GM’s phony taxpayer repayment

By Edward Harrison of Credit Writedowns

This comes via Deal Book at the New York Times.

The company’s chief executive, Fritz Henderson, called the repayment plan “a personal commitment.” The Obama administration, wardens of the 60 percent taxpayer stake in the company, declared itself “encouraged” by the news. Many commentators followed suit. But in the premature rush to herald the beginning of the end of the government’s involvement in the auto industry, a number of key considerations were left out, Edward Niedermayer, the editor of The Truth About Cars, writes in an op-ed in The New York Times.

For starters, $6.7 billion doesn’t begin to scratch the surface of what G.M. actually owes us. Over the past 12 months, the Treasury has given it some $52 billion in the form of cash, loans and the purchase of that 60 percent of the company’s post-bankruptcy equity. And that number fails to take into account the two bailouts of G.M.’s former lending arm, GMAC, or the $3 billion spent on the “cash for clunkers program,” which doubtless kept the company from posting even deeper losses.

Moreover, G.M. is not, in the strictest sense, paying back taxpayers at all. Rather, it is refunding $6.7 billion of an $18 billion escrow account that was given to it by the government when it emerged from bankruptcy. The rest of that account will be used to cover fourth-quarter losses (including $2.8 billion pledged for the rescue of G.M.’s major parts supplier, Delphi), repay loans from the Canadian government, and possibly prop up the automaker’s shaky European operations. That escrow account is due to expire in June, at which time G.M. will repay what remains of the $6.7 billion from this week’s pledge — and then pocket the estimated $5.6 billion remainder.

This post echoes comments I wrote at the time in my post “Why GM is repaying bailout money while it is still loss-making” when I said:

Meanwhile, in what should be seen as a PR move, General Motors has also announced it will begin repaying government money. The first $1 billion to be repaid in December. The company will make $1 billion payments to the U.S. government and $200 million payments to the Canadian government every quarter. It has said it could repay all the aid money by 2011, four years ahead of schedule. Presumably, this does not include the equity government stakes which can be sold on in the open market in an I.P.O.

Given the fact that General Motors is still losing money, it would make sense for them to delay repayment. However, I reckon they are going to repay early in order to tamp down criticism about their government-funded bailout.

Obviously, a lot of people were fooled that GM was repaying anything. It’s pure smoke and mirrors designed for public relations. The fact is GM is completely dependent on both government largesse and a global recovery in order to make its story work. Fritz Henderson mentioned in the flurry of announcements that he was more concerned with the top line than cutting costs. For that strategy to work, GM has to sell more cars or sell cars at a higher average price or both. To do so, recovery must be sustainable, which I don’t believe it is.

Meanwhile in Europe, GM has backed out of the Magna deal with the German government.  The Financial Times Deutschland believes they have done so in part to extract a better deal from other European governments which are chomping at the bit to save jobs in their own countries. The UK is said by German magazine Spiegel to have offered 400 million Euros in aid. Spain wants to pitch in with 300-400 million. Poland has offered tax breaks of indeterminate size. And Belgium is also in the running with their own package. All of this could add up to about 1.3 billion Euros.

However, Spiegel reports that the Opel head works council does not even believe the company can be turned around. In quoting works council member Klaus Franz, Spiegel said:

The existing plans call for GM to reduce fixed costs in Europe by 30 percent and capacity by 20 to 25 percent. The American company expects the Opel-Vauxhall turnaround will cost 3.3 billion euro. "I have no idea how they expect to be able to raise the two billion Euros on their own.”

We know where the money is coming from; it is coming from the $18 billion escrow GM has courtesy of the U.S. government and taxpayers.  This is a case in which U.S. taxpayers are funding European jobs. It’s as simple as that.

You noticed that GM is cutting capacity in Europe 25-30 percent. That’s a smart move because the world is awash in automotive productive capacity. However, massive bailouts only distort market mechanisms and artificially support this excess capacity. So it should come as no surprise that Volkswagen is increasing production. While this increase is mostly in China, this is prima facie evidence that we are not likely to see enough reduction in global automotive production as each individual country looks to protect its workers.

Every country is bidding to prop up its own domestic production facilities in an effort to save jobs at a time when the economy is still weak. This will keep excess capacity afloat in the auto sector such that when the next downturn hits, we are likely to witness more trouble in this sector. GM is actively pitting these countries against one another to extract the most in subsidies, using U.S. taxpayer money to float its operations as it does so.

