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Money Blog

Sep 7, 2012
01:44 PM

President Obama Let Detroit go Bankrupt and It Helped

President Obama Let Detroit go Bankrupt and It Helped

Even before he took the stage for his big speech accepting the Democratic party nomination, President Barack Obama was holding a big lead in Michigan.

A poll released Monday showed the president with a solid lead in the state as he went into the convention, leading native Michigander Mitt Romney 51 percent to 44 percent.

One large part of Obama’s popularity may be the idea that he saved the Big Three auto manufacturers from bankruptcy. But that’s not exactly correct.

The truth is that while Mitt Romney’s proposal was to give no federal aid to the struggling car giants, President Obama did actually allow —and even assist—GM and Chrysler to go into bankruptcy. The bankruptcy was detailed in an MSNBC article on June 1, 2009.

“General Motors filed for Chapter 11 bankruptcy protection Monday as part of the Obama administration’s plan to shrink the automaker to a sustainable size and give a majority ownership stake to the federal government.”

Chrysler filed bankruptcy on April 30, 2009.

What’s important to note here is what a bankruptcy really is. Many people believe that filing for bankruptcy means that your business goes belly up and you lose all your money. In reality, few things are further from the truth.

In the op-ed he wrote for the New York Times (“Let Detroit Go Bankrupt,” which I mentioned in my post “Are You Better Off Now Than You Were Four Years Ago?”), Romney advocates allowing Ford, GM and Chrysler to go through a “managed bankruptcy” wherein the “federal government should provide guarantees for post-bankruptcy financing and assure car buyers that their warranties are not at risk.”

If anyone should know about the benefits a managed bankruptcy can give to a company it’s Romney.

As I detailed in a blog post I wrote earlier this year for Loop21, Romney, like many, many, rich businessmen before him, used bankruptcy as a tool to become even wealthier. GM and Chrysler were able to do much the same, but with a big check from the government. (It’s also been said that a big check from the government helped Romney make his fortune.)

Contrary to popular belief bankruptcy does not mean that a business fails. Bankruptcy, particularly chapter 11, is a way for a business to shed debt by reorganizing its business affairs and assets. It is usually filed by corporations that need time to restructure their debts.

The main point here is that bankruptcies can be a helpful tool, to businesses and individuals, if used properly. And when combined with $60 billion in bailout money, they can be very helpful indeed.

According to CNNMoney, “Without financing during bankruptcy, GM and Chrysler would have had to go out of business, taking down many suppliers. That would have likely caused bankruptcies at the healthier automakers such Ford, who would not have been able to get the parts they needed to build cars.”

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