U.S. government says it lost $11.2 billion on GM bailout

By Eric Beech of Reuters. Excerpt:

"The U.S. government lost $11.2 billion on its bailout of General Motors Co (GM.N), more than the $10.3 billion the Treasury Department estimated when it sold its remaining GM shares in December, according to a government report released on Wednesday.

The $11.2 billion loss includes a write-off in March of the government’s remaining $826 million investment in “old” GM, the quarterly report by a Treasury watchdog said.

The U.S. government spent about $50 billion to bail out GM. As a result of the company’s 2009 bankruptcy, the government’s investment was converted to a 61 percent equity stake in the Detroit-based automaker, plus preferred shares and a loan.

Treasury whittled down its GM stake through a series of stock sales starting in November 2010, with the remaining shares sold on December 9, 2013.

At the time of the December sale, Treasury put the total loss at $10.3 billion but said it did not expect any significant proceeds from its remaining $826 million investment in “old” GM, the report by the Office of the Special Inspector General for the Troubled Asset Relief Program said."

Out of the $50.7 billion that GM received in federal bailout funds, $11.4 billion was never paid back.

See GM discovers that government bailouts come with golden chains attached by Matthew D. Mitchell and Tad DeHaven of Mercatus. Excerpt:

"Yet it’s hard to feel sympathy for GM. For decades, the industrial behemoth has benefited from a host of government-granted privileges. As Trump correctly noted, taxpayers rescued the company in 2009. And out of the $50.7 billion that GM received in federal bailout funds, $11.4 billion was never paid back. The company also benefited from the infamous “Cash for Clunkers” program, which offered a government handout to those who traded in perfectly good older cars for destruction, as long as they used the windfall to purchase a new car. While that program provided a short-term taxpayer-funded boost to companies like GM, there’s no evidence that it had any long-term benefit for the economy as a whole.

And GM’s government gravy train didn’t come to a stop in 2009. According to a subsidy database constructed by the advocacy group Good Jobs First, GM has since received another $700 million in federal grants and loans. While most of that figure comes from programs administered by the Department of Energy, the company received money from the U.S. Export-Import Bank and the National Science Foundation as well.

It’s also worth mentioning that GM’s ongoing employee pension woes could conceivably lead to another taxpayer bailout down the road. GM’s pension obligations are underfunded by approximately $30 billion, far beyond even the $18 billion insured by the federal Pension Benefits Guarantee Corporation (PBGC). Were the PBGC compelled to take on GM’s pension obligations at some point, the taxpayers could be on the hook for a bailout if the agency doesn’t have the resources to cover its own obligations.

General Motors also benefits from privileges in the tax code, though it would prefer to benefit more. The $7,500 tax credit that Trump mentioned in his tweet is limited to the first 200,000 electric vehicles an automaker sells. GM is already close to meeting this cap, so the company has actually been lobbying to have it lifted, so as to stay competitive with the other brands that haven't yet.

GM benefits from the so-called “ Chicken Tax,” too — a 25 percent tariff imposed on light trucks in 1964 as a response to European tariffs on U.S. chicken exports. The tariff has survived because it helps insulate politically powerful U.S. automakers from foreign competition.

The lesson here is that with government dollars come government shackles. Though lucrative in the short run, bailouts, subsidies, and protections are no guarantee of perpetual profitability. In fact, by insulating a firm from the realities of the market, they likely encourage poor decision making."

More On The Problems With The Auto Bailout

See Driving to Delusionville: Obama’s former auto czar is in deep denial about the government’s failed bailout by Shikha Dalmia of Reason. Excerpt:

"For starters, many experts suspect that at least GM could have obtained private bankruptcy financing if it had presented a credible restructuring plan addressing the cause of its malaise: the uncompetitive costs of its unionized work force. If it couldn’t, then the government could have offered guarantees to private lenders for the amounts they loaned, which likely would have been smaller than the bailout.

But the administration took matters in its own hands, using taxpayer dollars to commandeer the bankruptcy process to protect key constituencies, while giving short shrift to others. It gave Chrysler’s secured creditors, who would have had priority in a normal bankruptcy, 29 cents on the dollar. Chrysler’s unions, on the other hand, got more than 40 cents, even though they are equivalent to low-priority lenders. This made a mockery of longstanding bankruptcy law, something that will make credit markets wary of lending to political sacred cows in the future.

