right way. It is very easy when you are trying to deal with all the groups that hope to benefit from some program such as this to just throw caution to the wind and say don't worry about the cost. I thank Senator Burns not only for the leadership in seeing that we are writing this bill, but for his leadership in seeing that we are doing it right.