GM Repays Government Debt; Was The Bailout A Success?

GM repaid $6.7 billion in US loans and another $1.4 billion in Canadian government loans. So where does that leave GM? Let's take a look.

Please consider Gas in the tank: GM repays $8.1B in gov't loans

Fallen giant General Motors Co. accelerated toward recovery Wednesday, announcing the repayment of $8.1 billion in U.S. and Canadian government loans five years ahead of schedule.

Much of the improvement comes from GM slashing its debt load and workforce as part of its bankruptcy reorganization last year. But the automaker is a long way from regaining its old blue-chip status: It remains more than 70 percent government-owned and is still losing money — $3.4 billion in last year's fourth quarter alone. And while its car and truck sales are up so far this year, that's primarily due to lower-profit sales to car rental companies and other fleet buyers.

The U.S. government still owns 61 percent of GM. The automaker is counting on a public stock offering to allow the U.S. government to begin recouping its remaining $45.3 billion investment. The Canadian government's $8.1 billion stake, which equals a 12 percent ownership interest, also could also be unlocked if GM sells shares to the public.

GM lost $88 billion between 2004, when it last turned a profit, and last year when it declared bankruptcy. It endured years of painful restructuring, closing 14 factories and shedding more than 65,000 blue-collar jobs in the U.S. through buyouts, early retirement offers and layoffs.

GM received $52 billion from the U.S. government and $9.5 billion from the Canadian and Ontario governments starting in 2008. At first the entire amount of U.S. aid was considered a loan as the government tried to keep GM from going under and pulling the fragile economy into a depression.

But during bankruptcy, the U.S. government reduced the loan portion to $6.7 billion and converted the rest to company stock. Canadian governments also converted part of their debt to shares, reducing its loan balance to $1.4 billion. The final installments on those loans were repaid Tuesday, comfortably beating a 2015 deadline.

GM wiped out most of its staggering $95 billion debt in bankruptcy, closing last year with $15.8 billion in debt. As it was reorganized, the United Auto Workers agreed to concessions, including a plan to shift $50 billion in retiree health care costs to a union-run trust. New hires and white-collar workers now don't get the same rich health benefits.

GM's planned stock offering hinges on the company posting a profit. GM posted a $3.4 billion loss for the fourth quarter of 2009, but its operations in Asia, South America and other regions made money.

GM's Pension Plan Underfunded by $27 Billion

Inquiring minds are wondering GM's Pension: A Ticking Time Bomb for Taxpayers?

General Motors Corp. may no longer be the world's biggest automaker, but it still operates the country's largest pension fund. The threat to its pension plans has always been an issue, butit took on a new urgency when GM disclosed April 7 that its plans were underfunded by more than $27 billion, with more than half of that being owed to U.S. workers and retirees. Across town, a post- bankrupt Chrysler faces its own pension shortfall. Moreover, a report last week from the Government Accounting Office (GAO) says the pension crisis in the auto industry could create an unprecedented crisis for the federal Pension Benefit Guarantee Corp., a government-sponsored organization to backstop company pensions.

Could taxpayers really be on the hook for UAW pensions?

Yes. GM could face a funding crisis in 2013 or 2014 when, under the current projections, the automaker will be required to make more than $12 billion in contributions to its pension funds to keep them solvent, according to the GAO analysis.

The funding could easily become a serious challenge for the PBGC, which says it is now facing $168 billion in possible plan terminations across a range of companies, many of them auto suppliers. The PBGC is privately funded, but since it was created by an act of Congress and its board of directors consists of the Secretaries of Labor, Commerce and Treasury, it's possible that the U.S. Government would step in if the agency came up desperately short of funds.

What happens to GM and Chrysler pensioners if the PBGC takes over the funds?

The retirees could face dramatic cuts. The PBGC promises a certain level of benefits, but $35 billion of the two automakers' promised pension benefits fall beyond the PBGC guarantees.

GM Summary

• GM is still Government Motors.
• The US Government converted $45.3 billion in loans to a 70% ownership position.
• The Canadian Government converted an $8.1 billion stake into 12% ownership.
• GM lost $3.4 billion in the 4th quarter of 2009.
• GM still has $15 billion in debt.
• GM has $27 billion in unfunded pension liabilities.

Until GM IPOs we will not know an approximation of taxpayer losses. Moreover, those losses do not include the pension time bomb.

With GM still losing money on top of all those issues why did GM repay TARP? The likely answer is to get out from under TARP restrictions on CEO and executive pay.

With the Obama administration crowing about the "success" of this bailout, let's go back to the beginning, to those $45 billion in loans. Had the government not made those loans (now converted to equity), GM would have gone bankrupt just as it did. GM would likely be producing cars just as it is now, taxpayers would not be out $45 billion, and GM would not be Government Motors.

The bailout was a total and complete failure.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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