The
Automotive Situation
Update: The
Federal Bailout that Saved Mitt Romney
Mitt
Romney has gotten himself into a bit of a bind
with his well-intentioned but seemingly misguided
view on what to do about the Auto industry. Setting
aside the question as to whether the government
has any business in the automotive industry for
a second, it's clear that the automotive sector
has grown since the GM restructuring and other
steps were taken by the government to help the
auto industry.
Aside
from the ensuing growth, it's also important to
note that:
Mitt
Romney would have “let Detroit go Bankrupt”
The
statement above is not quite as bad as it seems.
It's unlikely that Mitt Romney literally wanted
to Detroit to fail. What he means is that he'd
like to see it fail so it can quickly reorganize
in a more efficient manner. Because the auto sector
has once again grown, his doom and gloom predictions
don't help his case.
Did
GM restructure the way Romney suggested?
Because
Mitt Romney did suggest GM go bankrupt then reorganized,
some (including Romney himself) make the claim
that GM did what he suggested, and therefore he
deserves credit as well. Indeed, Mitt has decided
to take credit for the bailout. The problem with
this claim is that he suggested GM be sold off
to the private sector, when in reality, no private
sector company wanted to buy a failing auto company
in the middle of the worst recession since the
Great Depression where vehicle sales were down
and the required loans were next to impossible
for many would-be vehicle buyers. In fact, Mitt
Romney's old private equity firm, Bain
Capital was courted for the purchase but was uninterested.
In
an article by The Economist (who
initially agreed with Romney, then retracted):
Had the government not stepped in, GM might
have restructured under normal bankruptcy procedures,
without putting public money at risk. Many observers
think this unlikely, however. Given the panic
that gripped private purse-strings last year,
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.
Government
Motors no more: An apology is due to
Barack Obama: his takeover of GM could have gone
horribly wrong, but it has not
Mitt
Romney and the UAW
Part
of Mitt Romney's war of words on this subject
have revolved around attacking the "UAW."
It seems counterintuitive to many that he would
do this because unlike many of us who see United
Auto Worker's Union as the workers themselves,
Romney believes he is attacking a large bureaucracy
called "unions." That the actual workers
own GM may not make much sense to someone like
Romney, but is preferable for the longterm. That
the actual workers own GM may not make much sense
to someone like Romney, but is preferable for
the long term viability of a company. After all,
no one is as interested in the long term health
of a company like its workers (especially in the
UAW culture where workers spend their life at
a company from which they retire with a pension
from). In Romney’s world, it’s the
hedge funds and private equity companies who should
make the decisions. The problem with this is that
these decisions often reflect short term gains
and quarterly profits and dividend payments, not
where a company will be in 10 years. Unlike workers
who intend to stay with a company for years, short
term investors are looking for money in the short
term and will simply shift their money elsewhere
when the time is ‘right.’ Unfortunately,
this is the culture which Romney represents.
What
about Ford?
One
of the arguments from those who object to the
bailout is that Ford’s ability to weather
the storm somehow proves that the bailout was
unnecessary. However, this ignores that fact that
Ford
also wanted GM bailed out. Why? Because GM’s
demise would have taken down many automotive suppliers--the
same suppliers Ford depends on. So Ford would
have likely been in worse shape had GM gone under.
A
parallel to GST Steel?
Why
was Ford able to ride out the downturn without
a government bailout? Because
it had set aside $25 million. Financially,
it was much better prepared to deal with the economic
situation than GM.
This
brings us to the situation with GST Steel. Had
Bain Capital not loaded the company with so much
debt burden (much of which was used to pay
dividends), GST would have been in much better
shape to deal with the downturn in the steel industry.
A
parallel to Steel Dynamics?
One
of Mitt Romney’s success stories revolve
around Steel Dynamics. The only issue is that
Steel
Dynamics received tens of millions of dollars
in government subsidies. So while criticizing
a government bailout of GM, Romney touts, as a
success story, an instance of a company that benefited
from government subsidies.
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