GM's Profits Don't Mean Taxpayers Will Be Off the Hook

The company's cash cushion might go to unions, not investors.


Three years after being rescued by a taxpayer bailout, General Motors recently announced some rather ambitious profit targets for 2012. But even if it meets these targets—a big if—taxpayers should not wait on one foot to recover their remaining "investment" in the company.

There is no doubt that GM has returned from the brink. It made $8 billion last year, a record high, and regained enough global market share to once again become the world's biggest automaker, a title it had lost to Toyota. More impressive, it is planning to bump its profit margins from 6 percent last year to 10 percent this year, on par with its best-in-class rivals such as Hyundai and BMW. This, it hopes, will allow it to post $10 billion in profits this year, something that only 17 public companies managed to do in 2010.

How did investors react to all this hope and cheer? With a giant yawn: GM's stock price, which has been hovering around $25 for months, barely budged. That's $8 below GM's IPO price. And it's $30 below what's needed for taxpayers to recover the $30 billion they still have stuck in the company.

If investors aren't buying GM's rosy scenarios, it's for some good reasons. Peter De Lorenzo, editor of Auto Extremist, notes that GM is facing the most competitive market in history and investors are dubious that it can deliver. GM's $8 billion in profits last year resulted partly from the tsunami in Japa that disrupted Toyota and Honda's global supply chain.

Both are back this year and more formidable than ever. While GM reported a 6 percent drop in January sales in North America from a year earlier, its foreign competitors posted impressive gains. GM will have a hard time matching last year's performance, let alone upping it if it has even one more month like January, De Lorenzo notes.

Tougher competition in North America is not GM's only worry. Its sales in China are slowing. Also, Europe will probably remain a trouble spot. GM suffered $2 billion in losses in Europe last year, thanks to Opel, its hopelessly bloated German brand. But GM has been unable to obtain permission from the German government to restructure its labor costs, even as European sales plummet in an economic meltdown.

Toyota and Honda don't have the same exposure in Europe and hence have less to worry about. What's more, GM's global pension obligations are underfunded to the tune of $22 billion, about $10 billion in the United States alone.

If GM manages to address all these issues, notes Sean McAlinden of the Center for Automotive Research, its share price might go up $40 to $45, leaving taxpayers still $5 billion to $8 billion in the red. But that's under the best scenario. If stock prices remain at the current $25 level, the losses could mount up to $15 billion. That's not counting the $15 billion in tax write-offs that GM got as part of the bankruptcy deal. All in all, taxpayers are facing somewhere from $20 billion to $30 billion in losses.

That's not all the exposure that taxpayers will have going forward. The GM bailout has distorted the playing field so badly that its competitors are demanding their own handouts to even things out.

For example, McAlinden notes, the administration gave GM about $10 billion more than was strictly necessary to finance its bankruptcy. The money contributed to GM's nice $33 billion cash cushion right now. GM could use this money to buy its own stock and bid up prices, mitigating taxpayer losses—or pay dividends. But McAlinden doesn't believe that's what GM will do. It could use the money to pay off its obligations to the union health-care trust fund, making this a direct infusion of cash from taxpayers to unions.

Or it will use the money toward product development, putting its competitors at a disadvantage. Moreover, because all but $10 billion of the bailout money GM got was in the form of equity, the company has no debt service costs. Ford by contrast, is still servicing the $23 billion in debt it took to avoid a bailout.

This is unfair, and the Obama administration knows it, which is perhaps one reason it quickly approved a $5.6 billion retooling loan for Ford. That, in turn, elicited howls of protest from Chrysler's Sergio Marchionne. The administration gave Marchionne's parent company, Fiat, the majority stake in Chrysler without asking Fiat to contribute a single euro of its own.

Yet Marchionne complains that the administration hasn't been generous enough. In contrast with GM, it forced Chrysler to service the bailout loan. Now it's dragging its feet in approving Chrysler's new retooling loans, he claims.

Bailout supporters maintain that it was a one-time deal necessary to shore up companies in acute economic times. In reality, the rush for the bailout's spoils has produced ripple effects that may well haunt the economy for a long time.

As President Barack Obama campaigns to keep his job, he will spin the bailout as a success story that saved millions of American jobs. But taxpayers should bear in mind that the hit to their wallets will be substantial and will probably grow in years to come.

Shikha Dalmia is a senior analyst at Reason Foundation and a columnist at The Daily. This colum originally appeared in Bloomberg news.

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  1. People’s Cars for all are just around the corner!

    1. How ’bout a nice two seat electric Volt? Only $41,000

      1. Help, I’ve driven into a ditch and I can’t get out!

          1. Help! I’ve pulled it out of the ditch, and driven it straight off of a cliff!

    2. The 2012 Pelosi GTxi SS/RT Sport Edition

      May not be far off if the 2025 CAFE rules go unchanged.

