GM's Phony Bailout Payback
The company is setting the stage for another taxpayer shakedown
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GoogleGM CEO Ed Whitacre announced in a Wall Street Journal column last Wednesday that his company has paid back its government bailout loan "in full, with interest, years ahead of schedule." He is even running TV ads on all major networks to that effect—a needless expense given that a credulous media is only too happy to parrot his claims for free. Detroit Free Press' Mike Thompson, for example, advises bailout proponents to start "warming up their vocal chords" to jeer their opponents with chants of "I told you so."
But before belting out their victory aria, GM-boosters ought to hear the whole story—not just the fairytale version about Government Motors' grand comeback that Whitacre is feeding them.
Uncle Sam gave GM $49.5 billion last summer in aid to finance its bankruptcy. (If it hadn't, the company, which couldn't raise this kind of money from private lenders, would have been forced into liquidation, its assets sold for scrap.) So when Whitacre publishes a column with the headline, "The GM Bailout: Paid Back in Full," most ordinary mortals unfamiliar with bailout minutia would assume that he is alluding to the entire $49.5 billion. That, however, is far from the case.
Because a loan of such a huge amount would have been politically controversial, the Obama administration handed GM only $6.7 billion as a pure loan. (It asked for only a 7 percent interest rate—a very sweet deal considering that GM bonds at that time were trading below junk level.) The vast bulk of the bailout money was transferred to GM through the purchase of 60.8 percent equity stake in the company—arguably an even worse deal for taxpayers than the loan, given that the equity position requires them to bear the risk of the investment without any guaranteed return. (The Canadian government likewise gave GM $1.4 billion as a pure loan, and another $8.1 billion for an 11.7 percent equity stake. The U.S. and Canadian government together own 72.5 percent of the company.)
But when Whitacre says GM has paid back the bailout money in full, he means not the entire $49.5 billion—the loan and the equity. In fact, he avoids all mention of that figure in his column. He means only the $6.7 billion loan amount.
But wait! Even that's not the full story given that GM, which has not yet broken even, much less turned a profit, can't pay even this puny amount from its own earnings.
So how is it paying it?
As it turns out, the Obama administration put $13.4 billion of the aid money as "working capital" in an escrow account when the company was in bankruptcy. The company is using this escrow money—government money—to pay back the government loan.
GM claims that the fact that it is even using the escrow money to pay back the loan instead of using it all to shore itself up shows that it is on the road to recovery. That actually would be a positive development—although hardly one worth hyping in ads and columns—if it were not for a further plot twist.
Sean McAlinden, chief economist at the Ann Arbor-based Center for Automotive Research, points out that the company has applied to the Department of Energy for $10 billion in low (5 percent) interest loan to retool its plants to meet the government's tougher new CAFÉ (Corporate Average Fuel Economy) standards. However, giving GM more taxpayer money on top of the existing bailout would have been a political disaster for the Obama administration and a PR debacle for the company. Paying back the small bailout loan makes the new—and bigger—DOE loan much more feasible.
In short, GM is using government money to pay back government money to get more government money. And at a 2 percent lower interest rate at that. This is a nifty scheme to refinance GM's government debt—not pay it back!
GM boasts that, because it is doing so well, it is paying the $6.7 billion five years ahead of schedule since it was not due until 2015. So will there be an accelerated payback of the rest of the $49.6 billion investment? No. That goal has been pushed back, as it turns out.
In order to recover that investment, the government has to sell its equity. It plans to do that only when GM becomes a publicly traded company once again. GM was hoping to turn a profit by the end of 2010 and float an initial public offering this winter. However, GM Chief Financial Officer Chris Liddell, when queried about that timeline a few days ago, demurred. The offering will be made, he said, "when the markets and the company are ready."
(Take that, taxpayers!)
The reality is that there is no certainty that GM will ever be able to make taxpayers whole. Some analysts such as Center for Automotive Research's Sean McAlinden and Global Insight's George Magliano believe that it will—eventually. McAlinden maintains that this will happen when the company's market capitalization touches $60 billion. (At GM's peak in 2000, this level was only $57 billion.) This is a challenging but not an impossible goal—provided the economy does not dip into another recession, he maintains. Magliano too maintains that the company will be able to pay back taxpayers if the industry is able to ramp up annual vehicle sales from the expected 10.8 million this year to 17 million in 2014 and GM captures 20 percent of these sales.
