Bailing Out GM Is Different From Bailing Out Banks

GM is back in bankruptcy court today, trying to piece together what the company will look like going forward. An article from the Washington Post today indicates that many find prospect of GM becoming profitable enough to pay back its $50 billion bailout unlikely. From the Post:

It's sure to be a stretch. For the United States to fully recover its investment, the value of General Motors stock will have to reach levels it has never before attained.

The stake will be worth enough to fully cover the government's direct investment only if GM's stock rises above $68 billion. Even at its recent 2000 peak, GM's stock was worth only $56 billion.

"It's very unlikely" that the government will recover its money, said David Whiston, auto equities analyst at Morningstar. "GM will be a smaller company after the bankruptcy and there are going to be more foreign automakers entering the market that will make GM's efforts more difficult."

There are few scenarios that would lead to the U.S. getting its money back. The article explains that they hinge on passing the U.S.'s potential losses onto GM's creditors:

Bloom and GM chief executive Henderson have suggested that by shedding so much of its debt through bankruptcy, the company's value would be less encumbered and its stock prices freer to rise.

We'll see. The earlier arguments seem stronger to me. Even without as heavy a debt burden, Whiston's arguments still apply.

Maybe nobody is surprised that Uncle Sam might be on the hook for a significant portion of GM's bailout. Yet, most of the bailouts advertised by the Bush and Obama administrations indicated that the taxpayers would come out virtually unscathed. In the case of banks, I think that's true. Banks have already begun paying back their bailout money. Even those who are having more trouble than others generally seem likely to survive. So why can't GM do the same?

GM's problems were not due to a sudden cataclysmic event. It's had problems for decades. Legacy benefits piling on over a period of time, high costs compared to its competitors and inferior products led to its demise. Bankruptcy finally came now because its credit finally dried up, so it had no financing to continue to tread water.

Banks, on the other hand, made very stupid bets on very ugly investments. Other than that gigantic error, they have been generally profitable over the past several decades. It's far more plausible that their future profits can overcome those losses. That means the government's investment in most of those banks should be much safer. Of course, for banks, the government bailout also amounted to a much smaller share of government ownership.

Some people may have assumed that bailout money was meant to be a government handout. I think many believed, however, that these funds were temporary loans to be paid back when firms get back on their feet. That doesn't seem to be the case for GM.

This also raises the question -- how will the government ever get out of the auto market? Will it sell its ownership share for a loss, or will it just hold on indefinitely? Questions like these show why it's so messy when the government gets involved in bailouts of this variety.