The New Romney on GM

...loan guarantees would have given all the gains to Wall Street...

David and I blogged in 2009 and then many times since on the so-called auto bailouts. (Since when is bankruptcy a bailout? -- there were no winners, all lost something.) From the start we noted that the vertical structure of the industry -- suppliers, assemblers, dealers -- was central, because GM's failure would have taken them all down. This is not a trivial issue: suppliers employ between 2 and 3 people for every "automotive" worker, and dealerships employ fully as many as all of manufacturing. In 2009 all were teetering on the edge of bankruptcy. Without normal financial markets that would have meant Chapter 7 dissolution, not Chapter 11 restructuring. And let's not forget that the whole industry is woven together in a complex pattern. Most cars are sold today by dealership groups; your GM dealer is also a Toyota dealer. In the strained market of 2008-9, the failure of one would have led banks to foreclose on the other in a rush for repayment. And the supplier to GM is also a supplier to Toyota and to BMW. They would have no more been able than GM to make cars -- or even get repair parts to keep the service bays of their dealers generating revenue. Even in the Great Depression of the 1930s there was never a complete collapse.

Mitt Romney's father may have once been the CEO of American Motors [for those without long memories, the Jeep portion of the old AMC continues to mint money, and to keep Toledo Ohio afloat], but that doesn't mean the son inherited a deep knowledge of the industry. Mitt is ignorant of (or chooses to ignore) this complex structure,
and to pretend that financial markets could have raised tens of billions of dollars in 2009. I'm sorry, at the time banks were cutting their loan portfolios, and investment banks were worried they might be the next Lehman, and had no ability to employ their tricks to issue debt on that scale.

Romney's current stand however is that we should have guaranteed loans. Never mind that banks were cutting their lending, David and I have beaten that dead horse several times. But let's stop and think about the winners and losers under guarantees. If things didn't go well, we the taxpayers would be out a lot of money (but Wall Street would have collected a few tens of millions in fees, and collected interest on top of that). If things did go well, Wall Street would reap all the gains. After 7 years on the campaign trail, Romney is still unable to put himself in the shoes of the American public.

For all his defects, Hank Paulson and crew (among whom we should count Steve Rattner) worked on behalf of the Amerian taxpayer. They structured deals, from AIG to GM, to see that we would share in the upside. At last reckoning, GM's share price is still too low to put us in the black, but on many of the other deals we're in the money, indeed we're making out like bandits, Wall Street style. As a result, by insisting on an equity stake (and on tacking high interest rates on the loans we made, something that gets overlooked), we may not break even in the aggregate. But we're pretty damn close.

If he's elected, maybe Romney will reorient to thinking on our behalf, and not that of his and his buddies. Over the past 7 years he's failed to make that case.

...mike smitka...

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GM and the Upcoming Presidential Election

by David Ruggles

Amid the political turmoil of election season the rescue of the domestic auto industry by the George W. Bush administration and the Obama Administration is certainly a political football. The President and the Democrats have to defend the fact that the “rescue” wasn’t done perfectly, although a debate rages over exactly what those imperfections might be and who is responsible for them. Many Republicans are sticking to their position that the domestic auto industry should have been allowed to liquidate and eventually reform, although that logic doesn’t play well in the key “swing states” Ohio and Michigan. Governor Romney was adamantly against the “bailout” saying “Let Detroit go Bankrupt” and declaring that “a bail out would insure their failure.” Of course, this is all confused by Romney’s attempt in the Republican debates to actually take credit for the rescue saying, “They took my advice.” (His campaign has repeatedly declined comment when asked to clarify their candidate’s position on the issue.)

It also seems to ignore the fact that in the case of liquidation, there would have obviously been a huge cost dropped on the various states for unemployment compensation, a ripple impact through the banking system, chaos in the supplier base, and a disruption of military procurement. The ultimate result could have been a true Depression. Most pragmatic politicians wouldn’t have taken the risk, despite rhetoric to the contrary.

Some of the criticism leveled at supporters of the auto manufacturer rescue is based on the fact that if GM stock were liquidated today, based on its current value which is down a third since its’ IPO date, the taxpayers would sustain a loss in the tens of billions of dollars, which is entirely true. Of course, no one has calculated the cost of NOT doing the rescue, a calculation which would have to be based on speculation and would be subject to considerable argument.

Another issue rarely heard has to do with the billions of dollars of pension liabilities that would have been dropped on the Pension Benefit Guarantee Corporation. While a close estimate of that financial burden is not available, a comparison is. When United Airlines dropped their pension liabilities on the PBGC about 8 years ago as a part of their Chapter 11 bankruptcy, the amount was $6.6 billion. While this is technically an insurance fund, the obligation for pension obligations abrogated by liquidating OEMs and suppliers in the case of an auto industry liquidation would have easily run into the tens of billions of dollars, rendering the fund insolvent. This would have either landed on the back of taxpayers or pension checks would have ceased for many retired Americans. The impact on the psyche of the country and on consumption in the economy can only be imagined.

In the meantime, President Obama and Governor Romney and their political parties have both been banned from GM properties until after the election. There will be no political grandstanding on bailed out automaker facilities! Imagine banning the person who represents one of your largest stockholders, without whom you would not exist.

The two automakers have also refused to furnish vehicles for the national political conventions. It’s a smart move for GM and Chrysler to stay away from politics when possible. After all, they want to sell vehicles to both Republicans and Democrats.

