Spinout at Government Motors

by Rob Kirby, Kirby Analytics. April 26, 2010

Is there anyone who hasn’t noticed the television advertising blitz begun by G.M. over the past week – how they’ve repaid all of their government loans? That’s right folks – Ed Whitacre – Government Motors’ Chairman turned pitchman has taken to the airwaves in both Canada and the United States boldly announcing that his beleaguered company had repaid ALL OF THEIR LOANS five years ahead of schedule, with interest!

For those of you who forget, it was last year, in 2009, that 50 Billion in TARP funds [along with billions from the Canadian Government] were made available to G.M. to stave off its bankruptcy. Now, they’d have us believe they’ve paid all the money back!

Quite a turn around story, eh?

Canada’s Globe and Mail newspaper sees things a little bit differently:

GM ads and the underlying truth
…Television viewers are getting a good look at the bespectacled visage of the auto maker’s CEO/pitchman this week. In a new television commercial, Mr. Whitacre (in navy suit and red tie, natch – some things never change) strides into a car factory as the bearer of happy news…
…His Edness keeps on talking through the whole thing, and at the end of 60 seconds, the viewer is supposed to be left with nothing but good impressions. Hey, these GM guys aren’t so bad! Hey, the bailouts worked and they repaid the money! With interest, even.
But certainly not: Hey, they still owe more than $50-billion!
Actually, “owe” isn’t the right word. A corporation doesn’t owe its shareholders anything, strictly speaking, except responsible management of the money left over, if any, once workers, suppliers and creditors have been paid. When the governments of the United States, Canada and Ontario decided to pump more than $60-billion into GM last year to keep it from sinking, they agreed to convert the vast majority of the cash into shares, so as to not saddle the business with too much debt. A sliver of the money – about $8.4-billion (U.S.) – remained as loans, and that’s what has been repaid. Big shareholders, the taxpayers remain.

Ok, so G.M. is going to repay 8.4 billion – that’s still pretty good and constitutes a turnaround – doesn’t it?

Not So Fast Edsel

Before we’re blinded with the beauty of this achievement, we should stop to consider there’s a little bit more to this “feel-good” story than the happy headlines suggest. Back in November, 2009 – G.M. pre-announced it was going to pay back its Government Loans – BUT with Government money!

GM Announces It Will Pay Back Gov’t Loan … With Gov’t Money
by Paul Kiel, ProPublica - November 16, 2009 3:39 pm EDT
GM will begin paying back the TARP money in December, the company announced this morning. It’s a statement in need of a little context.
Basically, GM will be using a portion of the $50 billion in TARP bailout money it received to in turn repay another portion of the TARP loans.
The reason GM can do this is because when it emerged from bankruptcy, it struck a deal with the Treasury Department to carve up its obligation to the government in four different ways.
They are, briefly: 1) $986 million remained an obligation of the old GM, the husk of the company left behind through its bankruptcy restructuring, and will never be seen again, 2) $6.71 billion remained as an interest-bearing loan, 3) $2.1 billion of the obligation was converted to preferred stock, which is a form of equity ownership that pays a fixed dividend, and 4) the rest was converted to a 60.8 percent equity stake in GM.
So, for GM to completely pay back the government, GM would have to completely repay the $6.71 billion loan with interest and purchase the government’s preferred shares (as well as keeping up dividend payments), and Treasury would have to make a pretty penny, in the range of $40 billion, selling its common shares after GM goes public again.
In a comprehensive overview (PDF) earlier this month, the GAO deemed that scenario “unlikely.” The former chief of the auto task force went further, saying that $20 billion of the $50 billion given to GM probably won’t be coming back.
GM’s announcement today was just about No. 2, that $6.71 billion loan—which it will begin repaying next month, it said. But the money to repay the loan will come from a portion of the government money it has set aside. In other words, GM has not actually drawn down every dollar of the $50 billion. It has about $13.4 billion [1] sitting in an escrow account, and it has tagged $8.1 billion [2] of that to repay loans from both the U.S. and Canadian governments. (Incidentally, GM also got a $1.3 billion loan from Germany in support of its European unit.)

So there you have it folks, the much ballyhooed achievement being trumpeted in the clueless mainstream press – at further cost of untold millions in advertising expense – is nothing more than an Enron-esque [or, perhaps better stated, Goldman-esque?] accounting shell-game.

The General Motors / government accounting chicanery has risen to such an egregious level, it even prompted one of their own to speak out against it last week:

GM TARP Repayment An "Elaborate Money Shuffle" Says Senator
By Peter Fowler at 23 Apr 04:30
A leading Senate Republican has written to the Treasury Secretary asking him to justify claims that General Motors has repaid its TARP loans, saying it appears to be nothing more than an "elaborate TARP money shuffle."
America's largest automaker GM says it repaid the remaining $5.8 billion owed to the U.S. Treasury and Export Development Canada five years ahead of the maturity date, despite announcing a $4.3-billion loss for the six-months following its emergence from bankruptcy as a U.S. government controlled company.
Senator Chuck Grassley claims the repayment dollars haven't come from GM selling cars but, instead, from a TARP escrow account at the Treasury Department.
"It looks like the announcement is really just an elaborate TARP money shuffle," Grassley said.
Grassley said it’s a matter of the Treasury Department being straightforward with taxpayers about its management of the $700 billion taxpayer funded TARP program.
On Tuesday of this week, the Special Inspector General for TARP, Neil Barofsky testified before the Senate Finance Committee saying the funds GM is using to repay its TARP debt are not coming from GM earnings. Instead, GM seems to be using TARP funds from an escrow account at Treasury to make the debt repayments, he said.
The most recent quarterly report from the Office of the Special Inspector General for TARP says "The source of funds for these quarterly [debt] payments will be other TARP funds currently held in an escrow account."…

The sad news is that G.M. remains Government Motors and they are still losing money. False proclamations that tax payer loans have been repaid should rightly be seen as an act of desperation – “SPIN” – on the part of the merged corporate-state. This is the epitome of fascism, a government which has lost control of the economy and its moral compass, too.

Today’s Market

Overseas equity markets began the week on positive note with Japan’s Nikkei Index gaining 251 points to 11,165. North American equity markets ended the day mixed with the DOW inching ahead .8 to 11,205, the NASDAQ off 7.20 to 2,522.95 and the S & P giving up 5.25 to 1,1212.05. NYMEX crude oil futures lost 1.14 to end the day at 83.98 per barrel.

On foreign exchange markets the U.S. Dollar Index gained .03 to 81.38.

Benchmark interest rates – the 5 yr. government bond ended the day at 2.57% while the 10 yr. bond finished the day at 3.81%.

Precious metals ended the day mixed with COMEX gold futures losing 4.70 to 1,153.80 per ounce while COMEX silver futures were unchanged at 18.32 per ounce. The XAU Index added .26 to 172.69 while the HUI Index lost 1.18 to 440.98.

On tap for tomorrow, at 9:00 a.m. the Feb. Case-Shiller Index data is due – expected +.7% vs. prior -.7%. Then at 10:00 a.m. April Consumer Confidence data is due – expected 54.0 vs. prior 52.5.

Wishing you all a pleasant evening!

Rob Kirby

Contact Information

Rob Kirby | Proprietor, Kirby Analytics Newsletter - Proprietary Macroeconomic Research
Toronto, Ontario, Canada | Observations | FSU Editorials | E-mail