GM Pays Back Gov. Loan with Taxpayer Funds

Discussion in 'Stocks' started by pspr, May 1, 2010.

  1. pspr


    Is there no shame at Government Motors?

    GM CEO Ed Whitacre announced in a Wall Street Journal column 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 Mr. Whitacre is feeding them.

    Yahoo! BuzzUncle 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 Mr. 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% 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% 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% equity stake. The U.S. and Canadian government together own 72.5% of the company.)

    But when Mr. 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..............
  2. I ran some quick numbers. GM has a payroll of 8.7 billion dollars per year. If you make a generous assumption that the us gov will collect 15% of that per year that is 1.3 billion dollars per year collected in tax revenue. So it will take almost 33 years to make back the equity stake. Obviously not inflation adjusted but you get the idea of what our tax dollars bought.

    When I see the numbers of some of the "zombies" that the government has created. I see no reason why the next 10 years wont be similar to japans lost decade. Not up, not down but basically on an island with a smoke monster and Jacob.
  3. It is possible that the equity itself will have some value and it need not be all paid through income taxes.