Ohio and the Auto Bailout
By Luigi Zingales
The presidential election seems to come down to Ohio and the vote in Ohio is likely to come down to one issue : the auto bailout. With one out of eight workers employed in the auto industry, it is hardly surprising that this is the most important issue in Ohio. And this issue seems to scream “Vote Obama”. With an unemployment of “only” 7%, Ohio is doing better than the US average and this is generally attributed to President Obama’s auto bailout. Doesn’t this prove that Obama’s industrial policy works? By contrast, Governor Romney is portrayed as the guy who would have let the industry die. After all in December 2008 Romney wrote an op ed in the New York Times titled “Let Detroit Go Bankrupt”. Isn’t this the ultimate proof that the auto industry would have done much worse had Romney been president?
Unfortunately, this view arises from a common misperception, i.e. that bankruptcy necessarily implies liquidation. This is not true in general, but it is particularly not true for large businesses in America. Chapter 11 of the U.S. bankruptcy code is specifically designed to help viable businesses survive a default. Most U.S. airlines went through bankruptcy and survived. Most importantly, GM and Chrysler did go through bankruptcy under President Obama’s plan and did survive. Thus, the difference is not that Romney would have let Detroit go bankrupt and Obama would not. Both would have and Obama did. So what was the difference in the plans?
Some people claim that Romney would have had a complete hands-off approach. During the extreme conditions of late 2008 that approach would have been completely self-defeating. Businesses survive in bankruptcy because they can raise new funds through debtor in possession financing, a special form of senior debt financing that needs to be authorized by the bankruptcy judge. But in late 2008 the few banks that could have extended such loans were already full of debtor in possession financing to GM’s supplier Delphi and would not have been able to double down in the same industry. Without any financing, the only option would have been liquidation.
Yet, this was not Romney’s plan. Romney was very clear in his article that the bankruptcy process should have been “managed” and the government should “provide guarantees for post-bankruptcy financing and assure car buyers that their warranties are not at risk.” Romney was also very explicit about the fact that management had to be changed, as eventually the Obama administration did. Thus, would Romney have managed Detroit as Obama did?
No. First of all, Romney’s article was written in November 2008 just before the Bush administration handed out $18 billion to GM and Chrysler (not to mention the $8 billion to GMAC) to kick the can down the road. Romney would have forced the two automakers in bankruptcy in December rather than May, saving not only the $26 billion wasted by the Bush administration, but also the extra $6 billion the Obama administration gave GM before it went into bankruptcy.
When finally both GM and Chrysler went to bankruptcy, Romney would have extended the same lines of credit the Obama administration did, but without pushing for a redistribution of value in bankruptcy, redistribution that favored the unions at the expense of the other more senior creditors.
Finally, Romney would have not forced GM to waste so much money in a useless electric car (the Chevy Volt) that found no clients. Thus, the fact that Obama saved a car industry that would have died otherwise is a myth. The reality is that Obama used taxpayers money to subsidize the unions.