The Coming Auto Bailout

[gags]

General Motors emerged from bankruptcy today after what was admittedly a very short trip through Chapter 11. GM has received about $50 billion in federal aid. The U.S. government has a 61% controlling interest, the United Auto Workers union gets a 17.5% stake, and the Canadian government controls 11.5%. The rest of the shares (10%) go to the bondholders of the old company.

Now I suppose we'll see whether the Company can make a profit. I doubt it will be able to pay back the taxpayers' money any time soon.

[Rearden_Steel]

Now I suppose we'll see whether the Company can make a profit. I doubt it will be able to pay back the taxpayers' money any time soon.

Were still waiting to be paid back from AMTRAK from thirty some odd years ago.

[gags]

Were still waiting to be paid back from AMTRAK from thirty some odd years ago.

Hey, Joe Biden used to ride that train almost every day. You should be happy about susidizing his commute to work.

[gags]

As the economy continues to flounder, it's increasingly clear that much of the money loaned to US automakers will not be repaid:

The federal government is unlikely to recoup all of the billions of dollars that it has invested in General Motors and Chrysler, according to a new congressional oversight report assessing the automakers' rescue.

The report said that a $5.4 billion portion of the $10.5 billion owed by Chrysler is "highly unlikely" to be repaid, while full recovery of the $50 billion sunk into GM would require the company's stock to reach unprecedented heights.

In all, the government has invested $74 billion in the nation's auto industry, including $12.5 billion into auto financing giant GMAC and $3.5 billion into auto suppliers, according to the report.

http://www.washingtonpost.com/wp-dyn/conte...ml?hpid=topnews

It's interesting that the government claims it has only "invested" about $74 billion into the auto industry. The figures I've seen are well over $100 billion and some estimates are nearly double the $74 billion amount.

[gags]

Here's a pretty interesting account of the government takeover of GM and Chrysler. GM's management (true to form) was arrogant and incompetent, right up to the very end.

Everyone knew Detroit's reputation for insular, slow-moving cultures. Even by that low standard, I was shocked by the stunningly poor management that we found, particularly at GM, where we encountered, among other things, perhaps the weakest finance operation any of us had ever seen in a major company.

For example, under the previous administration's loan agreements, Treasury was to approve every GM transaction of more than $100 million that was outside of the normal course. From my first day at Treasury, PowerPoint decks would arrive from GM (we quickly concluded that no decision seemed to be made at GM without one) requesting approvals. We were appalled by the absence of sound analysis provided to justify these expenditures.

http://money.cnn.com/2009/10/21/autos/auto...sion=2009102104

[softwareNerd]

A few days ago, GM announced that they were repaying, in full, the loans from the U.S. and Canadian governments amounting to $8.1 billion. This was being repaid years before schedule.

Yet, the curious thing is that GM reported a loss of $4.1 billion for the period since the company was reorganized (July 10th 2009) up to the Dec 31st 2009.

Of course, it is possible to have positive cash-flows while having losses. A company like GM has many huge non-cash expenses. So, when I saw those two figures, I assumed that GM must have done well on the operational front, gaining cash with which to repay the loan, but must have taken a loss by putting a more realistic estimate on the amount they will owe on their pension plan (a book entry which does not affect short-term cash, but shows as an expense).

Turns out that it is not so innocent. Actually, the government gave GM a loan of $52 billion. Then, during the re-org, GM wrote off its debts to all sorts of folk, and also converted $43 billion of the government's loan to equity. The net effect is that the government gave GM $43 billion and got an ownership interest, and the government also gave GM $7 billion and called it a loan. GM took the $52 million and paid back the $7 billion loan, even while they lost another $4 billion. It is easy to do, and they can do it a few more times, before the government's $43 billion is all gone. The structure -- paying you back with your own money, while making losses on the use of the money -- is the classic structure of a Ponzi scheme.

Now GM's CEO, Ed Whiteacre, http://www.youtube.com/watch?v=SSNPFVLIWjI, touting the repayment. Watch the ad with the renewed knowledge that this guy is lying.

Here's a more detailed article on the subject.

Edited April 25, 2010 by softwareNerd

[JASKN]

Here's a more detailed article on the subject.

The phrase, for those ignorant enough to use it, should really go, "Too big NOT to fail." But, of course, they would no longer be ignorant.

Nice article articulating some of those awful Government Motors realities and cascading effects.

[gags]

Here's a more detailed article on the subject.

Thanks, the Edmond Sun piece is great. The Washington Times from Friday has a good editorial on the subject:

Previously unreleased documents supplied to The Washington Times reveal that GM specifically used funds it received from the Troubled Asset Relief Program to pay off the government loan. According to Neil Barofsky, the special inspector general for TARP, $4.7 billion of $6.7 billion - 70 percent - of what GM paid back came from TARP money the company received. "The one thing a lot of people overlook with this is where they got the money to pay the loan," Mr. Barofsky told Fox News' Neil Cavuto on Wednesday. "It isn't from earnings." The numbers are based on a quarterly report Mr. Barofsky's office provided to Congress last week.

http://www.washingtontimes.com/news/2010/apr/23/government-motors-repayment-fraud/?utm_source=newsletter&utm_medium=email&utm_campaign=newsletter_must-read-stories-today