The Juggling Show: GM Calls Its European Dealers Worthless, Receives A $35 Billion "Stealth Bailout"

Bertel Schmitt
by Bertel Schmitt

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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  • Mbuehner Mbuehner on Feb 19, 2013

    You guys are concentrating on all the wrong things. There are two numbers that matter- sales and expenses. GM sold 152 billion dollars worth of cars (and other income) and spent 155 billion dollars doing it. Everything else is smoke and mirrors. GM can only privatize its earnings and socialize its costs for so long. This company is NOT PROFITABLE right now, four years after its bailout. And it would appear to be going in the wrong direction, with expenses growing at 9% and sales flat.

  • Doctor olds Doctor olds on Feb 19, 2013

    What is wrong is the conclusion that GM is not generating income from operations. The reason for this is Automotive cost of sales includes non cash losses and the buyout of salary pensions that relieves the balance sheet of tens of billions of future liability. GM is that much stronger. The lazy journalist at Alpha's flawed analysis and your spinning it into a "stealth bailout" is what is wrong. You make it appear as if the company is losing money on operations with this analysis, which is certainly not true. You put me to too much work. Going out of town!

    • See 1 previous
    • Doctor olds Doctor olds on Feb 21, 2013

      @ect- The facts remain: GM had $37B in liquidity at 2011 year end, and they increased that slightly to $37.2B at 2012 year end while generating $89.6B in cash, and their long term pension liability was reduced by $29 billion by the $2.2B salaried pension buyout. Their actual R&D spend went down slightly from $8.1B in 2011 to $7.4B in 2012, btw. The company, in fact, did make money last year on operations. They also could have spread out the goodwill impairment rather than taking it all in one year. The bottom line: GM is strong and getting stronger. Buffett knows that.

  • Teddyc73 A resounding NO. This has "Democrat" "Socialism" "liberalism" "Progressivism" and "Communism" written all over it.
  • Jeffrey An all electric entry level vehicle is needed and as a second car I'm interested. Though I will wait for it to be manufactured in the states with US components eligible for the EV credit.
  • Bob65688581 Small by American standards, this car is just right for Europe, and probably China, although I don't really know, there. Upscale small cars don't exist in the US because Americans associate size and luxury, so it will have a tough time in the States... but again Europe is used to such cars. Audi has been making "small, upscale" since forever. As usual, Americans will miss an opportunity. I'll buy one, though!Contrary to your text, the EX30 has nothing whatsoever to do with the XC40 or C40, being built on a dedicated chassis.
  • Tassos Chinese owned Vollvo-Geely must have the best PR department of all automakers. A TINY maker with only 0.5-0.8% market share in the US, it is in the news every day.I have lost count how many different models Volvo has, and it is shocking how FEW of each miserable one it sells in the US market.Approximately, it sells as many units (TOTAL) as is the total number of loser models it offers.
  • ToolGuy Seems pretty reasonable to me. (Sorry)