A new meme has emerged during the 2012 election season – Romney would have let the car companies go out of business  (for maximum effect, be sure to shake a clenched fist as you scream this line).

The other version – Romney would have let the car companies go bankrupt.I actually like this one better even though for the uninformed it remains ominous. I’ll explain, but first some context.

I have a dear friend who worked a lifetime for GM in division management ranks, as did her recently deceased husband; both retired prior to the auto company bailouts. Based on the final government mandated bailout terms their pensions and benefits were decimated.

Putting aside the great personal impact on my friends, we were both astonished that the senior secured lenders and debt holders of GM were virtually wiped out in the bailout. I committed to research the events and to determine how this happened.

I theorized that for senior secured lenders to agree to be wiped out in the bailout, they must have been assured of an even greater win somewhere else…I was right. The same lenders who fell on their swords in the bailout were at the same time reaping huge profits from TARP. In effect, this was hush money used to paper over billions of dollars of exposure on other crappy investments.

Another near-urban-legend circulating is that China is the winner because GM survived on taxpayer provided welfare, and is now thanks to the government mandated largesse of the US taxpayer, manufacturing and selling millions of cars there at the expense of US workers. One particularly well-produced video is circulating on the internet; it compels unwitting viewers to buy Ford because Ford didn’t take money from the government to spend in China.

The China argument relative to impugning the wanton US government intervention in the auto company’s insolvency is silly. Framing China as a villain and bad actor in this drama is solid jingoistic tripe- a dispassionate look at the world auto market easily distinguishes the good guys from the bad guys.

Perhaps it would help to ask the following to clarify…what were the two prominent choices for GM & Chrysler at the point of their insolvency in 2008, and does either option result in a difference as to how any auto company would exploit the Chinese auto market?

One particularly good source of information that I tripped across on this matter was an article published in the Wall Street Journal on June 13, 2012, page A19 by Professor Todd J. Zywicki with James Sherk. Todd is a George Mason University Foundation Professor of Law at George Mason University School of Law. Todd gave me permission to link to his site as well as the article titled- “Obama’s United Auto Workers Bailout”

Todd’s website:
http://mason.gmu.edu/~tzywick2/cv.html

Link to Todd’s Bailout article:
http://online.wsj.com/article/SB10001424052702303768104577462650268680454.html

Please take the time to read his work. It will arm you for discussions on this topic.

Ahead of your deeper reading, and in boiled-down fashion, the Bailout versus Bankruptcy choice plays out like this:

Chapter 11 Structured Bankruptcy- There was a role for the government in the GM and Chrysler normal bankruptcy process. Interim, or Bridge financing was an obvious requirement. The impossibility of GM and Chrysler receiving this financing during the process would have meant that the government had to step in. The government’s role would have been that of third-party guarantor, thus settling the hysteria in the capital markets & promoting the loans.

The first, normal, and best option of Chapter 11 Bankruptcy was instead usurped by our government in favor of a wholesale long-term taxpayer funded Bailout program. The bailout will ultimately cost the US taxpayers between $35-45B.

US bankruptcy laws have existed for centuries; they have evolved and been used countless times to exactly manage these sorts of situations in a free market system. It is not to say that there is no role for government to play. Rather, it means that if and when government participates, it does so on the fringe and in necessarily limited ways.

Alas, we return to what really happened once the situation became fair game for political advantage. It is a perfect time to recall what the President’s Chief of Staff- Rahm Emmanuel said in November of 2008 to a WSJ conference of top corporate executives- “You never want a serious crisis to go to waste”…a fitting backdrop to the administration’s well-hyped Bailout program.

The Bailout has been memorialized in writing for four years now. The obvious favoritism shown to Unions versus management and senior secured debt holders is historical fact. The negative bias against management survivors and retirees is plain for all to see. The unrecoverable cost to US taxpayers is well documented. The government’s wholesale interference in normal business practices as a “first-option” clearly placed the burden of outcome onto the shoulders of US taxpayers.

In the bankruptcy scenario, the auto companies would survive; undergoing top-to-bottom re-organization and downsizing; certain classes of investors like common share-holders and unsecured lenders would have been wiped out, and senior secured debt holders would sustain significant losses.  In addition, union members would be forced to make concessions that assured employment in the emerged entity. There were significant differences between Bankruptcy and Bailout in terms of who lost and who won based on how the deals differed, but an inarguable fact is that the auto companies would have continued on.  This is an oft ignored point that detractors of the bankruptcy process make. Insolvency and the Chapter 11 Bankruptcy process do not mean an automatic death penalty.Those who believe this are plainly ignorant about the long successful history of orderly bankruptcies and re-organizations. The process stands as a hallmark of our country’s business laws & processes.

Now to return to the China is Evil theme…Regardless of how GM survived, the executive leadership team headed by then CEO and Board Chairman Ed Whittacre, and now, Dan Akerson, were and are responsible to shareholders to maximize revenue and profit (please recall that those of us who pay taxes are now a significant shareholder class under Obama’s bailout plan).  Financial & market physics dictate that companies will generally favor, seek out, and sell into markets with the most opportunity (revenue, profit & growth), and will favor areas of the world that offer the lowest net cost for designing, building & delivering their products.

This year, more automobiles will be sold in China than in the US.  Thus, all auto companies are irresistibly drawn to this burgeoning market.  Almost without exception, companies who do business in China design and build their products there.  This is no different than doing business in India, or even Europe.  GM is following the same strategy as their competitors who are keen on exploiting the vast Chinese auto market.

There’s a lot to dislike about what Obama did if your political beliefs tilt toward small & limited government, but US jingoism at the Chinese market’s expense is not the way to frame the argument.  China is a slight of hand distraction from the real issues surrounding the government sponsored auto company bailout program. I do not favor our government involving itself in matters like private and public corporation’s insolvency.  But, I didn’t win that one.  The government’s abrogation of the rights of the auto company’s senior secured lenders in favor of the labor unions is only one of the despicable features of the deal.

In the context of viewing GM’s situation through the gauze of the Chinese market, unwitting jingoists advocate that since the Federal government intervened and directly spent US tax dollars on the bailouts, the government should have followed up on this folly by mandating & enforcing aggressive nationalistic/isolationist terms, ultimately hand-cuffing these companies as they attempt to compete in global markets.  This would have been one really bad idea, tag-teamed by an even worse idea, all but guaranteeing the US taxpayer’s investment would be squandered.

The only way US taxpayers are ever going to see some portion of our money back on the bailout deal is for these companies to be successful in China and all world markets…hate the bailout all you want, but be real sure about what you don’t like about it.