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Tuesday, April 27, 2010

Endorsing the dishonesty of General Motors

Shikha Dalmia writes at Forbes to explain how GM is essentially lying to say that they have paid back the money that the government spent to bail them out.
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.

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 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.
And no surprise that Robin Gibbs is practically wetting himself in triumphalist celebration of the supposed proof of the wisdom of Obama's supporting the bailout of GM.

I guess the Obama administration has run our of true good news about their economic policies so they're just making this stuff up and hoping no one else will notice.

Mickey Kaus writes
about the dishonesty of GM's claim and the administration's endorsement of those lies.
If Sarah Palin told a propagandistic whopper this big she'd be doing run back up to Wasilla by the press. ... It looks like, once the Obama administration realized GM was still in such bad shape there was no hope of pursuing Plan A--a public offering of stock to recoup at least some of the $50 billion capital bailout--they resorted to Plan B--a coordinated hype campaign to act as if the relatively puny $6.7 billion payback was the $50 billion. Larry Summers' credibility was dragged into the cesspool of PR scamming! ... Kausfiles calls on Summers to repudiate Whitacre's op-ed, lest his post-administration stature sink to Orszagesque levels. ... P.S.: GM really must be desperate for a way to counter resistance from bailophobic consumers if it has to blatantly jump the gun on claiming 'payback' like this. Whitacre's announcement is itself a sign, not of turnaround, but of GM's continuing weakness. ...
And now the Obama administration has jumped on board GM's dishonesty train. Perhaps they're just as desperate as GM to demonstrate some sort of success no matter the reality.


davod said...

Move along nothing to see here. A goverment controlled enterprise is folowing the admistrtation's standard operating procedures. Lie until it doesn't matter.

stubedobedu said...

You're kidding right? As it stands today, if the equity were sold, the government would receive a pretty good profit.

Is it spin? Absolutely. Whitacre's statement is pure business and is a marketing effort to help reestablish GM as a strong brand during a period the auto industry is still in trouble. Ford, while doing pretty good, is still in trouble with 30 billion in collective debt. Literally none of the auto companies is on sure footing these days.

Look, I'm not a fan of bailouts, the UAW of the last 45 years or the auto industry (exception Bill Ford Jr and Allan Mullaly, they rock. Been a fan of of Bill Ford since 2000 when he tried to persuade the company to move away from its SUV dependence for precisely the reasons that nearly destroyed the company). But I'm really tired of the collective memory loss in an effort to paint literally anything Obama touches as bad. The simple facts are we were in a meltdown and entirely too many business affected were too interconnected to let them simply close up shop. They were not going to be bought up. They were going to just shutdown with the additional burden on the broken economy. The collective stupid decisions by business and government over roughly the last 15 years (well 35 years really when it comes to the U.S. auto industry learning nothing from the last energy related crisis) insured it would be extremely painful. I simply do not understand how folks keep forgetting the first domino (Lehman Brothers) and how letting it just shut down started this whole mess (long overdue) to begin.

Betsy, instead of the bailout of GM, what would you have had the happen? And what do you presume would have been the effect? I hear your criticism but I may have missed your proposed alternative and evidence of how it would have had a more positive result.

BigFire said...

Meanwhile Ford reported $2 billions in profit last quarter.

Pat Patterson said...

To turn a profit on that $50 billion then GM would have to be valued at over $80 billion. That is simply not even anywhere near what the company is worth now nor was it before they slid close to insolvency two years ago. The reason that the government is even talking about selling is to pump up the value and so far no one is expressing any great interest.

Stan said...

GM is just flat out lying. Meanwhile, Senator Levin and company were making complete jackasses of themselves at the Goldman hearing. I don't give a hoot about Goldman, but the senators were just idiotic.

One simple point, instead of being upset over Goldman facilitating a way to short the mortgage bonds, Congress should understand that the problem is that Goldman and the rest of the street didn't develop a short mechanism ten years EARLIER. If there had been a way to allow short sellers to be the canary in the coal mine (an incredibly valuable role for society) on these mortgages early on, the crisis could have been avoided or sharply reduced in impact.

tfhr said...

We should all be so lucky to have such generous lending terms. Borrow $50, payback $6.70 with money that isn't yours and then call it square. What a deal!

Perhaps I can finance a GM truck like that.

tfhr said...

Oh wait...I am! Now GM has to find someone to sell it too - along with the rest of their cars and trucks.