Was There a Bankruptcy Alternative for the Automakers?

Some months ago, I predicted that we would finally move on from the overheated rhetoric surrounding the automotive bankruptcy cases. After all, even Paul D. Ryan supported the Obama administration on this point.

Boy, was I wrong.

General Motors and Chrysler made another appearance last night, this in the foreign policy debate.

The dispute between the Obama and Romney campaign turns on a 2008 opinion article that Mitt Romney wrote in The New York Times entitled “Let Detroit Go Bankrupt.” The Obama campaign focuses on the title, the Romney campaign on the end of the piece, where he urges that the auto companies go through a “managed bankruptcy.”

Neither campaign disputes the need for bankruptcy in the Chapter 11 sense. The crucial issue is whether Mr. Romney's article was actually advocating something like bankruptcy in the Chapter 7 sense: appoint a trustee and liquidate.

Mr. Romney may not have actually advocated Chapter 7 for G.M. or Chrysler, but his ideas about a “managed bankruptcy” might have lead to the same place.

He has generally argued for a more traditional Chapter 11 case, without any direct government involvement. In his opinion article, he did suggest that the government might guarantee debtor-in-possession loans for the automakers.

That would have been a perfectly viable plan in 2006 or early 2007, when syndicated debtor-in-possession loans were still widely available. These would have been very large loans, but it's not impossible that they could have been arranged.

The question is whether this would have been viable in late 2008 or early 2009, and there I think we have to say that the answer is plainly “no.”

Traditionally, the top providers of debtor-in-possession loans have been financial institutions like Bank of America, GE Capital, Citigroup and Wachovia. Lehman Brothers also participated in a fair number of such loans.

After Sept. 15, 2008, when Lehman filed for bankruptcy, none of these institutions were in a place to provide what would have been the largest debtor-in-possession loan ever in the case of General Motors. The only way the government guarantee would have changed this is if it were nothing more than a fig leaf, disguising what would have been for all intents a government-financed debtor-in-possession loan.

I don't think the Romney campaign is arguing for something like that, which is essentially just an opaque version of the actual policy adopted by the Obama administration. After all, in another article Mr. Romney termed the Obama approach “crony capitalism on a grand scale.”

Ultimately, the Romney policy is one that advocates a private Chapter 11 solution that was likely to break down at the time it was put into effect, resulting in either the need for the government to step in and save G.M. and Chrysler at a point where they might have been beyond saving.

Vendors and empl oyees tend to stay away if it looks as if they won't get paid.

Or G.M. and Chrysler might have converted their Chapter 11 cases to Chapter 7 cases.

Stephen J. Lubben is the Harvey Washington Wiley Chair in corporate governance and business ethics at Seton Hall Law School and an expert on bankruptcy.