Mitt Romney insisted in Monday’s debate that the auto companies would not have been liquidated under his watch, even as he’s complained the billions of dollars in government aid used to rescue the industry was unnecessary. But Larry Summers, who served as a top economic aide to President Obama in his first year, told TPM his claim is a “fantasy” for a variety of reasons.
Romney has said he would have saved money by relying on private finance to move the big three car companies through bankruptcy, although he’s been extremely vague as to how he would have reached that outcome without committing the vast federal resources that the Bush and Obama administrations did to achieve it. Romney claims that the two presidents overspent by billions of dollars by doling out federal loans when mere guarantees of some sort paired with an earlier bankruptcy might have gotten the job done for cheaper.
But Summers, echoing the opinion of industry experts, CEOs, and Republican politicians in Michigan who supported the bailout, said the kind of resources necessary were impossible to find in the private sector under any circumstances. The Detroit News editorial board made the same case this week even as it endorsed Romney.
“There was not private money available,” Summers told TPM on a conference call with reporters Friday. “And there wasn’t Congressional authority for the federal government to start guaranteeing loans ot the automobile companies.”
At the time, the top financial firms around the world were facing their own existential crisis, having just received hundreds of billions of dollars in government aid during the economic crash. The auto rescue ended up requiring about $80 billion in aid from across the Bush and Obama administrations. That would have been by far the biggest debtor-in-possession bankruptcy loan in history had the private sector stepped in per Romney’s plan. The previous record? $8 billion to Lyondell Chemical in early 2009 — and it came with huge interest rates and fees.
Summers argued that the level of debt at the car companies’ required whoever financed them to take a large equity stake. And if the federal government didn’t take that equity, taxpayers wouldn’t benefit when the companies turned around.
“Guaranteeing loans to the automobile companies in the necessary quantity without getting an equity stake so that when the company succeeded you profited from the upside would have been far more costly to the federal government,” he said.
Not only did Romney’s proposal to entice banks with guarantees not make “any financial sense,” Summers added that it wasn’t even clear that it was his proposal in the first place. Romney only started dropping references to it late in the campaign. His only suggestions for federal aid at the time were warranty guarantees and possible help working out post-bankruptcy financing.
Either way, Summers said, the plan they ended up using worked. So what’s there to argue?
“There’s lots of things you can debate about the tactics and the precise way we executed this support program for the automboile companies,” Summers said. “What you can’t debate is we still have three major American automobile companies in the United States and that looked very unlikely in January 2009. What you can’t debate is, based on current market evalutions all the money that President Obama put into the American automobile industry is like to come out and come back to taxpayers.”
Benjy Sarlin is a reporter for Talking Points Memo and co-writes the campaign blog, TPM2012. He previously reported for The Daily Beast/Newsweek as their Washington Correspondent and covered local politics for the New York Sun.