The administration favored union workers not only over creditors, but also other workers. All United Auto Workers retirees at Delphi, GM’s auto supplier, got 100 percent of their pension and retirement benefits. But 21,000 nonunion, salaried employees lost up to 70 percent of their pensions, and all of their life and health insurance. The Treasury could have covered 93 percent of the benefits of all employees for the same funds it spent on full union benefits, testified Bruce Gump, a representative of the Delphi Salaried Retirees Association.

Even for GM and Chrysler, the bailout constitutes a missed opportunity, not a second chance. They didn’t get nearly the kind of relief from labor costs that they would have in a normal bankruptcy. Not only are they on the hook for most of their legacy costs, they still pay union workers $58 per hour including benefits. This wouldn’t be so bad if Toyota, whose costs are $56 per hour, were setting the industry’s cost curve. But that’s no longer the case. Hyundai and Kia, with $40-an-hour costs, do that. The bailout prepared GM and Chrysler to compete with the industry leaders of yesterday, not tomorrow.

Absent the bailout, these companies would have survived, but they would have looked very different. They might have merged into one, pooling resources and slashing excess capacity from the industry. Alternatively, entrepreneurs might have purchased their more viable brands and run them as independent companies, breaking up the industry’s big vertically-integrated players into myriad smaller ones. Either way, the labor and capital squeezed out from the industry would have been more productively deployed elsewhere. History offers examples: A bankruptcy-triggered reorganization of the steel industry three decades ago led to an 18 percent increase in employment in the plastic industry, which replaced steel for some uses. The auto bailout has entrenched the status quo, strangling new possibilities.

Worse, it has unleashed a systemic moral hazard. GM had accrued $70 billion in losses in the two years before the bailout and debt 24 times its market capitalization. By contrast, Ford had eliminated money-losing brands and mortgaged all its assets -- including its logo, the Blue Oval—raising funds to weather the economic downturn. By bailing out GM, the administration rewarded its recklessness and penalized Ford’s prudence. Every company that feels it is too big to fail, or is a national icon or major regional employer, will wonder whether it makes more business sense to save for a rainy day or simply hold out for taxpayer assistance. And just as the Wall Street bailout became a justification for the auto bailout, the auto bailout will become a justification for the bailout of future reckless players."

The Real Cost of the Auto Bailouts

Great article by DAVID SKEEL in the WSJ, 6-6. He is a professor of law at the University of Pennsylvania and is the author of The New Financial Deal: Understanding the Dodd-Frank Act and its (Unintended) Consequences. Excerpts:

"In late 2008, then-Treasury Secretary Henry Paulson tapped the $700 billion Troubled Asset Relief Fund to lend more than $17 billion to General Motors and Chrysler. With the fate of the car companies still uncertain at the outset of the Obama administration in 2009, Mr. Obama set up an auto task force headed by "car czar" Steve Rattner.

Under the strategy that was chosen, each of the companies was required to file for bankruptcy as a condition of receiving additional funding. Rather than undergo a restructuring under ordinary bankruptcy rules, however, each corporation pretended to "sell" its assets to a new entity that was set up for the purposes of the sale.

With Chrysler, the new entity paid $2 billion, which went to Chrysler's senior lenders, giving them a small portion of the $6.9 billion they were owed. (Fiat was given a large stake in the new entity, although it did not contribute any money). But the "sale" also ensured that Chrysler's unionized retirees would receive a big recovery on their $10 billion claim—a $4.6 billion promissory note and 55% of Chrysler's stock—even though they were lower priority creditors."

"If other bidders were given a legitimate opportunity to top the $2 billion of government money on offer, this might have been a legitimate transaction. But they weren't. A bid wouldn't count as "qualified" unless it had the same strings as the government bid—a sizeable payment to union retirees and full payment of trade debt. If a bidder wanted to offer $2.5 billion for Chrysler's Jeep division, he was out of luck. With General Motors, senior creditors didn't get trampled in the same way. But the "sale," which left the government with 61% of GM's stock, was even more of a sham.

If the government wanted to "sell" the companies in bankruptcy, it should have held real auctions and invited anyone to bid. But the government decided that there was no need to let pesky rule-of-law considerations interfere with its plan to help out the unions and other favored creditors. Victims of defective GM and Chrysler cars waiting to be paid damages weren't so fortunate—they'll end up getting nothing or next to nothing.