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That commercial pisses me off every time I see it. My wife thinks I'm going nuts.
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What are you, some kind of commie? We're GM, something all Americans can be proud of again. You probably hate baseball and hot dogs, too!
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If only Chrysler and GM could get back to their glory days of the K-Car and the Celebrity... Oh wait, manufacturing crap automobiles was never a good idea.
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Look at the bright side--the Volt is coming up!
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Good one.
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And another bright side, it don't accelerate suddenly like a Camry ;-) lol.
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The new Volt will not do untill they find a better battery for this car that gives you more travel time between battery recharge.
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It is just schlocky madison avenue political consultant stuff, with some campaign advisor stuff on top. Welcome to the world of the state-owned-enterprise. Also, the message implies that the viewer is a rube which is why it's offputting. Fortunately, we now have access to information like never before and can only through wilfulness be so easily fooled. Thanks again, Hon. Mr. Gore, for inventing the internet.
Is GM now selling products or its image? It is mistakenly the latter; as a production / captive finance group its image can only be as good as the products it produces and can sell at prices unsubsisdized buyers (and not including government procurement offices) are willing to pay. A tall hurdle this is for that group.
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Yep, when one see how much they got from tax payers and they still pay bonuses and make money out of tax payers...you have to get distrubed
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Govt is bad, education is bad, healthcare is bad, quality of the population is bad.. What have happen to our nation.. this is very sad.. i dont like to see america is such a troublesome time..
BigBootyPorn -
I was at a family gathering where this came up. I was glad to explain to them that the "payback" was a bullshit accounting ploy.
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The looks of confusion and denial must've been priceless.
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I, too, nearly burst a blood vessel on a similar conversation the other day.
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Simple math suffices to prove it's a lie. GM is still losing money. If they don't bring in enough money to cover costs, where the hell did the money to pay back the government come from?
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Well, due to accounting rules, it is possible to have a loss while still having positive cash flow. Which, I doubt, is the case with GM.
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They're losing money more slowly than under the worst case scenario. They essentially got a credit line for the worst case scenario. They aren't doing as bad as that, but they're still losing money.
They are truthful when they say that they're doing better that the worst case scenario, and better than many expected-- but it still isn't good enough.
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said, "when the markets and the company are ready."
(Take that, taxpayers!)
The reality is that there is no certainty that GM will ever be able to make taxpayers whole. Some analysts such as Center for Automotive Research's Sean McAlinden and Global Insight's George Magliano believe that it will—eventually. McAlinden maintains that this will happen when the company's market capitalization touches $60 billion....or when hell freezes over. which ever comes first.
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Are these the same analysts who said Toyota is ruined recently?
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The reality is that there is no certainty that GM will ever be able to make taxpayers whole.
Based on P/Es of other carmakers, we're about 60% in the hole on our "equity" in GM. That's before whatever future bailouts we have lined up. I figure they will be the next AIG, always coming in asking for more.
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GM is a loser and will always be a loser because of Obama's union buddies. The "deal" screwed the bond holders and gave to the unions.
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Who would become a secured lender to GM now, but someone with a government bailmeout card of their own to play?
The way to end this bonfire of American wealth is to cut the fuel (our tax dollars) to the fire.
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If they don't bring in enough money to cover costs, where the hell did the money to pay back the government come from?
From another TARP fund, that's where.
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I was pretty sure that GM was at least not telling the whole truth. I was planning on never buying another GM car/vehicle ever again. This only hardens that resolve. I feel like buying a Ford, even though I all ready have a pretty good Toyota, just out of spite.
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Myabe we can merge GM and GE and call it GEM.
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That's truly, truly, truly outrageous.
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Personally I'm in favor of Barack Motors (BM)
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Or Bush Motors, take your pick.
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regardless it is still (a) BM
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Slogan:"If you are going to do it right you got to have a BM."
