GM Might Still Be Cost The Tax Payers Money

See GM's Profits are Still a Huge Net Loss For Taxpayers by Megan McArdle. Excerpt:

"About $40 billion of the money that the government gave GM was converted to GM common stock. In the November IPO, the government made about $20 billion selling 478 million shares, leaving us with around $20 billion more to recoup on our remaining 26.5% stake in the company. That means we need to sell the approximately 365 million shares we have left at about $55 per share, net of underwriting and legal costs. At the current share price of $31, we'd be left with a loss somewhere north of $9 billion--plus the $1 billion we gave the "old GM" to wind things up, and the $2.1 billion worth of GM preferred stock we own. Since I don't know the details of the preferred transaction, I'll leave that out, which gives us a loss after expenses of $10 to $11 billion on our investment in GM.

But of course, that assumes that the current share price holds. It could well fall over the next few months--or when the government dumps an enormous new supply of GM stock on a market that isn't showing all that much enthusiasm for the product.

It also leaves out a very important extra: the $14 billion gift that the government seems to have handed the company, in the form of a special tax break (quoting a Chris Isidore story at CNN):

"That break will reduce GM's U.S. tax bill by an estimated $14 billion in the coming years, and its global taxes by close to $19 billion, according to a company filing.

Companies typically get a break on future taxes because of past losses. But in most cases they lose that tax break during bankruptcy, because the losses are offset by the "income" the company receives from shedding its debt.

Since the company shed $30 billion in debt during bankruptcy, it should have wiped out most of the tax break. GM even warned it expected to lose those tax breaks shortly before filing for Chapter 11 protection.

But somehow, that never happened, and the automaker was able to keep most of its tax breaks, essentially receiving a $14 billion "gift" from the government.

While it's unclear why GM was allowed to carry over its losses, some experts insist that GM got preferential treatment."

"What lesson, exactly, are we supposed to learn from this "success"? What question did it answer? "Can the government keep companies operating if it is willing to give them a virtually interest free loan of $50 billion, and a tax-free gift of $20 billion or so?" I don't think that this was really in dispute. When all is said and done, we will probably have given them a sum equal to its 2007 market cap and roughly four times GM's 2008 market capitalization.

No, the question was not whether GM could make a profit after a bankruptcy that stiffed most of its creditors and shed the most grotesque burdens of its legacy costs, nor whether giving companies money will make them more profitable. The question is whether it was worth it to the taxpayer to burn $10-20 billion in order to give the company another shot at life. To put that in perspective, GM had about 75,000 hourly workers before the bankruptcy. We could have given each of them a cool $250,000 and still come out well ahead compared to the ultimate cost of the bailout including the tax breaks--and over $100,000 a piece if we just wanted to break even against our losses on the common stock.

And if we'd done that, we'd have saved ourselves in other ways. We would have reduced some of the overcapacity that plagues the global industry. We would not have seen the government throwing its weight into a bankruptcy proceeding in order to redistribute money from creditors to pensioners, which isn't a good precedent."