Was Romney right about bankruptcy?
I called to have my 2003 Saturn Ion repaired in early May. I wasn’t called back about the repair until the middle of June.
When Mitt Romney wrote, “Let Detroit Go Bankrupt,” perhaps he spoke with a bit more wisdom than we – myself included – realized at the time.
In this moment the conservative critique that the bailout of General Motors defied the judgment of the marketplace appears especially true. Since it was revealed the GM covered up faulty parts on many of their vehicles for a decade, in which time an estimated 13 people died and more injured, more recalls have been issued.
On June 1, 2009, GM filed for Chapter 11 bankruptcy protection in the Southern District of New York. Chapter 11 bankruptcy allows a company to restructure itself and adjusts its debt, and hopefully leave the process as a viable competitor in the marketplace.
Typically companies which continue to operate while in bankruptcy must obtain debtor-in-possession financing, or in other words money that is meant to keep the company afloat as some of its assets are sold in order to pay off creditors.
For GM, debtor-in-possession financing was provided by the U.S. government. The company was loaned $49.5 billion in total, first by the Bush administration, and the policy was continued under President Barack Obama.
The subsidy was intended to save the economy as much as it was meant to save GM. The automaker employs 77,000 people in the U.S. And it has since exited bankruptcy, and paid back $39 billion to the U.S. Treasury.
But the company has also issued a total of 45 recalls, which covers 29.9 million cars worldwide reported the New York Times.
In Mitt Romney’s op-ed, which was run in the New York Times on November 18, 2008, he crafted a well-written and well-reasoned exposition on why GM, Ford Motor Company, and Chrysler should not have been the beneficiaries of taxpayer money (Ford was not a recipient of bailout funds). It wasn’t as many critics derided, a cold conservatism, which demanded the scalps of three losers in the marketplace.
He wanted GM, Ford, and Chrysler to survive – to file for bankruptcy and to become more competitive because of it, but without help from taxpayers. In this respect, his criticism may have been too kind, towards GM in particular.
There are two types of bankruptcy, and two options for a U.S. corporation in financial distress. Chapter 11 bankruptcy allowed a shiny new company to come out of a pile of junk. Chapter 7 bankruptcy, or liquidation, would have laid GM bare, stripped of its parts and sold off to creditors.
Thousands of workers would have been laid off, and Midwestern economies may have been further depressed, but a bad company would have been taken down.
GM is important to America, and it is especially important to the Motor City, but should its importance protect it from market forces. And by market forces, I do not mean to invoke it in the manner that is has been in the past – as if it is mystical.
By market forces I mean the tendency for bad companies to be run out of business either by competitors, or by consumers who are dissatisfied with the product. And consumers should be dissatisfied with GM’s culture, which is to avoid responsibility and to risk the lives of its customers for the sake of the bottom line.
To be clear, GM isn’t the only auto manufacturer to issue recalls. Toyota and Nissan have both had to issue recalls for 3 million vehicles combined recently. So many recalls have been issued in fact, by all of the auto manufacturers that one in 10 automobiles on the road has been called in for a repair.
Ford had a disastrous moment when, in the 1970s, it was discovered that its Pinto caught on fire in low impact collisions.
When GM filed for bankruptcy in 2009, that wasn’t even the first time the auto manufacturer teetered towards bankruptcy. GM almost went bankrupt in 1982 and 2006.
Only this time, we had the opportunity to see the company fundamentally altered in Chapter 11 bankruptcy without help from taxpayers, or dissolved in Chapter 7 bankruptcy and the risk its vehicles posed to drivers ended.