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you mean...."BM... for the regular Joe"
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with enough wealth redistribution, we can have a BM in every driveway.
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I wanted to have a BM on my liberal neighbor's driveway, but I left the paperwork back at home.
Remember - the BM's not finished til the paperwork is done! -
"Remember - the BM's not finished til the paperwork is done!"
Would that be a BMW?(BM Wipe) -
Meanwhile, at the one-third of the big three that DIDN'T come to Washington hat-in-hand a second time-
Ford reported a $2.1 billion profit and raised its forecast for the year, boosting second-quarter North America production by 30,000 vehicles. It finished the first quarter with $25.3 billion in cash.
As an added anecdote, my 4 cylinder 2.3l 2009 Ford Fusion, which gets around mpg, is almost paid off from the initial $19,500 sticker (plus discounts) that I paid for it. I have not had a single problem with it for almost two years now, and it hums in cruise at 80 on the highway. Plus I love the Sync system, which plugs directly in to my iPhone through the onboard USB jack. Voice activated radio is AWESOME.
Ford has been quietly building smart, reliable, efficient cars that people enjoy driving, sort of like what Toyota and Honda did 20 years ago.
Fuck GM sideways.
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*should read "which gets around 26 mpg"
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The Ford stock I got for less than $2 per is doing ok.
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But not today.
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Not to be an asshole, but I regularly get 37 mpg in my 4 cylinder '06 Toyota Corolla aided by my ability to drive more sanely than the average American. These hybrid cars have yet to impress me. When these "superior" American companies can produce a similarly priced car with 40+ guaranteed MPG, then I might consider giving a shit about their Union stamped products.
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Ford reports $2.1B profit; turnaround ahead of schedule
I wonder how many cars they'd be selling if the government wasn't keeping GM andChryslerSchiavo Motors afloat. -
Were they pulling the plug on those vegetables and still pissing away our money on Cash for Clunkers, or no?
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Mike Thompson is a friggin' idiot. Trust me on this.
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Why is it necessary to build cars in America? I mean, other than the jackassian answer "union jobs."
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We do build cars in America, almost every manufacturer does. It's just that the UAW hasn't been able to fleece the Japs yet.
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Sorry, you're right. "Why is it necessary for there to be American car companies?"
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Tariffs.
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But isn't that at sop to the companies and not a reason for them to exist?
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Unions are the best reason to not build autos here.
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FUCK YOU, GENERAL MOTORS
Why doesn't Whitacre just send a letter to all prior GM shareholders which says, "We stole your money, SUCKER!!!"
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When the gov. sells off it's equity in GM the loan will be paid off with a net profit. In the meantime thousands of jobs have been saved along with saving a US icon. Without the bailout this whole country might look like Katrina.
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B+
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Just like what happened to Chrysler, right?
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Without the bailout this whole country might look like Katrina.
Katrina Kaif? Katrina vanden Heuvel? Katrina Elam?
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Detroit looked like New Orleans long before Katrina.
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Wow, that sentence is messed up. My kingdom for an edit function.
Trying to salvage the thought:
Detroit has looked like post-Katrina New Orleans for a long time.
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In Detroit, do they watch RoboCop and wish their city was that nice?
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Detroit's still a city? It looks like what it was and is, a primary target of the 5th column. A kind of nuke in reverse. What do they call The Motor City these days, "Urban farmland?"
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Wow. Cognitive Dissonance must feel great. If ignorance truly is bliss my friend and you must happier than Rosie O'Donnell at a buffet.
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Should I hold my breath while I'm waiting to see Whitacre in front of a senate committee testifying on this?
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Ha!
The Dems probably wrote the script for the TV commercial for him.
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Most likely TRUE!
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Most well-run businesses...
Oh, fuck it. GM has nothing in common with a well-run business; why wouldn't they forego potential long term business improvements in favor of enriching themselves in the short term with an IPO?
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Indeed!
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Uncle SamUncle Scam gave GM $49.5 billion last summer in aid to finance its bankruptcy.FIFY
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Come on guys, we're not bailing out GM or Wall Street bankers, we're bailing out America and the economy. Wall Street execs, auto execs, the UAW as well as public employees ARE America!
