Steve Rattner's Fuzzy Math: GM Worth $90b, Taxpayers Will Make Money

Edward Niedermeyer
by Edward Niedermeyer
steve rattner s fuzzy math gm worth 90b taxpayers will make money

In a conversation with The WSJ [sub]’s Paul Ingrassia, former Car Czar Steve “Chooch” Rattner did some “back-of-the-envelope calculation” to show why he believes the US taxpayers will see their $50b “investment” in GM recouped when The General goes public sometime in the next year.

Here’s how Rattner gets to his latest calculation: Bonds of GM’s bankruptcy estate – known as Motors Liquidation – are currently trading around 30 cents on the dollar, according to Thomson Reuters. Those bondholders were owed $27 billion.

As part of GM’s restructuring, those bondholders were promised a 10% stake in GM when it goes public. In very rough calculations, those bonds are currently valued at about $9 billion (because they currently trade at around 30 cents and were originally worth $27 billion).

Assuming that $9 billion represented 10% of GM if it went public now that would imply GM had a value of around $90 billion. The taxpayer’s stake: 60% of that $90 billion, or $54 billion — Rattner’s magic number.

For an alleged Wall Street hot-shot, Rattner’s calculations leave a lot to be desired. For one thing, they don’t take into account the crucial $17.2b bailout of GMAC, without which neither GM nor Chrysler would have likely survived. And as the WSJ [ sub] notes, the GMAC bailout will probably cost taxpayers at least $6.3b. Meanwhile, we still have yet to see GAAP-compliant financial results from GM, a fact that puts Rattner’s speculative calculations into proper context.

Furthermore, using the speculative market for Motors Liquidation bonds as a gauge of GM’s strength is hardly satisfactory. After all, Motors Liquidation stock, which shouldn’t be worth anything, is still valued at nearly 60 cents per share, giving the wind-down remnants of “Old GM” a market cap of about $350m. When it should be worth precisely nothing. This illogical state of affairs speaks to the deeply non-rational influences at play in speculative investment, and casts doubt on Rattner’s “back-of-the-napkin” calculation. Would Rattner conclude that Motors Liquidation is actually worth $350m just because enough investors are making moon-shot penny bets on the remains of Old GM?

Besides, the US Government isn’t the only stakeholder in GM. When GM does hold an IPO, the UAW’s VEBA 17.5 percent stake in the firm will have to be monetized as soon as possible, because the fund is in desperate need of cash, and it will be years before it can cash out its 55 percent Chrysler stake. If the UAW cashes out its GM stake at the same time as Treasury, the IPO size would be considerably larger than it would be otherwise, potentially diluting investor enthusiasm (depending on actual financial results). Presidential Task Force boss Ron Bloom has hinted at this, saying

Private markets would like to see us exit this investment, and I think they will be more comfortable if we’re on a sustained path out the door than if they think we’re going to try to market time it to maximize return.

Even Barrons [via MSN], which hypes GM as the “hot IPO of 2010,” agrees that taxpayers will play second fiddle to, writing

Even if the debt rallies, bondholders will fare the worst, reflecting the restructuring of GM by the Obama administration that favored the union over bondholders despite their similar legal claims. The union is also apt to do better than taxpayers, based on its sweet deal. [emphasis added]

The same Barrons report cites a JP Morgan analyst’s “aggressive” valuation of GM at $63b, with $50b given as a more conservative valuation. Considering GM was functionally worth nothing prior to the bailout, and was revived to the tune of about $50b (not counting GMAC, retooling loans, et. al.) that $50b valuation sounds about right to us.

Meanwhile, Rattner’s motivations for overselling the possibility of taxpayer payback shouldn’t be nearly as hard to calculate.

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2 of 23 comments
  • Bunkie Bunkie on Mar 12, 2010

    Sooner or later the US new vehicle market will pick up, big-time. The fact is that 10MM new vehicles per year is just as unsustainable as 17MM. The result will be a rising tide that will lift GM as well as everyone else. How much remains to be seen, but it *will* happen. At that point the IPO will succeed to some degree. It has been duly noted that markets are irrational. I could not agree more. For every bubble and its unjustified enthusiasm, there is the bust and it's excessive pessism. Smart people make a lot of money off of this irrationality, it's true. But it is also true that the world is not ending, the spring flowers will appear and GM will sell enough cars to survive assuming that said spring is not too late in coming.

  • DetroitsaRiot DetroitsaRiot on Mar 17, 2010

    "back of the napkin", or was it "bar napkin" cause it sounds like someone was inebriated with this kind of math......

  • FreedMike Race car drivers are all alpha-types. Aggression is part of the deal. I think you see more of that stuff in NASCAR because crashes - the end result of said aggression - are far more survivable than they would be in F1 or IndyCar.
  • Analoggrotto Only allow Tesla drivers to race, we are the epitome of class and brilliance.
  • Wjtinfwb When my kids turned 16 and got their Operators, we spent $400 to send both (twins) to 2 driving schools. One held by the local Sherriff was pretty basic but a good starter on car control and dealing with police officers as they ran the school. Then they went to a full day class in N Atlanta on a racetrack, with the cars supplied by BMW. They learned evasive maneuvers, high speed braking, skid control on a wet skid pad and generally built a lot of confidence behind the wheel. Feeling better about their skills, we looked for cars. My son was adamant he wanted a manual, Halleluiah! Looking at used Civics and Golf's and concerned about reliability and safety, I got discouraged. Then noticed an AutoTrader adv. for a new leftover '16 Ford Focus ST six-speed. 25k MSRP advertised for $17,500. $2500 above my self-imposed limit. I went to look, a brand new car, 16 miles on it, black with just the sunroof. 3 year warranty and ABS, Airbags. One drive and the torquey turbo 2.0 convinced me and I bought it on the spot. 7 years and 66k miles later it still serves my son well with zero issues. My daughter was set on a Subaru, I easily found a year old Crosstrek with all the safety gear and only 3k miles. 21k but gave my wife and I lots of peace of mind. She still wheels the Subaru, loves it and it too has provided 7 years and 58k miles of low cost motoring. Buy what fits your budget but keep in mind total cost over the long haul and the peace of mind a reliable and safe car provides. Your kids are worth it.
  • Irvingklaws Here's something cheaper, non-german, and more intriguing...
  • Wjtinfwb Happy you're loving your Z4. Variety is the spice of life and an off-beat car like the Z4 intrigues me as well. More than anything, your article and pictures have me lusting for the dashboards of a decade ago. Big, round analog gauges. Knobs and buttons to dial up the A/C, Heat or Volume. Not a television screen in sight. Need to back up? Use the mirrors or look over your shoulder. If your Z4 had the six-speed manual, it would be about perfect. Today's electronified BMW's leave me ice cold, as do the new Mercedes and Audi's with their video game interiors. Even a lowly GTI cannot escape the glowing LED dashboard. I'm not a total luddite, Bluetooth streaming for the radio would be nice and I'd agree the cooled seats would be a bonus on a warm day with the top down. But the Atari dashboard is just a bridge too far for me.