Um, What about the Other Billions?

moneyAs an early contender for “Most Misleading Headline of the Year,” consider this from today’s Wall Street Journal: “The GM Bailout: Paid Back in Full.” It tops a piece by General Motors Chairman and CEO Ed Whitacre, who writes:

Today, General Motors is announcing that it has made a payment of $5.8 billion to the U.S. Treasury and Export Development Canada. We’re paying back—in full, with interest, years ahead of schedule—loans made to help fund the new GM.

To be fair to Whitacre, headline writers sometimes miss the nuance in the body of the text. Whitacre does not make the claim that all accounts are settled between the taxpayer and the automaker; he’s just talking about the loans. The story, however, is being played as if this shows the resounding success of the government’s intervention in the auto sector.

Here’s a little corrective perspective. According to the Congressional Budget Office, the government invested $48 billion in General Motors Company. Of that, $7 billion is in loans, and the rest in preferred and common stock. (It also invested $17 billion in GMAC, an affiliated company that is important for financing GM car purchases). U.S. taxpayers got a 60.8 percent stake in the post-bankruptcy GM and a 56.3 percent stake in GMAC.

So was this a good investment? The government was motivated by far more than pure financial return; it was worried about the systemic damage a liquidation of GM might cause. Even from a purely financial perspective, final tallies cannot occur until the government’s stake in GM has been sold.

One recent analysis by Andrew Bary in Barron’s speculated that GM might go public this year with a valuation of $50 billion, giving the taxpayer stake a value of roughly $30 billion.

If we assume that the payment in the news today clears the loan portion (Whitacre is claiming to repay all loans with interest), that leaves $41 billion invested. If the taxpayer recoups $30 billion in a privatization, that leaves them $11 billion light.

So, in this rosy scenario, even after full loan repayment, the taxpayer comes out about $11 billion short on GM alone (plus a normal return on holding $50 billion for a year). Where did that money go?

Bary elaborates that in this scenario, the United Auto Workers would get $16 billion. Normally, as unsecured creditors, the UAW would have gotten nothing until senior creditors, including the U.S. taxpayer, were repaid in full. These are not normal times.

So, here’s an alternative headline that papers can use for their late editions: “The GM Bailout: Taxpayers may have lost over $10 billion,” and then a subhead, “Don’t worry, the union found it.”

Image by borman818.

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