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.
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Economists say the president is attempting to make the best of a bad situation, trying to avoid the devastating collapse of an industry, while pushing GM to come up with a realistic restructuring plan before granting federal aid.Skip to next paragraph
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The federal cash infusion won't save the company from deep job cuts affecting the United Auto Workers union (UAW), salaried managers and engineers, and GM's far-flung network of dealership franchises.
Goal is damage control
What the Obama administration does hope to do is avoid a much deeper and more damaging implosion of the firm and the wider industry, including suppliers.
Ron Bloom, a core member of Obama's auto task force, told reporters Monday that the choices in the end boiled down to two alternatives: "Put capital in, [or] we could have walked away."
He says GM would have had to liquidate in a Chapter 7-style bankruptcy.
Obama chose to provide $30 billion in new capital, on top of $20 billion already provided by the government in recent months, to allow a reorganization under the more forgiving Chapter 11 of the bankruptcy code.
Plan to maximize taxpayer proceeds
While not saying anything to raise expectations that the public will get all its money back, Obama and his team have said they want to maximize taxpayer proceeds from the GM rescue. They say they're doing this by taking a strictly "commercial" view regarding matters such as who should sit on GM's board of directors, and staying out of day-to-day management decisions.
When the company offered a restructuring plan in February, the Obama task force acted much like private investors would have done: They said the plan wasn't good enough to ensure viability.
And it took an equity ownership stake so that taxpayers would get something to show for their money, while not saddling the new GM with debt.
Some $8 billion of the federal money will be debt owed by GM, a smaller stake will be preferred stock that pays a 9 percent dividend to taxpayers, and the rest will be equity.
By making a tough assessment of GM's restructuring needs, the White House aid does open the door to potential profits when the economy recovers.
Henderson says GM's new overhaul plan will put the company in a position to break even if industry sales remain at current depressed levels of 10 million vehicle sales per year.
That could mean big profits if auto sales bounce back to a more normal level of perhaps 14 million a year.
Even then, though, the industry will remain a fiercely competitive one, and GM will need to plow much of its earnings back into development of new products. That means it would take an impressive turnaround for the GM stake to make money for taxpayers.
So America will own a majority of GM, but for now it may be more accurate to say that GM owns a piece of every American taxpayer.