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General Motors Will
Never Repay Taxpayers
Obama’s spin on GM’s latest profit report is pure baloney
By Shikha Dalmia
May 24, 2011
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.
But by this standard, Charlie Sheen’s comedy tour ought to be declared
a smash hit. Sheen’s backers will lose relatively less money on him
than taxpayers will on the bailout.
No sooner had GM made its announcement than Washington Post columnist
E.J. Dionne dashed off a stinging rebuke to naysayers (like me) who had
dared doubt the wisdom of the bailout. Likewise, the auto czar Ron
Bloom credited the turnaround to the president’s “tough love” approach.
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 wasn’t going to happen, this
earning report dispels it.
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.
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 Sam’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 that’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.)
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,
GM’s real per vehicle margin was over $1,000 less than Ford’s, thanks
to the heavy incentives it was forced to give buyers. (If the
administration can call this success, can it please call me the next
American Idol?)
And two, taxpayers have no guaranteed return as they would have with a
loan. Therefore, market valuation of GM’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). To get this back, the federal government
would have to sell its remaining 365 million shares—about 26.5 percent
of company equity—for about $55 per share. But after GM posted its
latest earnings report, its stock price dropped to $31, a few dollars
below even its IPO price of $33.
Nor are things going to look up for taxpayers going forward. One reason
GM’s first-quarter profits were even as high as they were was that low
gas prices boosted the sale of SUVs and trucks, GM’s (as Ford’s) most
profitable products. But with gas prices rising, customer demand is
expected to shift to smaller, more fuel-efficient cars. GM’s small cars
such as Chevy Cruz and Malibu have certainly done well in recent
months, but their profit margins are small because GM’s labor costs are
still too high.
GM slashed these costs during bankruptcy to $58 per hour, comparable to
Toyota’s $56. But the problem, notes Henry Payne, editor of Michigan
View, is that Toyota is not the industry cost leader anymore; smaller
Asian transplants such as Hyundai and Kia with $40-per-hour labor costs
are. To compete with them, GM needs to extract more concessions from
its labor unions during contract negotiations this September. But
United Auto Workers President Bob King has declared that workers have
already sacrificed enough to keep GM solvent and now expect givebacks.
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.”
Let’s hope that next time this administration decides to rescue
someone, it’s Charlie Sheen. He might be less high maintenance than GM
for taxpayers.
Read it at Reason
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