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.

Rick Wilking/Reuters
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.

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.

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.

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.

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.

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