President Obama and crony capitalism: Examining Mitt Romney’s claims

at 06:02 AM ET, 02/20/2012


(Gerald Herbert, AP)

“Before [GM and Chrysler] were allowed to enter and exit bankruptcy, the U.S. government swept in with an $85 billion sweetheart deal disguised as a rescue plan.”

— From a Mitt Romney op-ed in The Detroit News, Feb. 14, 2012

 

“I'd like to talk about something else that President Obama has been doing. He's been practicing crony capitalism. And if you want to get America going again you've got to stop the spread of crony capitalism. He gives General Motors to the UAW. He takes $500 million and sticks it into Solyndra.”

— Romney during debate in Charleston, S.C., Jan. 21, 2012

Mitt Romney has been driving home this “crony capitalism” message while stumping in the states with upcoming primaries, especially Michigan. He claims the president rewarded political allies with favors, specifically by throwing good money after bad with Solyndra and by protecting UAW interests in the auto bailout and restructuring processes.

 President Obama has said he will not walk away from the “promise of clean energy” just because some of the government’s investments flopped, and he touts the resurgence of America’s automakers as proof that his bailout and restructuring plan helped save the auto industry. Let’s take a detailed look to determine whether Romney’s claims have merit.

 

The Facts

Romney described “crony capitalism” during a Feb. 6 campaign rally as using taxpayer money “to take care of your friends or to have government bureaucrats decide how the economy ought to work.” So we will measure the Obama administration’s actions against those criteria.

Warning: this column is a bit long by Fact Checker standards, but it should serve as an up-to-date summary of how these issues evolved and where they stand today. We’ll update this analysis in the future if more information becomes available.

The Solyndra Controversy

We’ll start with Solyndra, a solar-panel manufacturer that received $535 million as part of the president’s $80 billion clean-energy initiative, which was part of the 2009 stimulus. Two reports from the Government Accountability Office raised concerns about the green-tech loan program, saying it didn’t protect taxpayers enough or have adequate guidelines for decision making. The Department of Energy determining which new companies would receive funds

A recent Washington Post article revealed that the DOE awarded $3.9 billion to a handful of companies backed by firms that had employed staffers and advisers from the Obama administration. None of those White House insiders made decisions about federal grants, but e-mails show that they informally advocated for some of the businesses. 

Some of the federally backed clean-energy ventures failed. One of the more troubling examples was the liquidation of Solyndra, a solar-panel manufacturer that received a $535 million federal grant. When the firm was foundering, the Energy Department restructured its loan, attracting $75 million in new private investments by promising to protect the private investors ahead of taxpayers if the company went bust.

The loan restructuring, to some extent, could fit Romney’s definition of crony capitalism because it represents bureaucratic interference with the free market. Private investors probably would have been less likely to risk money on a company showing no signs of life if they weren’t promised protection ahead of taxpayers.  

A House investigative panel subpoenaed the White House for internal communications after Solyndra closed down and the FBI executed a surprise search of the facilities based on suspicions that the company misled federal authorities about its finances.

The Obama administration released more than 186,000 pages of documents relating to Solyndra, but it hasn’t fully complied with the congressional subpoena. The House GOP has considered contempt charges over the matter, but White House officials say they’ve provided all relevant communications.    

A Washington Post analysis of released documents found that the clean-energy program was infused with politics at every level and that the administration remained steadfast in supporting the solar-panel maker despite clear warning signs of a potential collapse.  

E-mails reveal that the administration was deeply concerned about the political ramifications of Solyndra’s problems. For example, it appears that the Energy Department may have urged the company to delay necessary layoffs until after the 2010 midterm election, in which Democrats already faced grim prospects. One message among investors ended with: “No announcement till after elections at doe request.”

Energy Department staffers have also acknowledged strong pressure from administration officials to rush stimulus funding for clean-energy companies, according to the New York Times.  

One Post report noted that the Obama administration showed much concern about political fallout, but virtually none about the impacts that a Solyndra collapse would have on laid-off workers. Administration officials have tried to turn that notion on its head, insisting that the president’s unwillingness to cancel a May 2010 trip to the solar-panel company or replace senior Energy Department managers proves that he wasn’t concerned about political consequences. 

Obama’s critics have suggested the White House was doing favors for billionaire Democratic fundraiser George Kaiser, who raised between $50,000 and $100,000 for the president’s 2008 campaign.

