Feb. 28 (Bloomberg) -- Mitt Romney goes into Tuesday’s Republican primaries in Arizona and Michigan looking strong in the first and competitive in the second. Especially in Michigan, though, he had some explaining to do.
Wasn’t he wrong to oppose rescuing General Motors Co. and Chrysler Corp. with taxpayer money, interventions now widely seen as successes? If he gets the nomination, it’s a question President Barack Obama will put to him again and again.
Truth is, there’s less distance between Obama and Romney on this than either cares to admit. Obama praises the role played by the United Automobile Workers and celebrates that he went to great lengths to rescue an iconic American industry from profligate management. It was, he boasts, taxpayer money well spent, with nary a word about union demands for unaffordable pension and health-care benefits in exchange for labor peace. This preferred line papers over a lot of what caused Detroit’s descent.
Romney, on the other hand, cannot decide whether to attack the intervention as an improper use of public funds or praise it as a managed bankruptcy of the very kind he favored all along. Not the deftest of candidates, he does both.
The rescues, including the money spent by the outgoing President George W. Bush, came to $80 billion, about $17 billion of which taxpayers are unlikely to ever get back. The bankruptcies also forced big concessions on all stakeholders in return for government support. Essentially, this was the right outcome -- one that the companies’ managers and the UAW (Obama’s praise for its role notwithstanding) both resisted.
Bailout and Bankruptcy
Under the circumstances, the combination of bailout and bankruptcy was right. Bankruptcy without public money would have meant destruction rather than restructuring. If conditions in financial markets had been normal, new private creditors might have forced radical, desperately needed changes on GM and Chrysler as part of ordinary bankruptcy proceedings. In 2008 and 2009, this was not possible; private lenders were too distressed even to think about supporting auto companies on the necessary scale.
Either the government had to put money on the table or the companies would be liquidated -- not easy to contemplate in Chrysler’s case and all but inviting disaster in GM’s. Job losses on that scale would have hammered an economy already on its knees. Bush took this view, and so did Obama weeks after being sworn in. The crucial thing was forcing real change on Detroit -- and Obama’s team did so.
The concessions demanded of shareholders, management, creditors and the UAW were severe. Obama has chosen not to mention the role the union played in bringing the industry so low in the first place, and likes to portray the terms extracted from it as a kind of noble sacrifice.
Nobly or otherwise, the union gave up a lot of ground. Although the UAW got shares in both companies, this was in exchange for payments owed to workers’ health-care benefit funds. The union wanted cash, not shares, for those obligations. The bankruptcies shut down inefficient plants, forced out tens of thousands of workers and cut wages for new hires. Some treasured union work rules, including overtime payments after working less than 40 hours a week and the “jobs banks” that paid idled workers for doing nothing, are a thing of the past.
Both restructurings were extremely complex and unavoidably less than ideal. In the GM case, secured creditors were protected as they normally are in a bankruptcy, while junior bondholders did better than they should have. In the Chrysler deal, in contrast, secured creditors were trampled on in a manner that still rankles them (despite administration claims that they would have done even worse in liquidation). The union made concessions that would have seemed unthinkable not long before, but enormous pension obligations to union members were left in place -- a problem lying in wait for the companies.
All in all, if this was a union victory, it is one the UAW does not care to repeat. Confronting management in the time-honored way will be more difficult now that the union has a stake in the companies. It knows that members’ health-care benefits, paid for by the trusts that hold the shares, will suffer if the automakers’ finances do.
The unions’ unaffordable demands and the managers’ craven capitulation have been a large part of Detroit’s problems over the years. That dynamic may have changed because of these structured bankruptcies -- and if it has, time will judge the bailouts a success. Just don’t expect Romney to admit that the public money was well spent, or Obama to say that the unions helped make the mess that nearly brought down Big Auto.
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