While things are somewhat different for Chrysler now that FIAT has bought out the Federal Government’s stake, are GM executives hedging their bets in case President Obama loses in November? While it hasn’t been talked about a lot, it has occurred to more than a few GM stockholders (myself included) what would happen if Romney is elected and immediately dumps all of the government’s stock in General Motors. This would certainly be devastating for the stock price, but what does Romney have to lose? He could claim to have relieved of GM of its Government Motors moniker, while hurting millions of private stockholders. He could blame the losses on the previous administration, and move on. If reelected, it is a given that President Obama would hold on to the GM stock, selling small amounts at a time to maintain the stock price, while hoping the improving economy would further bolster the value of the taxpayer’s stock.

It is also a given that President Obama’s role in the restructuring in the domestic auto industry gives him a serious advantage in the November election. It is hard to imagine Ohio and Michigan going Republican. And without those two states, the road to the White House becomes a near impossible journey. And if GM shareholders across the country get wind of Romney’s intent to dump the taxpayer’s GM stock at once, it could impact the way people vote in other closely contested states.

The Politics of the GM-Chrysler Bankruptcies

By David Ruggles

During the recent Republican debate held in Mitt Romney’s home state of Michigan, the presidential hopeful was asked about the “rescue” of General Motors and Chrysler. The premise of the moderator’s question was that since the automakers are now doing well, did Romney “regret his opposition to the rescue?” Romney answered, “The government finally followed my advice,” referencing his November 2008 op-ed in The New York Times entitled, “Let Detroit Go Bankrupt.” [Click to read the full article.]

Despite the inflammatory headline, Romney’s article was temperate and well-reasoned. Some readers might have assumed that the “bankruptcy” Romney recommended was a Chapter 7 liquidation, but that was not the case. The piece was written in the context of events of the day, in particular the Detroit Three CEOs appearing before Congress to request a “bailout.” The initial request was for $25 billion in loans or loan guarantees. That appeal later grew to $35 billion, while the total investment necessary to do the job, which has largely been repaid or secured with stock, ballooned to $81 billion.

In his op-ed, Romney stated that it would be better if the two companies in question, GM and Chrysler, were allowed to go through a “managed, pre-structured bankruptcy to allow them to restructure themselves.” Without such a restructuring, but with a “bailout,” Romney argued, the companies would continue on their current unsustainable path and would ultimately have to liquidate. “But don’t ask Washington to give shareholders and bondholders a free pass — they bet on management and they lost,” Romney said in his piece.

Reached by telephone for this column, Steve Rattner, former chief of the Automotive Task Force, called Romney’s 2008 piece “prescient.” He praises Romney’s op-ed as “95% correct.” According to Rattner, the “Romney plan” was followed almost to the letter. The exception: there was “no debtor-in-possession financing available through private lenders, requiring the U.S. Treasury to fill that role,” he said. (Remember the financial system meltdown of 2008-9 – see the note at the bottom.)

After the “government finally took my advice” comment, though, Romney should have left it there. The Democrats seem to be trying to mischaracterize Romney’s stated position in the New York Times article by applying “liquidation” bankruptcy to Romney’s headline, instead of the reorganization he clearly recommended in the body of the column.

Even more confusing is that Romney himself currently seems to be mischaracterizing his own original position. Bloomberg writes: "In Michigan after Wednesday's Republican candidate debate, Mitt Romney defended his opposition to the government bailout that saved jobs in the tens of thousands at GM and Chrysler. (Again, see the note.) According to Romney, instead of asking the government to intervene, the companies should have entered into private sector bankruptcies immediately.”

Never one to waste an opportunity, former Michigan Gov. Jennifer Granholm, a Democrat, said in an interview with Bloomberg that “Romney's view was ‘a knife in the back’ to his home state."

Rattner, too, is puzzled. “I can’t understand how Romney can go from being so out in front of the auto company reorganizations to disavowing his almost perfect original position. In fact, GM CEO Rick Wagoner stubbornly refused to consider Chapter 11 bankruptcy for GM and had to be removed for the reorganization to go forward.”

By the time Pres. Barack Obama was inaugurated, the Bush administration had already advanced $17.4 billion in “bridge loans” from the Troubled Asset Relief Program to the two ailing automakers. Congress had turned down a “bailout” package despite Vice Pres. Dick Cheney admonishing his fellow Republicans, “Do you want to be known as the party of Hoover forever?”

Perhaps Romney is criticizing the Bush administration for the “bridge loans,” but last anyone checked, George W. Bush is not running for President again.

What is clear is that the rescue of the auto industry will be a hot topic in the upcoming 2012 elections. The President and the Democrats will be taking credit for what so far seems to be a good move, despite flaws in the “rescue’s” execution. The Republicans seem determined to claim that the “rescue” was a “bailout” and shouldn’t have been done.

In Republican frontrunner Romney’s case, he seems to be having a difficult time making up his mind what he thinks. His camp did not respond to a request for clarification of his position in advance of this column.

David Ruggles has spent his career in every phase of the retail side of the auto business, new and used, sales and management, including consulting and training in both the U.S. & Japan. Ruggles has been a dealer for Mercedes-Benz, Chrysler, Dodge, GMC, Ford, Mazda, and Subaru, and has consulted for one of the world’s largest privately owned Toyota dealer groups located in Japan. He blogs at autosandeconomics.blogspot.com and writes regular columns for several publications.

Note: on this blog Ruggles and Smitka repeatedly examined this issue during 2008-9, arguing that, due to the interlinked nature of the supply chain, made visible in the aftershocks to the industry of the "3/11" Tohoku earthquake, the liquidation of GM would have forced suppliers and hence Toyota, Honda and the rest of manufacturing to close. Without inventory, dealers would have followed, while even repairs on existing vehicles would have become difficult because spare parts production would also have shut down. Remember, there was no private financing to handle normal Chapter 11 bankruptcy – the only alternative would have been immediate liquidation.