GM Pays Back TARP Loan

Ed Whitacre, the Obama-appointed CEO of GM, just announced that GM is paying off the $6 billion TARP loan it owes the US government - sounds like GM is coming back.

Let’s see if I’ve got this straight.

The story began in early 2009, when the US government pumped around $15 billion into GM to bail them out and prevent them from going into bankruptcy. Well, the $15 billion evaporated and they went into bankruptcy anyway. Then, the US government used an additional $30 billion of Obama-money (money we either printed or borrowed, but certainly didn’t have) in exchange for GM stock, with another $6 billion pumped in as a TARP loan. All told, the US taxpayers were on the hook for about $50 billion. The bankruptcy deal ended up with GM ownership divided among: the US government - about 60%; Canada - about 12%; the United Autoworkers Union - about 18%; and various bondholders - about 10%. Existing GM stockholders were wiped out.

Well, GM just announced they are paying off the $6 billion dollar TARP loan. Now, although GM did turn a small profit in 1Q10, it was nowhere near $6 billion, which begs the question, “Where did GM get the money?” Funny you should ask. It turns out that, in addition to the $6 billion TARP loan, the government had set aside additional funds in “escrow” for GM, in the event of another financial crisis. Aha! Yep, Mr. Whitacre failed to mention that GM used this escrow money to “pay off” the loan – sort of like borrowing money on your house to pay off your car loan. You still owe the money, and GM still owes the $6 billion.

Nonetheless, the mainstream media and press, as well as the White House, are heralding GM’s recovery and the fine job the government has obviously done in running the company. Feel better? Confidence in Obama restored?

All of this also brings up another issue that I’ve been pondering. Assuming GM stays profitable, they plan on selling stock again and using the money to buy back the government’s shares, at which time we will no doubt be inundated with huzzahs about the taxpayers having recovered all the money “invested” in GM – well, a lot of it, anyway. Hmm. So, what will have happened? Absent government interference, GM would have declared bankruptcy and re-organized as a leaner, debt free company, with no burdensome union contracts. Instead, the government did interfere, GM declared bankruptcy anyway, and did reorganize into a leaner company. But, that leaner company now has to buy itself back from the US and Canadian Governments; and, the very unions that caused many of GM’s financial woes in the first place are now poised to become the major shareholders.

Feel like buying more GM stock?