Mitt Romney must recognize that he’s got a really big problem on his hands with respect to the auto industry. Michigan is, of course, a must-win state for him. Yet his current Michigan tour has been dogged by protests who object – understandably – to his position that the auto industry should have been allowed to fail.
Here’s what Romney says about that.
“I laid out a plan to get America’s industry on its feet again, and that’s happened,’’ Romney said yesterday. “I said go through bankruptcy reorganization, and that’s in part what got the industry back on its feet. Don’t forget it.” …
“Any Democrat who understands my stance on the auto industry will say, ‘Boy he was right on,’ ” he said.
Boy, that’s deeply misleading, Mitt. We already know that Romney’s campaign has had serious difficulty with truth-telling so far. This is yet another sorry episode.
See, Romney wants you to think that he laid the groundwork for the salvation of the auto industry through his now-infamous NY Times op-ed, unfortunately entitled “Let Detroit Go Bankrupt.” Here’s his basic proposal:
A managed bankruptcy may be the only path to the fundamental restructuring the industry needs. It would permit the companies to shed excess labor, pension and real estate costs. The federal government should provide guarantees for post-bankruptcy financing and assure car buyers that their warranties are not at risk.
In a managed bankruptcy, the federal government would propel newly competitive and viable automakers, rather than seal their fate with a bailout check.
Now, in some respects, Romney was right. GM and Chrysler actually did go through Chapter 11 bankruptcy. They’ve now both emerged, and are much the better for it.
But – and this is a big but – the Chapter 11’s would probably have failed without government intervention. The US government supplied billions of dollars of debtor-in-possession financing that allowed the companies to continue operating as going concerns through the bankruptcy. No other lender was going to do that (remember, this is in 2009 when credit was still nearly frozen), and a refusal by the government to finance the bankruptcies would almost surely have meant converting the Chapter 11’s into Chapter 7 liquidations, shutting down the companies with a likely loss of thousands upon thousands of American jobs. Note that Romney’s op-ed advocated “guarantees for post-bankruptcy financing,” but says nothing about lending money directly to the companies while in Chapter 11. On the contrary, he repeatedly argues that no money should go directly to the companies.
Basically, the difference between what Romney advocated for and what President Obama actually did is that what Obama did worked, and what Romney proposed would almost certainly have failed. Of course, Romney wants to take credit for something that worked, and the difference between what he proposed and what actually happened is sufficiently subtle that it requires some looking into the details. Romney, no doubt, is hoping that people won’t notice. But the Obama administration is, thank goodness, looking newly aggressive on defending its auto industry rescue, so I suspect they’ll be pointing out the difference early and often.
In my view, this is far less of a distortion than the “repayment in full, and more” BS that the president is spewing.
that it’s not BS. Other than that, though, I’m totally with ya.
Really demonstrate why there was an auto industry bailout: it was a giveaway of taxpayer money to a powerful interest in a swing state. In essence, the government, using taxpayer money, bought a car company and then gave it to the UAW. Now, it tells me that I’m really going to have to pay some more in taxes, in order to help pay for, among other things, this bribe.
Describing this as “repaid all of the funds (loaned during my administration)” is a technically true statement that is actually misleading and is intended to be misleading. An outright lie, in other words, with plausible deniability.
Massachusetts would be better served it it were a awing state. Then maybe we would get a few tens of billions thrown at our dying, noncompetitive industries, rather than paying the bill for others.
normally, when one is talking about a “giveaway,” there has to have been some, you know, giving away. That didn’t happen here, at least under Obama. There were loans; they’ve been fully repaid by Chrysler (I gather GM is not there yet). There were equity purchases; those will soon be sold for Chrysler, and I don’t know the status for GM.
So I really don’t get why you hate this as much as you seem to. It did actually work, and at least Obama’s policies ultimately won’t cost taxpayers anything. (I can’t speak for the Bush policies, nor would I care to.)
On Day 1, Carco owed the government $0, assuming they were roughly current on taxes, but were about to collapse.
So, on Day 2, the government lent TARP funds of, say, $1,000. Cool.
On Day 3, we realize that $1,000 isn’t going to cut it, so Carco files a bankruptcy case.
On Day 4, Carco borrows another $1,000 as DIP financing.
On Day 5, there is a “Section 363 sale” of Carco’s assets to Newcarco for $2,000. Where does Newcarco get the money? It borrows it, from the government.
So what happens to the $2,000? Well it goes to secured creditors, including the DIP lender, which inexplicably was willing to take a haircut, and to prepetition unsecured creditors, including the TARP loan. So the government shells out another $2,000, and gets $250 back on its initial $2,000. Except it didn’t lend $2,000. It only “lent” $1,200; for the other $800 it gets a stake in Newcarco.
