Romney's a Michigan native; his father George Romney was a well-liked governor and head of American Motors. Yet Romney is neck-and-neck with rival Rick Santorum in polls ahead of Michigan's Feb. 28 primary in no small part because of his opposition in November 2008 to the bailouts that saved GM, Chrysler and thousands of Michigan jobs.
I covered those bailouts in Washington as a reporter for the Detroit Free Press, following them through Congress to the White House to the bankruptcy courts a few blocks off Wall Street. As a first-hand witness, I can attest that some of Romney's new arguments hold their own — but most don't. Let me explain, point by point:
"Three years ago, in the midst of an economic crisis, a newly elected President Barack Obama stepped in with a bailout for the auto industry."
In fact, the bailout began with President George W. Bush, who was forced to lend GM and Chrysler $17.4 billion in December 2008 after Senate Republicans blocked a rescue plan in Congress. Bush told reporters just last week that he was warned by Federal Reserve Chairman Ben Bernanke and Treasury Secretary Hank Paulson that if he didn't act to shore up GM and Chrysler, up to 1 million jobs could vanish. Knowing what we know now, says Bush, "I'd do it again."
"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."
The crux of Romney's argument: If Obama had not acted, private companies would have stepped in and run a "managed bankruptcy." What this ignores is that in the fall of 2008, before Obama was even sworn in, no one on Wall Street or anywhere else was willing to lend GM and Chrysler a penny — let alone the $81 billion they and their financial arms eventually needed.
Both companies' bankruptcies required money on a scale not seen in legal history. Unlike airlines, which can keep running with much smaller short-term loans while they restructure, automakers need massive amounts of up-front capital to pay suppliers and workers while they build cars; their finance companies need even more to keep making car loans that can bring in revenues. The potential damage wasn't just layoffs; Chrysler executives testified on the first day of bankruptcy that without immediate cash the company risked destroying hundreds of millions of dollars' worth of equipment.
Even after Obama took office, GM and Chrysler searched frantically for paths to avoid bankruptcy, including a possible merger. Chrysler held a one-week garage sale of its assets in February 2009, inviting anyone with enough money to bid for parts of the company. No one bit.
"Ultimately, that is what happened. The course I recommended was eventually followed. GM entered managed bankruptcy in June 2009 and exited it a month later in July.
The Chrysler timeline was similarly swift. But something else happened along the way that was truly egregious. Before the companies were allowed to enter and exit bankruptcy, the U.S. government swept in with an $85 billion sweetheart deal disguised as a rescue plan."
No entity blocked GM and Chrysler's path to the bankruptcy court except their own executives. Had the government not intervened as Romney suggests, GM and Chrysler likely would have been liquidated by their Wall Street bondholders, some of whom held out for a few more pennies on the dollar at the risk of the entire bankruptcy case. One auto industry think tank estimated doing so would have led to 1.3 million job losses and threatened Ford, Toyota and other automakers.
"Chrysler's 'secured creditors,' who in the normal course of affairs should have been first in line for compensation, were given short shrift, while at the same time, the UAWs' union-boss-controlled trust fund received a 55 percent stake in the firm."
Chrysler's secured creditors were a group of Wall Street banks — including J.P. Morgan, Citigroup and Goldman Sachs — and investment firms, some of whom had bought the company's secured bonds in the months ahead of bankruptcy hoping to cash in. They could have rejected the government's offer of 28 cents on the dollar in cash for their $6.7 billion in bonds and paid to liquidate Chrysler themselves, but decided that not only would they come out even further behind, they'd also be blamed for destroying an American automaker. (GM's secured creditors − also mostly Wall Street banks — were paid in full, and endorsed the Obama bankruptcy plan.)
As for the "union-boss-controlled trust fund," that's what's known as a VEBA trust that now pays the health care of 426,409 retirees from GM, Ford and Chrysler — and in return, owns all future health-care obligations from the companies for those retirees. With this, Romney appears to argue that before hundreds of thousands of UAW retirees got health care, Wall Street should have been made whole.
"American taxpayers have been left on the hook for billions to benefit unions and the union bosses who contributed millions to Barack Obama's election campaign. Such a state of affairs is intolerable, and as president I would not tolerate it. The Obama administration needs to act now to divest itself of its ownership position in GM."
If the Obama administration sold its 500 million shares in GM today, it would lose at least $14 billion. GM shares have struggled even as the company reported strong profits, in part over concerns about an underfunded pension plan. If GM shores up its pension costs, its shares could rise — although they would need to nearly double before the government broke even.
There's ample factual reasons to criticize the bankruptcies — from the treatment of Delphi's retirees and GM's unsecured bondholders to the advantages GM, Chrysler and Chrysler's new parent Fiat gained over Ford. But doing so requires acknowledging that Obama's decisions, including his call to save Chrysler when some advisors were ready to let it go, were mostly right: GM and Chrysler came out stronger and leaner, keeping jobs in the country that would have disappeared if they'd gone out of existence.
Even in Detroit's more conservative newspaper, the comments this morning on Romney's new op-ed are running about 2-1 against him. Romney has plenty of time to change minds, but these comments left the factory with a few too many defects -- and losing your home state over its keystone industry would be a political sting no amount of Vernors could soothe.
- President Obama