In the last week of the presidential campaign, this is where we stand: Former Chrysler boss and Carter-era bailout baby Lee Iacocca says Mitt Romney is the better presidential candidate. Union boss and Obama-era bailout baby Bob King strongly disagrees, and repeats some dishonest to half-dishonest allegations about Romney’s relationship with the automotive business.
To begin with, King attributes Mein Kampf thinking to Romney, saying that the candidate was engaged in a “big lie” strategy by suggesting that Chrysler’s owners were considering moving Jeep production to China. Indeed, this accusation has been a favorite of Democrats and their media factota in the past couple of days, and Chrysler has publicly denied that it has any such plans. So where would Romney get a crazy idea like that? From the people who own Chrysler, of course. As Bloomberg reported: “Fiat SpA, majority owner of Chrysler Group LLC, plans to return Jeep output to China and may eventually make all of its models in that country, according to the head of both automakers’ operations in the region.” Which is to say that the owners of Chrysler, a firm with a great debt to the Obama administration, were openly contemplating shifting Jeep operations to China — right up until the second that fact became embarrassing to the Obama administration. Now they say that they are considering no such thing. Check back in after the election for a straight answer on that question: You can be sure that one will not be forthcoming before then.
King also claims that Romney himself turned an eye-popping 3,000 percent profit on the bailout from an investment in Delphi. Hoping that this was true, I looked into the claim, and was a little disappointed. It’s the usual thing we see with these crazy stories about Romney’s finances: an investment in a trust that was invested in another company that invested in something else, etc. In this case, the claim involves not Mitt but Ann Romney, who maintains a blind trust that invested at least $1 million in Elliott Management, a hedge-fund operator that made a big investment in Delphi debt when the auto-parts manufacturer was in bankruptcy and its bonds were toxic.
The Elliott-Delphi story is a fascinating little saga, a fair summary of which can be found in the New York Post’s reporting here. Elliott is mostly engaged in the “convertible arbitrage” racket, meaning that it invests in the debt of distressed firms while betting against their shares. That debt is usually in the form of convertible instruments, meaning that they can be traded for some fixed number of shares. The ins and outs of that business model get head-clutchingly complex pretty quickly, but the short version is that investors such as Elliott seek to identify discrepancies between the price of a company’s stock and the value implied by the price of its convertible debt, and then to profit from such arbitrage.
Elliott also has an old-fashioned bill-collector strategy, as when it invested in the sovereign debt of Congo and then forced that unhappy country’s dictatorial regime to pay up by publicizing the leaders’ Louis Vuitton lifestyles, which were financed by looting the Congolese fisc. After rumbling with the strongmen in the Congo, Elliott was pretty well prepared for the UAW and the Obama administration.
Elliott and other creditors entered the drama when Delphi was already in the fourth year of its bankruptcy. That is worth keeping in mind: Elliott did not bankrupt Delphi; it was bankrupt when they found it. (In fact, that is precisely why they invested.) Delphi had until 1999 been a division of GM, and was spun off into a separate entity — a very stupidly conceived separate entity. Like its GM mothership, Delphi was financially ruined by a combination of union-goon rapacity and overly compliant management. They’d barely changed the keys on the front door before they were in bankruptcy, where they sat, for years, with the unions, the shareholders, and GM (which maintained a financial interest in the new firm), unable to agree about how to proceed.
How bad was the management? By the time Elliott and the other creditors took ownership of the company, its pension fund already was underfunded to the tune of $7 billion — that for a firm that sold for only $3.5 billion. Given the underlying finances and that Delphi already was in bankruptcy, most of what critics blame Elliott for — GM’s taking a haircut on Delphi debt, and the collapse of its grievously underfunded pension program — was going to happen whether Elliott was on the scene or not. Most of what is unusual about the Delphi story is not what Elliott did but what the Obama administration did: Namely, the GM deal brokered by the administration required GM to bail out Delphi’s unionized pensioners, even though GM was under no contractual obligation to do so. The non-union white-collar workers were left twisting in the wind in what was plainly an Obama-administration sop to the labor syndicates that provide massive funding and thousands of foot soldiers to Democratic campaigns.
The difference between what happened at Delphi and what happened at GM proper is that, unlike GM’s pusillanimous secured creditors, Elliott and the other Delphi creditors refused to roll over and play dead when the Obama administration tried to foist a raw deal on them. Which is to say, they satisfied their moral and legal obligation to look after their investors’ interests. They did so by threatening to go thermonuclear on Government Motors by shutting down the supply of parts critical to the bailed-out firm’s operations. GM and the Obama administration were taught a lesson worth learning: Don’t take a hard-line position against somebody you can’t live without.
The worst that can be said of Elliott is that the firm displayed excellent political instincts and a fruitful understanding of the peculiarities of bankruptcy law. In the end, Delphi was restructured and it had a successful public offering of shares. The 3,000 percent return that King and others attribute to Ann Romney’s investment is also certainly not accurate inasmuch as it does not account for costs involved with such a complex episode — but even if it were, more power to the blind trust.
Nobody should be under any illusions about the strategies of a firm such as Elliott. But that the bailouts produced profits for creditors and investors is an argument against bailouts, not an argument against investing. It is worth repeating: Delphi was broke and bankrupt before Elliott was on the scene. It is now what appears to be a reasonably stable enterprise. (“Appears to be” — I have my doubts about the real health of the automotive industry, and, as they say, this column does not constitute an offer of investment advice.) In the same way, that the pension obligations of Delphi and other insolvent companies have been offloaded onto the Pension Benefit Guarantee Corporation is an argument against the existence of the PBGC, a government boondoggle that is an invitation to moral hazard. It was not Elliott and the other creditors who put Delphi’s pension fund into the hole, and it is hard to blame them for declining to inflict an unnecessary $7 billion hit on their investors.
What is most odd about this episode, though, is that the people most loudly decrying the intersection of finance and politics in this case are those who are most loudly celebrating the bailouts that created that nexus in the first place. Mitt Romney, recall, wanted GM and the other automotive firms restructured in private bankruptcy rather than propped up by the Obama administration. He lost that argument, and now the Democrats are blaming his wife for not losing money on the deal, too — a very strange thing for an administration that is always going on about the “investments” America should make.
— Kevin D. Williamson is roving correspondent for National Review.