The Truth About Cars » Bailout The Truth About Cars is dedicated to providing candid, unbiased automobile reviews and the latest in auto industry news. Sun, 27 Jul 2014 14:03:49 +0000 en-US hourly 1 The Truth About Cars is dedicated to providing candid, unbiased automobile reviews and the latest in auto industry news. The Truth About Cars no The Truth About Cars (The Truth About Cars) 2006-2009 The Truth About Cars The Truth About Cars is dedicated to providing candid, unbiased automobile reviews and the latest in auto industry news. The Truth About Cars » Bailout Was The Government’s Divestment of GM Stock Insider Trading? Fri, 23 May 2014 14:43:01 +0000 Department of the Treasury

Back in 2004, perfectionist homemaker and well known TV personality Martha Stewart was charged with insider trading. As presented, the facts in the case were simple. Martha owned stock in a medical research company called ImClone and, like a lot of people who invest in tech firms, she was hoping for a big payout when their product, a promising new cancer treatment, went on the market. Unfortunately, the FDA chose not to approve the drug and the value of the stock looked set to take a beating once the decision was announced. According to the charges initially brought against her, Martha and many of the company’s top executives learned of the FDA’s decision though their inside connections the day before it was publicly announced and were able to sell their shares before they crashed. That’s against the law and many of the people caught up in the scandal, including Martha who was convicted on the charge of making false claims to a federal investigator, ended up going to jail.

The above case is a useful example because it offers a clear cause-and-effect pattern and plays out along such a short timeline. Despite Martha’s protestations that she was innocent, the dots here appear to be easily connected. Most insider trading cases, however, require a little more imagination. The connections aren’t always so clear cut and sometimes the cases play out over a period of years. Take, for example, the US Government’s recent divestment of its massive amount of GM stock and the subsequent recall debacle that now threatens to drive that company’s stock prices through the floor. Coincidence? Some people think not.

Last December, the US Government sold its remaining shares in General Motors and ended a controversial bailout program that ultimately cost the American taxpayer something on the order $10 billion. At the time, the move puzzled many investment experts who argued that the government could have lessened its losses by simply holding onto the stock, which was trending upward at the time, and selling when its value was higher. It makes sense, right? The USG bought high and then sold low, even a novice investor like me knows that’s the opposite of what you’re supposed to do, so why not simply wait?

Recalled GM ignition switch

The move that looked so stupid then looks like genius today. In February of this year, just a couple months after the sale, GM announced the recall of 1.4 million cars for faulty ignition switches. In the months since, more GM vehicles have been recalled for other problems and, if you have been following the reports here on TTAC, you know that that the number of vehicles involved now exceeds GM’s total sales for the past 5 years! The question is did the government have inside knowledge that this was on the way? Well, evidence is emerging that GM had data going back to at least 2007 that the ignition switches were failing to function properly and the government’s own safety watchdog, the National Highway Traffic Safety Institute (NHTSA) shows the company was actively investigating the problem during the 2009 bailout. At some level, then, the government did know.

Whether or not the timing of the stock sale rises to the level of insider trading, however, remains to be seen. The US Government is bigger and more complex than most of us will ever know and the individual agencies don’t always communicate with one another with the efficiency we might expect. The NHTSA has an entirely different focus than the Treasury Department and the chances of their reports coming across the desk of the person charged with maintaining that portfolio are extremely small. Still, the appearance of malfeasance is enough to send the tin foil hat wearers into a frenzy and damage the public’s confidence in the markets. The matter needs to be looked into.

GM RenCen

Thomas Kreutzer currently lives in Buffalo, New York with his wife and three children but has spent most of his adult life overseas. He has lived in Japan for 9 years, Jamaica for 2 and spent almost 5 years as a US Merchant Mariner serving primarily in the Pacific. A long time auto and motorcycle enthusiast he has pursued his hobbies whenever possible. He also enjoys writing and public speaking where, according to his wife, his favorite subject is himself.

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Government Reports $9.7 Billion Loss On GM Shares Tue, 29 Oct 2013 17:04:30 +0000 RenCen

With the vast majority of the government’s General Motors shares sold, the U.S. government is reporting a $9.7 billion loss, according to a Congressional report cited by the Detroit News.

With the government’s stake now down to about 7 percent, the report states that

“Because the common stock sales have all taken place below Treasury’s break even price, Treasury has so far booked a loss of $9.7 billion on the sales,” 

The United States Treasury would have to get $147.95 to break even on its GM stake – an unrealistic proposition given that the stock currently trades at $35.80. Once the government unloads the last of its stake (worth about $3.6 billion), the total loss should amount to $10 billion.

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The Juggling Show: GM Calls Its European Dealers Worthless, Receives A $35 Billion “Stealth Bailout” Mon, 18 Feb 2013 13:52:58 +0000

GM’s European dealers had their run-ins with the company lately, but wait until their read GM’s annual report to the Security and Exchange Commission. In its 2012 10K, GM writes about its European dealer network:

“To determine the estimated fair value of the dealer network, we used the cost approach with adjustments in value for the overcapacity of dealers and the sales environment in the region. We determined the fair value to be $0.

Wait, there is less …

Further to our story about the financial juggling acts performed to arrive at GM’s $4.9 billion net profit, a few commenters asked how GM arrives at these conclusions. The 10-K has an answer: They make them up. Or rather, in accountant’s speak:

“Determining the fair value is judgmental in nature and requires the use of significant estimates and assumptions, considered to be Level 3 inputs.”

And what’s a “Level 3 input”?

The Financial Accounting Standards Board (FASB) has the answer: “Level 3 inputs are unobservable inputs for the asset or liability.” It’s whatever management says.

For folks who don’t want to sift through GM’s earnings release, and its ”dizzying array of accounting gains and losses for tax credits” (CBC). Seeking Alpha did a little sifting of its own. The analysis comes to these conclusions:

  • GM arrived at the $4.9 billion gain by assuming a $27.1 billion write-off on goodwill, off-set by an assumed future tax savings of $34.8 billion
  • Ignoring the write-offs of assumed goodwill, and ignoring the assumed “earnings” from future tax savings, GM had an operating LOSS of $3.218 billion in 2012
  • Operating costs rose 8.47% in 2012, while sales only grew 1.32%.

Seeking Alpha’s Spreadsheet


Also of note: Past losses can be used to off-set your future tax liability, fair enough. After a bankruptcy, these tax losses are usually wiped put. They turn into assets and are given to the creditors. Just like a bankruptcy discharges debt, it also makes loss carry forwards disappear, also fair enough. The TARP shenanigans unfairly protected the carry forwards, creating what Elizabeth Warren, former chairwoman of the Congressional Oversight Panel called a “stealth bailout.”

Harvard professor Mark Ramseyer called it “an arcane and hard-to-follow way of disguising billions of dollars paid to firms that, for whatever reason, are politically favored.” If GM can save $35 billion in taxes other companies would have to pay, then this is just another gift, taken from your pocket.


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How GM Avoided A $30 Billion Loss: With A Little Juggling Fri, 15 Feb 2013 18:06:09 +0000

So you think GM had a big profit last year? There are other people who say that GM should have reported a $30 billion loss. At least as long as GAAP (Generally Accepted Accounting Principles) are applied. How did that happen? It’s a puzzle palace of assets out of thin air, of non-paid taxes on assumed future earnings. It started in 2010 …

Back in 2010, Bloomberg and Ed Niedermeyer took GM to task over a bookkeeping entry called “goodwill.” It’s what’s also called an “intangible” asset, an asset that usually is hard and often impossible to get one’s hands on. If you buy a company, goodwill is easy: It’s the difference between the fair value of the net assets and the purchasing price. Apart from that, goodwill pretty much is what you want it to be – within not always clear limitations. So there you thought a lot of people did not think too highly of GM after the bailout, but in 2010, goodwill was GM’s largest non-current asset, to the tune of $30.2 billion. Without that extremely intangible asset, GM would have had a negative equity of $6.3 billion. If you want to know more about this, refer to Ed’s article from 2010.

This article also explained that as GM’s creditworthiness improves, the goodwill balance would decline. Perversely, improved results “could make GM’s goodwill vulnerable to write-downs in future periods, which would reduce earnings,” as the article said. Think of it as channel stuffing on a much, much grander scale.

This write-down happened in 2012. GM took a goodwill impairment charge of about $27 billion. Then how did GM end up with a $7.9 billion operating profit and a $4.9 billion net profit for 2012? With another intangible entry. GM adjusted its earnings with a tax benefit of $35 billion for a “deferred tax valuation release.”

What’s that, you ask? Mark Modica of the National Legal and Policy Center explains it:

“My understanding of the tax benefit, in simple terms, is that GM is taking as income the $35 billion in tax savings it says it will have in the future as a result of the sweetheart deal it got when the Obama Administration allowed it to have billions of dollars in tax-loss carryover credits, thus giving the company years of tax-free income.”

In other words, GM made a profit this year by booking the taxes saved on profits it will make in the future. Welcome to the New Old GM. Without this juggling act, GM would be deep in the reds, Modica says:

“GM uses non-GAAP (Generally Accepted Accounting Principles) to calculate its calendar year operating income of $7.9 billion. The GAAP number does not allow the tax benefit and is a bit more troubling at a LOSS of $30.4 billion.”

Undoubtedly, the pro-bailout, pro-UAW, and pro-Obama crowd is already typing comments along the lines that the National Legal and Policy Center is an organization that makes the Tea Party look like a group of bleeding-heart liberals. Wait, there are others that don’t think too highly of the accounting abracadabra:


“The amount of deferred income tax is based on tax rates in effect when temporary differences originate. It is an income-statement-oriented approach. It emphasizes proper matching of expenses with revenues in the period when a temporary difference originates. Finally, it is not acceptable under GAAP. …Management can use changes in the allowance to “manipulate” NI (net income) by affecting income tax expense. Analysts should scrutinize these types of changes.”


“A valuation allowance depends a great deal on management assumptions – who’s to say how high a company’s future profits will be, and therefore whether the company will be able to take advantage of its deferred tax assets? If management changes its assumptions about future earnings, the valuation allowance changes, and the difference is reported as earnings, today. So, management at companies with valuation allowances can directly change reported earnings today by changing assumptions about earnings tomorrow. Changing a valuation allowance is one way that management can manage or manipulate its earnings.”

“Keep a watchful eye on valuation allowances. Because they’re based on very subjective estimates, they’re an easy way for management to manipulate earnings. For example, if a company has a $100 million valuation allowance to offset $100 million in DTAs, and management realizes it’s going to miss earnings by $2 million, it can make slightly more aggressive assumptions to release $2 million in its valuation allowance, which flows to net income and allows the company to meet earnings.”

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The Truth About Post-Bailout Pay Restrictions: They Are A Lie Tue, 29 Jan 2013 11:30:07 +0000

What’s 10 million these days – give the man a raise!

Up until the mid-1800s, debtor’s prison did await those who could not pay their debts. To this day, more than a third of U.S. states allow debtors to be jailed for non-payment. If you run a company called GM, Ally, or AIG, not only do you keep your freedom, you will be bailed out by the government, and given a $10 million salary. Waitaminute, you say, aren’t executive salaries of bailed-out companies limited to a still very generous $500,000? This is exactly the question the special inspector general for the Troubled Assets Relief Program asked. The answer, provided in a report to Treasury Tim Geithner, and the public, is scathing: The Treasury Department ignored its own rules and approved “excessive pay packages” for the leaders of bailed-out companies.

The report lambasts the government which “continues to award excessive pay packages.” It also flogs executives who “continue to lack an appreciation for their extraordinary situations and fail to view themselves through the lenses of companies substantially owned by the U.S. Government.” Special mention for an inordinate amount of chutzpah received “GM CEO Dan Akerson [who] even asked Treasury Secretary Geithner to relieve GM from OSM’s pay restrictions, which was denied.” Akerson took home $9 million in cash and stock in 2012, apparently, he thought that was not enough.

This is your money on drugs

A total of 69 executives of bailed-out companies are under supposed salary restrictions. 23 were found earning more than the $500,000 limit. Another 25 made exactly $500,000. 65 of 69 made more than $450,000. Says the report:

“In stark contrast, the 2011 median household income of U.S. taxpayers who fund these companies was approximately $50,000.”

The report did not specifically reveal by name how much the executives of bailed-out companies make. It also did very little to hide the names.

According to GM’s website, a Daniel F. Akerson serves as GM Chairman and Chief Executive Officer, a Stephen J. Girsky is GM Vice Chairman, Daniel Ammann is GM Senior Vice President & Chief Financial Officer.

The Washington Post calls the report “stinging allegations of lax oversight and supervision.” The Detroit Free Press on the other hand complains that “Akerson’s pay package, which included $1.7 million in cash salary and stock valued at $7.3 million, did not increase from 2011 to 2012,” and that Alan Mulally and Sergio Marchionne make much more.

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Le Bailout: Ford Is Against It Thu, 25 Oct 2012 15:56:51 +0000


Stephen Odell, CEO of Ford Europe, thinks that state aid of ailing carmakers is a dead-end street.

Odell told Reuters:

“I don’t think it’s sustainable for support from governments to keep competitive companies going forward, particularly in a protracted downsized economy.”

Odell also said that some automakers question the legality of Peugeot government bailout. Germany’s state of Lower Saxony, second largest Volkswagen shareholder, already announced steps against the bailout.

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Le Bailout Watch: Peugeot Saved By French Government Wed, 24 Oct 2012 11:52:04 +0000

Europe’s second-largest automaker and GM alliance partner PSA Peugeot-Citroen is being saved from the brink for the time being. PSA is putting the final touches on an agreement with creditor banks on 11.5 billion euros ($14.9 billion) of refinancing, in addition to 7 billion euro  ($9 billion) in government  guarantees for its captive financing arm Banque PSA Finance, Reuters says.

In return, PSA will put government and union representatives on its supervisory board, halt dividend payments (which had been on hold anyway) and scrap stock options for its top executives, Reuters reports.

The refinancing deal will be “finalized in coming days” and comply with European Union rules, Chief Financial Officer Jean-Baptiste de Chatillon said.

The German state of Lower Saxony opposes the Peugeot rescue plan as a possible breach of EU rules. The plan will have to be approved by the EU. Even if there is final approval, a formal investigation into the plan could delay its implementation considerably.

European Competition Commissioner Joaquin Almunia did not received any notification of the deal, but promised “a very careful assessment of what is going on,” once notified.

The stock market greeted the plan with sell orders. At the times of this writing, the PSA share was down 5.8 percent to 5.49 euros. The stock has lost half of its value this year and is at its lowest level since 1986.


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Le Bailout Watch: France To Save Peugeot, Germans Say Verboten Tue, 23 Oct 2012 18:26:06 +0000

The French government will provide multi-billion euro guarantees to GM’s alliance-partner PSA Peugeot-Citroen via PSA’s banking arm, Reuters says. Don’t bet on it happening: There is already opposition from Germany, and wait until Brussels officially hears of the deal.

As explained in the morning, PSA is facing a serious cash dilemma. The French government is ready to provide loan guarantees between $6.5 billion and $9 billion, a reliable source told Reuters. The money will officially go to PSA’s bank, but will benefit PSA immediately. The aid would allow the bank to offer cheaper financing to car buyers, and compete with rival Volkswagen at least when it comes to cheap financing offers.

Also as explained earlier, the aid comes with strong strings attached: Reduced job cuts, French plants stay open, government and worker representatives get a seat on the board.

Also as speculated earlier in the day, it will be hard to impossible to get this package past the EU commissars in Brussels. Already, the German state of Lower Saxony says it will report the deal to Brussels as a possible breach of EU rules, writes Die Welt. Lower Saxony is a shareholder of Volkswagen, which is headquartered in the state.

Brussels has not been informed of any agreement. When notified, the EU regulator examines aid packages for compliance with strict EU rules. “The Commission ensures that there are no protectionist conditions placed on the attribution of aid,” an EU spokesman told Reuters.

In 2009, the EU Commission shot down conditions attached to 6 billion euros of state loans for Peugeot and Renault: “If the help comes with conditions, for instance to keep production in France, then these measures would be illegal and would not be approved by us,” free trade commissar Neelie Kroes said at the time. This time, the opposition likely will be stronger, as German carmakers really don’t mind seeing their French colleagues gasping for air.

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How The GM Bailout Turned Into Foreign Aid Sat, 13 Oct 2012 10:20:49 +0000

Longtime reader and new contributor Tyler Vandermeulen is a financial analyst by day. He took a deep dive into the EDGAR database to unearth how much of GM’s money flows abroad. Please welcome Tyler with the respect he deserves. Rude comments will not be tolerated.

Before the bailout of General Motors, it was well understood that the world’s largest automaker was losing huge amounts of money in the US and was staying afloat thanks to stronger performance in overseas markets. Since the bailout, however, that dynamic has been turned on its head. Thanks to a leaner manufacturing footprint, debt eliminations and steadily recovering sales, GM’s US operations have generated the lion’s share of the company’s profit since the bailout. And now, as the rest of the world economy slows, GM is spending more and more of its taxpayer-enhanced cash pile to shore up its faltering foreign divisions. In fact, according to an analysis of GM’s SEC filings, the company is likely to incur over $6.5 billion in losses and expenditures overseas in the 2011-2014 period, not counting over $1.6b in foreign potential legal liabilities or several other incalculable expenses that could add up to billions more. Not only are these expenses a challenge to GM’s overall financial health at a time when it also faces billion-dollar expenditures on pensions in the US, it shows the basic problem with national bailouts of global companies. Taxpayers who were told they were saving an American company are now seeing their tax dollars flowing overseas by the billions.

A full calculation of GM’s overseas expenditures since the bailout would be a daunting task indeed. Simply by scouring GM’s latest SEC filings, one finds no shortage of losses and one-time expenditures abroad. In fact, nearly every division of GM’s global empire has required some kind of assistance over the last year or so. These expenditures come in many forms, from tax assessments to investments, from bailouts to severance deals, and due to the complex nature of GM’s global finances they cannot be fully accounted with precision. But they all emphasize the reality that, after years of living off foreign operations, GM’s bailed-out North American division is now bailing out the rest of the world.

Europe: Black Hole Opel, Unions, PSA

GM’s European losses currently get the most attention from analysts, and are nothing new for The General, which has reportedly lost over $14b in Europe over the last decade. Those losses and expenditures continue to add up. In the two full years since GM decided to cancel a planned sale of its European division Opel, GM Europe’s losses have added up to $2.74 billion, with another $617m lost in the first half of 2012 (EBIT). Additional goodwill adjustments of $590m in the first half of 2012 and $621m in 2011 further added to the losses. Additionally, GM has spent some $313m on voluntary severance for European workers, and expects to spend another $100m on the same program through the end of next year. Finally, GM has an undisclosed agreement with European labor unions to spend as much as $265m per year between 2011 and 2014. The company has pledged some $406m in inventory as collateral for that agreement. Not counting the spending agreement with European unions, this puts GM’s losses and outlays on Opel and GME in the last two and a half years at more than $4.25 billion.

GM’s losses in Europe aren’t likely to end there. This year, GM spent $400 million on a 7% stake in Peugeot-Citroen PSA, an investment that GM admits has already lost value. GM says it plans to hold onto that stake for the long term, and has chosen not to write down that loss… yet. Just today, rumors surfaced that GM could spend even more money on its Peugeot tie-up, possibly providing capital for an Opel-PSA joint venture. Meanwhile, the worst-case scenario for Opel involves an estimated $13b outlay to shut down plants and prepare Opel for a sale, according to Morgan Stanley analyst Adam Jonas. In this scenario, GM could spend as much as half of its cash pile extricating itself from its money-losing European operations.

GM losses and outlays in Europe, 2010-June 2012: $4.5b+

Asia: Korea Debt, Murky Hong Kong Dealings 

GM’s Asian operations are consolidated as GM International Operations (GMIO), a division that includes Korea, China, Australia, India and other Asian markets. Prior to the bailout, GM’s Chinese operations were widely considered to be a major profit center for the company, while Korea has become increasingly important as a development center and India has potential for future growth. However, GMIO’s profitability has been weak in comparison to the revitalized North American division, generating just $400m in consolidated adjusted EBIT in the first half of 2012. And since 2011, GM has had several expenses associated with its Asian operations.

In 2011, GM spent $100m for 7% of its GM Korea subsidiary, increasing its holding to 77%. This year, GM has recorded a $27m Goodwill impairment related to its Korean operations, and has paid $22m to Korean workers as part of its severance program there. GM Korea also carries significant amounts of short-term and long-term debt to Korean creditors that GM will have to pay down.

More puzzling is GM’s strange Indian joint venture with its Chinese partner SAIC. In late 2009, GM rolled its Indian operations into a 50-50 joint venture with SAIC, known as the Hong Kong Joint Venture, or HKJV. By the first quarter of 2011, that venture had lost enough value for GM to record an impairment of $39m and “other charges totaling $67m.” From there things get strange. According to GM’s 10-Q:

“We were informed of SAIC-HK’s intent to exercise its right to not participate in future capital injections in HKJV. If this occurs we plan to settle the promissory note in the three months ending September 30, 2012 and provide an additional equity investment of $125 million into HKJV. As a result SAIC-HK’s interest in HKJV would be diluted from 50% to 9%. We also anticipate that the shareholders agreement would be amended such that we obtain control of and consolidate HKJV.”

It would seem that GM is buying its partner out of the Indian arrangement at a cost of $125m, however, GM has had several convoluted transactions with SAIC in the past, most notably in the sale of its “Golden Share” in the Shanghai-GM joint venture, which was offset by a Chinese bank loan and was eventually rolled back. It’s too early to say for sure whether GM will purchase the controlling stake in HKJV, and thereby regain full control of its India business. It is unlikely that SAIC will relinquish its grip on India, just because it suddenly can’t service the capital requirements of the HKJV. Possibly, more information will become available when GM files its Q3 paperwork, or possibly later. With some 30% of GM’s global sales in China, GM shareholders  deserve more visibility into this byzantine part of GM’s world.

GM Outlays on GMIO, 2011-2012: ~$380m

South America: Tax Assessments

GM’s South American unit dipped into the red in the second quarter of this year, and its $64m net EBIT through the first half of 2012 is just $7m better than its Q1 2011 performance alone. But even if GMSA’s performance improves this year, it has paid out around $100m this year between the purchase of GMAC’s Venezuelan financing operation and a worker severance program in Brazil. $700m was also spent in 2011 to retire debt facilities at GMSA. Furthermore, GM has run into several tax assessments in South America, including a $292m assessment for the years 2002-2004 by the Mexican government and a $180m assessment for 2007 by the Brazilian government. GM says it has “adequate reserves” to meet these obligations, but notes:

“Certain South American income and indirect tax-related administrative proceedings may require that we deposit funds in escrow or make payments which may range up to $0.9 billion.”

GM Outlays in South America, 2011-2012: ~$1.7b

Legal Liabilities

Due to the unpredictable nature of legal disputes, the amount of overseas legal liability carried by GM may not result in actual expenditures. That said, the following legal liabilities are noted in GM’s SEC filings:

Settlement of class action suits regarding Canadian pricing policy: $21m

GM Canada “Lock up agreement” lawsuit: potential liability $918m

Korean labor law suit: $152m in accrual, $556m in further potential liability.

Potential overseas legal liability: ~$1.65b

Without including potential liability costs or the more inevitable costs associated with Opel’s restructuring, GM has spent or lost in excess of $6.5b overseas in the last 30 months or so. With more losses and expenses coming, taxpayers can expect to see their investment in GM’s North American operations continue to support a steady flow of cash to GM’s overseas operations. Perhaps taxpayers should have been told that they weren’t simply bailing out an American automaker, but a variety of overseas operations as well.

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Rattner Defends Bailout With Old Talking Points Tue, 09 Oct 2012 16:15:12 +0000

Ford did not receive a government bailout. Not directly. It would have gone down the tubes along GM and Chrysler, if they would have been allowed to die, Steve Rattner, the head of the auto task force, told Bloomberg.

Said Rattner:

“Ford would have closed because it wouldn’t have been able to get parts, because the parts industry in this country was in arguably worse shape than the assemblers.”

Rattner repeated another favorite talking point of bailout supporters, namely that the U.S. government was the only entity that could save the domestic automakers because no one, including banks that were dealing with their own financial crises, was willing to put private capital into GM and Chrysler at the beginning of 2009.

But then, as the head of the taskforce, what should he say?



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Blind Spot: Digging Deeper Into GM’s Fuel Economy Record Thu, 19 Apr 2012 16:43:46 +0000

Old habits die hard. Whether it’s GM’s desire to slice-and-dice its fuel economy achievements to make them look better than they are, or our instinct to correct the record, it’s all just a little bit of history repeating.

GM, like most of the Detroit automakers, has never had an easy time marketing its fuel economy achievements. With a huge percentage of its sales and an even higher percentage of profits traditionally coming from full-sized trucks and SUVs, GM has had to respond to rising gas prices with some questionable claims. Perhaps the most infamous: 2008′s campaign touting the assertion that Chevrolet sold more cars getting 30 MPG on the highway than Honda or Toyota. Not only did this claim ignore the most accurate measures of fleet-wide efficiency, but it also stretched the truth rather badly. When TTAC’s readers analyzed this claim, they found that Chevy was counting different bodystyles as different models, effectively “double counting” cars like the Aveo (which was counted the four- and five-door models as separate cars). When the same counting technique was applied to Toyota’s model range, it was shown to have even more 30 MPG-capable cars than Chevy, essentially invalidating what was already a fairly marginal marketing claim.

But since 2008, the pressure has only mounted on GM to show improvement in its fuel economy. Though gas prices aren’t higher than they were back in the Summer of ’08 (yet), GM’s bailout has created a new kind of pressure. As I pointed out in a December 2010 NY Times Op-Ed, President Obama’s green justification for the bailout seemed to be something of a mirage. With gas prices then falling and pickup and SUV sales picking back up, Detroit was hardly living up to Obama’s vow that

This restructuring, as painful as it will be in the short term, will mark not an end, but a new beginning for a great American industry. An auto industry that is once more outcompeting the world; a 21st-century auto industry that is creating new jobs, unleashing new prosperity and manufacturing the fuel-efficient cars and trucks that will carry us toward an energy-independent future.

Now, not only is GM facing pressure put on it by a President who seemed to offer fuel economy leadership from Detroit as a public reward for the public’s investment, but gas prices are also beginning to rise once more. And though GM has absolutely improved its fuel economy in the meantime, it still significantly lags the rest of the industry on an objective fleet-wide basis. And what’s worse, it’s marring its modest but admirable achievements by falling back on the old “most models over 30 MPG” chestnut.

In a post titled “Digging Into GM’s Fuel Economy Record” at his new “BTW” blog, GM’s VP for Communication Selim Bingol resurrects GM’s pre-bailout canard by arguing

GM has been selling a lot of fuel-efficient vehicles in many different sizes and styles – and more than you may think.

Just look at March.  We sold more vehicles in the United States that deliver an EPA-estimated 30 mpg or better on the highway than ever before – more than 100,000 – and the figure includes cars like the Chevrolet Camaro V-6 and crossovers like the GMC Terrain.

It might surprise you to know that these results make GM far and away the leader among the “Detroit” Three automakers, and we’re not that far off the pace set by Toyota.

So, instead of “more models over 30 MPG than Toyota,” GM is claiming 30 MPG option leadership over its Detroit competitors. And, to its undying credit, it’s not misleading the public by double-counting models this time around. Thanks to its genuinely improved offerings, GM legitimately has 12 options rated at over 30 MPG on the highway. On the other hand, the fact that GM sells more 30 MPG cars than its Detroit competitors is, as Bingol admits, at least

partly a function of our scale.

But although Bingol makes a more credible case for the “more models over 30 MPG” claim than his predecessors, achievements like these don’t get better with age. For one thing, the competition has moved on: Hyundai, for example, now reports the percentage of its sales that are rated at 40 MPG on the highway… some 41% as of March. Bingol as good as admits that GM is still playing catchup when he notes

Of course, 30 mpg is not the goal line.  We can and will move the needle higher because customers and our CAFE commitments demand it.  Soon enough, 40 mpg will be the new 30.

Here’s the thing: it already is. GM is touting a claim that might have been impressive four years ago… had it been accurate. Today, with well over 20 models available with at least 40 MPG highway ratings, it’s a yawner.

But not only has the industry moved on since 2008, the market has as well. Thanks to the rise of sites like TrueCar and Edmunds, consumers have access to more data on new cars than ever before. And since transparency has improved in the auto market, there are now far more accurate ways to compare manufacturer fuel economy than existed in 2008. With the fuel economy leader Hyundai self-publishing its sales-weighted fleet fuel economy numbers, TrueCar has stepped in to provide similar data for the entire industry. And isn’t the best way to compare fuel economy by measuring what the manufacturers actually sell?

By this measure, however, GM does not come out looking like an industry leader. In fact, as a manufacturer, GM doesn’t even make the industry average fuel economy. And its greatest deficit is in the car segments, where it’s nearly two MPG off the industry average. Moreover, GM’s rate of improvement in March was one of the lowest in the industry, which means it’s actually falling behind the competition. By brand, the picture is similar: each of GM’s brands comes in below the industry average, with truck-free Buick coming the closest at just .1 MPG off the mean.

This is not to say that GM hasn’t made improvements. As Bingol points out, GM sells a far more balanced mix of cars, trucks and crossovers than ever before. By segment, GM’s offerings beat the industry average for Large Cars, Large and Small Trucks and Large and Midsized SUVs. In fact, TrueCar shows that GM’s Midsized SUV offerings are by far the most efficient in the industry, at 24.1 MPG compared to a 21.9 MPG average.

Though these are clearly signs of movement in the right direction, they’re not enough to give GM a credible claim to fuel economy leadership… even among the Detroit automakers. But then, that was fairly apparent from the moment The General dusted off an ineffective marketing claim from  2008. Thanks to the relatively slow run-up in gas prices, pickup and SUV sales are remaining strong and GM needs their profits far more than it needs to become a fuel economy leader. But if the market experiences another Summer ’08-style rush towards high-efficiency cars, GM is going to have to come up with a better pitch to economy-minded consumers. And ultimately, it’s going to have to work harder than everyone else if it ever wants to make good on Obama’s promise of fuel economy leadership.

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Should The Treasury Dump Its GM Stock? Mon, 03 Oct 2011 20:08:11 +0000

Today’s Rasmussen poll results, which show that Americans are arguably less likely to buy from a bailed-out automaker, raise some interesting questions. Like, does receiving a bailout constitute an inviolable black mark on an automaker? Do the size of the bailout, and the amount the government recovers make a difference? With a presidential election looming, these factors are worth knowing: after all, the government still has the choice of when to divest its shares in GM. And with GM’s stock down over 40% from its $33 IPO price last November, the government is looking at a significantly larger loss than it would have endured  had it divested immediately aftter the IPO. So, should the government dump now, anticipating larger losses in the near future, or should it hang on in hopes of a rebound, increasing the risk that “Government Motors” will become a political hot potato going into 2012?  The latest clue, via CNBC, remains as cryptic as ever…

Jim Cramer: GM, you had a great IPO, stock’s come down. What do you do? Shareholders are really getting hurt on this, but at the same time, should the government really blow out the rest of its stake here?

Timothy Massad, US Treasury Dept. assistant secretary for financial stability: No. we’ll be patient in our disposition of GM as well as our other assets. We have to balance the goal of divesting these stakes because the government should not be in the business of owning stakes in private companies, with the goal of maximizing taxpayer returns. [Emphasis added]

It’s too bad Cramer and company didn’t press Massad any harder on this (but hey, at least Jim Cramer disclosed that he’s an old school chum of Massad’s…), because the two implicit answers seem to be at odds with one another. The only reason for the government not to sell its GM exposure yesterday is that the stock price has been depressed for much of this year… one need look only at the recent Ford “bailout ad” kerfluffle to understand the political risks of holding onto a GM stake. In other words, exercising the “patience” that Massad advocates only makes sense if you’re trying to maximize the taxpayer return.

The Obama Administration has long emphasized the “balanced” approach to auto bailout divestment, likely to avoid the obvious political downsides of being married to either the “quick dump” or “market timing” approaches. But as the congressional TARP oversight committee found, those goals are fundamentally at odds with one another.  And I’d even argue that, a year after the IPO, the time to dump and run has come. After all, it’s fairly clear that the specifics of the loss or gain on bailouts have little bearing on public opinion: witness falling approval for the banking industry even though the bailouts of the biggest banks were revenue-neutral. Besides, Rasmussen’s poll numbers make it pretty clear that GM, more than any one politician, is going to bear the brunt of anti-bailout opinion. And because that backlash doesn’t seem to be tied to a specific amount of taxpayer loss, the Obama Administration would probably be well advised to cut ties with the automaker post-haste. Finally, holding on to GM stock doesn’t just make it a political issue. The real lesson of the For “Bailout Ad” drama is that, for better or worse, any attempt by the administration to boost the value of GM will be seen as worse politically than an extra $10b in government losses. And the longer Treasury holds onto GM’s sinking stock, the greater the temptation to meddle will be.

Besides, dropping GM stock fits best with the Obama Administration’s rhetorical defense of the auto bailouts, which is predicated on the notion that things would have been worse without the government intervention. If that’s true, and few make the effort to argue with the assertion any more, then who cares how much taxpayers lose on the deal? If the alternative scenario is as bad as the Administration has been arguing, wouldn’t avoiding it be worth $20b in losses? Even $30b? After all, the effect of a GM/Chrysler default on pensions alone would have swamped the PBGC by at least that much.

Are there downsides to cutting GM loose now? Sure. For one thing, GM will struggle to offset the larger taxpayer loss that will be pinned on it, rather than the Obama Administration. And at a time when GM’s stock already looks vulnerable, the market could interpret a government pullout as a vote of no-confidence, further depressing stock prices. And if GM can’t make traction in the equity market, there’s an added risk that GM could end up back in the government’s arms. But if GM is on a downward spiral, the government has little to gain by holding onto the stock now… and it will have a tough time defending its auto policy anyway. All in all, the government should probably stop waffling and just sell off its remaining shares in GM.

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“Volt Scam” Debate Misses The Point Wed, 01 Jun 2011 15:38:00 +0000

Mark Modica, a former Saturn dealer GM bondholder, has leveraged his financial loss at the hands of the government bailout into a blogging position at the National Legal and Policy Center, a conservative nonprofit that “promotes ethics in public life through research, investigation, education and legal action.” At the NLPC, Modica focuses on what he believes to be corruption surrounding the auto bailout, and has written a series of anti-GM posts that make TTAC look like a Detroit hometown newspaper (TTAC “bias police,” take note). Most recently, Modica has caught the attention of the auto media, including Automobile Magazine and Jalopnik, with a series of posts accusing Chevy dealers of “scamming” taxpayers by claiming the Volt’s $7,500 tax credit and then selling Volts as used cars. TTAC welcomes anyone seeking to cast more light on the bailout, but unfortunately, Modica’s attacks are too focused on making GM look bad and not focused enough on providing relevant information to the American people. Let’s take a look and see why…

In the piece that set off the current flap, Modica wrote

I recently set out to determine how honest General Motors is being when it claims that demand for the Chevy Volt is exceeding supply. It was not hard to discover that this is not the case as retail sales remain dismal. A web search on vehicle locator sites such as Autotrader and exhibit sufficient supply of the Volt, one dealership within 70 miles of my location had six new Volts available for sale.

Even Ebay lists vehicles, many had no bids and one listing in Texas hadn’t even met reserve with only one day of bidding time remaining. But I discovered something far more disturbing during my search. Many Volts with practically no miles on them are being sold as “used” vehicles, enabling the dealerships to benefit from the $7,500 credit supplied by the American taxpayers on each car. The process of titling the Volts technically makes the dealerships the first owners of the vehicles, which gives them the ability to claim the subsidies.  The cars are then offered to retail customers as “used” vehicles.

The practice of dealerships purchasing from one another is not uncommon. “Dealer trades” are done all the time in the industry. What is very unusual is for the receiving dealership to be able to maximize profits at the expense of taxpayers by claiming tax credits of $7,500. It is also very rare for dealerships to part with any model that has higher demand than supply, as GM claims is the case with the Volt. In addition to qualifying dealerships for a $7,500 tax subsidy, the titling process also allows GM to record Volt sales even if the cars are sitting on dealership lots.

Modica’s attack is hamstrung from the start because his goal is to demonstrate that supply of the Volt exceeds demand. The simple truth is that the government’s tax credit, in combination with strong early-adopter demand and low production volumes, basically guarantees that Volt demand will outstrip demand in the short term. If Modica wants to prove that the market won’t support the Volt’s high price and complexity, he’s going to have to wait until production ramps up and the early adopters have satiated their “gotta have it” instincts.

Because he doesn’t appear to have the patience to watch the Volt fail on its own terms (which, it must be added, is not a foregone conclusion, depending on how GM handles production), Modica has to look twice as hard for potentially damning evidence. Since the availability of used Volts alone doesn’t say much about the supply-demand balance, Modica manufactures another “scandal”: that Chevy dealers are taking the $7,500 tax credit that the government intends for consumers, and then selling Volts as used cars with no tax credit.

This “scandal” quickly falls apart under the weight of its over-ambitious pretensions: after all, if demand for Volts is as weak as Modica wants to believe, surely absorbing the tax credit at the dealer level is a recipe for Volts languishing on dealer lots. Since Modica offers no evidence for high dealer inventory, his major thrust (proving that demand for the Volt is weak) falls apart. Furthermore, without a single case of a dealership claiming the tax credit and then selling a Volt to a customer under the pretense that it still qualifies for the tax credit, his research ends up well short of proving a “scandal.” As a result, Modica is left having to argue against dealers taking the credit on principle.

And here’s the tragedy: Modica is so focused on landing a political-economic “scandal,” he ignores the legitimate criticisms of both GM’s Volt-dealer policies and the government’s tax credit. Had he been less interested in the political side of things, Modica would have noted that GM’s hands-off approach to Volt dealers has led to dealers gouging early adopters. Sure, that storyline would have proven that short-term demand for the Volt was strong, but then Modica could have pointed to the contrasting situation at Nissan, where Leaf sales are pre-arranged online, cutting dealer markups out of the loop. This strategy also keeps Nissan dealers from taking the tax credit (at least in theory), and will prevent any “gouging fatigue” that could hurt Volt demand down the road.

From the other side of this issue, if Modica had been more interested in the politics of plug-in tax credits, he would have realized that manufacturing a poorly-proven “scam” was wholly unnecessary. As TTAC reported back in February, taxpayers have already lost some $7m worth of plug-in tax credits to fraud. In short, the Treasury Inspector General for Tax Administration has already proven that $33m of tax credits were claimed erroneously by everyone from prisoners to IRS employees ($7m of which is unrecoverable), offering Modica a well-documented scandal that has been undercovered in the mainstream media.

When industry and politics collide, the public deserves strong, independent information gathering and analysis to protect against inevitable abuses. But those who wish to take up that mantle have a responsibility to own up to their motivations: are they looking for legitimate issues regardless of their political or economic consequences, or do they set out with predetermined conclusions and gather up just enough information to support them? Unfortunately, Modica’s history and recent work seem to place him in the former category. Exploring the interaction between the US Government and the auto industry that it now interacts with more than ever, requires the ability to spot scandals without having to manufacture them. And the more you cover the inevitably tortured relationship between private business and public government, the more you realize that there are very few big scandals anyway… after all, free markets and fair governments almost always die the death of a thousand cuts rather than being taken down by a cartoonish scandal.

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Remember Our Fallen Heroes: Was The Bailout Worth It? Sun, 29 May 2011 11:08:53 +0000

This is the Memorial Day weekend, when we commemorate our fallen heroes and raise our cancer risk by burning chopped beef. Listening to the media, it looks and sounds like the fallen heroes of the year are not the ones who gave and give their lives in ceaseless wars, but the auto industry. It didn’t quite die. It was medevaced in a TARP and helped by the PTFOA to get over its PTSD.

Instead of thanking the nation’s heroes (he did so in an afterthought, asking for “single acts of kindness”) VP Biden thanked himself:

“When President and I came into office, we faced an auto industry on the brink of extinction, total collapse. At the time, many people thought the President should just let GM and Chrysler go under. They didn’t think the automobile industry was essential to America’s future. The President disagreed – and, in addition, he wasn’t willing to walk away from the thousands of hardworking UAW members who worked at GM and Chrysler.”

By taking full credit for the bailout, Biden once and for all put the argument to rest that the bailout had been inherited from G.W., and that the heirs had no other choice. Time for another pat on the administration’s shoulders:

“Because of what we did, the automobile industry is rising again. Manufacturing is coming back, and our economy is recovering and it is gaining traction.”

Some (see below) have a different opinion. The video is above and in full length, but don’t let the hamburgers go up in flames while you watch.

Meanwhile, over at the National Public Radio, an organization which is generally not under suspicion of right-of-center leanings, Memorial Day was celebrated by yet another commemoration of the heroic rescue of our auto industry.

That program was headlined “Chrysler Repays Billions, Was Bailout Worth It?” Which signaled some skepticism.

NPR is a fair and balanced station, so they had someone who was pro bailout, and someone who was against.

The pro-bailout-person, Micheline Maynard, senior editor for CHANGING GEARS, the public radio project that looks at reinventing the Rust Belt, offered only lukewarm support for the bailout:

“There a lot of people who said the court system is available. Why don’t we put the auto industry – or at least General Motors and Chrysler – through that same system? But there were also fears because the recession was, I think, at its deepest point a couple of years ago, when this all – the subject came up.

There was also worries about the auto parts part of the industry, because if Chrysler had gone bankrupt, for example, and liquidated, these auto parts suppliers served not only General Motors and Ford, but Toyota and some of the other foreign carmakers. So that was part of the argument, that we can’t let the whole network go down.

But there is this other argument that you have other ways to do this, and this is the cost of doing business. Some companies make it. Other companies don’t.“

The anti-bailout-man, Dan Ikenson of the Cato Institute, generally called “a libertarian think tank,” first said that “I don’t think that we’re really in a position to measure” whether the bailout was worth it. But then he laid into the directors of the rescue operation:

“It should have gone to court. I think that we were in a sort of crisis mode, you know, as Rahm Emanuel, when he was in the White House, as he said: Never let a good crisis go to waste.

Paulson, former Secretary Paulson, told Congress they need to pass this financial bailout right away, or else we’re all doomed. It prevents us from really thinking clearly and with circumspection as to what we’re getting into.

So the costs of the rule of law, property rights were trampled with respect to the Chrysler bondholders, and this competitive process was stymied.

And so I think we need to – and if we look at the economy today, this regime uncertainty, which still persists – you know, we’ve been trying to come out of this recession. We’ve been moving slowly. Business is keeping money on the sidelines.”

We have linked to the full 30 minute program (sorry for the empty box …), but again, don’t forget those hamburgers.

It sure was a memorable Memorial Day. We’ll remember it as the beginning of the Presidential campaign 2012.

Did you check the $3 box on your tax return?

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“Government Motors”: The Exit Strategy Tue, 19 Apr 2011 22:21:09 +0000

With GM’s share price slipping below $30, the cries are going up again around the internet about the government’s stake in the bailed-out automaker. Thus far the Treasury has remained mum on its exit strategy, only indicating that it would emphasize speed rather than maximum return as it charted the course for its sell-off. But now, Reuters reports that “a big chunk” of the government’s 33% remaining stake in GM could be sold “in the summer or fall.” With the government’s shares “locked up” until May 22, that could mean the government is bailing as quickly as possible at a time when GM’s stock is hitting post-bankruptcy lows, and its CEO offers little in the way of explanations beyond blaming the Japanese tsunami and rising fuel prices. The Wall Street Journal figures taxpayers would lose $11b on its “investment” in GM equity if the government sold at today’s prices (the stock must hit $53 for break-even), but reports that political motivations outweigh fiscal considerations. The White House does not want “Government Motors” to be an issue in the next election.

A Treasury spokesperson insists that

Planning for the sale of our remaining GM stock is still at an early stage and the IPO lock-up does not expire until late May. At that point, we will consider all of our options, based on our twin goals of protecting taxpayers’ interests and exiting as soon as practicable.

But, once you get folks off the record, the real issue emerges:

Government officials are willing to take the loss because the Obama administration would like to sever its last ties to the auto maker, the people familiar with the matter said. A summer sale makes it more likely Treasury could sell all of its stake in GM by year’s end, avoiding a potentially controversial sale in the 2012 presidential election year.

So how does the White House expect to sell early and not lose its shirt? Well, for one thing, it’s premature to use today’s stock prices as a measure because the sale likely won’t happen all that soon. The WSJ reckons that

a sale in May is unlikely because Treasury would need time to put together a deal once the May share sales restriction lifts.

Another issue: on April 21, the former bondholders of Old GM will receive warrants and stock, and will likely sell them, placing further short-term downward pressure on GM’s share price. June? Not likely either, as Bloomberg [via Automotive News [sub]] cites sources who claim

The U.S. Treasury Department will wait for General Motors Co.’s first-quarter earnings before deciding whether to sell more of its investment in the nation’s largest automaker

The second quarter doesn’t end until June 30, and earnings won’t be publicly reported until August. So much for June. Starting in July GM becomes eligible to file an S3 with the SEC (allow Treasury to sell shares without having to address SEC comments), but it would be strange if the government sold shares of a publicly-owned company after viewing earnings that hadn’t been publicized. Unless you enjoy a soft spot for conspiracies, you can rule out July.

Starting in August, GM’s Q2 earnings will be out, it will have an S3 filed, and the government will have had time to structure a deal [according to Reuters]. If gas prices aren’t making headlines, the government will likely think very hard about selling at this point. The only issue: an August sale would have to take place in the first half of the month, as Wall Street takes the second half off. Trading should be closed through Labor Day, meaning Treasury could have to wait into September if it doesn’t pull the trigger in early August. Then, after the Treasury sells its “big chunk,” its remaining stake would be locked up again, meaning a final exit might not take place before December.

Is the remainder of this year a good timeline for Treasury to pursue as it seeks to exit its unwanted ownership stake in GM? On face value, it’s not ideal, with gas prices continuing to threaten, and worries about executive shuffling and incentive dependence taking the shine off GM’s stock. More than anything else, GM needs to signal a sense of consistency to investors in order to calm fears about the restructured company’s ability to rebuild its empire. More time would help calm those jitters (provided things go reasonably smoothly in the interim), meaning waiting could be in the taxpayers’ fiscal interest.

But since politics seems to be driving the sale, and the future can’t be counted on to give GM time to prove its stability in its “new normal,” the sale will happen sooner. And luckily, the Treasury does have one ace up its sleeve, as Reuters explains:

GM is expected to join the S&P 500 index . Such an inclusion would likely generate additional demand from portfolio managers who benchmark their holdings against the index. The U.S. Treasury might be able to sell additional shares based on this demand in what is known as an index inclusion trade.

Will increased demand from institutional investors as a result of an S&P500 listing be enough to buoy GM’s stock? Maybe not. But then, the White House has insisted for some time that recouping its investment was not the main point of the bailout, and that as an emergency economic measure, it was already “worth it.” At this point, there’s not much choice but hope they’re right, but the very question about how to time the government’s exit raises an interesting point: even after a government-backed bankruptcy and a cash injection of tens of billions of dollars, GM’s position remains uncertain and its future remains unclear. If The General collapses again, and investor pessimism indicates that it’s a possibility, will the “emergency economic measure” still have been “worth it?” Will another such measure be forthcoming? Regardless of how much the treasury loses when it exits GM, this question will dog the auto industry for some time to come.

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Treasury Lowers The Bar, Fiat Snags Another 5% Of Chrysler Tue, 12 Apr 2011 15:22:34 +0000

Exactly a week ago, Fiat said it would up its stake in Chrysler “within weeks,” and according to the Detroit News, the deed is now done. Having earned 5% of Chrysler’s equity by building a FIRE-family engine in the US (for use in the Mexico-built Fiat 500), Chrysler had to confirm that it has brought in $1.5b in non-NAFTA foreign revenue, and (according to Chrysler’s LLC agreement [PDF])

[execute] one or more franchise agreements covering in the aggregate at least ninety percent (90%) of the total Fiat Group Automobiles S.p.A. dealers in Latin America pursuant to which such dealers will carry Company products

in order to bring its stake up from 25% to 30%. We already know that Fiat will achieve this goal by rebadging Chrysler vehicles as Fiats for Latin American markets, a move that is technically compliant with the letter (if not the spirit) of the LLC agreement. But, it turns out that Fiat still had to get the Treasury to amend its agreement in order to bend the rules just a little bit more.

Exactly one week ago, a third amendment to the Chrysler LLC Operating Agreement [see gallery] was signed, making this second opportunity for Fiat to increase its share in Chrysler far easier. Whereas the original “Non-NAFTA Distribution Event” called for franchise agreements “pursuant to which dealers will carry Company [Chrysler] products” (note the plural), the amended version requires

“a distribution agreement… which shall (a) cover in the aggregate at least ninety percent of the total Fiat Group Automobiles S.p.A. dealers selling passenger vehicles in the European Union pursuant to which such dealers will have the right to carry one or more Company products (which may include Company products rebadged under any Fiat Group Automobiles S.p.A. brand name)” [Emphasis added]

The amendment also covers Brazil under the same language, which means Fiat was able to get Treasury to back off on a number of key conditions. First, Treasury only gets agreements to distribute Chrysler Group vehicles in Brazil and Europe, whereas the original called for agreements with Fiat dealers in all Latin American countries that Fiat has a presence. This was apparently too difficult for Fiat to negotiate with all of its Latin American dealers, so it was dropped (Chrysler dealers who were cut in the bailout-era dealer cull, take note). Second, the agreement went from requiring the sale of multiple Chrysler group models at Fiat’s Latin American dealers to requiring only one model to be sold in Fiat’s European and Brazilian dealers (so much for developing robust foreign markets for US-built Chrysler products). Finally, by agreeing in writing to Fiat’s rebadge request, Treasury has written the death warrant for any hopes of seeing Chrysler emerge as even a semi-independent company. Without any effort to push Chrysler’s brands in developing markets, Chrysler will become little more than the US manufacturing and retail arm of Fiat.

Are these amendments pragmatic? Possibly. It may not have been reasonable to expect Fiat to subvert its own global brand-building exercises to pump up Chrysler’s independent value, but that’s just what Treasury’s initial agreement with Fiat did. If Fiat was willing to agree to it when a bankruptcy-rinsed and publicly-refinanced Chrysler was on the line, why would Treasury back away from it after the fact? After all, Fiat was going to sell “at least one” Chrysler in most of its European dealerships anyway (as its Lancia line, and the Fiat Freemont), so why get rid of the multiple-vehicle requirement and leave aside the non-Brazilian Latin American markets? Chrysler Group’s vehicles would have had at least as good of a shot in Latin America as they have in Europe, particularly if Fiat had any intention of developing Chrysler’s brands outside of North America.

What this amendment acknowledges then, is that Chrysler’s opportunities for any kind of standalone independence are not something the Treasury is willing to fight for. Despite the rhetoric about “saving American automakers,” Treasury clearly has no intention of making any effort to preserve Chrysler’s options outside of being subsumed by Fiat. Like the green justifications for Treasury’s intervention in the auto industry, the “preserving American companies” justification has been abandoned in favor of a “we saved jobs” after-the-fact justification. Which would have been fine if Treasury had been upfront about it, and hadn’t signed agreements holding Fiat to conditions that made the bailout seem more favorable to American taxpayers, only to abandon them.

As things stand, Treasury has botched negotiations over Fiat’s “ecological commitment” (or purposefully made the agreement seem more significant than it is), and now it has pulled the teeth out of an agreement that was supposed to guarantee Chrysler some independent viability and access to foreign markets. It’s more than a little bit puzzling that, having been literally deadlocked over whether or not to save Chrysler at all, the president’s auto task force (and its successors at Treasury) decided not to save Chrysler, but to pump it with taxpayer cash and then doom it to becoming a Fiat subsidiary. That this would be accomplished while maintaining the impression that taxpayers were getting some kind of value out of the deal (in the form of the “ecological commitment” and “Non-NAFTA Distribution Event”), speaks to the fact that the rescue of Chrysler was, rather than the act of bravery it is so often trumpeted as, ultimately an act of cowardice. Picture 37 Picture 36 Picture 35 Fiat Obama in Mexico City is still waiting for its Chryslers...

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Fiat’s 40 MPG Fiction Fri, 14 Jan 2011 22:53:45 +0000

Yesterday’s release of the Congressional Oversight Panel report on the auto bailout pointed out several fundamental problems with the government’s intervention in the auto industry, all of which stem from what the report termed the “mutually exclusive” goals of the Treasury in overseeing its investment in the industry. But that report focused entirely on the post-bailout management decisions by Treasury, ignoring the decisions made during the bailout itself. And though the White House has, in recent months, redefined its goals in bailing out GM and Chrysler to focus on the improved financial performance of the bailed-out automakers, this is clearly a recent recalibration of its political message. As I pointed out in my latest New York Time Op-Ed,

what Mr. Obama called his “one goal” — having Detroit “lead the world in building the next generation of clean cars” — is nowhere near being achieved.

And, as it turns out, the Administration’s actions in the bailout will inevitably come up well short of that goal in at least one important respect.

When the White House’s Automotive Task Force bailed out Chrysler by forming an alliance between the struggling US automaker and the Italian industrial concern Fiat SpA, it gave Fiat some 20 percent of Chrysler’s equity. Fiat also received the right to another 15 percent of Chrysler’s equity in three five-percent chunks, each contingent upon the completion of three government-negotiated commitments. First, it required Fiat to begin commercial production of engines based on its Fully Integrated Robotised Engine family technology in the United States, a goal that was achieved earlier this week. The second commitment requires Chrysler to record $1.5b in revenue from outside the NAFTA zone, as well as Fiat’s

execution… of one or more franchise agreements covering in the aggregate at least ninety percent (90%) o f the total Fiat Group Automobiles S.p.A. dealers in Latin America pursuant to which such dealers will carry [Chrysler] products.

The final commitment of the Fiat-Chrysler alliance has been widely reported in the mainstream media using the language of the White House’s press release, which describes the commitment as

introducing a vehicle produced at a Chrysler factory in the U.S. that performs at 40 mpg

But nowhere in the mainstream media has it been reported whether that 40 MPG number refers to a city, highway or combined rating or whether it refers to an “adjusted” (i.e. what consumers read on the window sticker) or “unadjusted”EPA number. Having received a number of emails seeking clarification on this point, TTAC was heartened to find a link in a footnote of yesterday’s COP report, which put us in possession of the complete Fiat-Chrysler operating agreement [All 168 pages available in PDF format here]. Here we found what the “real reporters” never bothered to dig up: Fiat’s so-called “Irrevocable Ecological Commitment.”

This “commitment” is enshrined in the following “annex” to Fiat and Chrysler’s government-negotiated operating agreement, and reads as follows:

The addendum, as written, seems to be promising: after all, 40MPG combined is far better than, say, 40 MPG highway. But what the “Irrevocable Ecological Commitment” doesn’t specify is what test the government requires for compliance: adjusted EPA, or unadjusted EPA. For this crucial bit of information a little more digging was necessary. Way down, buried in the “definitions” section of the agreement, we finally get our answer:

Here is the dirty truth that neither the government, Fiat, Chrysler, nor the mainstream media has ever bothered to tell the American people: the “green car” that the White House secured US production of will get 40 MPG combined, but that number is to be measured by the “old” (pre-2008), “unadjusted” EPA methodology, which significantly inflates a cars mileage over the number consumers read on an EPA window sticker.

Now that we know the actual criteria for Fiat’s accomplishment of this commitment, the question becomes: did the government secure “the next generation of clean cars” as President Obama promised? The answer seems to be a fairly resounding “no.”At best, the government barely managed to negotiate a commitment to secure production of a vehicle with efficiency equivalent to the “current generation of clean cars.”

40 MPG combined unadjusted translates to almost exactly 30 MPG combined on the “adjusted” EPA test cycle which is used to produce window stickers for vehicles currently on the market. This is hardly a benchmark for a meaningful “Ecological Commitment” in the sense that a significant number of currently-available mass-market cars currently achieve this standard, and the cleanest vehicles on the market exceed it by dramatic amounts. According to the EPA, at least 11 2010 model-year “compact cars” currently achieve the 30 MPG combined adjusted standard. At least six “midsize sedans” achieved the magic number for the outgoing model-year, as did two “upscale sedans,” two convertibles, two station wagons and three SUVs (although the SUVs are all derivatives of the Ford Escape Hybrid).

The most efficient vehicles on the US market also achieve considerably more than 40 MPG on the unadjusted EPA test cycle; for example, the Toyota Prius scores about 70 MPG on the “unadjusted cycle” and the Ford Fusion Hybrid scores around 54 MPG unadjusted. Clearly, the standard for “the next generation of clean cars” should be considerably higher than 40 MPG combined unadjusted.

After all, five percent of Chrysler’s equity, the price taxpayers have paid for this uninspiring “Ecological Commitment,” would be worth quite a bit of money to Fiat if Chrysler’s IPO goes as planned. UBS analysts place a post-IPO valuation estimate on Chrysler of between $11.8b and $27.5b, which means Fiat’s reward for building this car could range from $590m to $1.35b. That’s at least half a billion dollars of taxpayer value going to a foreign automaker for building a car that performs at a level attained by such vehicles as the 2010 Kia Forte, Toyota Corolla and Chevrolet Aveo. And, if the Chrysler insider site Allpar has the correct information, the base model of the “40MPG” car will probably achieve even less-inspiring numbers with its Chrysler “world gas engine.” Consumers will likely have to pay extra for “40 MPG” models using Fiat’s 1.4 liter MultiAir engine.

In his insider account of the auto bailout, Task Force member Steve Rattner writes that the government “struggled” to get Fiat CEO Sergio Marchionne to put up cash for his desired 35% stake in a bailed-out Chrysler, and that the attempt eventually failed. Rattner writes

Eventually, after hard bargaining, Ron [Bloom] succeeded in carving back Fiat’s initial ownership stake to 20 percent, requiring the company to meet meaningful milestones before receiving additional shares…

It’s not clear from Rattner’s account where the 40 MPG “meaningful milestone” came from, but he does relay one anecdote from the Oval Office meeting in which it was narrowly decided to rescue Chrysler which seems instructive:

The President rested his chin on his hands for a few seconds. Then he looked up and said, “I’ve made my decision. I’m prepared to give Chrysler thirty days to see if we can get the Fiat alliance done on terms that make sense to us.” He turned to me and Ron and added, “I want you to be tough and I want you to be commercial.” We took that to mean that we should insist that all our conditions be met in a way that was prudent from the taxpayer’s standpoint.

Not wanting the Chrysler discussion to end on such a down note, [National Economic Council member Brian] Deese -who is anything but shy- piped up from the couch. “I think it’s worth recognizing that there are positive attributes associated with the Chrysler deal if it gets done,” he said. “It’s not all negative, including the fact that while Fiat hasn’t committed money, they have committed themselves with their technology, including a commitment to build a forty-mile-per-hour car in the United States.” People began to laugh, and it took a couple of beats for Deese to realize what he’d said and started laughing along. Building a forty-mile-per-gallon car would indeed be significant — but a forty-mile-per-hour car probably wouldn’t improve Chrysler’s prospects very much.

The sad irony is that, as negotiated by the auto team, Chrysler’s forty-mile-per-gallon car won’t be anywhere near as “significant” as they thought. Just as Deese made a slip of the tongue, task force negotiators made the oldest efficiency calculation mistake in the book: confusing adjusted with unadjusted EPA MPG. Unfortunately, this time nobody will be laughing… except perhaps Fiat CEO Sergio Marchionne.

]]> 78 TARP Oversight Report: Bailout Goals Conflict, Moral Hazard Alive And Well Thu, 13 Jan 2011 21:14:49 +0000

The Congressional Oversight Panel, which oversees the TARP program on behalf of the legislative branch, has released an update on the auto bailout [full PDF here] acknowledging the successes of the government intervention, while airing a number of important concerns. As has been typical of mainstream media coverage of the auto bailout, the good news has already been well-reported. The report, for example, notes that the bailout brought GM and Chrysler’s capacity utilization up, labor costs down, and allowed them to “[start] to reverse” their decades-long declines in market share. Furthermore, estimated government losses on the bailout have been halved, from $40b to $19b. The report’s summary concludes

While it remains too early to tell whether Treasury‟s intervention in and reshaping of the U.S. automotive industry will prove to be a success, there can be no question that the government‟s ambitious actions have had a major impact and appear to be on a promising course. Even so, the companies that received automotive bailout funds continue to face uncertain futures, taxpayers remain at financial risk, concerns remain about the transparency and accountability of Treasury‟s efforts, and moral hazard lingers as a long-run threat to the automotive industry and the broader economy.

Which brings us to the concerns that have received considerably less media attention…

As COP Chairman Ted Kaufman points out in his video introduction to the report, it is functionally impossible to asses the success to the auto bailout for the simple reason that there exists no set standard for success.The report notes

To analyze the success of Treasury‟s intervention in the automotive industry, there must first be a definition of “success.” Treasury has provided its own views on what would constitute a success. In testimony before the Panel, senior Treasury advisor Ronald Bloom defined success as primarily a question of return on investment: “the greater percentage of the money that we invested that we get back, the greater success.” The investment was not, however, made purely for the purpose of seeing a return on those funds. Mr. Bloom also testified to the importance of job preservation and listed a number of other measures for determining whether the program was successful, including the question of “whether these companies have addressed the long-term problems that we identified,” such as “a declining market share, a poor profitability profile” and failing to increase their ability to provide “good, stable jobs.”  Austan Goolsbee, Chairman of the Council of Economic Advisers, appeared in a recent video [link added] released by the White House to explain the “Rebirth of the American Auto Industry.”  According to Mr. Goolsbee, although taxpayers may soon see a return of the funds invested, the investment “was never really about the stock market.  It was about saving American jobs.”

If the success of the overall automotive rescue, and of the government‟s means of implementing that program in accordance with the principles listed in Section H.1, above, is measured by Treasury‟s ability to meet its own definition of success, the program must: (1) provide a return on investment; (2) create or at least preserve jobs that would have otherwise been lost; and (3) set the companies on a path toward ongoing stability.  Treasury‟s challenge, given its goals, lies not only in the difficulty of the goals themselves, but also in the fact that they may be mutually exclusive at times. [Emphasis added]

The ways in which these goals conflict has long been a staple of TTAC’s bailout coverage, and include several key points.

  • As TTAC pointed out back in May of last year when GM bought subprime lender Americredit, GM’s “need” for an in-house subprime lender conflicts obviously with the goals of the GMAC/Ally Financial bailout. To the extent that GM succeeds in improving sales through its new in-house lender, GMAC/Ally will suffer, hurting the taxpayer’s chances of repayment from that company. The report concurs, calling Treasury’s decision not to explore the option of folding GMAC/Ally back into GM “disconcerting.”
  • The short-term success of both GM and Chrysler, which determines taxpayer payback, can conflict with their long-term viability, a reality that pits two of Treasury’s main goals against each other. TTAC has also noted:

GM’s understandable impatience with government ownership is pushing it into risky territory. And the dangers of redlining a car business through risky loans isn’t limited to the risk of default: brand degradation, falling resale values, and boom-bust bubbles all come with the territory. Which is not to say GM is incapable of handling more subprime business… but rushing into risky positions in order to goose short-term performance has been a consistent bugbear of The General’s.

  • The financial turnaround of both GM and Chrysler required a significant loss of jobs.
  • The relative success of GM’s IPO trades off with the chances of successful IPOs from both Chrysler and Ally. The report points out:

In the case of GM, Treasury still holds a substantial share of the common stock, which it must sell at a price approximately 64 percent above the IPO price to realize a profit on the government‟s overall investment.  Investor interest in GM must therefore remain high enough to absorb such a large number of shares.  GMAC/Ally Financial faces various uncertainties before investors are likely to welcome an IPO.  And, in the case of Chrysler, the earliest an IPO is likely to occur is 2012, making it difficult to predict both Treasury‟s ability to sell its entire stake and the amount Treasury is likely to receive in such a sale.  In any case, $3.5 billion of Treasury‟s investment in Chrysler has already been written off, so even a very successful IPO is unlikely to recoup all of the money invested in that company.  Moreover, as discussed in Section E above, Treasury holds only an 8 percent equity stake in Chrysler and is unlikely to be able to exercise its call option to obtain more.  This leaves Treasury with a stake that is too small either to command a control premium or to exercise any control over the timing of the IPO.  Finally, it is not clear whether the market will have an appetite for shares of another large American auto company soon after the GM IPO.

  • The goals of the government as both an investor seeking to maximize return for taxpayers and the goals of exiting investments as quickly as possible as befits a “reluctant shareholder” also trade off with each other. The COP identifies the recent sale of Chrysler Financial as an area in which the Treasury demonstrably passed on an opportunity to maximize its investment, allowing Cerberus Capital to profit from its desire for a rapid exit. According to the report:

The case of Chrysler Financial may provide an example of the government forgoing potential upside in order to exit an investment as quickly as possible.  The issue is not that the implied value of Chrysler Financial increased by 33 percent in the seven months following the sale of Treasury‟s stake to Cerberus in May 2010.  The Panel acknowledges that there is no exact science to determining the most opportune time to exit an investment.  Rather, the government’s exercise of due diligence in response to the overture from Cerberus to buy out its stake appears to have been surprisingly limited and did not envision other valuation scenarios for Chrysler Financial that would involve a strategic buyer for the asset.

In short, the COP found at least two incidents in which the Treasury not only chose not to pursue maximum payback for taxpayers, but did so without fully exploring its options. The COP report charitably chalks these failures to Treasury’s conflicting goals, but they could just as easily be the product of sheer incompetence. Either way, Treasury did not stick strictly to its first goal (maximize return on investment). The success of its second goal (save jobs) is impossible to determine due to uncertainty about an alternative scenario, although the report does conclude that

It is likely, however, that, had GM‟s bankruptcy been a more prolonged process, a larger number of workers would likely have lost their jobs

As for the third goal (long-term viability), the report concludes that this goal is largely dependent on factors which Treasury can not control, arguing that

Even if the three companies‟ financials are relatively sound now, the domestic automotive sector as a whole must make a strong comeback in order for them to thrive

And even if all three of these goals are eventually fulfilled to the satisfaction of the COP, there remains one final problem: moral hazard. The report notes:

Treasury is now on course to recover the majority of its automotive investments within the next few years, but the impact of its actions will reverberate for much longer.  Treasury‟s rescue suggested that any sufficiently large American corporation may be considered “too big to fail,” broadening moral hazard risk from its TARP rescue actions beyond the financial sector.  Further, the fact that the government helped absorb the consequences of GM‟s and Chrysler‟s failures has put more competently managed automotive companies at a disadvantage.

And this, in a nutshell, has long been TTAC’s core complaint about the bailout. In a deeply competitive industry, where companies gamble with billions of dollars at a time, rewarding failure sets an incredibly dangerous precedent. Especially when the “more competently managed” competitors also employ Americans to manufacture a high proportion of their US sales volume domestically. The “additional views” addendum to the COP report holds up this invitation to moral hazard as “the most significant analysis” in the COP report (after noting that the bailout could have funded four Nimitz-vclass carriers or 25 years of NIH breast cancer research), arguing

The TARP has all but created an expectation, if not an emerging sense of entitlement, that certain financial and non-financial institutions are simply “too-big-or-too-interconnected-to-fail” and that the government will promptly honor the implicit guarantee issued for the benefit of any such institution that suffers a reversal of fortune.  This is the enduring legacy of the TARP.  Unfortunately, by offering a strong safety net funded with unlimited taxpayer resources, the government has encouraged potential recipients of such largess to undertake inappropriately risky behavior secure in the conviction that all profits from their endeavors will inure to their benefit and that large losses will fall to the taxpayers.  The placement of a government sanctioned thumb-on-the-scales corrupts the fundamental tenets of a market economy – the ability to prosper and the ability to fail.

]]> 48
On Detroit’s Guzzling Ways Fri, 17 Dec 2010 20:18:42 +0000

One of the more admirable qualities of the blogging culture is a relentless underdog streak. Anyone who mans the ramparts of a decent blog is forever scouring the worlds of business, media and opinion for an opportunity to attack the most prominent voices of the day. And TTAC is no exception: we certainly came up by attacking the apologists and Polyannas who are still massively overrepresented in the world of automotive commentary. But what a difference a bailout makes. While the mainstream automotive media spent much of the leadup to the auto bailout making apologies and excuses for Detroit’s decline, TTAC told the unpleasant truth, gaining us new readers and credibility every step of the way. Now that I find myself being asked to contribute to one of the most prestigious opinion outlets in the world (the NY Times op-ed page) on a regular basis, TTAC is no longer the underdog, and other blogs have stepped into the breach to attack us as the new status quo. Fair enough… let’s do this thing.

After an embarrassing hacker attack left its commenter base vulnerable and seething, it’s no wonder that Gawker’s Jalopnik car blog decided to lead the charge against my latest Op-Ed on Detroit’s “Guzzling” ways. And because the entertainment-oriented car blog has wisely decided to hire the former Detroit Free Press reporter Justin Hyde, they actually have someone on staff worthy of taking up the debate. Unfortunately, however, Hyde seems more interested in penning a takedown than actually engaging in a debate about the issues raised in the piece.

Hyde thesis is essentially that “Niedermeyer wants to blame Detroit for building the pickups and SUVs that remain popular with buyers” and that “Detroit can rightfully claim a share of leadership in green cars.” Towards the end of the piece he distills the argument:

So according to the Times, if gas prices don’t rise and Americans don’t buy greener vehicles, then the bailout of GM and Chrysler fell short. If gas prices do rise — creating the demand for the more-efficient models Detroit has now shown it can produce — that’s also bad, because the credit markets will suffer, and then flying unicorns attack Detroit and its Bailout II: Electric Boogaloo.

The implication is that I am somehow responsible for creating this damned-if-you-do, damned-if-you-don’t dynamic. What Hyde clearly doesn’t understand is that I never took to a public forum and attempted to make a politically unpopular bailout more palatable among certain constituencies by claiming that it would transform Detroit’s automakers from truck and SUV-dependent “dinosaurs” (the White House’s words, not mine) into green car leaders. My op-ed wasn’t meant to suggest any particular policy, or to push Detroit into either being “Pelosimobile” pushers or SUV-dependent laggards, but to point out the disconnect between an important justification for the bailout (green transformation) and the reality (GM and Chrysler have the worst fleet fuel economy numbers in the business). Hyde accidentally puts his finger on this reality when he writes

It may be news to the anti-SUV crowd, but Detroit can rightfully claim a share of leadership in green cars.

The first half of this sentence explains why my op-ed was necessary (the second half is highly debatable, witness the fleet-wide efficiency reality). Like it or not, SUVs do have a terrible reputation around the world, and Americans who oppose them on moral grounds can’t be blamed for taking Obama at his word and assuming that the government-led “transformation” of Detroit would lead GM and Chrysler to de-prioritize large gas guzzlers. Nowhere do I state that the government should have forced GM or Chrysler to build certain vehicles, but I absolutely understand why Americans might be disappointed to find out that the green rhetoric surrounding the bailout turned out to be just so much hot air.

But there’s that Catch-22 again: either Obama had to intervene in the day-to-day operations of the automakers, exposing him to libertarian and conflict-of-interest critiques, or he had to let GM and Chrysler operate purely on the basis of profit motivation, allowing old, bad habits to continue unchecked. But did TTAC create this lose-lose situation, or did Obama himself create it by justifying the bailout on green grounds? The fundamental problem here is that the American people overwhelmingly opposed the auto bailout, and rather than simply sell the policy as “the right thing to do” (a line that did emerge in the Administration’s rhetoric, but only after the bailout improved the auto-sector job situation) he had to sweeten the pot by promising that Detroit would transform into green car crusaders. Obama, not TTAC, promised the “flying unicorns”… we simply pointed out that

the bailouts have created a perverse new dynamic. With G.M. stock now being publicly traded on Wall Street, taxpayers have every incentive to cheer on the bailed-out automaker as it overproduces vehicles and pushes cheap credit. After all, the sooner G.M.’s stock hits a certain level — likely around $52 per share — the sooner the Treasury can sell its remaining equity and get taxpayers out of risk.

There’s certainly an argument to be made that allowing Detroit to operate as a business, though detrimental to Obama’s green goals, was the lesser of the two evils. But, as is so often the case when Jalopnik strays into heavy opinion, Hyde refuses to even take that stand. Instead, he concludes with a paragraph that oozes the kind of thinking that has enabled Detroit’s complacency for decades:

For this holiday, I’d wish for a few days where we set aside the kvetching about what the U.S. auto industry is or isn’t, and simply enjoy the fact that we as a nation decided a couple hundred thousand people should earn a living in manufacturing instead of hearing their children ask Santa Claus to stop their electricity from being shut off. I would also wish for better insights into the auto industry from the New York Times op-ed page, but I know better than to ask for flying unicorns.

In short, the message is “quit your whining.” For a piece entitled What The New York Times Op-Ed Page Doesn’t Know About Cars, that’s a pretty weak payoff. The American taxpayers made a massive investment in an industry that is constantly plagued by boom-bust cycles, makes huge gambles that destroy billions in wealth, and follows interests which, in the eyes of many, fundamentally trades off with the well-being of America’s environment and economy… but Hyde would prefer that we didn’t discuss any such trade-offs inherent in this kind of intervention. Given that the piece in question raises a number of issues that aren’t huge problems at the moment, but are indicative of industry backsliding into old bad habits (fleet sales, incentives, etc), isn’t discussing their trade-offs and raising awareness of them a fairly reasonable topic for an opinion piece?

And this is where Jalopnik and Hyde let down the blogosphere’s proud tradition of attacking op-ed columnists: if you’re going to imply that someone knows nothing about cars, you need to do better than wishing an end to all criticism of the bailout, or discussion of its fundamental contradictions. Blogs are about ongoing debates, but rather than adding anything meaningful to the war of ideas, Jalopnik simply retreats into the kind of “leave Britney alone” apologia that screams “we can’t handle the truth.” Luckily, readers who share Hyde’s visceral disagreement with my words but want more substance than limp-wristed a plea for censorship can always turn to TTAC’s comment section, where a vibrant exchange of ideas is already under way. After all, we don’t mind at all when people disagree with us; we all learn by having their views challenged. But the debate must go on…

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TTAC In The New York Times Thu, 16 Dec 2010 07:43:09 +0000

Ed Niedermeyer is too humble to say it, so it’s left to me: Ed just had his second third op-ed piece in the New York Times. Required reading.  Two core sentences:

“In particular, what Mr. Obama called his “one goal” — having Detroit “lead the world in building the next generation of clean cars” — is nowhere near being achieved. While the idea of improving G.M.’s and Chrysler’s fuel efficiency was doubtless a politically popular justification for the bailout, American consumers have not embraced the goal with equal fervor. Sales of fuel-sipping compact and subcompact cars have actually dropped this year, while pickup and sport utility vehicle sales grew by double-digit percentages.”

Honestly: Trying to tell customers what to buy fails. You have to make what they want. If they want dualies, give them dualies. It (still) is a free country. The mind-altering abilities of advertising are vastly overrated.

“And if Detroit’s slipping into bad old habits wasn’t distressing enough, the bailouts have created a perverse new dynamic. With G.M. stock now being publicly traded on Wall Street, taxpayers have every incentive to cheer on the bailed-out automaker as it overproduces vehicles and pushes cheap credit. After all, the sooner G.M.’s stock hits a certain level — likely around $52 per share — the sooner the Treasury can sell its remaining equity and get taxpayers out of risk.”

True, very true.

]]> 59
Is Detroit’s “Perception Gap” Dead? Wed, 13 Oct 2010 20:35:13 +0000

According to our latest sales data, the Detroit Three have enjoyed something of a comeback relative to the “foreign” competition this year. And though it’s not clear how long that trend will last, the media is catching the Detroit-boosting bug again.  The NYT’s Bill Vlasic epitomizes the mood, focusing on improvements in GM and Ford’s products in a piece titled American Cars Are Getting Another Look. Between IQS score improvements and anecdotal evidence of consumer interest in Ford and GM’s “gadgets” and “value,” Vlasic’s sidekick, Art Spinella of CNW Research, forwards an interesting theory for the death of the “perception gap” (a construct he helped create, by the way):

Ford has become almost the ‘halo brand’ for G.M. and Chrysler. Because of Ford’s success, people are less resistant in general to considering all of Detroit’s products.

Well, that’s not the dumbest thing ever said about the destruction of the perception gap… but it sure is a head-scratcher. Did Nissan and Honda just spend the last several decades skating by on Toyota’s sterling reputation (RIP)? Still, it might be interesting to hear Ford’s perspective on all this.

Sure enough, Ford’s Jim Farley tells Vlasic that the bailout was basically responsible for bringing Ford’s product improvements to the public eye. In the frantic days of debate over a possible auto bailout, argues Farley, something changed.

For the first time in many years, Americans debated the value of our industry. When the crisis happened, they started to notice that we were doing things differently and our cars had gotten a lot better.

Of course it helped considerably that Ford was the one company not receiving billions in TARP money from the government. But if Ford’s image benefited from being the conspicuous exception to Detroit’s bailout binge, how are GM and possibly Chrysler piggy-backing off of Ford’s image-boost now? After all, it’s not like these firms have paid taxpayers back yet.

The answer, if there is a definitive one, may well be found in a recent piece by The Atlantic’s business and economics editor, Megan McArdle. A libertarian-oriented commentator who admits to having opposed the bailout, McArdle traveled up to Lansing to watch Buick Enclaves being built. Her epiphany reflects a shift in perspective that has slowly emerged in a number of anti-auto-bailout commentators (er, both of us):

In the end, the bailout will probably cost voters a lot of money, and worse, more money than it had to. And there are all sorts of questions about whether other companies will be tempted to seek a government bailout, or whether the cost advantage that GM gained in bankruptcy might put pressure on other manufacturers’ margins, ultimately forcing them to follow suit.

On the other hand, had the government not stepped in, the GM liquidation would arguably have deepened the recession—not tumbled us into Great Depression II, as some more-hysterical bailout supporters claimed, but raised the unemployment rate and lowered GDP somewhat. A libertarian economist of my acquaintance recently confided that he thinks the bailout has been surprisingly successful—“not necessarily a good idea, but far from the worst thing the administration has done.”

After spending a few days in Detroit, this assessment strikes me as about right. The bailout wasn’t a good idea, and it will probably cost billions. But the government wastes billions of dollars every year, because for the United States, $1 billion adds up to the equivalent of less than one venti latte per American. At least in this case, we got something in return: a functional car company, resurrected from the ashes of the old GM’s bloated carcass. Americans probably won’t notice the few extra dollars they spent on the bailout. But they may eventually be glad when another shiny new Buick Enclave rolls off the Lansing assembly line, and into their driveway.

Which goes to show how far the erstwhile anti-bailout crowd has come on the role of consumer choice. For the sake of contrast, I predicted (in the height of bailout-debate mania) that GM’s relationship with consumers wouldn’t change post-bailout because it

has singularly failed to understand that the classic American narratives of rebirth and redemption begins with a dark night of the soul– not a trip to DC to ask Santa for a multi-billion dollar bailout.

But perhaps this distinction has been lost to most Americans. After all, most of the products credited with improving GM’s overall quality were on the market by the time the bailout went through, and once invested their manufacturer, taxpayers would be more likely to consider buying them. Especially when, as McArdle notes in her piece,

Jack Baruth, a reviewer on thetruthabout, recently wrote, “[The Chevy Cruze is] well-positioned against the Civic and Corolla. I believe that it beats both of those cars in significant, measurable ways.”

Certainly building cars that meet with the approval of respected independent reviewers like Jack will tend to make consumers more interested in their cars. Meanwhile, the argument that “things would have been worse” without the bailout takes a lot of the air out of lingering political opposition to GM. But with a GM IPO on the horizon, the final bill still has yet to be reckoned. And as the latest round of Volt hysteria has proved, GM still likes to use its political persecution syndrome as a PR crutch… and cudgel.

If Ford has overcome its image issues, and Chrysler is still dying by the side of the road (for now… it can’t enjoy a “perception gap” until more of its vehicles are actually better than people think they are)), GM is the dramatic figure, still struggling through the doors of perception. Depending on the value of its IPO, the amount taxpayers are finally paid back, and the path GM’s PR team treads between now and final payback, real improvements in the quality of its cars might not translate into improved market share. Certainly ham-handed attempts like “Payback-gate” won’t help. In fact, other than continuing to relentlessly improve product, GM’s biggest challenge is figuring out a way to address the bailout honestly, while taking advantage of the intellectual shift mapped by McArdle. Though consumers are learning (and liking) more about improvements in GM’s products, they’re still struggling to love The General.

]]> 55
GM’s AmeriCredit Deal: Awaiting Approval Fri, 23 Jul 2010 17:59:44 +0000

Now that GM’s acquisition of the subprime lender AmeriCredit has had 24 hours to sink in, howls of protest are starting to surface. The charge is being led by Senator Chuck Grassley, who has requested a review of the deal from the SIGTARP, saying

If GM has $3.5 billion in cash to buy a financial institution, it seems like it should have paid back taxpayers first.  After GM’s experience with GMAC, which left GM seeking a taxpayer bailout, you have to think the company and, in turn, the taxpayers would be better off if GM focused on making cars that people want to buy and stayed clear of repeating its effort to make high-risk car loans.

And though Grassley’s criticism could be read as mere partisan gamesmanship from a leader of “the party of no,” there are a number of very good reasons for opposing the deal.

A look around the blogosphere reveals that opposition to the AmeriCredit deal largely falls into three categories: one camp, led by Grassley, believes that GM is burning cash on the deal that should be going to taxpayers, another worry is that the deal is an excuse for GM to fall back into bad habits, while a third objection concerns the deal’s effect on GM’s former captive lender GMAC (now known as Ally Financial). Each of these criticisms has its own valid points, and together they form a solid basis for opposition to the deal for government overseers, taxpaying citizens and potential IPO investors alike.

Grassley, who was a leading critic of GM’s “payback” ads frames his criticism of the deal by holding up full taxpayer payback as the deal’s opportunity cost. Though Grassley is on the right track with his criticism of GM’s profligate spending, $3.5b would hardly make a dent in GM’s obligations to the taxpayer. The Treasury’s stake in GM currently stands at about $43b, or over 12 times the amount GM spent on AmeriCredit. Though paying back taxpayers would likely help GM’s sales by eliminating the sense of obligation to taxpayers, the idea of GM buying back equity from Treasury is nothing short of laughable given that its cash pile stands at about $30b (or about $14b short of what it needs).

But even if you remove the taxpayer angle from the equation, there are still good reasons for sharing Grassley’s misgivings about the deal. Perhaps the best-articulated criticism of GM’s deal from a cash-management perspective comes from the NYT’s Deal Professor Steven Davidoff, who argues

With more than $35.7 billion in cash and marketable securities on its balance sheet as of the end of the first quarter of this year, G.M. is paying cash for AmeriCredit, something it certainly could not have done without the tens of billions of dollars that it received in government assistance. G.M. is also paying a 24 percent premium to AmeriCredit’s closing stock price on the day before the deal was announced.

If I were an owner of G.M., and I suppose I am in part as a taxpayer, I would wonder if that cash might not be better used as a special dividend to G.M.’s shareholders. Certainly, the fact that G.M. is spending $3.5 billion will be noticed by its unions and seen as a sign that there is cash available for them too.

Taken with TTAC’s latest analysis of the GM IPO, it’s clear that GM still doesn’t understand that its government-supplied cash pile paints a huge target on its back. Given the political overtones to anything related to subprime lending, it’s hard to imagine the UAW not seeing this deal as a sign for it to start pushing concession rollbacks. Meanwhile, $3.5b might not be enough to make an impact on taxpayer ownership, it does represent a healthy amount of R&D spending, or most of the amount needed to rescue GM’s European division, Opel, or enough to affect any of the other cash outlays that GM will not be able to get away from over the next five years. Instead of looking at looming medium-term costs, GM jumped into AmeriCredit because, as Davidoff points out

Managers with too much cash to burn will burn too much cash. If you want a real-life example, simply read the beginning of “Barbarians at the Gate” and Ross Johnson’s epic struggle to spend all of the money that RJR Nabisco was throwing off in the 1980s.

If GM could expect a serious improvement in its business by acquiring a subprime lending arm, these criticisms might be easy to dismiss. Unfortunately, the “bad habits” critique offers strong evidence that this is not the case. Davidoff lays out the case thusly

First, when G.M. owns a captive lender, it subsidizes the plants, labor unions and dealers. Captured finance means nonmarket financing for buyers when they receive a loan. Think zero percent financing. In connection with the acquisition, AmeriCredit will also re-enter the lease financing business, raising similar issues. Lease financing for automobiles usually results in artificial residual pricing for the buyout price at the end of the lease. All of this helps empty dealer lots and keeps plants running. But it oversupplies cars. The problem of artificially oversupplying new cars (like new houses) is put off for another day.

Second, the subsidy ensures that people who may not otherwise qualify to buy new cars do so. They overconsume and overspend as they shift their buying from used cars to new cars. This may be an immediate net gain for an economy in distress, but it may be a drag as well, as consumers divert income that could be used for other things that would perhaps create more wealth over all.

And, as the Peridot Capitalist points out, fueling another boom-bust cycle through lax standards is a recipe for, well, another bust.

While I am sure those in the industry will praise this deal as a way for GM to maximize unit sales, we need not completely forget how cyclical economies work. Subprime lending pays off when the economy is improving but when the business cycle inevitably turns (as every economy does), the loans turn sour, the losses are crushing, and the cycle starts all over again. To me this highlights one of the core problems our domestic economy has developed over the last 10 or 20 years. We continue to follow the path of loose credit when things are going great and at the first sign of a downturn, credit standards increase dramatically. Once things stabilize, we hear that banks are slowly reducing their standards and loan volumes increase again.

Of course, this line of reasoning is vulnerable to exaggeration. The Atlantic’s Daniel Indiviglio notes that

The auto market also doesn’t really have to worry about the kind of bubble that struck the mortgage market, specifically because autos are a depreciating asset. Millions of people are going to hope to get rich quick by flipping their cars, for example. There’s an old industry adage that most people will keep paying their auto loan even after they’ve defaulted on their mortgage, because they need their car to get to work. They can default on their mortgage and rent, but they probably don’t want to have to walk if they lose their car. Moreover, if times really got tough, and they did lose their home, they could always live in their car temporarily.

Indiviglio’s defense of subprime auto lending is cogent and well-argued, but even that isn’t enough to convince him that the AmeriCredit deal was a good idea. He concludes

Of course, none of this means to imply that it makes sense for GM to purchase Americredit. While most other auto companies, particularly foreign ones like Nissan and Honda, have found it sensible to keep a captive finance company in-house, none of those are subprime. They generally cater to people with very strong credit so they don’t have to worry about strategy and can simply earn interest on loans that are a very safe bet. So it’s puzzling that GM wouldn’t just focus on building up a new prime borrower-driven captive unit instead. And it’s even stranger that the government wouldn’t raise its eyebrows when GM is making an acquisition rather than engaging in additional divestitures to try to pay back the billions it still owes Uncle Sam.

Underlying these criticisms are the obvious incentives that GM has to improve its short-term performance even at the expense of its long-term health. IPOs are notorious pressure-cookers, focusing an entire company on projecting a certain image for one discrete moment. Given GM’s history of overproduction and volume-boosting tricks that inevitably must be paid off in either falling resale or diminished profit margin, this line of criticism can’t be ignored. Especially because we already know that much of GM’s cash is essentially spoken for over the medium term.

The final criticism of GM’s AmeriCredit acquisition involves The General’s former captive finance unit Ally Financial. The criticism is a simple one: though Ally will continue to provide floorplan financing to GM dealers as well as some retail loans, AmeriCredit will inexorably grow closer to GM once its credit rating improves on the strength of its consolidation to GM’s balance sheet. Already losing out on GM retail loans, Ally could find itself replaced by AmeriCredit as GM’s main floorplan lender, dealing Ally a devastating blow. The WSJ [sub] puts the relationship between Ally and GM into context

Ally financed 33.5% of GM’s U.S. customers in the first quarter, compared with 30.3% as of Dec. 31. It financed 87.7% of the inventory in GM’s U.S. dealerships during the same period, compared with 90.9% in the fourth quarter.

The problem is that Ally still owes taxpayers $16.3b, and by buying AmeriCredit instead, GM may have doomed Ally to a much longer payback timeline, effectively increasing its impact on taxpayers. After all, GMAC might not have been rescued from its subprime mortgage mess had it not enjoyed its close relationship with GM, which the government was set on rescuing. It’s galling enough that GMAC was rescued as a “stealth bailout” for GM, but the fact that GM is now throwing Ally to the wolves is one serious twist of the knife.

On the other hand, had GM bought Ally, it would have been doing a great disservice to its balance sheet. Not only would buying GMAC have been expensive, it would have brought more government debt on board, and would have faced regulatory issues as well, as Ally is a bank holding company. Ultimately, it’s impossible to fault GM for not going with Ally… the blame belongs to the auto task force, which saw GMAC/Ally’s importance to GM without facilitating their long-term cooperation. Both GM and Ally insist that their relationship remains strong, but it’s hard to imagine GM acquiring a lender and not moving aggressively to consolidate its credit business with that lender. And once again, the taxpayers will be left holding the bag.

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GM’s IPO: For King, Country, or Cadillac? Thu, 15 Jul 2010 19:38:43 +0000

After ending the first quarter of this year with $35.7b in cash and equivalents, GM was in the best position it’s enjoyed in decades. And yet, with an IPO prospectus looming, The General is seeking a $5b line of credit and trotting out EBITDAPRO as its in-house measure of financial success. Both of these tactics are hallmarks of companies that are doing poorly, and GM has already learned how problematic loading up on debt and sliced-and-diced financials can be. So why is The General inviting criticism from outlets like Edmunds Autoobserver, which characterizes GM’s push towards an IPO as the rebirth of old bad habits? The simple answer: “business execution.” In other words, GM may have a lot of cash, but it’s got nearly as many demands on its resources as well… and these cash drains hardly add up to a coherent strategy.

GM still has yet to announce its Q2 financial performance, but already it’s clear from anecdotal evidence that GM is spending a lot more money than it has in several years. Much of it is going to marketing, as GM sponsorships have re-emerged post-bankruptcy for everything from Public Broadcasting to the giveaway of Corvettes to baseball players and business leaders. With a new marketing boss, GM is also re-shuffling its ad agencies, and has been buying up ads for new products like the Buick Regal, as well as older products with sagging sales, like the Chevy Corvette. Add increases to R&D for a number of canceled powertrain programs ($42m of which had been written off as losses at the end of last year) and the development of a number of potentially expensive new products (more on this in a bit) and you’ve got a sure-fire recipe for rising costs.

Meanwhile, GM’s sales have remained relatively stagnant. “Core brands” were up nearly 32 percent in the first half of 2010, but overall GM is outperforming its H1 2009 performance in US-market sales by a mere 13.2 percent, as the economy falters mid-recovery. Against a backdrop of sharply-increasing costs in marketing and R&D, the underlying mechanics of GM’s business are a crunch that will eventually require either another cutback in long-delayed marketing or R&D spending, or a real turnaround in sales not driven by profit-sapping fleet sales.

And that’s just the background to GM’s real dilemmas. The General will need to spend about $6b on its Opel and Daewoo divisions in this year alone, a move that will cut its cash pile by at least a fifth. Since these divisions develop the platforms and products that have made GM competitive once again, The General can’t afford to not keep them open, and no government seems willing to step in and help out.

Meanwhile, The General needs to be saving cash for a rainy day as well: it will have to pay $5.9b in unfunded pension costs in 2013, and another $6.4b in 2014. That’s roughly $18b of GM’s $30b cash pile spoken for before a single new car is developed, not counting any operating losses accrued along the way.

And new car development is a must if The General’s turnaround is to stay rolling along. Powertrains are one area where GM is said to be spending big money, and a new generation of full-sized trucks and SUVs are also in the works. A whole new RWD platform, known as Alpha, is under development at Cadillac and is said to provide the underpinnings for Cadillac’s new 3-Series competitor (ATS) as well as the next-gen CTS and Camaro. Though the costs for these projects aren’t being released, it seems safe to assume that capital expenditures in Q2 and beyond should accelerate significantly from Q1′s $800m number simply on the strength of these investments.

And here’s where it gets interesting: with Chairman/CEO Ed Whitacre now running product planning, a RWD Cadillac flagship is coming back onto the table, backed internally by both Whitacre and GM NA boss Mark Reuss. Though a modified Zeta platform is under discussion for the range-topper, GM had previously declared the platform unfit for luxury car duty, and there are reports of a new RWD platform known as “Beta” under development at GM Shanghai. If a new platform is being developed, the cost could easily amount to another billion dollars (if not more), which begs the question: does GM need a full-blooded flagship? How this plan impacts the Epsilon II+ XTS “flagship” that is probably even further along in development isn’t clear; the XTS was supposed to be the cheap route to a Caddy flagship, but now it seems more likely to be canceled or become a hybrid-only model.

But while Whitacre dreams of a world-class RWD Cadillac (and purportedly fights for the Chinese-market RWD Buick Park Avenue to come stateside), yet another force is stirring beneath GM’s feet. With the election of Bob King, the United Auto Workers have taken a distinct turn towards the internationalist left, as the union struggles for relevance in the post-bailout environment. And with profits at Ford inspiring talk at the UAW of rolling back long-overdue concessions, any sign of consistent profits by GM by next year’s bargaining session will be seen as an excuse for King’s fired-up negotiators to put the squeeze on GM. Especially if the union is able to dump most of its VEBA account holdings of GM equity, it would have no compunction in once again bleeding the goose that lays golden eggs.

In short, GM’s expenditures are rising even as sales remain sluggish. After a solid five years of starving powertrain and platform development, GM conservatively faces $5b in annual capital expenditures, plus an additional $6b in annual expenditures for 2010, 2013 and 2014 to maintain its pension plan and overseas divisions. That accounts for The General’s $30b cash pile right there, before making the investments needed to fulfill Ed Whitacre’s desire to make Cadillac a world-class luxury brand, or accounting for demands made by a newly invigorated UAW led by Bob King’s firebrand vision. Either of these could add billions to GM’s survival bill, especially during the 2011-2012 respite from pension and overseas obligations.

And then there’s the final piece of the puzzle: what this all spells for the government’s 61 percent stake in GM. Because of political pressure to exit its unwanted investment as soon as possible, the Treasury’s priorities are last in the growing line for GM’s cash pile. This is hardly surprising given that the cash came from Treasury in the first place, but GM also can’t ignore the deleterious effects that a huge taxpayer bath would have on its image with consumers. GM doesn’t owe Treasury full payback out of a moral obligation, but because its potential customers are footing the bill for their turnaround. With King, Country and Cadillac all lining up for a piece of GM’s dwindling cash pile, someone is going to get left out in the cold.

So, what’s a bailed-out automaker to do? Holding a hard line on the union is crucial, as it’s the one component of this balancing act that can be taken for granted (on the other hand, British Leland). And as much as we disdain GM’s plan to saddle Cadillac with the mass-market platform-derived XTS flagship, there’s no guarantee that Whitacre’s cherished RWD flagship would be worth the $1b-$2b it would cost to develop. If anything, GM should prioritize taxpayer payback for the simple reason that its obligation to the taxpayer (rather than, say, the fact that the government controls its day-to-day decisions, which it doesn’t) is a significant factor in its sluggish sales relative to Ford.

But the fact that GM is pursuing a $5b line of credit and diving into an IPO indicates that GM is willing to take a hit on its initial valuation and let Treasury take the loss, rather than forgo a number of expensive new development programs. This will serve only to extend GM’s financial burden beyond the 2014 window for its pension obligations, further hurting its long-term investment value. And this debt also hurts its short-term value compared to Ford, because the Blue Oval’s overleveraged balance sheet is one of the only things that makes GM look good by comparison.

With King, Country and Cadillac all lining up for GM’s liquid assets, it’s too soon to abandon austerity measures in the RenCen. There are more than enough tough choices ahead for General Motors.

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GM’s IPO: Faster, Harder And Less Satisfying Mon, 05 Jul 2010 17:33:01 +0000

Despite having more cash than debt for the first time in decades, GM is going back to Wall Street in search of fresh debt. Over the weekend, The General has been in talks with several banks to secure a $5b revolving line of credit to shore up its liquidity position ahead of an IPO that’s rumored to take place in August. At $5b, GM’s desired line of credit would essentially replace the $5.8b the automaker has repaid to the Treasury, and will help it deal with a number of pressing cash needs to maintain its shaky global empire. But with so many pressing uses for the cash, and political pressure mounting for a rapid IPO, can GM deal with its issues and take on more debt and be worth what the government wants it to be worth? Troublingly, the answers to these questions are not to be found on GM’s balance sheet.

GM’s money-losing European Opel division has lost over a billion dollars since the firm emerged from bankruptcy, and will require nearly $5b in restructuring funds, to be paid by GM since state aid from Germany fell through. On the other side of the Eurasian continent, another crisis is racking GM’s other most important overseas division, GM-Daewoo. Tradingmarkets reports that GM-DAT’s creditors (including the Korean Development Bank) have agreed to roll over some $900m in debt. And not just because they’re sweet people either. The payback was postponed on the condition that GM

transfer key auto technologies to its South Korean unit and dispatch an official to take charge of the subsidiary’s finances to keep it afloat

Needless to say, this $6b overseas money pit is a nasty bit of business given GM’s desire to hold an IPO this summer. Which is where the $5b credit line comes in. Unfortunately, GM isn’t having an easier time getting money from Wall Street than it did trying to get money from the German government.

In fact, GM is even keeping its options open to include asset sales, according to the FT. Possibly up for sale: GM’s stakes in Delphi and GMAC (now known as Ally Financial). But with nobody breaking down doors to get at either of those two struggling firms, credit is GM’s first line of defense against looming cash problems. After all, as IHS Global Insight’s Rebecca Lindland tells the Freep

Alan Mulally taught the industry, you can never borrow too much cash

And here we were thinking that the bailout proved that you could take on such crushing debt loads that the government has to rescue you. Speaking of which, Reuters reports that fellow TARP recipients, Bank of America, Citigroup, JPMorgan Chase and Morgan Stanley, have agreed to each provide half a billion dollars to the GM revolving credit cause. The other $3b? No word on that front yet… and that’s not exactly great news when you’re about to ask the market to out a value on your stock.

GM says it has two weeks to line up the remaining $3b in credit, and sources tell Reuters that

GM is more likely to cut the valuation on the IPO than delay it and is looking for a broad investor base

And at this point the size and valuation of GM’s IPO is the crucial question. Treasury is staying cagey about just how much of its 61 percent stake in GM it will float, but 20-24 percent is being mentioned as a possibility. That would make sense, as it would be just barely enough to take the Treasury’s below the crucial 51 percent mark, theoretically freeing GM from the stigma of majority government ownership.

Reuters says that this 12.2-14.6 percent stake could be worth $10b-$12b, numbers that would give GM an overall value of around $80b. With GM planning to sell $3b worth of convertible securities, the Canadian and Ontario governments looking to move 20 percent of its 11.7 stake, and the UAW moving an undisclosed amount of its stake, Reuters reckons GM’s IPO could reach $15b-$20b. That would make it one of the biggest IPOs in American history.

If everything goes to plan, anyway. But here’s a problem: the $80b-ish market cap that this hypothetical IPO supports, is over twice the market cap of automakers like Ford Motor Company, Nissan (which stands on the brink of an EV breakthrough) and Volkswagen. Though smaller than Toyota’s $107b-ish market cap, this valuation would make GM one of the most valuable automakers in the world, despite modest post-bankruptcy operating profit, looming overseas division issues and $27b in pension shortfalls. That last issue alone could cost the company as much as $12b by 2014.

No wonder then, that GM’s IPO hypsters are using Ebitdapo, or earnings before interest, tax, depreciation, amortization and postretirement benefits to tout its financial health. But pretending like those pension obligations don’t exist doesn’t make it so. Is GM in better shape than it once was? Undoubtedly. Is it one of the most valuable automakers in the world? Almost certainly not. The fact that GM is determined not to delay its IPO is a product of political needs, not market-related concerns. If a mid-term election weren’t looming, the Treasury would wait to let GM deal with its numerous remaining issues before releasing the automaker into the wild. But it can’t have its cake and eat it to: if GM’s IPO launches this August, it will do so with so many potential cash sucks hanging over it, that an $80b valuation isn’t likely to be the result.

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Editorial: The Truth About GM’s IPO Thu, 10 Jun 2010 19:06:55 +0000

One might believe that GM’s forthcoming IPO marks the second coming of Christ.  GM, once the world’s largest corporation, faced oblivion in the winter of 2009.  The train wreck of this former company reemerged from burial last summer through the generosity of the US and Canadian taxpayer as a new company shorn of most of its former financial liabilities, unproductive assets, and brands it no longer could support.  Everything that Jerry York (R.I.P.) told the automotive world in January 2006 that GM needed to do to survive back then finally came to pass.  And now, it’s preparing an IPO to swap ownership from the governments to the public. Ed Whitacre and his team will get the credit for a most remarkable turnaround while Obama will bask in the light of his stewardship of public monies.  Let’s get the story straight.

For starters, GM’s “turnaround” is mostly a result of the balance sheet restructuring.  By eliminating its onerous debt load, transferring a good portion of its UAW VEBA obligation from debt to equity, and killing four brands along with eliminating a bunch of unnecessary assets (like NUMMI), it greatly lowered its operating breakeven level in North America.  Think of it as you tearing up your credit cards, getting rid of most of your mortgage and auto loans, and stop alimony payments to your two ex-wives. You could cut your salary in half and survive. It has nothing to do with the genius of Ed Whitacre.

Instead, GM launches a whole bunch of new products, all of which were designed and engineered as part of the old GM, that just happen to be pretty darn good (thanks to Bob Lutz and Ed Welburn).  Think Camaro, new Equinox, new SRX, and new Lacrosse, and maybe even the upcoming Cruze.  On top of that, GM has a potential technological “tour de force” in the new Volt that could possibly anoint GM as the “King of Green.”  Oh yeah, GM comes out of bankruptcy during one of the deepest recession in automotive sales in history (relative to the trend line) and start selling again into an upswing.  Then its major competitor, Toyota, stubs its entire foot by ignoring a major design flaw that results in death and dismemberment of several US citizens including a California highway patrolman and family.

Even so, GM’s market share remains flatlined mostly at around 18%.  But it’s enough share (and volume) that it pays back $6.7 billion of government debt through an escrow fund set up for extraordinary expenses that was barely tapped – and that’s only because the terms of that extra funding required it to be applied against the debt if it wasn’t used for emergencies.  Whitacre goes on TV and dupes the public without revealing the true nature of the repayment. That’s like using the estate money you inherited – which was never your money in the first place – to pay off your bookie… but you tell your third wife she can keep her diamond ring and now she thinks you’re her hero.

GM reports its first quarter earnings and, surprise, it makes money in North America for the first time in years.  And it even manages to reduce losses in Europe while its China JV’s hum along nicely as before.  The future looks bright – time to put on the shades.  It’s so bright that the GM top executives look to reward themselves some $13 million in restricted stock for just being in the right place at the right time – and by coasting off of new products designed before some of them even knew they’d be in Detroit.

But what’s really driving the IPO is not the requirement to raise capital for GM.  Instead, it’s a combination of factors, mostly the need for the Obama Administration to win political points before the November elections.  A market value on the Treasury holdings – most of which it will still own even after the IPO – will make headlines all by itself and prove to the taxpayers that the Government Motors moniker is no more.  Second, Wall Street investment banks see huge fees of the IPO and secondary offerings of what will be one of the larger stock issuances of all times.  Third, Ed Whitacre (and other insiders) wants to proclaim victory and put a value on shareholdings.

What about that value? Here’s what the Congressional TARP Oversight Panel has to say on the topic:

The valuation of New GM used by the bankruptcy court estimated that the market capitalization (the price of all outstanding shares) of the new entity would be worth between $59 and $77 billion in 2012. Treasury has invested a combined $49.5 billion in the New and Old GM and approximately 61 percent of equity in New GM.280 Assuming full repayment of the $8.8 billion note and preferred stock issued by New GM to Treasury, the shares in New GM will have to be worth $40.7 billion (the difference between $49.5 billion and $8.8 billion) for Treasury‟s investment to be repaid when Treasury sells its shares, meaning the market capitalization of the entire company needs to be worth $67.7 billion. In April 2000, when Old GM shares were at the height of their value (not adjusted for inflation), the company‟s total value was only $57.2 billion. In other words, New GM will have to achieve a capitalization that is higher than was ever achieved by Old GM if taxpayers are to break even.

GM is still in turnaround mode.  Yes, it will pull off an IPO – likely by early in the fourth quarter this year – and will garner accolades from Obama, Wall Street, and even some competitors for its remarkable story.  But GM still faces a massive problem in Europe – Opel/Vauxhall has been a perennial laggard in a market that now looks to be moribund for years.  The new executive team hasn’t yet sold a car that it has designed and developed for North America.  And we’re still trying to decipher the playbook of the four brands in North America.  The IPO is merely a swap of stakeholders in the company – from the government to the public – but there’s still little there to tell us whether or not GM in the future will be a winner.  Place your bets!

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