      1. “….and I promise TWO electric cars for every garage!”

        1. You spelled chimp wrong.

          1. + 1 Condfederate Flag

    3. Bi-curious? -Datebi*cO’Mis designed for bisexual and bi-curious individuals to meet in a friendly and comfortable environment. It hopes that all members can make new friends and establish romantic relationships.

    1. No.

      1. +brevity

  2. GM is not a car company. It is a taxpayer funded union pension plan that builds crappy cars.

  3. What if the bailout worked?

    1. “Worked” for whom?

      Certainly not the taxpayers!

      “Worked” for Obama’s cronies in the UAW? Sure it “worked” for them. What if you’re not in the UAW?

      “Worked” for the UAW?


      Worked for me?!

      Hell no.

    2. Oh, it worked as intended. Perfectly.

      1. Big surprise there. And I agree–this kind of blatant payola to constituents could be the beginning of the end.

        1. What the fuck’s the problem…this is how Democracy works!

          1. That’s right! Now who’s the chump?

        2. Yeah, it’s never, ever happened before, ya know.

  4. … I love these articles. Can’t you just see Reason’s brain trust stamping their feet outside GM, shouting: “YOU WEREN’T SUPPOSED TO MAKE ANY MONEY” 🙂

    1. If we took our 60% ownership out of GM right now? We would lose *at least* half of our investment…

      And that’s with Fukashima crippling Japanese parts manufacturers–and tens of billions in tax holiday the Obama Administration gave them that wasn’t part of our initial investment–but ends up costing the taxpayers anyway.

      Is GM about to make a (mostly tax free) profit? Sure.

      How’s that get the taxpayers their money back?

    2. When GM was IPO’d after the bailout? It sold for about $33 a share. Right now it’s trading at $26.50 a share. Despite the profits, it’s stock has lost value since it was offered!

      Oh, and if the United States government sold its 60% stake in GM, and flooded the market with a huge supply of GM shares, what kind of effect do you think that would have on GM’s share price price? Don’t you think the price for the taxpayer’s stock would go down from where it is now?

      GM making money is hardly the issue. Ken Shultz getting reamed by Obama’s scumbag, overpaid union cronies–and being forced to pay for them out of my future paychecks?

    3. Holy smoke, the way you’re looking at it, Bernie Madoff did a great job for his investors–because Bernie Madoff got rich! …and who cares how his investors did?! Don’t you know anything about how to price an investment? Obama was smart because the UAW is making money now?

      What about the taxpayers? How’d that investment work out for us?

      Believe me, if the Obama Administration thought they could recoup their “investment” (my tax dollars) out of GM by selling the stock the government holds? They’d have done it already going into an election year.

      If they sold the stock now, the headlines would all make it painfully clear how much out of our future paychecks the Obama Administration squandered on the overpaid scumbags in the UAW.

      1. Um, well, they tell me inflation will take care of that. Eventually. Maybe even by my third term.


      No, we’re stomping our feet outside GM shouting “YOU WEREN’T SUPPOSED TO GET A BAILOUT, NOW GIMME MY MONEY BACK” 🙁

  5. What does John/Warty think?

    1. We think you should be BANNED, you heretic!

  6. Right, Liberty, GM “made” money last year.

  7. taxpayers should not wait on one foot


  8. Reason articles on GM = 30-40?

    Reason articles on AIG = zero?

    (AIG was MUCH worse)

      1. *shrugs*

        So I lied. It’s what I do.

      2. A few words on the AIG bonus “scandal” where Obama “interfered” with a subsidiary of the US Government?

        AIG is barely a footnote compared to GM here.

        (Welch did write a good article in March 09 on AIG though – calling for financial reforms that Obama passed in Dodd-Frank)

        1. So you read all of those articles from the search?

          Go back to calling everyone christfags, you look less silly.

          1. Nothing of importance on AIG since March 2009. The writers work GM because they know it will rouse the rabble here up.

            1. and? that’s it?

            2. shrike|2.22.12 @ 6:56PM|#
              “Nothing of importance on AIG since March 2009. The writers work GM because they know it will rouse the rabble here up.”

              You bet, shriek. No reason for anyone to write anything that isn’t about *your* concerns!

            3. Wrong again, dipshit. If Clint Eastwood had made a super bowl ad about AIG we’d be talking about AIG.

        2. Oops, I did it again. I really can’t help myself.

          1. Shitting out of your mouth is so common for you we excuse it. No worries.

          2. You’re not that innocent

  9. We are all GM shareholders now

    1. What about the people who actually were creditors? Are they going to get anything repaid?

      1. Why should they?

        They helped to contribute to a failing company. It took a bold move by Obama and his administration to get GM back on track to profitability.

