GM Obama and Romney
I am going to try to explain the fundamental difference between federal investment GM and federal loan guarantees. This is politically important, because the Obama administration invested in GM by buying shares of new GM*. Romney denounced this and said that the Federal government should guarantee private sector loans rather than invest directly. The argument made by everyone who was actually involved in the bailout is that Romney’s proposal is nonsense, because there were no private sector entities capable of making loans of the necessary scale at the time.
I think there is a way to explain this argument to the person in the street (most of whom fortunately are just not buying Romney’s line so why worry). Let’s consider a specific private entity. For example Robert Waldmann. Would Mitt Romney argue that the solution is for the US gov to guarantee loans and then for me Robert Waldmann to loan tens of billions to GM ? It wouldn’t work. I don’t have tens of billions on hand. No one would loan Robert Waldmann tens of billions to loan to GM. That would be risky, because the US Gov guarantees payment to me but not payment by me.
So the straw^10 Romney argument that the US government shouldn’t have sent money but rather guarantee loans from me, Robert Waldmann, is silly. So is the actual Romney argument. The loans to be guaranteed would have been made by large money center banks. In 2009, all of them were just like me in the sense that no sane person trusted us with billions. They didn’t have the cash on hand (normal) and couldn’t raise it (not at all normal) because their solvency was questionable. They couldn’t borrow long term from each other. The banks themselves borrowed from the Federal Government. In particular they borrowed from the Federal Reserve System, something which is always an option for US commercial banks and bank holding companies (that is after the crisis for all US banks) but something they normally don’t do.
They could borrow from each other short term paying a high risk premium. They couldn’t borrow money and tie it up for years without paying a gigantic risk premium to their creditors which they would have had to pass on to new GM which would not have been viable.
If Romney really believes what he is saying, he demonstrates that he doesn’t understand finance at all. Of course he does and he’s lying. He knows that Obama did the risky but wise thing and he bet on failure and lost.
update: Josh Marshall wrote this better here
Yes, both Obama and Romney favored the companies going through managed bankruptcy. But the US auto industry entered its own existential crisis as the world economy, particularly credit markets, were at a standstill. Even with government guarantees there was no private capital for the GM and Chrysler to power to keep them functioning as they went through the bankruptcy process. And that was the rub. Government guarantees weren’t enough. The government had to write checks and at a moment when bailouts of all sorts had become politically toxic.
The Obama/Rattner version of bankruptcy was a “pre-pack,” prepackaged which is to say rigged in favor of some parties against others.
This saved the companies short-term, yes.
STR: Most corporate bankruptcies I have read about have winners and losers. How is this version different and why?
Chapter 11 sometimes seems like just a contrivance set up to allow businesses to pile up a lot of problems and transfer them to a set of rather weak losers leaving the bounty to the business and the business’ high wheeling friends.
Robert, Sorry if this is too off topic but there is something I don’t understand.
Was Romney hoping to do a corporate raid on the auto manufacturer? So, Bain presumably had a model that included taking out loans in the name of the company, transferring some of the money to private pockets and then letting the company try to survive or go bankrupt, defaulting the loans. (If this picture is wrong, tell me because it’s the one I have.) So, if this is the model, then Romney’s problem would seem to be that no raider made out like a bandit at taxpayer expense. Correct me, Robert, if this is entirely wrong. If not, is it flawed thinking? (Pundits, I want to see if Robert will help me with this one, please.)
romney’s plan privatized the profits while socializing any losses.
shocking, I know.
Hopefully most American understand the difference between a loan and a guarantee.
Do,you think I could buy a $10 million home on a $10,000 income if the government would guarantee the loan?