General Motors Will Never Repay Taxpayers

Last week, Reason Magazine ran an excellent article entitled “General Motors Will Never Repay Taxpayers.” I don’t really have anything to add in the way of commentary, but wanted to reprint some of the information here for your enjoyment.

I was against any and all bailouts from the very beginning. I truly believed that the markets should be allowed to work. If one or more of the automakers had a business model that could not survive in today’s economic climate, than it should have been allowed to die. There would still be demand for cars that would need to be made up somewhere, and another car company would have filled that need (at little or no cost to the taxpayers).

And now we see that even though Obama and the media did a happy dance over the $3.2 billion profit made by General Motors in the first quarter of 2011, the true story wasn’t as rosy as it seemed and GM will likely never be able to repay the money taxpayers so generously gifted to it.

Here’s the truth by the numbers:

  • The taxpayers gave GM $60 billion. Our president assured us the $60 billion given to General Motors and $20 billion given to Chrysler were not gifts, but investments that would not cost tapayers a dime.
  • The real bailout number is more like $105 billion. The federal government gave GM a special tax break worth $45 billion when it went through bankruptcy. Taxpayers usually lose the benefit of having old losses to write off against future profits when they go through bankruptcy, but GM got to keep their tax losses and will use them in the future. So when the company is profitable, it still won’t pay taxes for quite a while because of this tax break.
  • $1.5 billion of GM’s $3.2 billion profit is from the one-time sale of its auto parts supplier, Delphi, and its financial arm Ally Financial. Subtract that, and you’re down to $1.7 billion. That’s the number we should care about, because it’s the one that might be replicated.
  • GM has paid back the $10 billion it was loaned by the Treasury, but that leaves $50 billion in equity that was given to it by taxpayers. If the company has no loans, it has no debt service costs (interest expense), giving GM an unfair advantage in the marketplace. In contrast, Ford borrowed money to stay afloat and so it is automatically more expensive for them to stay in business.
  • Equity has no guaranteed value. With a $50 billion loan, at least GM would have to pay $50 billion back to the government. Instead, the  taxpayers hold equity (or stock) in the company. That stock is only worth what the market says its worth, and so who knows what the taxpayers will get back . The Treasury got back $20 billion when it sold half its equity (yes, it sold equity that it paid $25 billion for, at a loss). There is $30 billion still owed to the taxpayers, with no guarantee of how much it will be worth.
  • At the time of the Reason article, GMs shares were trading at $31. To get back just the $30 billion in equity the taxpayers are still owed, the shares would need to be selling at about $55. That would be quite a jump for a company with shaky footing.
  • Again the $30 billion in equity taxpayers would be looking to recover doesn’t include the $45 billion in tax breaks GM got.

GM’s most recent numbers are attributed, in part, to sales of SUVs and trucks. Gas prices were low enough that GeneralMotors was able to sell more of these, which are more profitable for them. But as gas prices rise, consumers naturally look at buying more fuel-efficient vehicles, which will cut into GMs profitability. GM’s labor costs are still at $58 per hour, while industry cost leaders Hyundai and Kia are at $40.

Auto industry analysts project GM’s stock price to be at about $42.85 one year from now. That price would leave taxpayers with a loss of $13 to $19 billion on their equity, plus the $45 billion in tax breaks, for a total loss to taxpayers of $58 billion to $64 billion.

Let’s not forget that Ford made a $2.6 billion profit last quarter, without any bailout money. Suddenly, the situation with General Motors doesn’t look so rosy.

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