CNBC Debate moderator John Harwood: “Governor Romney, I want to switch to the bailout drama that we’ve lived through in this country, and no state understands it better than the state of Michigan. I'm going to talk a little bit about your record on that. Four years ago when you were running for the Republican nomination and the auto industry was suffering, you said, where's Washington?
“After the election, when the Bush administration was considering financial assistance for the automakers, you said no, let Detroit go bankrupt. Now that the companies are profitable again after a bailout supported by your Republican governor here in Michigan, you said, well, actually, President Obama implemented my plan all along, or he gravitated to my plan. With a record like that of seeming to be on all sides of the issue, why should Republicans be confident in the steadiness of your economic leadership?”
Mitt Romney: “My view some years ago was that the federal government, by putting in place CAFE requirements that helped foreign automobiles gain market share in the U.S., was hurting Detroit. And so I said, where is Washington? They're not doing the job they ought to be doing.
“My view with regards to the bailout was that whether it was by President Bush or by President Obama, it was the wrong way to go. I said from the very beginning they should go through a managed bankruptcy process, a private bankruptcy process. We have capital markets and bankruptcy. It works in the U.S. The idea of billions of dollars being wasted initially -- then finally they adopted the managed bankruptcy. I was among others that said we ought to do that.
“And then after that, they gave the company to the UAW, they gave General Motors to the UAW, and they gave Chrysler to Fiat. My plan, we would have had a private sector bailout with the right private sector restructuring and bankruptcy with the private sector guiding the direction, as opposed to what we had with the government playing its heavy hand.”--Exchange during the CNBC Debate on Nov. 9, 2011
This exchange during Wednesday’s CNBC GOP debate encapsulated both a recurrent concern about the former Massachusetts governor—is he a flip flopper and on “all sides of the issue”—and the political problem he faces about appearing unconcerned about the fate of auto workers by urging “let Detroit go bankrupt.” If Romney becomes the GOP presidential nominee, we are sure to hear a lot about this as he and President Obama battle over Michigan’s 16 electoral votes.
Already, the Democratic National Committee, on its amusing Which Mitt? Web site, has a YouTube blast suggesting Romney flip-flopped on help for the auto industry, saying different things depending on whether he was in or out of Michigan:
So let’s examine whether Romney was consistent, whether Obama adopted his plan, and whether Romney is correct that the Obama administration “gave” GM to the United Auto Workers and Fiat to Chrysler.
We reviewed many of Romney’s remarks in early 2008, when he unsuccessfully battled Sen. John McCain of Arizona for the Republican nomination. McCain had said that the auto jobs “were never coming back” and Romney saw an opening, criticizing McCain for giving up on the auto industry. That’s the context for the quote that the DNC highlights in its ad: “I’m not willing to sit back and say, ‘Too bad for Michigan, too bad—too bad for the car industry, too bad for the people who’ve lost their job.’”
Indeed, Romney expanded on this theme in a major speech before the Detroit Economic Club. As he said during Wednesday’s debate, he criticized Washington for dropping “yet another anvil on Michigan” with higher fuel mileage requirements. He said that if he became president, he would “personally bring together industry, labor, Congressional and state leaders and together we will develop a plan to rebuild America's automotive leadership.”
Romney added: “I am not open to a bailout, but I am open to a work out. Washington should not be a benefactor, but it can and must be a partner.” Romney repeated that line in several television interviews at the time.
Fast forward to the economic crisis later in the year. In an opinion article for The New York Times, under the striking headline “Let Detroit Go Bankrupt,” Romney argued that if the automakers “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.”
It is also important to note that although “bankrupt” often conjures up images of liquidation, Romney called for a “managed bankruptcy.” This is a process in which the company uses the bankruptcy code to discharge its debts, but emerges from the process a leaner, less leveraged company. But you can bet that “bankrupt” headline will be featured in many anti-Romney campaign ads, as it is highlighted in the DNC video.
When auto executives first sought government assistance at the end of 2008, they argued a bankruptcy filing would be detrimental to their business.
Ultimately, along with getting nearly $80 billion in loans and other assistance from the Bush and Obama administrations, GM and Chrysler did go through a managed bankruptcy. Romney has tried to argue that Obama eventually adopted his position on managed bankruptcy, but that’s a bit of a stretch. Many independent analysts have concluded that taking the approach recommended by Romney would not have worked in 2008, simply because the credit markets were so frozen that a bankruptcy was not a viable option.
Here’s how the bipartisan Congressional Oversight Panel, in a unanimous finding, framed the issue in a January 2011 report:
Typically, when a firm reaches a financial crisis as severe as the ones facing GM and Chrysler in the fall of 2008, the firm files for bankruptcy in federal court. This invokes a process where there are two possible courses of action: either the firm is salvaged but reorganized using interim debtor in possession (DIP) financing, or the firm is liquidated. But the circumstances in the global credit markets in November and December 2008 were unlike any the financial markets had seen in decades. U.S. domestic credit markets were frozen in the wake of the Lehman bankruptcy, and international sources of funding were extremely limited.
Facing the prospect of the collapse of GM and Chrysler, and with the option of a privately financed DIP bankruptcy proceeding foreclosed because of the extraordinary conditions in the credit markets, President George W. Bush on December 19, 2008 announced a government-funded rescue package for the automotive industry--the Automotive Industry Financing Program (AIFP). The rescue package broadened the allocation of TARP assistance to the domestic automotive industry.
Similarly, a review by Ann Arbor-based Center for Automotive Research in 2010 concluded that “providing government assistance to General Motors and Chrysler through quick and structured bankruptcy proceedings avoided the worst case scenario.”
(Of course, there is not unanimous praise for the bailouts. For a critique of CAR’s research and the “hard lessons” of the bailouts, read this Cato Institute report.)
Romney spokesman Eric Fehrnstrom said that Romney has not changed his mind about the best course that should have been taken. “Gov. Romney believes the bailout-approach was the wrong course to follow. He supported a private sector restructuring under the protection of the bankruptcy laws,” he said.
Regarding Romney’s claim during the debate that Obama gave GM to the UAW and Chrysler to Fiat, this is a stretch.
A trust known as the Voluntary Employee Beneficiary Association, which was created to take on UAW retiree medical obligations, now owns about 10 percent of General Motors (it was higher before GM went public). The trust is managed by a three-member investment committee that includes one UAW representative.
The U.S. government still owns about 26 percent of GM, so it is odd to say the UAW, with its 10 percent stake via the trust, “owns” GM. As for Fiat, it first took a 20 percent stake and has over time built up its ownership of the company to 53.3 percent, including buying the U.S. government share. The rest of the company is owned by the UAW trust.
Romney is not the only person who has mischaracterized these bailouts. We have also taken President Obama to task for some of his language on the issue.
The Pinocchio Test
Romney is correct when he says he has been consistent on the question of bailouts for the auto industry, but he pushes the envelope when he suggests the Obama administration, after wasting billions, ultimately reached the same conclusion. By most accounts, Romney’s approach would not have been viable in the depths of the economic crisis. And certainly Romney’s prediction that a bailout would lead to the auto industry’s certain demise was wildly incorrect.
On Chrysler and GM, Romney greatly oversimplified what happened to those companies as they emerged from bankruptcy and went back (largely) into private hands. That by itself might be a Three Pinocchio claim, but overall, Romney emerges with two.
Check out our candidate Pinocchio Tracker