Saturday, October 27, 2012

Romney’s Lemon Socialism for Detroit

Mitt Romney is debating Larry Summers whether his managed bankruptcy proposal would have saved Detroit?
Romney has said he would have saved money by relying on private finance to move the big three car companies through bankruptcy, although he’s been extremely vague as to how he would have reached that outcome without committing the vast federal resources that the Bush and Obama administrations did to achieve it. Romney claims that the two presidents overspent by billions of dollars by doling out federal loans when mere guarantees of some sort paired with an earlier bankruptcy might have gotten the job done for cheaper. But Summers, echoing the opinion of industry experts, CEOs, and Republican politicians in Michigan who supported the bailout, said the kind of resources necessary were impossible to find in the private sector under any circumstances. The Detroit News editorial board made the same case this week even as it endorsed Romney. “There was not private money available,” Summers told TPM on a conference call with reporters Friday. “And there wasn’t Congressional authority for the federal government to start guaranteeing loans ot the automobile companies.” At the time, the top financial firms around the world were facing their own existential crisis, having just received hundreds of billions of dollars in government aid during the economic crash. The auto rescue ended up requiring about $80 billion in aid from across the Bush and Obama administrations. That would have been by far the biggest debtor-in-possession bankruptcy loan in history had the private sector stepped in per Romney’s plan. The previous record? $8 billion to Lyondell Chemical in early 2009 — and it came with huge interest rates and fees. Summers argued that the level of debt at the car companies’ required whoever financed them to take a large equity stake. And if the federal government didn’t take that equity, taxpayers wouldn’t benefit when the companies turned around. “Guaranteeing loans to the automobile companies in the necessary quantity without getting an equity stake so that when the company succeeded you profited from the upside would have been far more costly to the federal government,” he said.
Larry is relating what a lot of us have already noted but I guess Mitt Romney is still too ideologically driven to understand the basic point. TPM reader made an excellent point:
Its actually slightly worse than you say. Towards the end of the op-ed, Governor Romney almost in passing proposes government loan guarantees. That is, it would have been a pure privatized- gain, socialized-loss transaction. A Bain type entity would have bought the company with very little equity. A huge new government guaranteed debt would have been undertaken for the company. The old debt would be subordinated to the new debt through the bankruptcy process. The new debt would be very low interest rate, since it would be backed by the full faith and credit of the United States. So, to this extent, the idea that no funding would have been available for the company is, strictly speaking, false. The Bain type entity would have set about repudiating pension obligations and otherwise cutting costs. If it works, the new owners who bought the company with very little of their own money at risk get very rich. If it fails, well, hey, there are the government loan guarantees. Note that there is absolutely no upside for the taxpayer guaranteeing the new debt. The gains are strictly for the job-creating superhero private equity guys.
Well said!

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