I was impressed by Mitt Romney’s Detroit News op-ed on the auto bailout, but the debate surrounding the bailout is complex. David Skeel of Penn Law School made the case against in June of last year:

If the government wanted to “sell” the companies in bankruptcy, it should have held real auctions and invited anyone to bid. But the government decided that there was no need to let pesky rule-of-law considerations interfere with its plan to help out the unions and other favored creditors. Victims of defective GM and Chrysler cars waiting to be paid damages weren’t so fortunate—they’ll end up getting nothing or next to nothing.
Nor would both companies simply have collapsed if the government hadn’t orchestrated the two transactions. General Motors was a perfectly viable company that could have been restructured under the ordinary reorganization process. The only serious question was GM’s ability to obtain financing for its bankruptcy, given the credit market conditions in 2008. But even if financing were not available—and there’s a very good chance it would have been—the government could have provided funds without also usurping the bankruptcy process.
Although Chrysler wasn’t nearly so healthy, its best divisions—Jeep in particular—would have survived in a normal bankruptcy, either through restructuring or through a sale to a more viable company. This is very similar to what the government bailout did, given that Chrysler is essentially being turned over to Fiat.

The deeper problem, which many of my interlocutors dismiss, is the following:

The indirect costs may be the worst problem here. The car bailouts have sent the message that, if a politically important industry is in trouble, the government may step in, rearrange the existing creditors’ normal priorities, and dictate the result it wants. Lenders will be very hesitant to extend credit under these conditions.
This will make it much harder, and much more costly, for a company in a politically sensitive industry to borrow money when it is in trouble. As a result, the government will face even more pressure to step in with a bailout in the future. In effect, the government is crowding out the ordinary credit markets.

I recently saw a post which argued that because GM workers accepted serious concessions, they were entitled to take a large ownership stake and to be afforded some level of protection. This may well be true. But if we’re at all concerned about setting bad precedents that will deter private investors from investing in “strategic” or politically sensitive industries in the future, the core priority should have been to abide by the established rules to the extent possible.

In a Michigan Law Review article, Skeel and his co-author Mark Roe offered the following about the Chrysler bailout:

Much corporate and commercial law has to do with the proper treatment of minority creditors and minority shareholders. For minority stockholders, there’s an elaborate corporate-law machinery for freeze-outs when a majority stockholder seeks to engineer a transaction that squeezes out minority stockholders. For minority creditors, there’s a century of bankruptcy and equity-receivership law designed to balance protection from the majority’s potential to encroach on the minority and squeeze them out from their contractual priority against the minority’s potential to hold out perniciously. These are neither small nor simply fairness-based considerations: capital markets depend on effective mechanisms that prevent financial majorities from ousting financial minorities from their ratable position in an enterprise. That’s what’s at stake.
It’s in that light that the Chrysler bankruptcy was pernicious. It failed to comply with good bankruptcy practice, reviving practices that were soundly rejected nearly a century ago. Going forward, the extent of Chrys- ler’s damage to bankruptcy practice and financial markets will depend either on congressional action or on how Chrysler is construed by other courts, and whether they will limit its application, as they should.

It is safe to assume, however, that Skeel and Roe’s arguments won’t resonate on the campaign trail. The reason is that it is very hard to explain the counterfactual. Had we had a managed bankruptcy that abided by good bankruptcy practice, it seems entirely likely that GM would be in fine shape and that Chrysler would have been sold, in part if not in total, to willing investors; moreover, Ford might be faring somewhat better, as it wouldn’t be competing with two firms that had received a large cash infusion from the federal government. But we’ll never know and the Obama administration can claim that in the absence of its departures from good bankruptcy practice, Detroit would be a ruined shell. One is reminded of advocates of the USA PATRIOT Act who insist that in the law’s absence, the United States would have experienced any number of mass-casualty terror attacks.