Why The Right Is Wrong About Saving Detroit

An emerging myth being pushed by the right contends that federal spending to rescue GM and Chrysler was unnecessary, and that the companies instead should have gone through a “traditional” bankruptcy. In fact, economists at the time explained that frozen credit markets made private financing for a “traditional” bankruptcy impossible.

MYTH: GM And Chrysler Could Have Gone Through “Traditional” Bankruptcy

National Review's Rich Lowry: “Certainly GM Would Have Survived Just An Ordinary Bankruptcy Process.” National Review editor Rich Lowry claimed:

LOWRY: These companies, they needed to go bankrupt. They needed to go through that process. And they would have survived coming out on the other end without the taxpayer losing money on them. And they'd probably be even leaner and meaner than they are today. Certainly GM would have survived just an ordinary bankruptcy process. [Fox News, America Live, 2/7/12]

Fox's Eric Bolling: “GM And Chrysler Could Have Operated In Bankruptcy, Come Out, And Then We Wouldn't Have Spent Billions Of Dollars.” Fox News host Eric Bolling claimed:

BOLLING: Just like Continental Airlines operated in bankruptcy for 10 years, GM and Chrysler could have operated in bankruptcy, come out, and then we wouldn't have spent billions of dollars, and the investors, the bondholders and the stockholders, wouldn't have been destroyed in the market. [Fox News, The Five, 2/7/12]

Fox's Charles Payne: “We Bailed Them Out Instead Of Them Going Through A Traditional Bankruptcy.” Fox News contributor Charles Payne claimed:

PAYNE: In some ways, GM reminds me of America's own little version of Greece. They had a major problem, we bailed them out instead of them going through a traditional bankruptcy. And it would still, in my mind, probably be the same company but with private owners. [Fox News, Your World with Neil Cavuto, 2/15/12]

FACT: Economic Experts At The Time Said Private Financing For Auto Bankruptcies Was Impossible

Moody's Chief Economist Mark Zandi: Because Of “Credit Crunch,” Private Bankruptcy Financing “Would Be All But Impossible To Get.” In 2008, Moody's economist Mark Zandi explained why the federal government needed to provide financial help to prevent liquidation of U.S. automakers:

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. [Moody's Analytics, 11/21/08]

Paul Krugman: Chapter 11 “Would Mean Wiping Out Probably Well Over A Million Jobs.” In 2008, Nobel laureate and New York Times columnist Paul Krugman wrote:

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. [New York Times, 11/16/08]

Dean Baker: “No One Would Have Stepped Forward To Provide Credit To Operate Through Bankruptcy Without A Government Guarantee.” Dean Baker, co-director of the Center for Economic and Policy Research, wrote:

Had General Motors and Chrysler been allowed to go into bankruptcy last fall, 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. Because Ford shares many of these suppliers with GM and Chrysler, the disruption to the supply chain almost certainly would have been enough to push Ford over the line as well.

This would have meant almost a complete shutdown of the auto industry in the states of Michigan, Indiana and Ohio. In these states, the auto industry and its suppliers account for close to 6% of total employment. Imagine if the country suddenly lost 8.4 million jobs (more than twice the actual job loss over the last five months). Such is the impact these three states would face were the Big Three to cascade into bankruptcy. [Center for Economic and Policy Research, 4/3/09]

Jonathan Cohn: “The Same Wall Street Meltdown That Has Dragged Down The Economy And GM Sales Has Also Dried Up The ... Money GM Would Need To Operate.” Jonathan Cohn, senior editor at The New Republic, reported:

One reason for the casual support for letting GM fail is the assumption that bankruptcy would be no big deal: As USA Today editorialized recently, “Bankruptcy need not mean that the company disappears.” But, while it's worked out that way for the airlines, among others, it's unlikely a GM business failure would play out in the same fashion. In order to seek so-called Chapter 11 status, a distressed company must find some way to operate while the bankruptcy court keeps creditors at bay. But GM can't build cars without parts, and it can't get parts without credit. Chapter 11 companies typically get that sort of credit from something called Debtor-in-Possession (DIP) loans. But the same Wall Street meltdown that has dragged down the economy and GM sales has also dried up the DIP money GM would need to operate.

That's why many analysts and scholars believe GM would likely end up in Chapter 7 bankruptcy, which would entail total liquidation. The company would close its doors, immediately throwing more than 100,000 people out of work. And, according to experts, the damage would spread quickly. Automobile parts suppliers in the United States rely disproportionately on GM's business to stay afloat. If GM shut down, many if not all of the suppliers would soon follow. Without parts, Chrysler, Ford, and eventually foreign-owned factories in the United States would have to cease operations. From Toledo to Tuscaloosa, the nation's assembly lines could go silent, sending a chill through their local economies as the idled workers stopped spending money. [The New Republic, 12/3/08]

Looking Back, Experts Agree That Private Financing Was Unavailable For A “Traditional” Bankruptcy

Center For Automotive Research Chief Economist: “Private Bankruptcy For Automakers Would Not Have Been Possible ... Because Credit Markets Were Frozen.” Reuters reported that supporters of GOP presidential candidate Mitt Romney “point out that airlines and other large businesses have been able to reorganize in bankruptcy without government help.” Reuters continued:

“There were two ways to do it - either use crony capitalism, where government picks the winners and losers, or you go through the traditional reorganization process,” said Saul Anuzis, a Romney supporter and former head of the Michigan Republican Party.

Sean McAlinden, chief economist at the Center for Automotive Research, or CAR, said there was one problem with that argument: a private bankruptcy for automakers would not have been possible during the 2008-2009 financial crisis because credit markets were frozen and GM and Chrysler were unable to get private financing to keep operating through bankruptcy.

Without federal help, the companies could have been forced to shut down, which would have devastated parts suppliers and threatened solvent carmakers such as Ford and Toyota, McAlinden said.

The intervention saved 1.3 million jobs in 2009, CAR estimates.

“It was the most successful peacetime industrial intervention in U.S. history,” McAlinden said. [Reuters, 2/10/12]

The Economist: “The Credit Markets Were Bone-Dry, Making The Privately Financed Bankruptcy ... Improbable.” Robert McShane, The Economist online U.S. editor, wrote:

Following the bail-outs, the president eventually forced Chrysler and GM into bankruptcy, a step Mr Romney thought should occur naturally. And the government oversaw painful restructurings at both companies, which were largely in line with Mr Romney's broad suggestions. But the course Mr Romney recommended in 2008 began with the government stepping back, and it is unlikely things would've turned out so well had this happened.

Free-marketeers that we are, The Economist agreed with Mr Romney at the time. But we later apologised for that position. “Had the government not stepped in, GM might have restructured under normal bankruptcy procedures, without putting public money at risk”, we said. But “given the panic that gripped private purse-strings...it is more likely that GM would have been liquidated, sending a cascade of destruction through the supply chain on which its rivals, too, depended.” Even Ford, which avoided bankruptcy, feared the industry would collapse if GM went down. At the time that seemed like a real possibility. The credit markets were bone-dry, making the privately financed bankruptcy that Mr Romney favoured improbable. He conveniently ignores this bit of history in claiming to have been right all along. [The Economist, 2/14/12]