The remaining $1750 on the initial loans is lost. But, wait, Newcarco paid back its $1,200 loan from the government.
Comes the pronouncement: “Newcarco paid back all of the loans, with interest. This arrangement was a success.”
Wait, what about all the money that went to Carco?
“All of the money owed by Newcarco was repaid, with interest! We made a profit!”
Wait, what about the huge tax gifts given to NewCarco (in the form of NOL carry forwards– not something that happens in a bankruptcy sale unless the government is the plan investor)?
“All of the money owed by NewCarco was repaid, with interest! We made a profit!”
Wait, what happens when Newcarco can’t fund Carco’s huge pension obligations, which it had to assume as part of the deal?
I guess then, the government will just lend some more taxpayer money, and make another “profit.”
CMD, I am closer to your position than David’s in assessing Obama’s rhetoric on the auto bailout. The weaselly language about repayment “during my presidency” is annoying. I’d prefer “it’s 90% repaid and jobs were saved, at a precarious time where things could have gotten much worse if fundamental confidence were shaken” sort of thing.
My question to you — what do you think would have happened if the Romney plan had gone through?
Recall that Romney was calling for this at a time when the government policy was indeed to simply throw money at the companies, months before the actual bankruptcy filings. Indeed, the pre-bankruptcy money thrown at the companies comprises much of the taxpayer’s loss (and have a lot to do with the Obama weasel words).
I agree with David that there would not likely have been post-petition financing, for two reasons. One, the credit markets were a wreck. Two, the companies were looking to borrow more than they were worth, which means the lender would take a haircut, as indeed the taxpayers have.
I don’t know that this would have necessarily resulted in a Chapter 7 liquidation. I think it likely that someone would be using the manufacturing plants, perhaps for cars, and in a greatly reduced capacity (as they are anyway), that extra assets would be sold off piecemeal (as they are anyway, to the Fisker people, for example) and that the UAW would have been croaked.
For this reason I think that the policy as implemented was quite misguided, because it seems to me to have been orchestrated for the benefit of the union. In so doing, we “saved” some number of present jobs and maintained GM and Chrysler on their slow and painful descent into the abyss, and the opportunity to use the remnants as the basis from which to build some new and dynamic American industry is foregone.
I guess what I am saying is that I agree that the bailout accomplished its goals; I just think that, like the temporary measures to prop up home prices, the effect of achieving the goal has been a drag on economic recovery.
I am delighted to point out that I actually came up with the idea a couple of days before Romney published his op-ed:
I recall others tossing around similar ideas at the time as well, so Romney was assuredly not the first person to come up with a “managed bankruptcy” idea. But the key factor really is the financing. Romney’s idea simply would not have worked, as you acknowledge.
But I suspect that someone at Weil Gotshal thought of it even sooner
Do you not think there was any substantive difference between what Obama did and what Romney was advocating in 2009? In your comment you seem pretty sour on the former, so presumably you wouldn’t like the latter either?
The centerpiece of the Obama policy wasn’t bankruptcy itself (Private companies are free to file bankruptcy without input from the President), but the use of bankruptcy as a mechanism for the government to purchase these companies at a significant premium. As reorganizations go, it solved some, but not all (and not the biggest) of the problems that caused the companies to fail in the first place.
As a business matter, Romney’s solution would likely have been more economically painful in the short term, but would have been a long term solution. Obama’s plan prevented short term pain at the expense of fixing long term problems. That is why I view it as a political policy with political, not economic– goals, and why I am indeed sour on the Obama policy.
was for Chrysler and GM to go bankrupt, sold off in bits and pieces, along with almost all of their jobs in this country, and all of their parts manufacturers’s jobs, and all of their dealerships’s jobs, then no, it was not a longterm solution. What Romney wanted — and you apparently agree with — was to give up on the American automotive industry, letting more than a million Americans all over the country lose their jobs at the heart of the Great Recession. All to score a few, cheap political points. For shame.
This was not fair to FORD who managed to survive the “Great Recession” or the foreign auto companies who also make and design cars in the US.
All Obama did was tilt the table in direction of some political allies. It’s crony capitalism at it’s worst.
If GM and Chrysler had gone out of business – FORD would have been able to pick their assets on the cheap – that’s what suppose to happen.
The reason Ford survived was that they had mortgaged themselves to the hilt before the recession, while credit was still available, in order to retool themselves. It was either a brilliant move, lucky timing, or a combination of both.
So I’m not sure where Ford would have gotten the money to snap up any of the assets of the other automakers, especially in the environment that would have existed in the wake of the failures.
And there is also the question of whether Ford could have waited out the local economic depression that would have resulted.
Every time I am about to parody Mitt Romney, he does me one better.