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Nope, we're just digging a deeper hole.
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I was scratching my head to figure out how they paid it all back "in full." Thanks for the help.
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"Why doesn't Whitacre just send a letter to all prior GM shareholders which says, "We stole your money, SUCKER!!!"
The letter should go to the bondholders who were fleeced in order to hand over 17% of GM's carcass to the UAW, which held a lower security position in the credit structure.
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Great article Shikha!
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Now all of America knows what it's like to have their shit pushed in.
Thanks GM!
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To paraphrase Otto Von Bismark, "No greater lies are told than before the elections, during a war and after a government bailout!"
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GM is toast and will ultimately will make Amtrak look like Microsoft.
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Uhhh.... who buys GM cars anymore??
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Reminds me of a lotto scratcher ticket when they advertize the odds of winning are 1 in 11. What they don't tell you is that they count a dollar winner as a "win." But, how can it be called a win when it takes a dollar to buy the ticket in the first place? Because the lawyers say it's "legal."
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Thanks for raising millions for me, Whitacre, and here's a nice CEO job for you. GM.
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My spouse and I have been GM fans in the past, but NEVER AGAIN...they have failed as a company and failed their loyal customers in a big way. We will NEVER purchase another GM product no matter what the price, interest rate or terms.....bye bye GM and we are all sorry the US Government (the tax payers) bailed you out. BE GONE!
Thank you for publishing this article to represent the true facts on the GM bail out. We suspected something wasn't right,but didn't have the facts. Thanks again. BYE BYE GM....
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Well, we could buy a Nissan. Oh wait, Renault own 40% of Nissan and Renault is still owned at 20% by the French government ;-)
On a more serious tone, maybe it's time to repeal the Clayton Antitrust act, to allow Dupont to revinvest in GM after they forced to sell their shares in 1957 http://www.jstor.org/pss/3478640 they'll do a more better job then Ed Whitcare.
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I want to sue GM for fraud.
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Great article. Two questions:
Is there a breakdown of the term loan, equity and working capital line somewhere? It is not clear from the article if the working capital line was part of the 57 BN or additional funds.
A 57 BN market capitalization in 2000 is what in 2010 or forecasted 2020 dollars (assuming the dollar still exists in 2020)?
Thanks again.
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Exactly the reason I will never buy another GM product after the 2010 model year.
I used to be a BIG fan of GM products especially their trucks. No one built a Truck like Chevrolet. I love my Trailblazer LT EXT. My mother loves her Yukon. We have been a Chevrolet and GM family for a very long time.
The solution is simple for GM and Chrysler. Dump the UAW union and Dump them now. As long as these corporations are beholden to the Unions they will be government owned entities.
Ford however has not depended upon one dime of federal money. My next Truck will be a Ford so long as the government owns GM.
Unless the government wants to pay me my return on my investment with a new truck of my choice. Both a GM and a Chrysler product. Ill take a Chevy Silverado and a Dodge Charger Hemi please. Being that the government owns Both Manufacturers.
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AMEN! It's the unions helping to ruin America - every single one of them is holding this country hostage and the public is paying the extortion in bailouts which support the unions. Moreover, unions ONLY want mediocrity and lock step. Heaven forbid a union member should outshine another union member and get a merit raise or praise.
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both parties are corrupt to the core
as is the mediamassive greed
financial theft
bailout bonus
9/11 coverup
corporatism -
BTW, my '91 Ford Probe (built by Mazda's non-union Flat Rock, Michigan plant) gets anywhere from 25 - 30 mpg, depending on how I drive, and cruises nicely at 80.
A little history: VW is the only "foreign" automaker to have a UAW plant (from '78 to '88). VW is also the only foreign automaker to have CLOSED a U.S. plant. They moved production to Brazil, citing a better-educated workforce.
In January '85, I bought one of those UAW VWs, a Golf. It was a great car, and it was miserably assembled. It had a 2-year warranty, and I brought it back once each month, with a list of several problems. There was never a component failure; things just didn't fit right. It seems the dealer took the whole car apart and put it back together, twice. Looking at the invoices, it seems VW paid the dealer for the work about twice what I had paid for the car.
