Free Markets, Free People

Forbes gets to the bottom of the GM loan “repayment” claim

And, it’s actually worse than first imagined. First the background:

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.)

So GM “paid back” only the $6.7 billion it got in the “pure loan”, not the full $49.5 billion it is on the hook for to taxpayers, or the $1.4 billion it got in a “pure loan” from Canada’s government.

When this story was first reported, it was claimed that TARP money was used to pay the loan. That’s true, but not exactly how you might have imagined it. Remember, GM reported a $3.4 billion fourth quarter, and a loss for the year. Where did it get $6.7 billion to pay off the loan? Here’s where:

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.

Yes, that’s right, they used a taxpayer funded escrow account to pay off the loan. And, as Forbes points out, the GM claim that being able to do so shows progress, it’s hardly worth the hype it received – except that’s not the whole story. In fact, it’s not a show of progress at all. GM did it for a very specific reason:

Sean McAlinden, chief economist at the Ann Arbor-based Center for Automotive Research, points out that the company has applied to the Department of Energy for $10 billion in low (5%) interest loan to retool its plants to meet the government’s tougher new CAFÉ (Corporate Average Fuel Economy) standards. However, giving GM more taxpayer money on top of the existing bailout would have been a political disaster for the Obama administration and a PR debacle for the company. Paying back the small bailout loan makes the new–and bigger–DOE loan much more feasible.

Or, as Forbes sums it up:

In short, GM is using government money to pay back government money to get more government money. And at a 2% lower interest rate at that. This is a nifty scheme to refinance GM’s government debt–not pay it back!

~McQ

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11 Responses to Forbes gets to the bottom of the GM loan “repayment” claim

  • Wow.  I didn’t think it was possible, but it’s actually worse than I thought.

  • The “black hole” only grows larger

  • You know, this sounds like just the sort of shell games – much worse, actually – that Imeme and the dems are ostensibly trying to stop with their new financial regulations.

    If MiniTru had a scrap of integrity (or if Imeme had an “R” after his name), this story would be a scandal getting 24/7 coverage.  Instead, they’ve played right along with the (mal)administration.  I wonder how it feels to be an unpaid shill?  Oh, who am I kidding!  These clowns in MiniTru probably go to work with smiles on their faces and songs in their hearts, happy in the knowledge that they are doing good for the country, the entire human race, and the universe.

    And speaking of integrity – or lack thereof – where is the left on this?  They whined and b*tched all through the Bush years about “corporate welfare”, yet here we have a clear case of it.  But we hear… not a peep.

  • Reading that story made me think that this would make an excellent episode of I Love Lucy.

  • Saw the commercial GM just put out saying it had paid off the loan in full. I wonder if the government would go after them for false advertising if I filed a complaint.

    • Everytime I see that commercial I want to punch my TV because I know that guy is lying through his teeth and there are millions of idiots sitting there smiling and saying, “WOW, they must be doing a good thing.”  Mr. Erb comes to mind.

  • We all know that borrowing from Peter to pay Paul doesn’t work well, but apparently borrowing from Peter to pay Peter works fine as long as you’re OK with the idea that you’ll eventually be owned by Peter.

    It also works  if you and Peter are working together in a shell game  to scam a whole bunch of Pauls into donating the money.

  • GM received money from two sources.  One was loans from TARP started by Bush.  The other was cash for quity from the Obama bankruptcy.  Money from the government in return for an equity stake.  All this money GM is moving around is from a year ago.
     
    Whitacre paid back the loan portion of the money because executive pay restrictions are tied to the TARP loans, not the cash for equity.  Which is the cynical way of saying it basically simplifies the types of obligations GM has to the government by eliminating the loan aspect.
     
    GM didn’t seek the cash for equity.  It was the last entity that wanted it.  It sought only loans all along.  Instead Obama decided to seize ownership and push the previous owners and investors out on the street.  He chose a crap shoot IPO instead of loans which would have been a known quantity.  That’s not GM or Whitacres doing.  Yet the Forbes author wants to lay this primarily at the feet of GM itself.
     
    As for seeking other loans, the DoE bureaucrats control the loan funding for fuel economy related renovations.  That fund was set aside long before the bailouts because of the ridiculous pacing of fuel economy standards applied to the industry.  So far GM has seen next to none of that money despite applying for the above amount some time ago.  The #1 recipient so far is Ford who applied for $11 billion and got around 6-8 of that for plant renovations so far followed by Nissan with $1.4 billion to develop an electric car for our market but to be built in Japan possibly a second plant built the US at some later date.
     
    As I said earlier, this is again deceptive on both counts.  Perhaps GM only gave back a little over 10% of what they received, but they didn’t give 0 back either.  Despite the outrage that the Forbes author tries to stoke, ask yourself if GM keeping 6.7 billion of the money they received last year is better?
     
    Whitacre is exaggerating what happened.  But the Forbes author is exaggerating in the opposite direction in an attempt to smear another industry in defense of their own.  Its easy for Wallstreet journalists with sympathies for the financial sector to whip on another industry.  Especially when their industry is in Congress’ crosshairs today for their bailouts.  What better than to accuse the ‘usual suspects’ in another industry of the type shell game you’re guilty of yourself.  http://www.qando.net/?p=1761

  • “Nissan with $1.4 billion to develop an electric car for our market but to be built in Japan” well, we wouldn’t want any icky factories here. No green jobs.