Kaiser’s family foundation owned more than a third of Solyndra’s stock, but the oil magnate did not sit on the foundation’s board or own shares of the solar-panel company. However, a manager for the foundation’s investment fund sought Kaiser’s counsel and asked for “authority” to make a major move, suggesting he might have played an advisory role to some extent. (We’ll refer you back to this Post article).

Kaiser visited the White House 16 times, but his family’s foundation claims he never discussed the Solyndra loan, just green-energy policy in general.

Overall, the facts of the Solyndra matter represent a strong case for Romney’s claims of crony capitalism, but they don’t provide conclusive evidence.

The Obama administration, for its part, says there is no basis for the crony capitalism claims. “After 187,000 pages of documents, nine committee staff briefings, and five congressional hearings, Republicans’ allegations of political favoritism is as unfounded today as it was a year ago when they started this investigation,” said White House spokesman Eric Schultz.

The Auto Industry Restructuring

As for the auto-industry bailout and the restructuring process, we can summarize Romney’s take with this excerpt from his Detroit News op-ed:

“The outcome of the managed bankruptcy proceedings was dictated by the terms of the bailout. 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.”

This is an oversimplification, as The New Republic pointed out in a recent article.

What happened is that the unions agreed in 2007 to set up an independently-managed trust fund to take over the burden for retiree benefits, which were crippling the Detroit automakers. Chrysler and GM agreed to pay about 65 percent to 70 percent of what they’d promised toward those benefits before, but they didn’t have the cash to meet that obligation in 2009. Instead, they offered stock, which is how the union trust ended up with so many shares of the companies.

It’s worth noting that GM and Chrysler still haven’t paid off what they owe toward retiree pensions, a fact that has kept their stocks relatively low recently despite record profits.

The Center for Automotive Research reports that the union trust fund now owns 10.3 percent of GM’s shares, while the U.S. Treasury owns 32 percent, and public shareholders own 35.2 percent. Italian automaker Fiat owns 53.5 percent of Chrysler, while the union trust owns 41.5 percent.

That may seem like a takeover of sorts, but it could also ease future contract negotiations, since the union will have an interest in keeping wages and benefits realistic — their members’ pensions rely on it now.  

Romney had called for a structured bankruptcy of the auto companies, which essentially happened anyway during the government takeover. But the result was quite different from a normal Chapter 11, in which judges will often rule that corporations can default on pension obligations. That’s what happened with many of the airlines that filed for bankruptcy in recent years.

For what it’s worth, the federal government’s Pension Benefit Guarantee Corp. sometimes delivers a small percentage of the promised benefits after a company files for bankruptcy.

Former Obama administration “car czar” Steve Rattner pointed out in his book “Overhaul” (see page 231) that the UAW chief was totally unwilling to negotiate on pensions during the GM restructuring process. Romney obviously wouldn’t have allowed such a stance if he’d been president. Then again, he wouldn’t have implemented a government-led reorganization in the first place.

 

The Pinocchio Test

Obama has his work cut out for him trying to convince voters that his administration didn’t throw good money after bad, especially because internal documents suggest that the White House tried to make Solyndra look like a success despite clear signs of trouble. Still, Romney can’t assert as a matter of fact that the president practiced political favoritism in this case. He is better off saying there is “evidence” or “reason to believe” that crony capitalism occurred.

In terms of the “sweetheart deal” for the UAW, it’s fairly clear that the president gave precedence to the union and its blue collar members, who fared better than they would have been under Chapter 11. Meanwhile, scores of employees from the white-collar ranks are angry about cuts they had to accept. We won’t judge whether Obama’s stance was appropriate, but we can say that he came down on the side of the Democrat-friendly UAW.

Nonetheless, the auto bailouts have proven to be a success so far, and Romney has overstated whether his alternative approach would have been viable during an economic crisis, as we pointed out in a previous column. We’re also hard-pressed to think of a single president who hasn’t pandered to the traditional allies of his party — for Obama, this includes unions and environmentalists.

Overall, the former Massachusetts governor and Michigan native earns one Pinocchio, but mainly for accusing the president of crony capitalism in the matter of Solyndra. He doesn’t have definitive proof of Obama’s intentions, even if the evidence suggests continued grounds for suspicion.

One Pinocchio

(About our rating scale)

Check out our candidate Pinocchio Tracker

Follow The Fact Checker on Twitter and friend us on Facebook .

Track each presidential candidate's campaign ads .

 
Read what others are saying

    About the Blogger

    Glenn Kessler has covered foreign policy, economic policy, the White House, Congress, politics, airline safety and Wall Street.

    Fact Check This!

    Help us keep an eye on public figures by sending us statements to fact check in one of the following ways: