Mitt, Not Barack, Was Right About the Auto Bailout

You may have noted that a big part of President Obama’s bid for re-election hinges on Joe Biden’s gleeful statement that “Bin Laden is dead and GM is alive.” That’s a convenient sound bite. Bin Laden is in fact dead, and while President Obama deserves some credit for giving the order to proceed (not without some controversy regarding taking more credit than is his due), as for GM, Mitt Romney’s prediction in his New York Times op ed piece, often vilified by the Obama administration, seems strangely prescient today:

If General Motors, Ford and Chrysler get the bailout that their chief executives asked for yesterday, you can kiss the American automotive industry goodbye. It won’t go overnight, but its demise will be virtually guaranteed. Without that bailout, Detroit will need to drastically restructure itself. With it, 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.

While Mitt may have been falsely attributed the headline “Let Detroit Go Bankrupt” as a result of this op ed (the title was actually written by the New York Times staff), under Obama two of the big three did in fact go bankrupt, and GM may in fact go bankrupt twice. And Mitt’s predictions of GM’s lack of competitiveness are unfortunately being proven out by the market. GM’s stock price is falling, its products uncompetitive and its costs still too high. Who was right? It’s becoming obvious that Mitt was all along.

Even the Washington Post admits that the bailout is not an “unmitigated success.”

At the Democratic National Convention, the Obama campaign has celebrated the rebirth of the American auto industry — pointing out, as Vice President Joe Biden has done, that “Bin Laden is dead and General Motors is alive.”

What Democrats don’t mention is that bailing out the car industry initially cost $80 billion, or roughly $30,000 per automotive worker. Despite the sector’s resurgence, taxpayers are still owed $25 billion from GM and its former financing firm.

For those of you who keep track of your spare change and actually have to balance a budget to make ends meet, that’s $105 billion taxpayer dollars and counting.

RealClearMarkets put it this way:

The administration claims to have saved the U.S. auto industry. What it really saved was the industry’s dominant union - and it weakened capitalism in the process. Michigan is one of those light-blue states where Mitt Romney just may have a chance on Nov. 6. Don’t be surprised, then, if Barack Obama’s re-election campaign carpet-bombs it with ads noting that Romney once said the auto industry should go bankrupt, and that the Obama administration found a better way.

In fact, two of the Big Three automakers did go into bankruptcy under Obama. But it was a bankruptcy like no other before and, we hope, no other to come.

What Does “Bankruptcy” Really Mean?

The root of the Democrats’ glee in repeating their misleading sound bite is that many people don’t know what “bankruptcy” means. A bankruptcy is often not a complete shut down of a company. Many, if not most, times it’s a process in which creditors agree to forgive some or all of a company’s debt in exchange for a restructuring of the company’s obligations, making the company more competitive and able to service debt in the future. Creditors agree because in the absence of a new deal they may be repaid very little of their investment. According to Investopedia: “Upon the successful completion of bankruptcy proceedings, the debtor is relieved of the debt obligations incurred prior to filing for bankruptcy,” making the resulting company stronger, saddled with much less debt and much more able to compete.

But unfortunately that’s not what happened in the GM bailout.

Mitt’s Plan

Governor Romney’s plan was as follows (paraphrasing):

1. Use a managed process (not a complete shut down of the auto industry) to unburden the car companies from their crippling debt, including the United Auto Workers contracts, which made them uncompetitive vis a vis foreign manufacturers. Does the following sound like an admonition to flush the auto industry?

First, their huge disadvantage in costs relative to foreign brands must be eliminated. That means new labor agreements to align pay and benefits to match those of workers at competitors like BMW, Honda, Nissan and Toyota. Furthermore, retiree benefits must be reduced so that the total burden per auto for domestic makers is not higher than that of foreign producers.

That extra burden is estimated to be more than $2,000 per car. Think what that means: Ford, for example, needs to cut $2,000 worth of features and quality out of its Taurus to compete with Toyota’s Avalon. Of course the Avalon feels like a better product — it has $2,000 more put into it. Considering this disadvantage, Detroit has done a remarkable job of designing and engineering its cars. But if this cost penalty persists, any bailout will only delay the inevitable.

That’s not a recommendation to stop supporting the industry, it’s a recommendation to preserve it long term. He continued:

The American auto industry is vital to our national interest as an employer and as a hub for manufacturing. 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. …

In a managed bankruptcy, the federal government would propel newly competitive and viable automakers, rather than seal their fate with a bailout check.

2. Recruit new management to replace those that failed. Note Mitt is talking about firing management, not the workers. In fact Mitt said:

The new management must work with labor leaders to see that the enmity between labor and management comes to an end. This division is a holdover from the early years of the last century, when unions brought workers job security and better wages and benefits. But as Walter Reuther, the former head of the United Automobile Workers, said to my father, “Getting more and more pay for less and less work is a dead-end street.”

In other words it’s in everyone’s interest to cooperate. He says specifically that part of this new era of cooperation would be through reducing executive pay and perks. Sound like a spoiled rich guy only looking out for his country club buddies? Not at all. He’s talking about shared sacrifice.

3. Invest for the long term in new technologies and innovation.

4. Don’t fire the dealers, who are effectively the sales force. If you want to sell more stuff, you need to have sales people.

5. The government should research new, more fuel efficient options, not give Detroit a blank check.

Obama’s Plan

Obama had a different, more expensive plan that involved protecting one of GM’s biggest creditors from the usual debt forgiveness process. It was one of Obama’s biggest constituencies, the auto unions and their pensions. What’s not as well known is that the Obama administration strong-armed participants in the bankruptcy process, skirting the usual legal means and calling into question the legality of the entire process.

RealClearMarkets stated:

The government’s tweaking of bankruptcy and tax rules freed GM from the usual limits on carrying pre-bankruptcy losses forward. Curt Levey, executive director of the conservative legal group Committee for Justice, estimates that this special tax break adds $18 billion to the cost of the GM deal.

Also, the bailouts would have cost much less if not for the favored treatment given to the United Auto Workers. According to analysis by the Heritage Foundation’s James Sherk and George Mason University law professor Todd Zywicky, the UAW giveaways were worth about $26 billion.

Most of this sum came in payouts - stock and notes - to settle debts owed by GM and Chrysler to a union’s Voluntary Employee Beneficiary Association, an entity set up to cover retiree health care costs. VEBA fared much better than other unsecured creditors and even those (at Chrysler) with asset-backed debt.

The administration also added to taxpayers’ costs by refusing to push for significant changes in compensation to current UAW employees.

Bankruptcy law gives firms the right to renegotiate union contracts. Sherk and Zywicky argue that the failure to trim GM’s labor costs to something like market levels has depressed profit and taken (by their estimate) $4 billion off the company’s stock value.

All in, that’s $48 billion of the $105 billion incurred unnecessarily under the Obama plan. And the end result of avoiding the usual legal process? A less competitive General Motors.

The National Review’s Blistering Critique

The National Review yesterday tore into Obama’s auto bailout. It noted that the auto bailout was an odd duck from the beginning, and so it’s an especially unusual corner piece to a re-election campaign. The bailouts were unpopular at the time they were implemented, and even those in favor of them were wary of their “moral hazard” (incentive for other industries to take similar risks, knowing the government would bail them out, too). The auto industry was also allocated funds under TARP, which was created to solve the problems related to the bursting of the real estate bubble, not auto manufacturers’ lack of competitiveness.

