This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

The Real Story Behind the U.S. Auto Bailouts

Stocks in this article: GM F

For Romney in November 2008 to suggest government guarantees for any lender willing to put up the money for DIP financing of GM and Chrysler now appears wildly impossible. In 2009, syndicated DIP loans to U.S. borrowers hit $20.82 billion -- still just 28.9% of what GM and Chrysler required.

What Did Romney Really Say?

Father George Romney in 1954 became chief executive of the former American Motors Corp. and successfully revamped the brand, but Mitt disgruntled much of the automotive industry in 2008 when he suggested to let the major players (including eventual American Motors' acquirer Chrysler) go into bankruptcy.

The election 2012 uproar, though, could be attributed to a misunderstanding of bankruptcy.

"Bankruptcy doesn't mean liquidation. Bankruptcy can mean that the company comes out the other end, and that's exactly what happened with GM," said Brent Horton, a law professor at Fordham University who wrote in 2010 about the GM bailout .

Horton said that as a company as big as GM moved through bankruptcy that it needed money to continue operations and pay employees, warranties, suppliers and any other contracts that it owed money on.

Debtor-in-possession financing means that the debtor -- GM and Chrysler in the case of the auto bailouts -- still possesses and runs the company as it moves through the restructuring process.

Romney in his op-ed was not calling for liquidation, he was referring to DIP financing, said a Romney campaign official who spoke on background.

The U.S. Treasury and Fiat jointly padded Chrysler's bankruptcy while the Treasury took a 60.8% common equity stake in GM. The equity stake would eventually allow GM to pay back its "loan" by buying back stock from the Treasury. The majority position also gave the U.S. government to call the shots.

Romney wanted private lenders, not the government, to provide the DIP financing. The Bush administration originally considered this action , but didn't carry it out. Even though DIP financing of the $62 billion amount needed to restructure GM and Chrysler was likely impossible, RBC Capital Markets auto equity analyst Joseph Spak offered another grim reality of the presumptive nominee's then-suggestion.

"Historically, when you see private equity come in and take control of the situation, there's massive cost cutting and changes -- and not to say there wasn't restructuring under the government -- but there likely would have been a larger ripple effect through the entire automotive supply chain," Spak said.

3 of 6

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,804.80 +26.65 0.15%
S&P 500 2,070.65 +9.42 0.46%
NASDAQ 4,765.38 +16.9840 0.36%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs