Fox News host Jon Scott claimed that the "organized bankruptcy" Mitt Romney proposed for General Motors was "essentially what happened" for the automaker. But experts agree that the strategy Romney proposed for GM and the other automakers would not have worked given the state of the financial markets at the time.
On the September 14 edition of Fox News' Happening Now, Scott and Real Clear Politics reporter Erin McPike were discussing Romney's lagging poll numbers in "swing states" like Ohio, a state that has been receptive to Vice President Joe Biden's claim that "General Motors is alive" because of the Obama administration. Scott said, "We've also heard Governor Romney talk about the fact that what he proposed for the auto industry was an organized bankruptcy, which is essentially what happened to General Motors."
Romney first articulated his support for a "managed bankruptcy" and opposition to bailouts in a November 2008 New York Times op-ed, headlined "Let Detroit Go Bankrupt." Romney later expressed his sentiment that the automakers needed to go through bankruptcy before receiving any government assistance. In June, he told The Detroit News:
I think (Democrats) will try to distort what I was saying. As you know from the very beginning, it was my view that the companies -- if they were in distress - needed to go through a managed bankruptcy to relieve themselves of their excess debt and other burdens. If they needed help coming out of bankruptcy and government support, that was fine but I was not in favor of the government writing billions of dollars of checks prior to them going into bankruptcy -- and by the way that posture was ultimately agreed upon by people in Washington -- because despite the fact that they resisted going into bankruptcy, they finally came around.
Most recently, Romney said on the September 9 edition of NBC's Meet the Press:
My view was General Motors should have gone into bankruptcy earlier. The president resisted that for six months. I said, "Let them go into bankruptcy. Help them come out. But let them go in." And I don't think most Americans know that GM went bankrupt. That they did go bankrupt. The president put them into bankruptcy. And he finally did what I also thought was the right thing to do, but I thought it from the very beginning.
Scott's claim echoes what other Fox personalities have said in support of Romney's vision for handling the auto industry's problems -- that GM and Chrysler would have successfully navigated a bankruptcy filing without a government bailout. But economists pointed out at the time that credit markets -- which were in the midst of a financial crisis -- would not have permitted GM and Chrysler to come out of bankruptcy with the private financing it needed to survive and be competitive.
Moody's chief economist Mark Zandi explained in 2008 that because of the "credit crunch" resulting from that year's financial meltdown, private bankruptcy financing was "all but impossible to get":
The U.S. auto industry desperately needs financial help, and the federal government should provide it. Without aid, the industry seems headed toward a quick liquidation, which would mean hundreds of thousands of layoffs at just the wrong time for the sliding U.S. economy.
Without government help, the Big Three will almost surely enter the kind of bankruptcy from which there is no exit. They could file for a Chapter 11 restructuring, but would most likely end up in a Chapter 7 liquidation. Their plants and other operations would be shut and their assets sold to pay creditors. Given the collapse in the financial system and resulting credit crunch, so-called "debtor in possession" or DIP financing would be all but impossible to get. Bankrupt firms need DIP financing to operate--to pay suppliers, finance inventories and meet payroll--while they restructure. It is risky for DIP creditors even in good times, but they do get first dibs on the bankrupt firms' assets and can earn high rates and fees. But in a credit crunch such as we are experiencing now, nothing will convince creditors to take the risk.
Nobel laureate and New York Times columnist Paul Krugman wrote shortly before Romney's op-ed was published: "If the economy as a whole were in reasonably good shape and the credit markets were functioning, Chapter 11 would be the way to go. Under current circumstances, however, a default by GM would probably mean loss of ability to pay suppliers, which would mean liquidation -- and that, in turn, would mean wiping out probably well over a million jobs at the worst possible moment."
Dean Baker, co-director of the Center for Economic and Policy Research, wrote in April 2009 that if automakers filed for bankruptcy at the time Romney wrote his op-ed, "it would have quickly led to a chain of bankruptcies by a whole set of parts suppliers, all of whom are owed large amounts of money by these two companies. It is virtually certain that these companies and their suppliers would be forced to shut down, because no one would have stepped forward to provide credit to operate through bankruptcy without a government guarantee." That would have also affected the supply chain of Ford, even though it did not request a government bailout.
Further, the billions the government lent to GM and Chrysler helped the companies move through the bankruptcy process "much faster than anyone thought was possible." From a May 8 CNN Money article:
But the billions of dollars from the federal bailout helped the bankruptcy process get done in about two months, much faster than anyone thought was possible, said Van Conway, CEO of Conway MacKenzie, a restructuring firm in Detroit.
And Conway said the idea of a managed bankruptcy was not unique at the time. "Romney might very well have had the idea, but it's not an idea no one else had on their own," Conway said.
Other supporters of the bailouts, and even some critics of them, say that Romney deserves no credit for the turnaround, given that he opposed the federal bailout that kept the companies alive during the bankruptcy process. Without that $81 billion in funding, the companies would have been forced to go out of business and liquidate, according to those experts.
"There was no way they could get financing," said Conway. "They were burning money so fast, with no end in site [sic], that no one but the government was going to give them money."
CNN Money also quoted Bob Lutz, vice chairman of GM at the time of the bankruptcy, criticizing Romney's view of the bailout: "He thinks we didn't try to borrow money from the banks" "The banks were even more broke than we were. Who had the money?"
Because there was so little private capital available in late 2008 and early 2009 due to the financial crisis, as experts have pointed out, it is unlikely that a bailout of the auto companies that didn't involve help from the federal government would have happened or succeeded. And that's why, contrary to Fox's Scott, what Romney proposed is not "essentially what happened" to GM and Chrysler.
Media Matters research interns Alessandra DiMonda and Brendan Karet contributed to this report.