Officially Official: Taxpayers Will Lose Tens of Billions on Chrysler, GM Bailout

The autoblogosphere is abuzz re: a recently released Congressional Oversight Panel for the Troubled Asset Relief Program report stating the obvious: US taxpayers can kiss their $60.5 billion-plus Chrysler and GM Debtor-in-Possession funding goodbye.

Although taxpayers may recover some portion of their investment in Chrysler and GM, it is unlikely they will recover the entire amount. The estimates of loss vary. Treasury estimates that approximately $23 billion of the initial loans made will be subject to “much lower recoveries.” Approximately $5.4 billion of the loans extended to the old Chrysler company are highly unlikely to be recovered. The Congressional Budget Office earlier calculated a subsidy rate of 73 percent for all automotive industry support under TARP and recently raised its estimate of the cost of that assistance by approximately $40 billion over the previous estimate. Because Treasury has not clearly articulated its objectives, it is impossible to know if this prospect, indeed, represents a failure of Treasury‟s strategy.

Note: that figure is what anyone in business calls “low ball.” For one thing, it doesn’t include the automakers’ inevitable share of the Department of Energy’s $25 billion of no-to-low interest retooling loans, or the $7500 tax credit for theoretical buyers of the theoretical Chevy Volt, or anything else for that matter.

In fact, if you add the $12.5 billion, middle-of-the-night, Christmas Eve, let’s-change-the-banking-rules just-for-GMAC FDIC boondoggle, or the $3.5 billion fronted to auto suppliers, we’re looking at an non-recoupable federal “investment” in the failed automakers that totals more than $100 billion.

For another, Chrysler and GM are zombies: dead automakers trading. When they collapse, their assets will be worth pennies on the dollar. In that regard, the Panel is no punch-pulling palaver.

To wit: it tackles the automakers’ “Cash Flow Challenges.” How about all that New debt, then? “The amount of money to service this debt, even before the companies start to pay for normal operations, such as steel and wages, is significant.” The chart [page 67] reveals that New Chrysler needs to generate $20.4 billion by 2017 to service its debt. GM has to generate $15.56 billion, including a $9.96 billion payment in ’15.

Uh-oh . . .

The viability plans assume positive cashflow in the relatively short term. To the extent that cash from the sale of automobiles cannot cover the costs of production or other corporate costs, Chrysler and GM will have to borrow money from banks, or access the debt or equity capital markets . . . it is unclear whether either company in its current form could access the banks or the debt capital markets in the amounts and on the terms that they would require.

What’s a mother to do? The Panel hints at a politically unpalatable suggestion:

Moreover, the Treasury auto team’s decision to dispose of its ownership stakes in Chrysler and GM “as soon as practicable” also raises important policy questions regarding the safeguarding of the taxpayers‟ investment, maximizing taxpayer return and the government‟s likelihood of achieving the operational, cultural and economic restructuring it seeks. The lingering issue is whether the government can really change the culture of these companies and help improve their profitability while it remains a (supposedly) disinterested shareholder with a “hands-off” approach to managing its investment. Merely exercising the right to vote on slates for boards of directors and other significant corporate governance issues may not provide the influence necessary to achieve the level of transformation sought.

And here’s how!

Treasury could articulate a mission and strategy for these companies that is transparent to management, the boards, and the taxpayers, set up a system for reporting and disclosures, and leave the business in the charge of management. The Treasury auto team has approved Chrysler and GM‟s viability plans. It has appointed or reinstated 10 of the 13 board members at New GM. It has appointed four of the nine board members at New Chrysler. New management is firmly in place. The longer that Treasury lingers in the decisions of management, the greater the opportunity that such decisions could become politicized.

Or, alternatively, vice versa. Or, alternatively, so what else is new? But before we go there, where the hell are we? Not to be inelegant about it, fuck knows.

In addition to information about revenues and profitability, New Chrysler and New GM should provide the taxpayer investors with a set of metrics by which the companies‟ success can be measured, along with periodic updates regarding progress toward those goals.408 The companies should also disclose to what extent internal controls, that is, clearly defined processes and procedures relating to the communication of information, accountability for individual employees, etc., have been established to ensure the companies‟ plans are being properly implemented and executed. To date, neither Treasury nor either company has disclosed such information.

Bottom line:

The Panel recommends that Treasury use its role as a significant shareholder in Chrysler and GM to ensure that these companies fully disclose their financial status and that the compensation of their executives is aligned to clear measures of long-term success. To limit the impact of conflicts of interest and to facilitate an effective exit strategy, Treasury should also consider placing its Chrysler and GM shares in an independent trust that would be insulated from political pressure and government interference.

Finally, because of the unprecedented nature of the assistance provided to the automotive industry, the Panel also recommends that Treasury provide its legal analysis justifying the use of TARP funds for this purpose. This analysis will inform policymakers‟ and taxpayers‟ understanding of the potential for Treasury to use its authority to assist other struggling industries.