GM's Profits are Still a Huge Net Loss For Taxpayers

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An analyst at Jeffries provides some full frontal snark about GM's recent performance:


How many large-cap IPOs have you bought over the last six months in which the issuer already missed initial expectations by 30% and were hit with senior management turnover? This is what seems to have happened at GM since the November IPO, yet few analysts seem concerned. We struggle to understand why.

Investors seem a little concerned, though:Screen shot 2011-05-12 at 8.23.49 AM.png

(thanks to Mickey Kaus for the idea)

About $40 billion of the money that the government gave GM was converted to GM common stock. In the November IPO, the government made about $20 billion selling 478 million shares, leaving us with around $20 billion more to recoup on our remaining 26.5% stake in the company.  That means we need to sell the approximately 365 million shares we have left at about $55 per share, net of underwriting and legal costs.  At the current share price of $31, we'd be left with a loss somewhere north of $9 billion--plus the $1 billion we gave the "old GM" to wind things up, and the $2.1 billion worth of GM preferred stock we own.  Since I don't know the details of the preferred transaction, I'll leave that out, which gives us a loss after expenses of $10 to $11 billion on our investment in GM.  

But of course, that assumes that the current share price holds.  It could well fall over the next few months--or when the government dumps an enormous new supply of GM stock on a market that isn't showing all that much enthusiasm for the product.  

It also leaves out a very important extra:  the $14 billion gift that the government seems to have handed the company, in the form of a special tax break:

That break will reduce GM's U.S. tax bill by an estimated $14 billion in the coming years, and its global taxes by close to $19 billion, according to a company filing.

Companies typically get a break on future taxes because of past losses. But in most cases they lose that tax break during bankruptcy, because the losses are offset by the "income" the company receives from shedding its debt.

Since the company shed $30 billion in debt during bankruptcy, it should have wiped out most of the tax break. GM even warned it expected to lose those tax breaks shortly before filing for Chapter 11 protection.

But somehow, that never happened, and the automaker was able to keep most of its tax breaks, essentially receiving a $14 billion "gift" from the government.

While it's unclear why GM was allowed to carry over its losses, some experts insist that GM got preferential treatment.

I thus find it a little hard to understand why liberal columnists are so excited about the GM deal.  EJ Dionne's column from this weekend was very indignant that the GOP wasn't recognizing this outstanding success:

Government failure gets a lot of coverage. That's useful because government should be held accountable for its mistakes. What's not okay is that we hear very little when government acts competently and even creatively. For if mistakes teach lessons, successes teach lessons, too. 
In the case of the car industry, allowing the market to operate without any intervention by government would have wiped out a large part of the business that is based in Midwestern states. This irreversible decision would have damaged the economy, many communities and tens of thousands of families. 
And contrary to critics' predictions, government officials were quite capable of working with the market to restructure the industry. Government didn't overturn capitalism. It tempered the market at a moment when its "natural" forces were pushing toward catastrophe. Government had the resources to buy the industry time.
What lesson, exactly, are we supposed to learn from this "success"?  What question did it answer? "Can the government keep companies operating if it is willing to give them a virtually interest free loan of $50 billion, and a tax-free gift of $20 billion or so?"  I don't think that this was really in dispute. When all is said and done, we will probably have given them a sum equal to its 2007 market cap and roughly four times GM's 2008 market capitalization.

No, the question was not whether GM could make a profit after a bankruptcy that stiffed most of its creditors and shed the most grotesque burdens of its legacy costs, nor whether giving companies money will make them more profitable.  The question is whether it was worth it to the taxpayer to burn $10-20 billion in order to give the company another shot at life. To put that in perspective, GM had about 75,000 hourly workers before the bankruptcy.  We could have given each of them a cool $250,000 and still come out well ahead compared to the ultimate cost of the bailout including the tax breaks--and over $100,000 a piece if we just wanted to break even against our losses on the common stock.  

And if we'd done that, we'd have saved ourselves in other ways.  We would have reduced some of the overcapacity that plagues the global industry.  We would not have seen the government throwing its weight into a bankruptcy proceeding in order to redistribute money from creditors to pensioners, which isn't a good precedent.

But even if you still think that the bailout was a good idea, there's something you should consider before we start celebrating the administration's Solomonic wisdom: the Obama administration's rush to dispose of its GM stake before the 2012 election is probably costing us billions.  No one I interviewed for my piece on GM was exactly enthusiastic about an early IPO; doing it so quickly meant that the company had very little to show in the way of earnings and stability.  Now the government may rush to sell all its remaining shares this summer even though this means locking in a substantial loss.

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.

. . . At the time of the IPO, Treasury officials and banks underwriting the deal believed the price would climb through the winter, enabling the government to sell most or all of its remaining stake within weeks of the lifting of the sales restriction at a narrower loss to taxpayers, the people familiar said.

Shares have fallen by recent events that have undermined investor confidence in GM. Those include the rise in gas prices, which hurt sales of big, highly profitable trucks. Wall Street also is fretting over recent management moves such as the unexpected departure of Chief Financial Officer Chris Liddell.

Investors also were spooked by GM's sales-incentive blitz in January and February, which could temper the auto maker's first-quarter earnings. GM is expected to report next month that it made money in the first quarter and generated cash from operations, people familiar with the matter said.

GM is profitable, which is certainly better (for them and for us) than being unprofitable.  But the government's job is not to make individual companies profitable, because it's not very good at it.  The only way it knows how to do it is to indiscriminately throw huge sums of taxpayer funds into the kitty.  But that's not exactly something to celebrate.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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