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Thursday, February 16, 2012

Auto Bailout Redux and Mitt Romney

See the post on my parallel blog, US and Economics on Mitt Romney's puzzling statements on the government-led bankruptcy of GM and Chrysler. First, as I discuss there, Romney knows finance and so must know he's wrong. Second, and not discussed there, from my end it's not a bright strategy to take this stance in Michigan. After all, the UAW membership in my experience is strongly Republican in leaning -- it's the leadership who support the Democratics. So he's not exactly helping his cause, though I don't follow the ins and outs of campaign strategy and presume I am missing something.
Readers of this blog likely remember that it was Bush who bailed out the industry, with $17 billion or so in loans (the figure is from memory) with no strings attached except for providing a "plan". Obama would have none such, and let these firms file for bankruptcy. In the absence of a functioning financial market, the US government provided the DIP financing that is a normal and necessary part of Chapter 11, and took an equity stake when firms exited, again normal bankruptcy practice -- but the whole thing was extraordinarily well done, as large-scale bankruptcies normally take many years, not 90 days.
Now Rick Santorum is saying similar things -- see the following -- but we have no illusions that he knows anything about finance or economics. He seems to think that the normal "private market" Chapter 11 bankruptcy is quick, that recovery after one is prompt, and that in early 2009 private equity markets would have lent $50 billion to the industry. All three parts of this sort of claim are incorrect.
From Automotive News (link here):
GM and Chrysler would be "alive and equally as well, or better off, than they are now," Santorum told about 300 people at a Detroit Economic Club luncheon today. "The markets would have reacted to restructure it to be more competitive."
Mike Smitka