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• The Truth Squad: Arguing The Auto Rescue Between The Campaigns

The Democratic National Convention this week features much rhetoric and debate about whether it was a proper use of government to rescue General Motors and Chrysler with loans in 2008 and early 2009, followed by a tax-payer-assisted bankruptcy for both companies designed to preserve the companies and hundreds of thousands of jobs centered in the Midwestern states of the country.

On Tuesday night, former Ohio Governor Ted Strickland was a loud endorser of the rescue effort, asserting that 1 in 8 jobs in his state are tied to the auto industry. On Wednesday night, Democrats showed a film to the television audience and conventioneers about the auto rescue and its benefits. A union auto worker gave a short speech, as did United Auto Workers President Bob King. Former President Clinton, too, touched on the decision to rescue the domestic auto industry. A co-founder of the auto retailing chain CarMax also gave a speech extolling the virtues of both the auto rescue and the way the Obama White House supports small and medium-sized business.

Vice President Biden has made "Osama bin Laden is Dead. And General Motors is Alive," a kind of unofficial campaign battle slogan.

The rescue of the auto industry with tax-payer money -- nearly $85 billion in total, with a net cost now estimated to be around $25 billion-$27 billion after the companies repay the loans and the government sells its 26 percent stake in GM -- remains a hot political button. Because the auto industry is a key driving force of the economy and the companies have returned to profitability and are hiring again, the President is making it a cornerstone of his re-election campaign. But Republican nominee Mitt Romney and vice presidential nominee Paul Ryan claim that the government was wrong to grant loans to the automakers, or take an equity stake in GM.

Because of the hot temperature of political rhetoric this close to the election, and the frequency with which the auto rescue will come up, AOL Autos is providing a guide to the issues, a "truth squad" if you will, where we will check the candidates' words and "facts."



Issue: Paul Ryan's rhetoric about the former Janesville, Wisconsin GM plant.

Truth: Here is the quote from Ryan's speech: "My home state voted for President Obama. When he talked about change, many people liked the sound of it, especially in Janesville, where we were about to lose a major factory. A lot of guys I went to high school with worked at that GM plant. Right there at that plant, candidate Obama said: 'I believe that if our government is there to support you ... this plant will be here for another hundred years.' That's what he said in 2008. Well, as it turned out, that plant didn't last another year. It is locked up and empty to this day. And that's how it is in so many towns today, where the recovery that was promised is nowhere in sight."

By any reasonable interpretation, Ryan was trying to tie the closure of the GM plant to the President. But GM announced that the GM plant, which made big SUVs, was going to close because of lack of demand. That announcement came on June 3, 2008. Obama made his statement as a candidate, not as President. The plant was shuttered except for light contract work, before President Obama took office.

Ryan has denoted that he intended to tie the closure of the plant to an Obama policy. And he has pivoted on his response. In response to Vice President Biden saying, "Osama bin Laden is dead, and GM is Alive," Ryan now says, "GM is not alive in Janesville." That pivot does't address his earlier misleading assertion in his nomination speech.

Issue: Mitt Romney says: "The government gave the [auto] companies to the union [UAW]."

Truth: When the White House structured the rescue of General Motors and Chrysler, the government negotiated with the United Auto Workers to swap $20 billion that GM owed the union in future healthcare benefits for an equity stake of 17.5% in the company. The UAW healthcare trust, not the union, today owns 10.2% of GM and 41.5% of Chrysler.

The banking and investment community did not like this. The union clearly got preferential treatment in the deal, compared with institutions holding GM and Chrysler bonds. It's worth noting that most of the bond holders were investors who bought the bonds as they lost value from their original sale price, many for as little as .19 cents to .30 cents on the dollar. The bankruptcy judge's decision was that bond holders would get 10% of GM's post-bankruptcy equity, and warrants to buy an additional 15% of GM. It is true that these stakes were much smaller than the union healthcare trust received.

Those deals were negotiated between the White House, the union and bond holders. Institutions representing more than 50% of the bond debt agreed to the terms, as did the union.



Issue: Mitt Romney said "Let Detroit Go Bankrupt."

Truth: A New York Times headline writer actually wrote that line above an op-ed article Mitt Romney wrote for the paper on November 18, 2008.

