Posted by: mulrickillion | March 11, 2012

When Debating the Auto Bailout, Consider Lehman’s Fate

By James B. Stewart, March 9, 2012 —

Would Americans be better off if General Motors and Chrysler had simply gone bankrupt, without benefit of taxpayer assistance?

For the Republican presidential candidates Newt Gingrich, Mitt Romney and Rick Santorum, the answer is emphatically yes. They’ve outdone one another denouncing the auto bailout. Mr. Romney told The Detroit News that the government’s rescue of the American auto companies amounted to “crony capitalism on a grand scale” and has argued that G.M. should have gone through a Chapter 11 bankruptcy without taxpayer assistance. According to Mr. Santorum, “the government should not be involved in bailouts, period.” Mr. Gingrich called the auto industry rescue “a violation of 200 years of bankruptcy law.”

Unlike a science experiment, in which variables can be changed and the experiment repeated, we can’t turn back the clock, let the auto companies go bankrupt and compare the results with what we have today, which is an American auto industry that is, by nearly all measures, healthier than it’s been in many years. G.M. and Chrysler, not to mention Ford, which didn’t get taxpayer money but benefited indirectly, are profitable, hiring more workers, competing more effectively, gaining market share and building better cars and trucks. But we do have a contemporaneous case study by which to measure the auto bailout: Lehman Brothers, which remains the largest bankruptcy ever measured by assets.

This week the once venerable investment bank emerged from three and a half years in Chapter 11. Gone, along with the gleaming Midtown Manhattan tower now branded with the Barclays logo, are most of the more than 25,000 jobs once on the firm’s payroll and nearly all the over $600 billion in assets that once swelled its balance sheet. Lehman still owns a large portfolio of troubled real estate assets and derivative securities. Its only reason for existence is to manage those assets to pay off its remaining creditors, whose claims total more than $300 billion. It remains mired in contentious litigation.

Lehman’s bankruptcy was untainted by any taxpayer money or government rescue operation. After efforts to arrange a private rescue failed, the Treasury Department, Federal Reserve and White House decided not to rescue it, but instead to try to limit the consequences by putting “foam on the runway,” as the New York Federal Reserve chief at the time, Timothy F. Geithner, put it. We all know the results: a near-catastrophic collapse of investor confidence, plunging markets and the Great Recession.

Even so, a case can be made that Lehman fared much better than could have been expected for either G.M. or Chrysler. Within days of Lehman’s collapse, Barclays stepped in and bought its core investment banking unit. That gave Lehman the cash to keep managing the remaining assets, and it subsequently was able to borrow what is known as debtor-in-possession financing to keep operating through the Chapter 11 process. Barclays kept about 10,000 Lehman Brothers employees.

None of those options were available to G.M. or Chrysler. Months into the financial crisis, rapidly running out of cash, the auto companies couldn’t find anyone interested in buying their assets. Even if they could, no banks were in a position to lend to would-be acquirers, nor would they provide the financing needed to keep the automakers operating during the Chapter 11 process. When G.M. filed for bankruptcy in June 2009, a Federal District Court ruled that the Treasury was the only potential source for the $15 billion in DIP financing G.M. needed to continue operating. The court also oversaw and approved G.M.’s emergence from bankruptcy, contrary to Mr. Gingrich’s contention that G.M.’s reorganization was a “violation” of bankruptcy law.

I spoke this week to Harvey R. Miller, a partner at Weil, Gotschal & Manges in New York and a prominent bankruptcy expert who advised both Lehman and G.M. The idea that General Motors or Chrysler could have survived a Chapter 11 filing without government support “was very unlikely,” he told me. “Without the debtor-in-possession financing, they would have had to shut down,” he said. “The court ruled there was no possibility for DIP financing except from the government. The Republican candidates are ignoring this. I’ve watched the debates. The misstatements are so shocking.” (Mr. Miller said he wasn’t identified with either political party.). . . . 

When Debating the Auto Bailout, Consider Lehman’s Fate –


See also Has Political Discourse Hit Rock Bottom?

See also Further Media Miscellany

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See also Independent Poll Shows Most Americans want Obama’s Health Care Reforms and Contraception Coverage

See also Economics by Mitt Romney – The “Zisi”-Effect:

A problem with their calculus for success is a recovering economy. As recently witnessed in the state of Michigan, the car industry is recovering with new jobs, with overtime for workers, car sales are up, and the success of the auto industry is reviving Michigan’s economy.

In response to the earlier bail out of the auto industry in Michigan, and again reflecting the “zisi”-effect, there are the economics of Romney, and his New York Times article, which is entitled, “Let Detroit Go Bankrupt.”

As Barry (2012) observed,

The Republican candidates all opposed the bailout, including Romney. The son of former American Motors president and Michigan governor George Romney wrote an article in the New York Times, entitled “Let Detroit Go Bankrupt.” His words may come back to haunt him.

“If (automakers) get the bailout … you can kiss the American automotive industry goodbye,” he wrote, arguing in favor of a “managed bankruptcy” in which the government would guarantee loans, but not provide financing. He reiterated his position in an Op-Ed published in the Detroit News Tuesday. And he paired it with a new TV ad that shows him driving around Detroit neighborhoods. . . .

See also Obama’s Accomodations to Religious Institutions – The Quiet Resolution of an ‘Ab Initio’ Non-Issue

See also The Republican Conundrum


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