The phony taxpayer repayment has to be seen against this backdrop. The U.S. and Canadian governments have invested over $60 billion in GM. GM had a market capitalization at a 2000 bubble peak of $57 billion. Yet, according to the New York Times article, equity from a planned I.P.O. would have to be worth $66 billion, an even higher market capitalization. I seriously question whether this money will ever be repaid in full. This is what happens when you bailout bankrupt companies. Expect the same in the wonderful world of finance too.


G.M. Is Taking Taxpayers for a Ride – Deal Book

Opel-Länder starten Subventionswettrennen – FTD

Mercedes-Manager soll Opel-Chef werden – Spiegel

Opel-Betriebsrat traut GM Sanierung nicht zu – Spiegel

Volkswagen to invest billions to increase production – BBC News

VW planerar miljardinvesteringar – Dagens Nyheter

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward


  1. c1ue

    The GM-Opel sage is even worse than it appears.

    The autoworkers in Germany know full well what is going on: a secular decline in worldwide automobile purchases.

    They also know that this means only those companies able to retain and/or build market share in the coming years will survive. Doing so requires a massive investment and they are plainly dubious that GM will do so – a very reasonable belief given the GM behavior in its home country.

    The refusal to go through with an already agreed upon sale not only angers the autoworkers in Germany, but has stuck a thumb in the eye to Canada, Russia, and Germany – in the latter case of Angela Merkel, a woman not known for forgiveness.

  2. albrt

    “This is what happens when you bailout bankrupt companies. Expect the same in the wonderful world of finance too.”

    Finance is a little different. The bankers end up with a much larger percentage of the bailout money going directly into their personal pockets. And the bankers have a much easier time appearing to pay the money back because there are so many alternatives for replacing direct payments that are drawing too much attention with off-budget guarantees and other dodges.

    If GM was the worst of it I would still have some hope. The government capture by banks goes much deeper than the capture by heavy industry.

  3. Hugh

    For me, GM is a useful metaphor for how risk and debt are shuffled around and portrayed as resolved. It is all bandaids and potemkinvilles.

    As for Dimon, I think the talk of him as Treasury Secretary is just an ego and prestige boost for him. Actually getting the job would be a sure way to destroy his carefully nurtured reputation. On the other hand, the turf wars between him and Summers would almost be worth the price, if the country’s economy wasn’t crashing that is.

  4. CrocodileChuck

    there was 35-40% excess capacity in the auto business globally BEFORE the Lehman collapse

    @ c1ue above accurately notes the secular DECLINE in auto sales

    the ‘cash4clunkers’ has pulled a lot of future US demand forward

    and yet no one, NO ONE, is thinking about correcting the size of global mfg capacity (surely exceeding 40% now)

    in cruel hindsight, GM and Chrysler (the least adaptive) should have been allowed to go to the wall in Q1

    Schumpeterian ‘creative destruction’ and all that

  5. Vinny G.

    Why sell Opel or anything, when next year they can just come back for a bailout refill.

    The bailouts do offer unlimited free refils, don’t they?… Like that overpriced coffee at Starbucks… Or the all you can eat buffet at your favorite Chinese restaurant…


  6. run75441


    Think we will see the ~$180 billion back from AIG or even the the $billions funneled through AIG to Sachs, Deutche and whoever else? Granted GM management screwed up; but, it still employs thousands of workers who make < than $28/hour as compared to how many $billions set aside by Sachs for bonuses?

    I will rescue Labor as opposed to W$ capital.

    1. Edward Harrison Post author

      “Think we will see the ~$180 billion back from AIG or even the the $billions funneled through AIG to Sachs, Deutche and whoever else?… I will rescue Labor as opposed to W$ capital.”


  7. superduperdave

    “We know where the money is coming from; it is coming from the $18 billion escrow GM has courtesy of the U.S. government and taxpayers. This is a case in which U.S. taxpayers are funding European jobs. It’s as simple as that.”

    Not quite: Germany had already agreed to pay 4.5 billion euros toward the restructuring if GM went with Magna. GM is seeking MORE money as it plays the governments off of one another, like in the U.S. with defense contractors and congressional districts. Berlin is theoretically still on the hook for that.

    It’s true that the market is oversupplied everywhere (and China hasn’t even begun to export), but Opel is a relatively solid operation, at least in comparison with the American arm, which now simply a global marketing/finance/outsourcing/lobbying business domiciled in Detroit.

  8. superduperdave

    The Germans haven’t said yet, so you can’t say that categorically. They ARE mega-pissed, obviously, since the whole thing was contingent on GM safeguarding German jobs.

    When push comes to shove, though, ask yourself, will Merkel insist on liberal orthodoxy and liquidate 10,000 German jobs, or will she cave in and pay up?

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