Auto "Bailout" Redux: Sen. Romney

...it was Bush who bailed out GM -- Obama forced it into bankruptcy...

Mitt Romney now thinks the bailout bad. At first I assumed that he'd used clever phrasing that could be given that spin, because as a former investment banker he should be familiar with more than just the basics of bankruptcy and restructuring. That is, it was a case of journalist sensationalism. But in fact he was clear, saying:

"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." (Bloomberg of Feb 16)

Furthermore, this contrasts with his calls for more Federal assistance to the industry during his unsuccessful 2008 campaign.

Now there was a bailout of the industry under Pres. Bush, loans with no strings attached (or rather, "here's money to give you time to come up with a plan"). Pres. Obama was then faced with a choice of providing another bailout, or allowing General Motors and Chrysler to file for bankruptcy. We know his decision.

Back to Romney. Given how he made his hundreds of millions, he clearly is knowledgeable about corporate finance. So he should have no illusions – or maybe delusions – that at the time of the bankruptcy filings financial markets were not operating normally. To keep operating, however, a company needs to be able to borrow, to pay suppliers and workers, what is called DIP (debtor-in-possession) financing. Such financing was not available in private markets. Absent financing from the government, Chapter 11 bankruptcy would not have been possible.* Instead, what we would have seen was Chapter 7, an "orderly" dissolution of GM and Chrysler. Workers – both blue- and white-collar – would have lost their jobs immediately, along with their health care. Of course dealerships would have had no product to sell, and no ability to obtain continued financing – banks were nervous, and many large ones were themselves in trouble; car loans were already hard to find. Good luck, too, repairing a car. You'd be able to find brake pads, but not replacement body panels or computer chips or anything else that required "genuine" parts.

Suppliers were trying to stay afloat in the face of a 40% drop in sales; many were themselves in dire financial straits. (In fact, the final financing package made allowance that, authorizing GM to on-lend to suppliers.) They too would have been thrust into bankruptcy. This would have affected not just GM. First, over the past decade European and North American headquartered suppliers have done a fairly good job at penetrating the "transplant" makers, including Toyota. Had even a few mid-sized suppliers abruptly closed their doors, in all likelihood so too would have Toyota, Honda and BMW. While they may not have been thrust into bankruptcy, they would have put their workforce on unpaid leave, and left their suppliers without business. Indeed, as we saw with the March 2011 Tohoku Earthquake in Japan, the impact have stopped at our borders. Today's supply chain is interlinked on a global basis; in many segments in the parts business, US suppliers are the technological leaders, not Japanese ones. In the normal course of events plants in the US ship vehicle components and specialized materials around the globe (even if most production takes place nearer to their final customers in Germany, China and Brazil). We would have seen plants throughout the world facing temporary shutdowns.

As a result not just GM but also Toyota dealerships would have had no new vehicles coming their way. Furthermore, in 2009 banks themselves needed rescue; many had simply pink-slipped their entire auto finance operations. But many of Toyota's dealers also operate GM and Chrysler franchises. That Toyota technically was still in business would have been scant consolation as they watched their cars be (re)possessed** by their banks.

So to put it bluntly, all automotive-related production in the US, Canada and Mexico would have squealed to a halt in a matter of days, and most of the new car dealerships and portions of the vehicle repair business would likewise have shut down. Not just for GM, but for Toyota as well – with collateral damage to Canada (where banks were not up to their reserves in bad real estate loans) and manufacturing throughout the world. In January 2008 auto-related manufacturing in the US employed 950,000 workers; by April 2009 some 275,000 of those people had lost their jobs; the dealership sector shed 245,000 jobs. Had GM collapsed, another 500,000 manufacturing jobs and another 500,000 dealership jobs would have vanished overnight.

Conservatively – it doesn't attempt to measure jobs in steel and aluminum and paint, in trucking, and other sectors directly dependent upon the industry, much less local businesses that depend on such workers – this would mean 1 million jobs from the already depressed levels of Spring 2009. Of course losses by lenders to the industry would have amplified the "hits" to the banking sector coming from the mortgage sector and related derivatives.

Would Michigan be better off today? Let's assume that the above did not lead to a full-fledged recession on a national basis, and that we are seeing the tepid recovery of today (Feb 2012). Without GM and Chrysler, Toyota and Honda and BMW and Hyundai would be booming. Other than the Honda plants north of Columbus, however, none of these firms have plants within 3 hours of the metro Detroit area. In contrast, we would have seen virtually no jobs created in Michigan. And remember (well, none of us are that old…) that in the Great Depression the car companies didn't shut down – even if Ford and GM were employing fewer workers than in 1929. Unemployment in Michigan wouldn't just be percentage points higher than it is now, it would be higher than in the darkest days of the 1930s.

Back to Romney. That he thinks the State of Michigan would be better off without the so-called "bailout" is, well, inexcusable. His wealth suggests competence in the realms of high finance, of which bankruptcy is a piece. He knows enough of the auto industry to know that it is interconnected.

I wish he had the courage to stand by the truth. Instead he's turned his back on healthcare reforms that worked, and that the main part of Republican party supported not all that long ago. Yet attacking the ills of healthcare is one of two long-term issues facing our nation – our budget deficit can't be tackled without doing so, it is consequence not cause. He shows no boundaries on his willingness to pander. No, I take that back: he's not (yet?) renounced his Mormon heritage to become a Baptist.

• As in a standard bankruptcy, taxpayers and other large creditors took the equity stake when GM and Chrysler emerged from Chapter 11, rather than handing it to managers and bankers. Some apparently think we should have simply handed those shares to the banking system – apparently thinking they deserve additional lucre at our expense.

** Banks don't hold title, so they would be exercising a lien to take initial possession. The "repo" men hauling away cars wouldn't care.