Opinion: Mitt Romney picks the wrong fight over the auto bailout
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Mitt Romney’s father once served as president of American Motors, maker of the Nash sedan that a young Mitt is pretending to drive in the photo above. So on the campaign trail, Romney likes to say he has ‘cars in his bones.’ His career as a turnaround artist also has given him unusual familiarity with the bankruptcy process -- both in terms of rescuing companies and dooming them.
Yet he seems to have forgotten those lessons when he talks about the recent bankruptcies of General Motors and Chrysler.
Romney has been sharply critical of the Obama administration’s bailouts of GM and Chrysler, and he reiterated his case against those moves in a op-ed Tuesday in the Detroit News. According to Romney, the ‘managed bankruptcy’ process that the two companies went through was the proper way to go. But they should have done so without the federal government’s involvement:
The president tells us that without his intervention things in Detroit would be worse. I believe that without his intervention things there would be better.
As Romney surely knows, money-losing companies that go into bankruptcy need a lender’s help to stay afloat while their debts are restructured. GM and Chrysler ran out of private sources of credit in 2008, when Wall Street was reeling from the collapse of Lehman Bros. and credit was barely flowing even to healthy companies. That’s why they ran to Washington for help. It’s hard to believe that the automakers could have lined up multiple billions of dollars in new financing from any private source, whether it be debt or equity.
The reality is that if the feds hadn’t put up the loans needed to keep those two companies afloat, they would have gone into liquidation, not reorganization. Chaotic sell-off, not managed bankruptcy. And such a collapse could have taken with it companies that provided critical parts to all U.S. auto factories. That’s why Ford, which still had an ample line of credit, went to Washington in 2008 to support GM and Chrysler’s pleas for help. And that’s why President Bush provided billions -- almost unconditionally.
Romney also contends that the Obama administration rigged the process so that the federal government and labor unions would wind up with huge stakes in the two automakers post-bankruptcy. Again, he glosses over what happens in bankruptcy: existing shareholders get wiped out, and creditors exchange all or part of the debts they are owed for equity in the reorganized company.
The taxpayers wound up with a huge stake in GM because Washington loaned the company so much money to keep it running during its reorganization. And the United Auto Workers acquired a majority stake in Chrysler because the company owed more than $10 billion to its retirees’ healthcare fund, which the union took over as a concession to management (the shift relieved Chrysler of a huge unfunded liability). In the bankruptcy proceedings, those debts were largely converted into equity to reduce the companies’ operating costs and make them more competitive. That’s standard operating procedure in a bankruptcy.
Critics can argue with the value that the automakers put on the shares they granted to the UAW and the taxpayers. And Romney is free to contend that some creditors (namely, the unions) got better treatment in the process than others. That’s fair, and the criticism can go either way. But given how much the companies owed the union and the government, the only way the latter could have avoided becoming major shareholders is if they’d simply forgiven billions of dollars of debt.
Of course, Romney appears determined to have taxpayers take a bigger loss on this deal than they have to. ‘The Obama administration needs to act now to divest itself of its ownership position in GM,’ he wrote in the op-ed. ‘The shares need to be sold in a responsible fashion and the proceeds turned over to the nation’s taxpayers.’
Although Romney didn’t frame his critique this way, there is a fundamental conflict of interest in the government owning a stake in any corporation that competes in the free market. But precipitous divestiture isn’t the only way to address that problem. The right approach is to adopt measures to ensure the independence of GM and Chrysler, then sell the shares in a way that maximizes taxpayers’ returns. That appears to be what the administration is doing.
The Times’ editorial board didn’t like the idea of the government bailing out GM and Chrysler either. But it recognized that liquidation was the only real alternative, and so urged Washington to insist on major structural reforms as a condition for any aid. That’s what happened. The process wasn’t perfect, but it has succeeded -- at least so far. There’s no shortage of bones to pick with President Obama’s leadership; Romney should drop this one and find another.
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-- Jon Healey