Romney, lobbying as a future White House candidate even before Obama took office against a loan package approved by President Bush to keep the automakers afloat, argued that the bailout would delay a much needed reorganization of the auto companies. Romney advocated for a "managed bankruptcy" in the Fall of 2008, a move that would not be done until six months later with the White House overseeing it and tax-payers funding it.

For that reason, Romney claims that President Obama and his White House task force followed his advice. Romney says it was wrong for President Bush to have spent more than $20 billion in loans propping the companies up while bankruptcy was debated. Bush should have just let the companies "fall" into bankruptcy, says the former Massachusetts governor.

What Romney leaves out of the discussion is that there was a prolonged political debate in Washington that lasted for months about how best, or whether, to rescue the auto companies. If the loans had not been granted by President Bush, the companies would have defaulted on obligations and forced into a messy, sudden bankruptcy. Romney says that rather than the government rescuing GM and Chrysler, the government should have provided loan guarantees to banks and private equity firms that would have then lent the automakers enough money to get through the financial crisis. President Obama funded the auto rescue out of the Troubled Asset Relief Program [TARP] because he could not get the Congress to vote yes on a specific rescue package for the auto companies.

There are two big flaws in Romney's position. According to Steven Rattner, the private equity investor who was named by President Obama to the auto industry task force, banks and private equity firms had neither the capital nor the interest in providing some $80 billion in funds needed for a traditional managed bankruptcy. None came forth at the time. Additionally, recapitalizing the companies with all loans--debt-- would not have fixed the company's problems or led them back to profitability. It was decided that GM and Chrysler needed to shed debt, restructure by shutting down low-performing brands and factories, and that the government would have to take equity in GM and take a risk that it would it get its money back later. Romney and adviser Carly Fiorina have said that the government could have forced the banks to provide the loans given the atmosphere and the fact that the banks were being bailed out too. But the companies would still have more debt than they could handle.

Issue: Romney says it would have been better to let banks and financial firms manage GM's bankruptcies and be their owners rather than the government/taxpayers.

Truth: The Obama White House reckoned that the country and economy would be better off if the auto industry was managed up from their low point for job growth. If banks and private equity groups owned GM and Chrysler, they would be managing through the financial crisis and recovery for their profit only.

Cerberus Capital Management, a private equity firm, owned Chrysler from 2004 to 2008. By any objective account, Cerberus was managing the company down, and was more interested in profiting off the company's book of auto-loans than making competitive cars and trucks, or building a company for the future. Employees of Chrysler have said that Cerberus's management of the company was leading Chrysler to destruction and eventual breakup before the collapse of the financial markets.

Issue: The auto industry is the backbone of the U.S. economy.

Truth: The U.S. auto industry employs about 1.7 million workers and supports an additional 6.3 million private-sector jobs, according to the Center for Automotive Research in Ann Arbor, Mich. The center said those positions represent more than $500 billion in annual compensation and more than $70 billion in personal tax revenue. That is significant, especially in Michigan, Ohio, Indiana and Illinois.

Issue: The auto industry's hiring is driving job growth.

Truth: Jobs are notoriously hard to count. The White House says the auto industry, including suppliers, have added 170,000 jobs since 2009. The UAW puts it at 250,000, but that includes dubious additions such as auto-parts retailers. It also includes jobs added by foreign automakers, such as Volkswagen and Hyundai, which were not part of the rescue.

Issue: The government will make money on the auto rescue.

Truth: We heard this in some of the DNC interviews this week with various lawmakers. We figure it is a talking point that is getting repeated without verification. This is a big stretch, and is pretty much untrue. The U.S. Treasury has recently estimated that the cost to the tax-payer for the auto rescue will be approximately $25 billion. That is after GM and Chrysler paying back all the loans it was on the hook for, and what the government is expected to net after selling its remaining 26% of GM.

What the U.S. Treasury estimate does't include is the future tax revenues of auto workers who would have been displaced had GM and Chrysler been allowed to break up under private equity ownership. Private-equity ownership would have had purely profit incentives, unless blocked by the government participation in the own guarantees, to offshore more jobs to cheaper labor markets. Preservation of high-quality manufacturing jobs has an enormous ripple effect through the economy and to the tax base. The cost also doesn't include the enormous state and federal payouts of unemployment benefits to those that would have been displaced by private equity ownership of the automakers.

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