Nor would both companies simply have collapsed if the government hadn't orchestrated the two transactions. General Motors was a perfectly viable company that could have been restructured under the ordinary reorganization process. The only serious question was GM's ability to obtain financing for its bankruptcy, given the credit market conditions in 2008. But even if financing were not available—and there's a very good chance it would have been—the government could have provided funds without also usurping the bankruptcy process."

"The claim that the bailouts were done at little cost is even more dubious. This side of the story rests on the observation that GM's success in selling a significant amount of stock, reducing the government's stake, and Chrysler's repayment of its loans, show that the direct costs to taxpayers may be lower than many originally feared. But this doesn't mean that taxpayers are off the hook. They are still likely to end up with a multibillion dollar bill—nearly $14 billion, according to current White House estimates.

But the $14 billion figure omits the cost of the previously accumulated tax losses GM can apply against future profits, thanks to a special post-bailout government gift. The ordinary rule is that these losses can only be preserved after bankruptcy if the company is restructured—not if it's sold. By waiving this rule, the government saved GM at least $12 billion to $13 billion in future taxes, a large chunk of which (not all, because taxpayers also own GM stock) came straight out of taxpayers' pockets.

The indirect costs may be the worst problem here. The car bailouts have sent the message that, if a politically important industry is in trouble, the government may step in, rearrange the existing creditors' normal priorities, and dictate the result it wants. Lenders will be very hesitant to extend credit under these conditions.

This will make it much harder, and much more costly, for a company in a politically sensitive industry to borrow money when it is in trouble. As a result, the government will face even more pressure to step in with a bailout in the future. In effect, the government is crowding out the ordinary credit markets."

Failures of Auto Bailouts Hidden by Deceptive Accounting and Bogus Jobs Figures

Good post by Hans Bader of the Competitive Enterprise Institute Blog.

"Mounting evidence shows that the auto bailouts weren’t worth it. They have been far more costly, and less successful, than claimed, as even liberal commentators now have admitted. The Washington Post fact-checker criticizes President Obama’s phony accounting on the auto industry bailout: “What we found is one of the most misleading collections of assertions we have seen in a short presidential speech. Virtually every claim by the president regarding the auto industry needs an asterisk, just like the fine print in that too-good-to-be-true car loan.”

Obama cites various figures of jobs allegedly saved through the bailout. But he’s playing deceptive numbers games that take credit for jobs actually created by foreign car manufacturers that didn’t participate in the bailout. As the Washington Post’s Charles Lane earlier noted, Obama’s jobs figures cite jobs created by the foreign competitors of GM and Chrysler, and their competitors’ auto dealers, including “not only the Detroit 3, but also all of the plants operated by foreign car makers in the U.S., the entire supply chain and all car dealerships around the country!”

Obama’s false jobs figures are reminiscent of the previously debunked claims by the Obama administration about the $800 billion stimulus package, which it defended by citing imaginary jobs created in 440 non-existent congressional districts, such as Arizona’s 15th and 86th districts. Meanwhile, economists concluded that the stimulus had wiped out a net 550,000 jobs in the real world. (The stimulus destroyed a million private sector jobs, while creating or preserving 450,000 government jobs.)

The Post‘s Lane notes that although GM and Chrysler temporarily benefited from the Japanese earthquake and tsunami, which cut the market share of their Japanese competitors like Toyota, they failed to properly take advantage of it. Instead, lower-cost Korean automakers took almost twice as much market share from the Japanese as American automakers did. GM and Chrysler’s ability to survive and expand over the long haul is impeded by the fact that the Obama administration, for short-sighted political reasons, failed to adequately reduce GM and Chrysler’s high labor costs in the bailouts. As a Post observes, “the administration … did not press the United Auto Workers, its political ally, for even deeper labor cost reductions” needed to maximize the automakers’ long-run chances of survival.”

As a result, when the effects of the Japanese earthquake receded, so, too, did GM’s sales: “Car sales sputtered in May, slumping to levels that were much lower than expected as higher vehicle prices led consumers to put off purchases in the face of a weakening economy. Tightening supplies of vehicles after the Japan earthquake emboldened many companies … to raise car and truck prices, a strategy that analysts and investors said had backfired. U.S. automakers … reported sales on Wednesday that fell short of expectations as the industry experienced its lowest sales rate in eight months.”