        1. Tony|2.22.12 @ 8:04PM|#
          “Why should they?
          They helped to contribute to a failing company.”

          One more lie from shithead.

          1. That HAD to be a spoof. I don’t think anyone can be that stupid.

            1. anon|2.22.12 @ 8:34PM|#
              “That HAD to be a spoof. I don’t think anyone can be that stupid.”

              You have more confidence in shithead than do I.
              Several times, I presumed the same only to be subjected to many posts claiming only shithead’s good intentions were sufficient to keep children from being fed Alpo or some such bullshit.
              Shithead continues to amaze.

  10. Also, anyone know when rectal goes back on its meds? It’s out of fucking control anymore. Like, Whyte Injun out of control. But worse.

  11. Them goddamn union workers. I hate them bastards. They done ruint Merica.

    1. What about us? Are we innocent? Are we not men?

  12. Sorta OT:
    Let’s say you own a Tesla. Let’s say you’ve now figured out that it can be used only for 100-mile round trips with no luggage. Let’s say that as a result, the thing stays in the garage 95% of the time. IOWs, let’s say you got sucked into buying one and now realize it really isn’t an automobile.
    So, sucker, why should you gripe about $32K to replace the batteries?
    “Tesla stock down on bad battery blog post”…..1NB2MA.DTL
    The apologists are getting dizzy trying to spin some ‘equivalence’ or other.

    1. 32k?
      For a fucking battery!?


      1. anon|2.22.12 @ 8:36PM|#
        For a fucking battery!?

        And if you read some of the comments, that’s chump-change compared to the ‘externalities’ from oil-burners!
        Maybe someone’s brought it up by now, but I didn’t see a single comment on the disposal of the batteries.

        1. ‘externalities’

          UGH. That word really makes me want to vomit every time I read it. I seriously think I’d punch someone in the face if they said it to my face.

          I really like the comments that think electric cars are “new” though. Quite funny.

          1. If basic economic concepts vex you, maybe you shouldn’t read posts about economics.

            1. The Derider|2.22.12 @ 9:39PM|#
              “If basic economic concepts vex you, maybe you shouldn’t read posts about economics.”

              Oh, good! An ignoramus is to enlighten us!
              Explain “externalities” in detail and explain how, exactly, they affect a market. I’ll be waiting…

  13. While we’re on the subject of electric cars, you can get an 07 or 08 Prius for around 10 grand, and buy an all-electric conversion kit for about 6k, saving you roughly 25k over the nearest priced government subsidized vehicle.

    1. Interesting. Any good links on this?

      1. Yes, just do a google search for “Prius conversion kit.”

  14. Don’t forget to add the $3 Billion Cash For Clunkers subsidy to the ledger.

  15. Excellent Blog every one can get lots of information for any topics from this blog nice work keep it up.

  16. What a great blog post! Thanks for sharing it on your site.

  17. As someone that works in financing technology companies mostly software, over the last 2-3 years almost every company we see (19 out of 20) are in some way depended on some government handout or regulation (EPA “green” building codes, for example) for their revenue. It is becoming quite rare to see a company that makes its salt purely off commercial activities.

    This is not good. Seems like almost everybody is subject to the whims of Washington. Not just the poor.

  18. The stock price didn’t budge because no investor believes GM’s numbers, anymore, and why would you take the risk when just 3 years ago, they totally wiped out their shareholders’ equity? GM has been caught out too many times in the last five years stuffing its supply channel and claiming revenues that turned out to be vapor. There’s only so many accounting tricks you can pull before it comes time to pay the bills with cash that doesn’t actually exist. The only owners of GM stock nowadays are the large funds that have no choice but to own some GM stock for diversification.


  19. It could use the money to pay off its obligations to the union health-care trust fund, making this a direct infusion of cash from taxpayers to unions.

    Specifically, GM is obligated to use that money to pay off the UAW, even though it has already received more cash from GM (and suck…er, new stockholders) post-bankruptcy than GM owed it pre-bankruptcy. GM is obligated to pay the $146 million quarterly dividend on the $6.5 billion in 9% perpetual preferred stock held by the UAW before it pays any other dividend, and it cannot claw out of that obligation until the end of 2014, which will burn roughly $8.5 billion in cash.

  20. What an incendiary headline to grab readers attention. The headline implies that money will flow into union coffers; that is not the case.

    The money will go into a union run healthcare trust fund to pay healthcare for retirees. The money can only be used for this reason. GM, as Chrysler and Ford, were going to dump retiree healthcare for retirees. This was done to help the companies get this cost off their books so they could be more profitable.

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