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Why taxpayers won't get return on GM investment

The auto company would have to bounce back to sustained profits before the US government would get any money back.

By Staff writer / June 2, 2009

Hot seat: A technician walks past a Hummer H3 in for service at a Denver auto dealer on Monday. What taxpayers get back depends partly on whether GM can move into profitability.

Rick Wilking/Reuters

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American taxpayers are now investors in the auto industry, but make no mistake: This is a rescue mission, not a moneymaking proposition for the public.

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Theoretically, it's possible that taxpayers could get their $50 billion back, if GM moves steadily into profitability and the government is able to sell its equity in the carmaker at a good price.

But many private economists say taxpayers shouldn't expect to get a whole lot of their money back.

"Most of it's gone," says Donald Grimes, an economist at the University of Michigan. "I think that's pretty much guaranteed."

How much taxpayers do get back depends on two key factors, he says. The first is whether the new GM can build vehicles that catch on with consumers. The second is whether the firm's cost structure has been adequately realigned for profitability in normal times.

Worst case: GM seeks more money

In a worst case for taxpayers, the carmaker may end up burning through the federal assistance and asking for more. Only 21 percent of Americans favor the bailout, according to a poll by Rasmussen Reports.

That is what Mr. Grimes says he expects, but GM and the Obama administration both played down that prospect this week.

General Motors CEO Fritz Henderson pledged that the firm's plan for a two- to three-month reorganization in bankruptcy will be successful.

"We will do it right, and we will do it once," he said Monday.

A senior Obama administration official said the White House is not expecting a Plan B either. "Never say never," the official said. But "this is it."

The president said the government has become a "reluctant" investor, and that the US Treasury will seek to exit that role as soon as practical.

Quick exit vs. recouping investment

Administration officials acknowledge that this goal – a quick exit – partially conflicts with their aim of maximizing the recovery of taxpayer dollars. The president has emphasized that he does not want the government to own private companies. His auto task force is thus not inclined to wait around to see if the government can get more money back by waiting longer to sell its stake.

Still, Mr. Henderson said he expects the exit process will take years. The Treasury will own about 60 percent of the new GM, with the rest divided among other stakeholders: the Canadian government, the province of Ontario, a healthcare trust for union workers, and bondholders. For any of these parties, an exit strategy involves waiting for GM to be in good enough financial condition that private investors will want to buy in.