Under the Freedom of Information Act, the Obama administration was recently compelled to release documents that show that it previously deceived the public about the costs and consequences of the GM bailout, which has been far more costly than Obama has claimed."

Obama Administration knew for weeks that GM would make fraudulent claims

Great article by Hans Bader of The Competitive Enterprise Institute Blog. Excerpts:

"The federal government knew of deceptive advertising by General Motors well in advance, and tacitly approved of it. Only later did federal officials distance themselves from those deceptive claims, after they drew criticism from an inspector general, Republican members of Congress, and even some journalists at liberal newspapers. Not, however, before the Treasury Secretary himself had trumpeted GM’s deceptive claims, which the Treasury Department had plenty of time to review before GM made them.

Documents just released by the U.S. Treasury Department in response to a Freedom of Information Act request make this clear. They show that General Motors and the Obama Administration coordinated PR strategy regarding GM’s much-criticized ad campaign in 2010, in which the car maker misleadingly claimed to have repaid what it received from taxpayers. In those ads, GM’s CEO at the time, Ed Whitacre, boasted that GM repaid its government bailout loan “in full, with interest, five years ahead of schedule.”

In May 2010, the Competitive Enterprise Institute (CEI) filed a deceptive advertising complaint with the FTC, and GM shortly thereafter stopped running the ads. CEI also filed a Freedom of Information request with Treasury for documents on the ad campaign. Those documents were finally released late last month, after a year of delay – far beyond the 20-day legal deadline for responding to FOIA requests."

"More importantly, this so-called “repayment” was just a drop in the bucket compared to what GM has received from taxpayers. The federal government had yet to recover the lion’s share of the more than $50 billion it loaned the company. Why? Because that $50 billion was mostly “converted into stock held by the Treasury Department” – stock worth far less than the billions the federal government injected into the company."

"Eventually, even columnists for liberal newspapers like the New York Times and San Francisco Chronicle ridiculed these false claims. Gretchen Morgenson of the Times noted that “the company simply used other funds held by the Treasury to pay off its original loan.” Kathleen Pender of the Chronicle noted that “GM repaid its government loan with other government money.” The conservative Washington Times noted that “General Motors Lost $3.4 billion” just before running the ad; “GM specifically used funds it received from the Troubled Asset Relief Program to pay off the government loan.”"

Even Liberal Washington Post Casts Doubt on Auto Bailouts

Great post by Hans Bader of The Competitive Enterprise Institute Blog.

"“Only 16 percent of executives in the auto industry” support the Chrysler bailout, according to the Washington Post’s editorial today. I think the bailout was a bad idea, for the reasons I list in my own commentary at this link, where I also chronicle how the Obama administration has deceived the public about the cost and consequences of the bailouts, and disseminated misleading claims by GM about allegedly repaying taxpayers.

As the Washington Post editorial board, which has not endorsed a Republican for president since 1952, noted, the bailout sent a harmful “message” that the automakers are “too big to fail.” And the bailouts might not have been necessary to save most auto jobs, since even “If GM and Chrysler had failed, their profitable parts would, eventually, have been bought up and put to work by others … expanding production and hiring workers in the process. Government dollars spent propping up the two automakers might have created jobs elsewhere.”

Even if a bailout had been a good idea, the Obama administration did not handle its execution well. As the Post notes, it is questionable whether having “decided to aid the industry, the administration chose the best way of doing so. The administration … did not press the United Auto Workers, its political ally, for even deeper labor cost reductions” needed to maximize the automakers’ long-run chances of survival. Moreover, bailing out Chrysler was harmful to GM, since “propping up Chrysler would saddle GM with additional competition, thus complicating survival for the larger, stronger company.”

Moreover, the automakers’ recent profits may be ephemeral: the Post notes that “a remarkable 29 percent of executives told Booz & Co. that a U.S. automaker could fail within the next 24 months.” Reuters earlier reported that “Car sales sputtered in May, slumping to levels that were much lower than expected as higher vehicle prices led consumers to put off purchases in the face of a weakening economy. Tightening supplies of vehicles after the Japan earthquake emboldened many companies … to raise car and truck prices, a strategy that analysts and investors said had backfired. U.S. automakers … reported sales on Wednesday that fell short of expectations as the industry experienced its lowest sales rate in eight months.”

The unemployment rate shot up to 9.1 percent in May, suggesting that consumer purchasing power may not increase enough to provide a robust market for automobiles."