[President Barack Obama delivers remarks at General Motors Auto Plant in Hamtramck, Mich., July 30, 2010. (Official White House Photo by Pete Souza)]
The third presidential debate was supposed to be focused on foreign policy, but the candidates took a few detours into domestic affairs, including a tense exchange about the auto industry. President Obama accused Mitt Romney of opposing the 2009 automaker rescues, and of “trying to airbrush history” with his claim that he had supported a managed bankruptcy for GM and Chrysler, complete with government assistance to make sure the companies didn’t collapse before they could be restructured.
The dispute ended with both agreeing that the audience should “look it up.” In the November 18th, 2008 New York Times op-ed in which Romney initially laid out his views, infamously titled “Let Detroit Go Bankrupt,” Romney did indeed call for the automakers to go through managed bankruptcy and for the federal government to “provide guarantees for post-bankruptcy financing…”
A simple fact-check, however, would fail to convey the significance of this debate. The story of the auto bailouts is one of the Obama campaign’s central themes. Vice President Biden’s favorite quip is that “Osama bin Laden is dead, and General Motors is alive.” In the second, town hall debate, Obama used his first statement to establish the auto bailouts as defining his overall domestic agenda: “Now when Governor Romney said we should let Detroit go bankrupt, I said we're going to bet on American workers and the American auto industry, and it’s come surging back,” he said. “I want to do that in industries, not just in Detroit, but all across the country…”
Clearly, Obama and company see their handling of the auto bailouts as more than just a debate point. So it’s worth taking a closer look at the differences between Romney’s stance and Obama’s actions on the auto industry rescue.
In the NYT op-ed, Romney’s solution for the then-failing auto companies had two parts. The first part was to ensure they didn’t get a bailout: with a bailout, Romney wrote, “the automakers will stay the course — the suicidal course of declining market shares, insurmountable labor and retiree burdens, technology atrophy, product inferiority and never-ending job losses. Detroit needs a turnaround, not a check.” The second part was a “managed bankruptcy,” with government help to see it through if need be: “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.”
At the time Romney was writing, of course, George Bush was still president. In December of 2008, the Bush administration extended funds from the TARP bailout program to GM and Chrysler to allow them enough time to restructure. In late March of the next year, with the companies still not on firm footing, the Obama administration pushed out the CEO of GM, directed a merger of Chrysler with Fiat, and gave both GM and Chrysler another round of loans. A month later, with the companies still lacking credible restructuring plans, the administration finally instructed them to go through bankruptcy – five months after Romney’s suggestion.
The bankruptcy process for GM and Chrysler, however, was most likely not what Romney had in mind. As the legal scholar Todd Zywicki wrote in a polemical article for the conservative journal National Affairs, it was “a bankruptcy combined with a bailout, incorporating the worst elements of both.”
Instead of a more typical managed bankruptcy, the bankruptcy process the administration put the companies through is what is known as a “363 sale.” Both GM and Chrysler’s assets were sold to two new companies – “New GM” and “New Chrysler” – and their creditors’ claims were resolved with the cash from the sales and stock in the new companies.
David Skeel, a law professor at the University of Pennsylvania, argued in a June 2011 Wall Street Journal article that, by using 363 sales, the government was able to alter the terms of the bankruptcy in ways that violated the principles of such bankruptcies, and led to an unfair result. The government restricted bids for the two companies’ assets to bids that had the “same strings as the government bid—a sizeable payment to union retirees and full payment of trade debt...”
The net result of the bankruptcy was one that many of Chrysler’s senior creditors, including a number of hedge funds, protested. Union workers were made whole and given stock in the New Chrysler, while the senior creditors, who would normally have been first in line to receive what was owed them, were forced to accept 29 cents on the dollar, as Zywicki writes. In the case of GM, the federal government wound up owning 61 percent of the new company’s stock.
So there were two major differences between Romney’s proposal and Obama’s actions: the timing and the nature of the federal assistance, and the type of bankruptcy.
Romney says, and his op-ed indicates, that he wouldn’t have extended loans to the carmakers before putting them through bankruptcy. Bush and Obama did. Could they have survived through the bankruptcy without those loans? It’s not clear, and maybe there was no scenario in which they wouldn’t have needed the feds to bridge them over the bankruptcy process. Remember, late 2008 and early 2009 were the depths of the financial crisis.
However, it may have been possible to find private financing for the bankruptcies with federal loan guarantees – as opposed to direct loans – as Romney suggested in his op-ed. In a note to a January 2001 Congressional Oversight Panel report on the auto bailouts, J. Mark McWatters, a law professor at SMU, and Kenneth Troske, an economist at the University of Kentucky, suggested that private funds were likely available with some government aid:
Despite claims to the contrary, we still have trouble concluding that Chevrolet, Cadillac, Buick, GMC trucks, and Jeep… were worth next to nothing in the closing days of 2008 and, but for the taxpayer-funded bailouts, would have failed and left hundreds of thousands temporarily unemployed. It would have been preferable for these institutions to have been reorganized by private sector participants, with, perhaps, debtor-in-possession financing guaranteed to a limited extent by the government. It is difficult to accept that private sector strategic buyers, private equity firms, hedge funds, and sovereign wealth funds were not willing and able to orchestrate the successful reorganizations or restructurings of the three distressed companies.
As Stephen Lubben, a bankruptcy expert, argues in the New York Times’ DealBook, private financing for such bankruptcies was scarce enough in late 2008 that government aid would probably have had to have been fairly significant to secure sufficient funds for GM and Chrysler’s bankruptcies. Maybe more would have been required than Romney’s 2008 op-ed hinted at – although he’s since expressed a willingness for an even greater role for the feds.
As for the type of bankruptcy involved in reorganizing GM and Chrysler, it’s impossible to know exactly what a President Romney would have done in 2009. Obama, on the other hand, has a record. Zywicki notes in his National Affairs piece that the government’s ownership in GM and Chrysler, a product of the unusual bankruptcies, has at times conflicted with the ongoing reorganization of the two companies. Inefficient dealerships have successfully lobbied the government not to be shut down. The feds’ environmental goals have led the automakers into ill-advised green projects. And so on.
Even more importantly, the experiences of secured creditors in the Chrysler bankruptcy might discourage investors from extending similar loans in the future, and raise the cost of capital.
The Obama administration inherited a very messy auto situation from the Bush administration during a severe financial crisis, and its actions have to be considered in the context in which they took place. Romney’s vision for an alternative approach is different only its details, not in its orientation toward the auto industry. The fine distinctions Romney’s made about the auto bailouts throughout the years may not have survived the actual experiences that Obama went through. Nevertheless, they are important given that Obama regards the auto industry rescue not as a survival story, but as an example of an approach he wants to bring to “industries…all across the country."