General Motors Will Never Repay Taxpayers
The Obama administration, and its media backers, have seized upon news that General Motors made a $3.2 billion profit in the first quarter of 2011 as proof positive that its auto bailout is a success. President Obama is so buoyed that he is reportedly planning to make the bailout a major part of his reelection campaign.
Realities:
1. No doubt, $3.2 billion is a big number.
But an even bigger number is $60 billion. That’s what this administration and the last one together sank into GM (not to mention another $20 billion or so they dumped into Chrysler). When President Obama gave GM this money, he insisted that it was not a handout but an “investment” that would cost taxpayers “not a dime.”
But if there was ever any doubt that this wasnÂ’t going to happen, this earning report dispels it.
2. For starters,
included in the $3.2 billion figure is the net $1.5 billion that the company generated from the one-time sale of Delphi, its auto parts supplier, and Ally Financial, its financial arm. Subtract that, and its performance looks much less impressive, especially compared to its rival
Ford that really didn’t receive a dime from taxpayers yet made $2.6 billion last quarter—or nearly a billion more than GM.
3. But cold, hard cash is not the only help that GM got. Usually when companies declare bankruptcy, their tax liabilities increase since they have no more losses to write off. But GM got Uncle SamÂ’s special bankruptcy package that allows it write off up to $45 billion of old losses going forward. That puts
its total bailout at up to $75 billion*. Even thatÂ’s not all. The Treasury gave GM $10 billion of the $60 billion as a loan; the rest was through the purchase of equity. (It has more or less paid back the loan.)
4. The equity means two things: One,
GM has zero interest payments, something that gives it a distinct advantage over competitors. Ford, by contrast, had to pay $251 million in debt-service costs. Despite this, GMÂ’s real per vehicle margin was over $1,000 less than FordÂ’s, thanks to the heavy incentives it was forced to give buyers
5.
And two, taxpayers have no guaranteed return as they would have with a loan. Therefore, market valuation of GMÂ’s stock will determine what they will recover. They got back $20 billion when the Treasury sold half of its equity when GM floated its first post-bankruptcy IPO in December.
But that still leaves a $30 billion shortfall (excluding the $45 billion tax break).
Given such realities, Bloomberg’s survey of 21 auto analysts put the average projected price for GM at $42.85 per share a year from now. This means that, outside of miracle, taxpayers will lose anywhere from $13 to $19 billion on their principal and another $15 billion on taxes for a grand total of up to $28 to $34 billion* in losses. And that’s just for GM. Chrysler is whole different—and equally sordid—story. Even Treasury Secretary
Timothy Geithner acknowledged last month: “We’re going to lose money in the auto industry.”
.
Reason Foundation Senior Analyst Shikha Dalmia is a columnist at The Daily, America's first iPad newspaper, where this column originally appeared.
General Motors Will Never Repay Taxpayers - Reason Magazine
