This Day On The Street
Continue to site
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

The Real Story Behind the U.S. Auto Bailouts

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

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

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
Stocks Under $10

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

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

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
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
F $13.56 0.00%
GM $31.80 0.00%
AAPL $93.74 0.00%
FB $117.58 0.00%
GOOG $693.01 0.00%


Chart of I:DJI
DOW 17,773.64 -57.12 -0.32%
S&P 500 2,065.30 -10.51 -0.51%
NASDAQ 4,775.3580 -29.9330 -0.62%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs