The Truth About Cars » TARP The Truth About Cars is dedicated to providing candid, unbiased automobile reviews and the latest in auto industry news. Wed, 23 Jul 2014 18:25:17 +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 » TARP 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 TARP Is Lifting: Government Motors No More, In About A Year Or So Wed, 19 Dec 2012 15:00:30 +0000

It has been repeatedly suggested that GM should use its ample profits to buy back the shares held by the U.S. government (don’t forget the Canadians.). Finally, GM listens to reasons. Or, possibly, strong suggestions from Washington. GM will purchase 200 million shares of GM common stock held by the U.S. Department of the Treasury for $5.5 billion, or $27.50 per share, the company said in a statement  The share buyback is part of the Treasury’s plan, also announced today, to fully exit its entire holdings of GM stock within 12 to 15 months, subject to market conditions.

Stock buyback plans usually lift the price of the share. Promptly, GM shares were up some 8 percent to 27.57 at the open.

After the buyback, Treasury will still own a stake of about 19 percent, down from about 26 percent currently. Treasury said it will sell its remaining stake of about 300.1 million shares “through various means in an orderly fashion” over the next 12 months to 15 months, and could begin the process as soon as January. That could bring the price down again.

According to Reuters, Treasury has agreed to relinquish certain governance rights, including required levels of U.S. manufacturing and barring the purchase of corporate jets. Senior executive payment caps under TARP remain in place. Once Uncle Sam is completely out of the picture, it will be bonus time at RenCen.

The Canadians remained unmentioned in the declarations of impending independence. Canadian Finance Minister Jim Flaherty told Reuters that his government has no immediate plans to sell its stake in General Motors. Not now, maybe later. Oh well, maybe Government Motors a little longer.

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Report: Treasury Behind Delphi Pensions Debacle Tue, 07 Aug 2012 17:21:58 +0000

The Daily Caller says it has emails that prove that the pensions of 20,000 salaried retirees at Delphi were terminated “solely because those retirees were not members of labor unions.”

The emails, says the conservative website “contradict sworn testimony, in federal court and before Congress, given by several Obama administration figures. They also indicate that the administration misled lawmakers and the courts about the sequence of events surrounding the termination of those non-union pensions, and that administration figures violated federal law.”

In 1994, GM spun off its parts business into Delphi.  In 2005, the company went Chapter 11.  Later, parts of the business was sold, wound down, or sold back to GM. Says the Daily Caller:

“Twenty thousand of its workers lost nearly their entire pensions when the government bailed out GM. At the same time, Delphi employees who were members of the United Auto Workers union saw their pensions topped off and made whole.”

In sworn testimony, former Treasury official Matthew Feldman and former White House auto czar Ron Bloom, stated that the Pension Benefit Guaranty Corporation (PBGC), and not the administration, “led the effort to terminate the non-union Delphi workers’ pension plan,” the Daily Caller says. “The emails TheDC has obtained show that the Treasury Department, not the independent PBGC, was running the show.”

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Obama: Banks Should Pay For The Auto Bailout Mon, 19 Sep 2011 23:48:00 +0000  

At the height of “bailout fever,” after TARP had been instituted but before the automakers had been completely bailed out, one argument that we heard a lot of from Detroit’s defenders was “how can you begrudge the manufacturing base a few billion when speculators at the banks are receiving far more support?” At the time, the argument seemed to me like a convenient way to shift attention away from Detroit’s failures and undercut the argument that consumers, not a credit crunch, were responsible for killing off GM and Chrysler… but at least then it still had some validity. Fast forward to today, and history has stripped it of all relevance, as it turns out the banks will likely be picking up the automakers’ bailout tab.


The Detroit News‘s David Shepardson reports that the Obama Administration has resurrected its “Financial Crisis Responsibility Fee” as part of its new deficit-reduction package, which, in the words of Treasury Secretary Tim Geithner,

 is designed to make sure that if there are any losses from the emergency actions we took to put out the financial fires of ’08 and ’09, that we recover those losses in the form of a fee on the institutions that benefited most directly from those programs… If Congress did not legislate a fee like this, then if we ultimately realize losses on the emergency programs, then those would add to the deficit. So by proposing this fee, we try to make sure that doesn’t happen.

Sounds good, right? Well, here’s the problem with expecting payback for bailouts: the firms that “benefit most directly” from them are least likely to be able to pay them back. As a result, the big bad banks that have not only paid back most of their loans but also lent Chrysler the cash to pay back its TARP loans are the ones in line for a soaking. The automakers, which received less up front but are paying back a lower percentage of their loans, are in line for a free pass. Think of this as a handy reminder of all that “moral hazard” stuff people were talking about a few years ago.

The Freep explains the details

The fee would be restricted to firms with more than $50 billion in assets, according the Obama administration plan – and is estimated to raise $30 billion over 10 years.

By “firms with more than $50b in assets,” the Freep means the biggest banks. With the exception of AIG, Ally Financial (formerly GMAC, GM’s once-captive finance arm), and the Fannie/Freddie twins, this refers to banks that were the quickest to recover post-bailout, and have repaid most or all of their TARP loans. And the last time the Obama Administration proposed this Fee, the heads of those banks were not amused. In early 2010, the WSJ reported that

[J.P. Morgan Chase CEO James Dimon] said it felt like the banks which have already paid back taxpayers, were being asked to subsidize the bailout of General Motors and Chrysler.

At the time, I wrote

The real irony is that the bank bailout allegedly took place because nobody understood the real nature of the crisis, shrouded as it was in the opacity of financial industry jargon. Now that the moment of crisis is over, the banks are back to making money, while the automakers are still dreaming of that first post-bankruptcy profit. Which one turned out to be the more difficult, complex industry?

But now that Detroit is making big profits, what’s the excuse? By my count, Chrysler still owes the American people around $5.3b that it shows no interest in ever repaying. At current stock prices, the taxpayers are likely to lose around $15b on the GM bailout. And GM is already making so much money it has to shell out nearly a quarter-billion dollars to the union that helped drag it from industry-dominator to federal charity case. But rather than putting GM and Chrysler on a payment plan until they square up with the American people, we’re going to shake down the banks for their share? Is this making sense to anyone?

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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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The Invisible Hand Of The United States Treasury Mon, 01 Nov 2010 16:41:57 +0000

Ever since it became clear that the government would rescue General Motors and Chrysler, the Treasury Department has made it clear that it would stay out of “day to day” decision making at the rescued automakers. Allowing the rescued firms to operate independently was a political calculation based on the desire to keep politics from affecting sales at the two rescued automakers, but according to a Reuters special report, Treasury has not been able to keep its hands completely out of important decisions concerning the future of the two firms. Particularly in terms of setting up GM’s Initial Public Offering, Reuters found that the Treasury made important decisions affecting

its speed and size, the fees paid to the bankers and the potential involvement of offshore investors

Though this has kept the IPO out of election season and all of its potential for political problems, there is some downside to the Treasury’s involvement, particularly because it will not be exiting its equity position in GM until about 18 months after the IPO. As a result, analysts predict problems securing investors in a firm that may still be subject to ongoing government control. Morningstar’s David Whiston tells Reuters

I’m sure that there will be some institutional investors, and even some individual investors, that it scares away

Earlier political backlash against the auto bailout is also affecting decisions surrounding the IPO, including whether or not GM’s forthcoming IPO roadshow should make use of private jets, after the automakers received bitter criticism for arriving at the initial bailout hearings in separate private jets. GM plans to continue to use commercial flights as its sells its IPO around the country, but that could change. According to Reuters

Nothing has to be set until the road show begins, but if the bankers have their way, the taxpayer-owned automaker will use private jets for the IPO, sources said.

Said one person involved in the deal: “It is nuts to think people are going to go wait through security lines. And the possibility you would have a missed flight and that that would affect your ability to sell stock? It would be the stupidest decision on the face of the planet.”

“It’s just dumb. It would be so penny-wise, pound-foolish it would be ridiculous,” said the banker.

Government ownership has also complicated GM’s advertising policies, particuarly in regards to preventing backlash against politically-themed advertising. According to the report

GM quietly dropped a plan for a commercial for the Chevy Cruze small car that would have featured Sarah Palin, the polarizing Republican politician, and her comic doppelganger, Tina Fey

Treasury may not have directly intervened in the decision, but its mere ownership of The General clearly affected the decision to keep politics out of advertising. After Ed Whitacre became the company’s CEO, Treasury became more hands-off, allowing the former AT&T exec to run the company as he saw fit. Prior to Whitacre’s ascnt to GM’s top spot, however, CEO Fritz Henderson had far more government interference to deal with. For example, Henderson’s plan to move GM headquarters from the Renaissance Center to nearby Warren, MI, was scuttled by the White House auto task force.

But even Whitacre had to temper his desire for independence with a cooperative approach to GM’s largest stakeholder. Whitacre was infamously eager to push the government out of itst ownership stake during the initial offering, but faced pushback from the government. At that point, it became clear that Treasury would be running the IPO, with investment bank Lazard (former employer of Auto Task Force head Steve Rattner) as its principal adviser. Because Whitacre cared less about which banks underwrote the IPO and more about getting rid of government ownership, one source tells Reuters that the IPO underwriting bids

opened a lobbying circus for Treasury.

Goldman Sachs created a real problem for Treasury when it pushed fee bidding to the ultra-low point of .75 percent. But because of Goldman’s unpopularity in the wake of the Wall Street bailout, Treasury was unwilling to go with the investment bank, even though its fees were lowest. Instead of settling on Goldman, Treasury used its low bids to drive down fee requests by the eventual lead underwriting firms, JPMorgan and MorganStanley. BofA/MerrilLynch and Citi were eventually added as lead underwriters as well after leading GM’s quest for a $5b revolving line of credit, despite protests from JPMorgan and MorganStanley. And the addition of Citi was not inconsequential:

The U.S. Treasury, which owns 61 percent of GM, also owned 12 percent of Citigroup’s common stock. At its core, that set the government up to be potentially both a buyer and a seller of GM stock.

Another area in which the Treasury has played a major role in the lead-up to GM’s IPO: determining which foreign investors could be courted for the IPO. Reuters explains that GM’s Chinese partner SAIC was key in allowing foreign ownership stakes in the new GM:

Bankers involved in the deal argued that funds like the Kuwait and Qatar investment authorities could serve as “cornerstone” investors that could buy and agree to hold a big chunk of the deal in an otherwise tough market.

But the Treasury was sensitive to the potential backlash. Had U.S. taxpayers bailed out GM to subsidize its purchase by foreign governments in the Middle East, Singapore and China? After all, the GM IPO was expected to be priced at a discount of up to 20 percent from what bank analysts determined would be its theoretical value.

By September, the question became more pressing because GM’s partner in Shanghai, Chinese automaker SAIC, had expressed an interest in buying a “single digit” stake, sources said.

That trial balloon put the pressure on Treasury to clarify how investors would be treated. After deliberations involving Bloom and Herb Allison, a former Merrill Lynch executive who was then overseeing the Treasury’s bank bailout fund, Treasury delivered its verdict late on a Friday in mid-September.

In a statement posted online, the Treasury said the GM IPO would be open to the widest range of investors as it looked to “maximize returns” on its stake. The bankers had a green light to pitch the likes of Kuwait and Qatar.

By early October, GM IPO bankers had kicked off meetings with sovereign wealth funds, according to people with knowledge of the proceedings.

GM has since met with Singapore-based GIC and Temasek Holdings, Kuwait Investment Authority, Qatar Investment Authority and the Abu Dhabi Investment Authority, despite early worries over political backlash against foreign ownership of the bailed-out firm.

But GM had already become used to managing the government’s concerns, whether big or small. When Whitacre pounced on subprime lender AmeriCredit, creating a new in-house finance unit, the government was concerned about the move’s effect on former captive finance unit, GMAC.

GM did not consult the Treasury during the discussions and the government was troubled at the last-minute notice before the announcement, people familiar with its thinking said.

U.S. officials were also concerned about how the deal would affect Ally, which is 56 percent owned by the Treasury and remains a major lender to GM, the sources said.

And government backlash even extended to Whitacre’s day-to-day decisions, even if the pressure didn’t always come directly from Treasury.

Whitacre, an enthusiastic outdoorsman, even brought [board member and adviser  Steve] Girsky along on a weekday trip to Windsor, Ontario, to get a Canadian fishing license so he could fish both sides of the Detroit River, according to a person with knowledge of the trip.

On the return back through the tunnel that connects Windsor with Detroit, Whitacre and Girsky were stopped by a border patrol agent who seemed puzzled by their story. “Let me get this straight,” he said. “You work for GM and you took off on company time in a company car to get a fishing license?”

The constant pressure of keeping the government happy wore on Whitacre, according to Reuters’ sources, and when the government made it clear that it would not completely exit its ownership stake during the IPO, Whitacre’s frustration boiled over, and he quit suddenly. Not only was the uncertainty bad for GM’s image, but more troubling still, it raised the question of who was really in charge of GM’s future. After all, if Whitacre was the government’s hand-picked choice to run GM and he was leaving over frustrations with the government’s interference, what would future CEOs face?

With Whitacre gone, and the government poised to remain a major shareholder in GM for at least another year, questions over the Government’s role in running General Motors do not seem likely to disappear. Indeed, if GM uses private jets for its IPO roadshow, or if foreign firms take major stakes in the re-launched form, political backlash could push the government into taking a more active role at the automaker. And investors like The Gordian Group’s Peter Kaufman will be stuck asking tough questions without obvious answers.

Are they running this company for profit to shareholders or for other, more political, goals? As long as the government runs this company, that will be a key question.

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The Auto Bailout Explained Tue, 05 Oct 2010 22:39:37 +0000

While some have questioned why TARP was used to support the automotive industry, both the Bush  and Obama Administrations determined that Treasury’s investments in the auto companies were
consistent with the purpose and specific requirements of EESA.  Among other things, Treasury
determined that the auto companies were and are interrelated with entities extending credit to
consumers and dealers because of their financing subsidiaries and other operations, and that a
disruption in the industry or an uncontrolled liquidation would have had serious effects on financial
market stability, employment and the economy as a whole.

Translation: credit dependence killed the car companies. And from the 0% Red Toe Tag Sales to GM Daewoo’s $2b currency gambling loss, the glove fits. It’s a lesson that isn’t brought up often enough, and it’s one of the only passages of note in the Auto Industry Financing Program section of Treasury’s two-year TARP retrospective [PDF here]. Otherwise, the document is swallowed up in accounting for the billions spent on banks, despite the fact that

We now have recovered most of the investments we made in the banks.  Taxpayers will likely earn a profit on the investments the government made in banks and AIG, with TARP losses limited to
investments in the automobile industry and housing programs.

So, why not explain why projected auto rescue losses were reduced to $17b with more than just a footnote? [#2 on Figure 2-B shown above]

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Treasury: GM “Payback” Claims Not Misleading Wed, 28 Apr 2010 20:53:26 +0000

In response to Senator Chuck Grassley’s concern that GM’s claim to have paid back taxpayer loans was misleading, the US Treasury is now saying that it has no problem with The General’s statements. According to the Freep, a Treasury letter to Grassley explains that:

GM’s decision to pay off the loan signaled the automaker did not face “extraordinary expenses,” and that Treasury approved the loan payoff.

“The fact that GM made the determination and repaid the remaining $4.7 billion to the U.S. government now is good news for the company, our investment and the American people,” said Herbert Allison, assistant Treasury secretary for financial stability.

Strictly speaking, GM’s claim to have paid back all US Government loans is correct. The only issue is that GM’s ad touting the payback makes no reference to the fact that it still owes the Treasury upwards of $40b. If that misleads folks, well, apparently the Treasury Department isn’t going to do anything about it.

And why would they? The better GM does, the better it looks like Treasury has managed the bailout, and GM’s success is undoubtedly tied to its ability to convince Americans that it doesn’t owe them anything, even if it does. The problem for both GM and the White House is that even former GM “ambassadors” are lining up to knock this misleading softball out of the park… and fan the flames of anti-GM sentiment in the process. All of which just increases the likelihood that taxpayers won’t ever be paid back in full.

Wouldn’t it be easier if some high-profile administration official simply acknowledged that GM has along ways to go? Or what about if GM didn’t try to score PR brownie points off this money-shuffle in the first place? At this point the auto bailout can’t be un-done, but it can still be made even more pointless by whipping up opposition with these Treasury-backed half-truths. After all, if you owe someone money but can’t pay them back, the least you could do is be honest about it.

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Auto Bailout “Progress” Defined: “Only” $28b in TARP Losses Mon, 26 Apr 2010 17:00:05 +0000

Last week’s announcement that had Chrysler turned a Q1 profit and GM had “repaid” taxpayer loans brought a flurry of political posturing about the success or lack thereof of the auto bailout. With Republicans laying into the auto bailout from several angles, President Obama dedicated his weekly address to a defense of industry assistance. Obama still frames the bailout as an unpleasant necessity, but argues that last week’s news means the chances that taxpayers will recoup their “investment” are improving. And apparently the Treasury agrees. According to the Detroit News, Treasury has revised its estimate of auto bailout losses (not counting GMAC) downwards, from $30.6b to $28b. Progress, sure, but hardly a sign that taxpayers can expect full payback from its state-owned automakers.

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Grassley: Was GM’s “Payback” Shuffle About Avoiding The TARP Tax? Fri, 23 Apr 2010 14:47:09 +0000

While the White House and most of the media spent the last two days parroting GM’s claim that it “paid back” taxpayers, Senator Chuck Grassley was busy writing a letter to the Secretary of the Treasury [letter available in PDF here]. The three-page note opens:

Dear Secretary Geithner:

General Motors (GM) yesterday announced that it repaid its TARP loans. I am concerned, however, that this announcement is not what it seems. In fact, it appears to be
nothing more than an elaborate TARP money shuffle.

No surprises there: TTAC has been all over this ruse for months now. Grassley does sum the situation up nicely, stating that “A debt-for-equity swap is not a repayment,” but the most interesting part of his letter is his theory for why GM and the Administration approved the tax-money reshuffle. Thus far, we’ve assumed that PR was the driving concern in this transparent deception. According to Grassley though, there may be another reason…

Grassley’s theory: GM and the Administration shuffled the money back to taxpayers in order to help the automaker avoid President Obama’s Financial Crisis Responsibility Fee, also known as “The TARP Tax.” He explains:

I am also troubled by the timing of this latest maneuver.  According to Mr. [TARP Special Inspector General Neil] Barofsky, Treasury had supervisory authority over GM’s use of these TARP escrow funds.  Since GM’s exit from bankruptcy court, Treasury had approved the use of the escrow funds for costs such as GM’s obligations to its parts supplier Delphi. According to the GM 8K, GM had planned to use the TARP funds in escrow to pay back the TARP loans on a quarterly basis beginning in the fourth quarter of 2009.  But following the April 20, 2010, hearing of the Senate Finance Committee, where Treasury’s decision to exempt GM from the bank TARP excise tax was questioned and GM’s refusal to testify was noted, it is odd that GM suddenly drew down on the TARP escrow and accelerated the repayment of the remaining balance of GM’s outstanding TARP loans.

The bottom line seems to be that the TARP loans were “repaid” with other TARP funds in a Treasury escrow account.  The TARP loans were not repaid from money GM is earning selling cars, as GM and the Administration have claimed in their speeches, press releases and television commercials. When these criticisms were put to GM’s Vice Chairman Stephen Girsky in a television interview yesterday, he admitted that the criticisms were valid:

Question:    Are you just paying the government back with government money?

Mr. Girsky: Well listen, that is in effect true, but a year ago nobody thought we’d be able to pay this back.

Mr. Girsky then said that GM originally planned to pay the loan over the next five years.  So the question is why—other than a desire to justify excluding GM from the administration’s TARP tax proposal—would Treasury and GM reduce GM’s TARP debt with TARP equity and then mischaracterize it as a repayment from earnings?

Why indeed? As Grassley points out, GM did decline to appear at TARP Tax hearings, which was convenient, considering it and Chrysler are likely to account for most of the TARP program’s losses. With a number of questions about the TARP Tax looming and more hearings planned, it’s not inconceivable that Grassley’s theories will pressure Treasury to explain its approval of GM’s white lie.

But more important than any game of Potomac Gotcha is the glimpse at GM and Chrysler’s future that this controversy presents. Americans actually seem to care whether bailed-out automakers really pay them back or just pretend to. With Chrysler literally unable to ever make the taxpayer’s whole, how can that company ever project an image of success to the public? With a GM IPO unlikely to generate the huge sums needed to square up with Treasury, how can The General plan for a future of growth on the basis of this flimsy deception? The Department of the Treasury may rubber stamp GM’s creative accounting, but it won’t be buying the cars that will create a real turnaround for the automaker. That’s up to the American people, and as a group, they’re not overly fond of spending their hard-earned at companies that owe them money. As companies in an industry that is deeply dependent on consumer sympathy, GM and Chrysler simply can not afford to be seen as trying to weasel out of commitments. They should be embracing, not evading a framework for long-term repayment.

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Quote Of The Day: Payback’s A Bitch Edition Fri, 15 Jan 2010 00:55:31 +0000

My commitment is to the American taxpayer. My commitment is to recover every single dime the American people are owed… We want our money back and we’re going to get it.

Without even getting into the politics of President Obama’s proposed “financial crisis responsibility fee,” it’s easy to see that the initiative holds a wealth of implications for America’s TARP-recipient automakers. In Obama’s new rhetoric, taking TARP money put businesses in a new category of special obligation to the taxpayers. Though the fee is targeted at financial institutions, the principle applies just as much to Detroit.

Banks owe the government about $60b in TARP money, while GM and Chrysler owe about $50b. Unlike the financial institutions though, it’s clear that GM and Chrysler will never be able to pay back their full obligation to the taxpayers. This has Wall Street types in a fury, accusing the White House of forcing them to subsidize Detroit.

The real irony in all this isn’t that successful banks will be penalized while failing Detroit gets a pass. That makes perfect sense, because as Rep Barney Frank puts it “getting money from these banks is a good way to expand government revenue without expanding the deficit.” There’s no such money to be had from GM and Chrysler.

The real irony is that the bank bailout allegedly took place because nobody understood the real nature of the crisis, shrouded as it was in the opacity of financial industry jargon. Now that the moment of crisis is over, the banks are back to making money, while the automakers are still dreaming of that first post-bankruptcy profit. Which one turned out to be the more difficult, complex industry?

If you don’t want banks making risky bets you can tie “fees” to their leverage ratios. But how do you legislate your way to a successful automaker?

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DetN Bailout Report: White House Forced Rapid Bankruptcy, UAW Refused Hourly Pension Freeze Tue, 24 Nov 2009 15:58:23 +0000 Do you remember the time? (courtesy:WSJ)

On October 13th of last year, when TTAC’s Bailout Watch clocked in at a mere 115 entries, GM’s then-CEO Rick Wagoner and board members Erskine Bowles and John Bryan approached the Treasury for a “temporary” bailout. Not that we knew it at the time. “In this period of continued uncertainty in the markets, you really can’t rule out anything,” said GM spokesfolks at the time. “Stand by for another big public investment in a failing firm,” warned TTAC. As subsequent events proved, the rush to bailout had already begun. Funny then, that we’re only now learning some of the most crucial details of the chaotic maneuvering of late 2008, thanks to a Detroit News investigation. Though the industry’s disastrous hearings before congress nearly derailed the deal, the initial strategy of approaching the White House would prove to be the key to the eventual bailout. In fact, President Bush was ready to provide $25b to GM, Chrysler, GMAC and Chry-Fi on December 19, only to have talks with the two finance firms break down. Instead, GM and Chrysler were given $9.4b and $4b respectively, with GMAC getting $7b 10 days later and Chrysler receiving $1.5b in January.

This staggered bailout, with multiple tranches soon came to symbolize the indecisiveness that would characterize the entire rescue effort. For example, the idea of a merger between GM and Chrysler was being discussed up to late October, when it was abandoned by GM, only to be brought back to the table early in 2009. Twice. The DetN explains:

Henderson rebuffed overtures from Chrysler in February, but two months later he raised with the task force the possibility of acquiring parts of Chrysler, if a deal with Fiat faltered. “If the Chrysler deal doesn’t go through, we’re interested in some pieces of Chrysler,” Henderson said, according to a person familiar with the situation. “We’re interested in Jeep. We’re interested in a couple of the powertrains.” GM was most interested in Chrysler’s jewels: the Jeep brand, Dodge trucks and minivans. “Fritz’s view on the Ram was, it’s a brand new Ram. You run it for five years for cash and not do a new one,” said a person involved in the talks. Also under consideration in GM’s corporate mind: eliminating Chrysler’s dealer network, and selling Chryslers at GM dealerships.

Several members of Obama’s auto team (including Steve Rattner) remained in favor of an American Leyland solution, until someone did the math and realized that a GM-Chrysler merger would be more of a Canadian Leyland affair. Most of the jobs that would have been saved in such a scenario would have been located in Canada, while it would only have saved about a quarter of Chrysler’s US jobs. The task force quickly came to see a GM-Chrysler merger as a worst-case scenario in the event of a failure of the Fiat option, even though it could have been a cheaper option.

As both companies began to move towards bankruptcy, the government task force took a firm hand in guiding the processes. Even though GM had foreseen a somewhat different bankruptcy experience than the government had planned.

GM planned to present a 300-page slide presentation at the first meeting. The Obama team wasn’t interested. Instead, they went through 15 major issues and assigned deadlines to specific people. With the efficiency of a drill sergeant, task force member and Wall Street vet Harry Wilson, went through each item and got a commitment of when it would be completed. GM filed for bankruptcy June 1. CFO Ray Young said that due to its complex accounting system, GM couldn’t exit by Aug. 31 or even Sept. 30, the end of a quarter. Wilson was incredulous: GM would lose at least $100 million a week during bankruptcy, and would be willing to incur as much as $1 billion in additional losses, because it couldn’t resolve accounting issues. “I can’t think of a problem in the world I can’t solve for a $1 billion,” Wilson said, according to participants.

The government task force also held secret talks to sell GM’s bankrupt supplier Delphi to financier Carl Icahn, which fell apart when Icahn held out for a better deal. The UAW was no better of a partner in the sacrifice-sharing department. GM had asked the UAW to freeze its hourly pension plan, a move that the union refused point-blank. Could the government have pushed the union to accept GM’s offer? Perhaps, but the will clearly wasn’t there. And UAW President Ron Gettelfinger was standing tough, even with the fate of the entire industry on the line: he actually walked out of one meeting with Fiat’s Sergio Marchionne.

None of these revelations carry the explosive power they would have had they been made public during the course of bailout deliberations. In retrospect, though, they provide a few more wrinkles to the bailout narrative. The battle over the bailout, as such, is over. The taxpayers will take a bath on the adventure, no matter what. But by studying the events of the last 15 months, we may yet learn valuable lessons about government support for an industry that could well end up needing more.

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Bailout Watch 573: GM Bailout Cost Taxpayers $12,200 Per Car Thu, 19 Nov 2009 17:14:52 +0000 Condition 1: taxpayers get the hose (

This according to the National Taxpayer’s Union report “The Auto Bailout: A Taxpayer Quagmire,” authored by Rochester Institute of Technology Professor of Economics, Thomas D. Hopkins. That number includes the $52.9b taxpayer “investment” in General Motors, as well as GM’s portion of the GMAC bailout, which brings GM’s taxpayer tab to over $60b. Chrysler’s GMAC-inclusive bailout bill totals $17.4b, or $7,600 per vehicle, based on estimated 2009/2010 sales. Don’t believe that GM or Chrysler will match their projections over the next twelve months? The NTU estimates that total government support for the auto industry comes out to $800 per taxpaying American family. These numbers do not include the Cash for Clunkers program, likely future bailouts of GMAC (projected at a further $2b), or Department of Energy retooling loans (ATVML). These numbers also do not reflect the very real possibility that GM, Chrysler and GMAC could continue to drain taxpayer money post-2010. “For each year of survival beyond 2010,” the report warns, “the burden per vehicle would decline [Ed: but not disappear] – so long as no additional government funding is provided.”

The report concludes:

Viewed from today’s vantage point, the auto bailout is troublesome in a number of respects. As already noted, the bailout has become a taxpayer quagmire, escape from which will be a major public policy challenge. The recommendations offered by the GAO have much merit, especially those focused on developing an exit plan and on ensuring during the interim that management of the three firms is insulated from political pressures. Sound business practices, not special interest advocacy, should prevail. Both require that a qualified, objective and independent team be given full access to current information about the firms’ operating and financial conditions.

Greater transparency should be achieved so that taxpayers will be better able to understand both issues and outcomes. In particular, taxpayers as part-owners of each of the three firms should be given the same information, on the same timely basis, that public corporations routinely would be required to provide shareholders.

More generally, the bailout has been a sobering experience whose adverse consequences cannot be corrected easily. Auto producers whose products American consumers find most appealing have been notably missing from the roster of bailout recipients. Our subsidies instead have gone to the poor performers, firms whose past management decisions proved faulty. As a result the bailout has created moral hazard problems, inadvertently handicapping the progress of stronger, non-subsidized producers. The problems extend beyond just the auto industry, as favored status for one financial company and its bank necessarily complicates prospects for non-subsidized rivals. The time has come to stop such bailouts, and in an orderly way, to seek at least some recovery for taxpayers.

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Bailout Watch 571: How GM Won’t Pay Off Its Government Debt (But Will Try To Make You Think It Did) Mon, 16 Nov 2009 16:06:58 +0000 (

According to GM’s 3rd Quarter financial results announcement:

GM plans to repay the United States, Canadian and Ontario government loans in quarterly installments from escrowed funds, beginning next month with an initial $1.2 billion payment to be made in December ($1.0 billion to the UST and $192 million to the EDC), followed by quarterly payments. Any escrowed funds available as of June 30, 2010 would be used to repay the UST and EDC loans unless the escrowed funds were extended one year by the UST. Any balance of funds would be released to GM after the repayment of the UST and EDC loans.

Though this sounds like positive news, don’t let it fool you. GM’s financials only acknowledge $6.7b in government debt, a sum that barely scratches the surface of the taxpayer “investment” in The General (let’s use $52b as a baseline). The escrow fund in question contains $13.6b of the final $30b GM was given as it exited bankruptcy. Having burned through nearly half of that princely sum, GM now plans on using at least part of the rest to pay off the “outstanding $6.7b.” The escrow account expires in June 2010, at which point whatever is left unpaid of the $6.7b will be returned to the government, and GM will keep the rest. GM will then declare victory and pretend like it has squared up with the tax paying public, when in fact the public will have merely paid itself back a paltry fraction of what GM actually owes. This “repayment” will then be dutifully reported without question by the mainstream media, and the stain of bailout will be symbolically lifted. Except, of course, it won’t. GM and the government are playing a classic shell game, taking advantage of the public’s inability to keep the billions straight. Shameful.

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