Interestingly, the National Review points out that it was not even President Obama, but President Bush that first initiated the auto bailout. So if a president deserves credit, it does not all belong to Obama. President Obama’s distinguishing addition was the end run around the standard bankruptcy process in order to serve one of his primary constituencies, the UAW:

Admirers of the GM bailout should bear in mind that it was the Bush administration that first decided to intervene at the firm, offering a bridge loan on the condition that it draw up a deeply revised business plan. President Obama’s unique contribution was effectively to nationalize the company, seeing to it that the federal government violated normal bankruptcy processes and legal precedent to protect the defective element at the heart of GM’s troubles: the financial interests of the UAW. It did this by strong-arming GM’s bondholders into taking haircuts in order to sweeten the pot for the UAW. The Obama administration also creatively construed tax law to relieve GM of tens of billions of dollars in obligations — at the same time that Barack Obama & Co. were caterwauling about the supposed lack of patriotism of firms that used legal means rather than political favoritism to reduce their tax bills.

Unfortunately, while the purpose of the usual bankruptcy process is to free the company from the bonds of its debts to make it more competitive, President Obama’s questionable tactics, like the attempts of a tragic Greek hero to avoid fate, nearly ensured GM would remain uncompetitive. The National Review, on the other hand, said Mitt had it right:

Mitt Romney’s proposal for a structured bankruptcy would have necessitated considerable federal involvement, too, but with a key difference: The UAW contracts would have been renegotiated, and GM’s executive suites would have been cleaned out, placing the company on a path toward innovation and self-sufficiency rather than permanent life support. Which is to say, Obama did for GM what he is doing by un-reforming welfare: creating a dependent constituency.

So if you’re keeping score at home, Mitt’s proposal would have saved tens of billions of dollars and helped ensure GM’s ongoing competitiveness.

But didn’t the administration’s actions save 1.5 million jobs? The National Review notes that to get to 1.5 million jobs one would have to assume that the entire auto industry, including suppliers and US jobs at auto manufacturers that were not bailed out, such as Ford, Honda and Toyota, would have been lost. That would never have happened.

In fact, it is unlikely that even GM or Chrysler would have stopped production during bankruptcy: The assembly lines would have continued rolling, interest and debt payments would have been cut, and — here’s the problem — union contracts would have been renegotiated. Far from having saved 1.5 million jobs, it is not clear that the GM bailout saved any — only that it preserved the UAW’s unsustainable arrangement.

The National Review also took time to hammer the inaccuracy of President Clinton’s claims that 250,000 jobs have been added to the US auto industry since the bailouts. While GM was the principal US recipient of bailout money, of the approximately 240,000 jobs regained in the auto industry, “almost none are at GM, which has added only about 4,500 workers, a number not even close to offsetting the 63,000 workers that its dealerships had to let go when the terms of the bailout unilaterally shut them down.” Under this analysis, the cost per GM job created (ignoring the lost dealership jobs) is $23 million.

Meanwhile, the Vice President insists GM is alive. Well, it’s not dead, but it’s not doing very well, either. Choosing to take President Obama’s path may require that the US taxpayers not only “let Detroit go bankrupt,” but that it do so twice. National Review states:

At their convention, Democrats swore that GM is “thriving,” but the market doesn’t think so: GM shares have lost half their value since January 2011. And while the passing of the Great Recession has meant growing sales for all automakers, GM is seriously lagging behind its competitors: Its sales are up 10 percent, a fraction of the increases at Kia, Toyota, Volkswagen, and Porsche. With its sales weak, its share price crashing, and its business model still a mess, some analysts already are predicting that GM will return to bankruptcy — but not until after the election.

Mitt Romney’s plan was a managed process in which the debts of GM and Chrysler would have been dismissed, permitting each to be more competitive than ever. Today, GM’s success is still in considerable doubt, and GM has been propped up at enormous taxpayer expense. And as GM’s stock decreases in value, the US taxpayer investment increases.

National Review states:

As much as it will pain the hardworking men and women of GM to hear it, it is not worthwhile to save jobs at enterprises that cannot compete on their own merits. So long as the federal government is massively subsidizing the operation, a job at GM is a welfare program with a fairly robust work requirement. (And we all know how the Obama administration feels about work requirements.)