BTW, that '85 Golf got 40 mpg, reliably, and was a little faster than my Porsche 914.
In '91 I bought a new Mercury Tracer, built in Mexico (40+ mpg). I found NOTHING wrong during its 2-year warranty.
I have worked for a few companies that had auto makers as customers; I've been in auto plant in 3 states and 1 province. I have a very simple rule: never buy a car built in Detroit. It has served me very well. (Even the VW ended up as a great car once it was re-built by the dealer.)
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Shikha:
Brilliant study on the GM bailout. Kudos to you..!!DK
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...and how is this any different from the derivitives market?
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YEAH!!
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The author of this story is uninformed. In GM's situation, debt is essentially like equity because the company is in so much distress. His point is flawed. Why not take part in the upside of equity when the debt is almost as risky?
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great
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Great informative article on our beloved GM. It is probably a good thing this is not mainstream knowledge as that would hurt them even more and we would be in even worse shape. Sometimes little white lies to the masses are the way to go.
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I hope you morons realize an equity stake is NOT a loan. So by definition and any other way you want to cut it, it was paid back. Paying back a loan with the borrowed money is not wrong either. Imagine you take a loan for $20,000 to fix up your house. You put it in the bank, and realize, I have enough funds to pay the contractor as I go in the remodel of the home. You send a check early to the home equity creditor. Would you say you didn't pay off the loan?
Also, profitability and cash flow are tow totally different concepts, ESPECIALLY in a business with lots of depreciation at play. Their daily operations bring in more cash than they spend. That is the metric GM is using.
I wish they wouldn't let people who know nothing about accounting, the law and business write columns they know nothing about. -
stock traders can still ride the wave and make some money. knocking GM is not positive. However; I dont know why they cant build a car similar to honda. Honda seems to outlast all cars says current owner of a 1999 honda. I jus tpaid $5,900 for this candyapple red CRV - runs like a top. Dear General Motors I moved to Atlanta with a 8 cylinder GM and got 400,000 miles on it! no joke! CAN YOU PLEASE PLEASE PLEASE make a car that performs NO REPAIRS like HONDA? Get rid of those plastic parts! STOP the huge dealership repair bills. The only thing that should be replaced on a vehicles are tires and fixes for emission. I don't plan to sell my General Motors SUV bcause i think car repairs are still better then car pmts.
Good Luck. I just bought 10k in stock. -
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the best of watce s
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Yeah well written man! Love your blog!
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Well GM is now selling its stock publicly for $35 a share. That money means that billions of dollars will be repaid to the tax payer, hundreds of thousands of American jobs will be saved, and we keep a major part of our manufacturing base. Nothing phony about that.
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That commercial pisses me off every time I see it. My wife thinks I'm going nuts.
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Such....anger.....for the banks!!! must...resist...BLOWOUT!!!
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Honda seems to outlast all cars says current owner of a 1999 honda. I jus tpaid $5,900 for this candyapple red CRV - runs like a top. Dear General Motors I moved to Atlanta with a 8 cylinder GM and got 400,000 miles on it.
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I'm always getting mad when I hear about government bailouts. Even for such an old news as this one.
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LOL what kind of BS is this!?
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what a crock!
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Strange, Strange - some people are just don't have manners
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GM is toast and will ultimately will make Amtrak look like Microsoft...
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Anyone of us is obliged to pay our taxes. Failure on paying this one is already considered as offence in the law. In order to avoid any consequences, it would be a better thing to be obedient on paying your taxes at the right time.
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Was LOL the other night after watching the news and GM's grand plans to make a comeback on some new compact vehicle.
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Have you seen the new Ford ad? Love it! Taking a shot at GM. About time someone started shooting back.
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Really these big guns of motors need a good hiding. Across the waters here in the UK its a cat fight, and they will always wonder why people wont spend.
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It is terrible with these automobile companies. Like with black death in the middle age.
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Yeh auto companies major fights all the time
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Great Information thanks for sharing
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At least they paid something back. The banks didnt pay anything back. They handed out bonuses to all the higher ups. Im sorry but thats worse than what they gave gm.
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