Summers and Marchionne on 2009 Auto Bailout: No Alternative

At Brookings today Lawrence Summers gave four reasons why the U.S. government bailout of General Motors and Chrysler in 2009 was not a mistake. Summers, who at that time was director of the National Economic Council in the White House, said that “There are three things you could be seeing today that would lead me to think we made a mistake. Fortunately none of them are things that we see.” He elaborated on those points and added a fourth:

One is you could see that either GM or Chrysler had failed, and basically we propped them up for another year-and-a-half, and it hadn’t really worked, and a reasonable judgment is that we had thrown good money after bad, and merely delayed a little bit an inevitable, painful failure. That did not happen.

The second thing that could have happened would have been that a reasonable reading of developments in the credit markets and the ways in which loaning—if somebody had produced a $27 billion DIP [debtor-in-possession] financing in August of 2009. It would have been reasonable to suppose that we had had insufficient nerve, and that if we had just left this to the conventional bankruptcy mechanism, that private finance would have been available on a substantial scale. I think nothing that happened in credit markets between 2009 and 2011 would suggest that our lack of confidence and what the private market could do was unwarranted.

And the third thing that could have happened that would have constituted a failure today is that this could have been Vietnam. The government could still be heavily involved with the companies. It could have turned out that a Democratic administration was incapable of keeping hands off. And the process of government involvement through bankruptcy could have led to all kinds of new government-mandated labor arrangements, all kinds of new government-mandated environmental arrangements, all kinds of barriers to necessary restructuring and shrinkage, and automobile companies could be being operated as public utilities in some sense.

Or I suppose a fourth thing that could have happened would be that there were managers of big companies in America thinking that it was OK to take risks or be incompetent because the government would bail them out and citing the example of the automobile companies as a basis for complacency.

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Summers added that “Battlefield medicine is never perfect.” Continuing on the balances struck in the intervention:

Basically we struck a couple of balances. We struck a balance between being too soft and setting terrible precedents, not forcing necessary restricting; and being too hard and killing what we were trying to save. And I think we struck that balance broadly about right. We also struck a balance in terms of the breadth of what we did. [What] were we going to do the automobile companies? [What] were we going to do suppliers? How broad a network of manufacturing were we going to do?

Do what’s necessary. It’s necessary not to do more than what’s necessary. I think we struck that balance broadly right.

The comments came during a Brookings event, “Recovery Road? An Assessment of the Auto Bailout and the State of U.S. Manufacturing.” The conversation occurred as June 1 approaches, the five-year anniversary of General Motors filing for Chapter 11, which had been preceded by Chrysler Motors’ declaration of bankruptcy. Summers’ keynote discussion was followed by two panel discussions, one focused on the implications of the government’s intervention in the auto industry, and the second on the broader question of the state of manufacturing and manufacturing policy in the United States.

Visit the event’s webpage to learn more about the panelists.

The event concluded with a second keynote discussion by Sergio Marchionne, chairman and CEO of Chrysler Group. Marchionne defended the bailout as the only solution to the crisis. “I can tell you as somebody who unfortunately at the time was also the vice chairman of a relatively large bank in my spare time,” he said:

that the financial system was absolutely incapable of digesting anything, never mind a bankruptcy, of this caliber. So you can get it out of your head. … At that time the digestive system, of not just the U.S. system but the international financial structure, could not digest a bankruptcy, not even Chrysler’s and certainly not GM’s. …

[T]he devastating impact on the supplier base would have been so large that it would have actually frozen Ford in its tracks. It could not have produced a car. The failure of GM and the failure of Chrysler would have sent the supplier base into absolute convulsions and if that happened it would have stopped making parts for Ford. So you would have had a chain effect that would have just destroyed the U.S. automotive business completely. So don’t look for alternative solutions. There were none.

And I can tell you that the deal that was put together by Steve [Rattner] and his team was an incredibly tough deal. It was a private equity deal that as I said had a very short leash. If we had sneezed the wrong way they would not have delivered it. They would have taken it back into GM. Because GM had all the cash. They could have just absorbed Chrysler and done Plan B. Which was their Plan B at all times, to put these two companies together. … And I think the UAW [United Auto Workers] and the fact that they insisted on the continuing existence of Chrysler as a separate entity went a long way. …

Five years later was it the right thing to do? And the answer is yes. The best deal they could have done at the time.

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Get full event audio here.