Mitt famously said in his op ed that if the first bail out was pursued you could kiss the American auto industry goodbye. Of the big three, it’s hard to argue that Chrysler is still a US auto manufacturer. Ford still is and is healthier today because it didn’t need the bailout. And as for GM? National Review concludes:

…bankrupt is what GM was, and bankrupt is what GM is, a fact that will become blisteringly apparent should the government ever attempt to sell off the shares it owns in the company.

The GM bailout was a bad deal for GM’s creditors, for U.S. taxpayers, and, in the long run, for the U.S. automobile industry and our overall national competitiveness. No wonder the Democrats are campaigning on a fictionalized account of it.

Paul’s Conclusion

I find it interesting that the entirety of Obama’s 2008 campaign against Hillary Clinton was that somehow he had the foresight to vote against the Iraq war when she did not. If we’re going to vote for those with the foresight enough to be right when others around them are wrong, what does this experience suggest? It’s more complicated than a sound bite, but the evidence says that, not surprisingly, it is Mitt that deserves our trust. Let’s let Mitt take over where Obama has failed at a cost of over a hundred billion of US taxpayer dollars. If you live in Michigan, Ohio or Wisconsin, it would seem clearly in your best interest to do so, as Mitt’s the one who clearly understands how to truly save the US auto industry.

Paul Johnson

Paul Johnson is an attorney for venture capitalists and their portfolio companies by day, husband and father of three teenage boys by night. He’s an avid supporter of Mitt Romney for president and, as a graduate of Brigham Young University, a BYU football and basketball fan. Paul also enjoys competing in triathlons. Because he’s in the “Clydesdale” (over 200 lb.) class, he has even had podium finishes from time to time. Paul also has the distinction of being a big enough U2 fan to be willing to travel to Dublin to see them in their native environment.

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About Paul Johnson

Paul Johnson is an attorney for venture capitalists and their portfolio companies by day, husband and father of three teenage boys by night. He's an avid supporter of Mitt Romney for president and, as a graduate of Brigham Young University, a BYU football and basketball fan. Paul also enjoys competing in triathlons. Because he's in the "Clydesdale" (over 200 lb.) class, he has even had podium finishes from time to time. Paul also has the distinction of being a big enough U2 fan to be willing to travel to Dublin to see them in their native environment.
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6 Responses to Mitt, Not Barack, Was Right About the Auto Bailout

  1. kath says:

    Romney was all about saving the American auto industry in his op-ed…. he made suggestions for the industry to re-structure and help itself, not just throw tons of tax-payer money at the problems. Key word is *American* auto industry.
    Ford re-structured, Chrysler is now foreign controlled, and anything can happen at GM still.

  2. kath says:

    What used to be Delphi, then Saginaw Steering Gear, now Nexsteer is now Chinese… but that’s ok, people are still punching in and out.
    A123 Battery Systems had a ton of federal and state of MI tax payer money sunk into it, now it’s gone to the Chinese.

  3. David says:

    Is it true that 79% of GM’s auto sales are to the government? Is that what’s keeping GM alive now? If that’s true, then GM’s just a walking zombie. Someone should be able to verify that in GM’s SEC 10Q.

  4. Annette S says:

    Paul..Thank you for the very comprehensive study of both the Romney and Obama auto bailout plans!

    I am sure Romney will point out in the upcoming debates that Obama spent 30 billion needlessly in the GM bailout before going through bankruptcy procedures. I am anxious to see Obama try to defend his actions to Romney. Obama was more interested in taking care of his friends such as the UAW and stepping all over the bondholders in the process.

    Romney has the ability to restructure in order to create a stable prosperous environment for our auto companies. Why should we have someone who has disdain for the free market sitting at the helm of these projects. It’s bad for our Country. Obama is bad for our Country.


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