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"Each individual should allow reason to guide his conduct, or like an animal, he will need to be led by a leash."
Diogenes of Sinope

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Saturday, April 24, 2010

The truth about GM's bailout repayment

Shikha Dalmia, writing in Forbes Magazine, debunks GM's recent claim that they have repaid the US & Canadian governments "in full, with interest, years ahead of schedule" for their bailouts last summer:
Uncle Sam gave GM $49.5 billion last summer in aid to finance its bankruptcy. (If it hadn't, the company, which couldn't raise this kind of money from private lenders, would have been forced into liquidation, its assets sold for scrap.) So when Mr. Whitacre publishes a column with the headline, "The GM Bailout: Paid Back in Full," most ordinary mortals unfamiliar with bailout minutia would assume that he is alluding to the entire $49.5 billion. That, however, is far from the case.

Because a loan of such a huge amount would have been politically controversial, the Obama administration handed GM only $6.7 billion as a pure loan. (It asked for only a 7% interest rate--a very sweet deal considering that GM bonds at that time were trading below junk level.) The vast bulk of the bailout money was transferred to GM through the purchase of 60.8% equity stake in the company--arguably an even worse deal for taxpayers than the loan, given that the equity position requires them to bear the risk of the investment without any guaranteed return. (The Canadian government likewise gave GM $1.4 billion as a pure loan, and another $8.1 billion for an 11.7% equity stake. The U.S. and Canadian government together own 72.5% of the company.)

But when Mr. Whitacre says GM has paid back the bailout money in full, he means not the entire $49.5 billion--the loan and the equity. In fact, he avoids all mention of that figure in his column. He means only the $6.7 billion loan amount.

But wait! Even that's not the full story given that GM, which has not yet broken even, much less turned a profit, can't pay even this puny amount from its own earnings.
Read the whole thing.


kursk said...

Exactly..the analogy of GM using a secondary source of funding (TARP) to 'payoff' their loan is thus: using a Mastercard to pay off a Visa card.

Lynn said...

Have you seen the commercials,aired during HNIC playoff broadcasts,where the President of GM walks out and boldly states that they've paid the loan in full and five years early?

I read about this payback a few days ago,and it was immediately obvious they only made a payment of about 15% on the loan.

But, as they say,perception is everything. It's quite shocking the Advertising Standards Council hasn't said anything about this, as GM is peddling a blatant lie.

Anyone with a modicum of financial savvy knew this had to be untrue from the moment it was announced,there is simply NO possibility GM or anyone else could pay that amount of billions back in such a short time.

GM would have had to have inherited Saudi Arabia's oil fields to pay back 49 billion after one year,or simply produced and sold a couple of hundred million cars.

Either way, the claim simply isn't credible and they should be brought up short on it.


Anonymous said...

You are correct and I felt exactly the same way when I heard about this. But, when was the last time any other company lent money to by government paid it back? That's right... I'm still trying to remember. (real conservative)

Thucydides said...

The Canadian government could force the issue by putting their portion of GM shares up for auction.

The CAW and UAW would have to either madly scramble to buy them, or watch their stake in GM submerge like "Das Boot" doing a crash dive (and taking their pension fund with it).

Either way, good riddance, and when GM comes back to the trough (and they will based on pension liabilities if nothing else, although for political reasons they will be forced to wait until after the 2010 mid terms, or the 2012 Presidential elections), politely tell then where to go.

Bob O said...

Somewhere along I read that President Obama was going to forgive GM 10 Billion dollars. Since the UNion is an owner doesn't that amount to paying the Union a bonus to VOTE TO REELECT HIM>. ISN't that illegal to use taxpayers
money to fund your reelection campaign ?