It's been nearly three years since General Motors and Chrysler went into bankruptcy protection, with the financial assistance of the U.S. government. But even as the financial crisis recedes into the distance, the rescue efforts remain a hot political topic, says Steven Rattner, the former investment banker who helped direct the Obama administration's auto rescue efforts.
As auto sales and production continue to climb, the Obama administration has been quick to trumpet its support for GM and Chrysler and to claim credit for the revival of the companies, and of the entire market. Meanwhile, Mitt Romney, a critic of the bailouts, has recently taken credit for Detroit's revival. And in a Wall Street Journal op-ed this week, Republican political operative compared the Obama administration's efforts to the work of private equity firms like Bain that it has condemned.
Rattner isn't convinced Romney deserves much credit for the bailouts. "In fairness to him, he did propose a form of managed bankruptcy, and got a fair amount of it right in 2008," Rattner said. But Romney then walked away from that support in 2009 "and attacked what he did, and said Obama had made a mistake."
No politician likes to be on the wrong side of a turnaround story. Neither, apparently, does the public. Rattner notes that polls from the spring 2009 until very recently showed the auto rescues were unpopular. When Romney was campaigning in the Michigan primary earlier this year, the bailouts were unpopular even among Michigan Republicans. Rattner argues that Romney is now trying to associate himself with the turnaround stories at GM and Chrysler because the rescues have been gaining in popularity on a nationwide basis. A Harris poll from April found that 45 percent of Americans said the bailouts helped the economy, while 29 percent said the hurt the economy. That's a marked change from 2009, when Harris says 69 percent of Americans opposed the auto bailouts.
Rattner also rejects the argument, made in Rove's Wall Street Journal column, that the bailouts were a method of rewarding political allies like the United Auto Workers. "Think about the capital structure," Rattner said. "The people at the bottom, the shareholders, got wiped out." Unsecured creditors — i.e. bondholders in the case of GM — took a very big haircut. For its part, the UAW had massive claims against both companies for health care benefits that had been promised contractually and that the two companies hadn't bothered to fund adequately in the years when they were profitable. Rattner argues that the equity stakes they received in the company were given in exchange for having relinquished their health-care claims against the company, and for making significant concessions on labor costs. "They took a big haircut," Rattner said.
The U.S. closed out its 'investment' in Chrysler at a loss when Fiat took full control. But it still owns a large stake in General Motors. And until those shares are finally sold, the entanglement between Washington and Detroit will continue to be a political issue. GM would certainly prefer that the U.S. Treasury Department divest its stake in GM immediately, even if it would lead to a large loss for taxpayers. But Rattner advises patience. "It typically takes five to eight years to divest a stake as large as GM." Even given a slower divestment schedule, Rattner believes the U.S. could wind up losing $15 billion on the auto rescues.
In the scheme of the overall bailouts and stimulus, that loss will wind up being a rounding error. But given the politicization of the auto industry in recent years, we should expect the GM and Chrysler rescue efforts to play a big role in this fall's presidential campaign.
Daniel Gross is economics editor at Yahoo! Finance
Follow him on Twitter @grossdm; email him at firstname.lastname@example.org
His book, Better, Stronger, Faster: The Myth of American Decline and the Rise of a New Economy, has just been published. To receive a chapter as a free PDF send an email to: email@example.com