Five Promises

A look at how the GM bailout was supposed to go.

By Stephen Spruiell

GMAC, the company that finances car purchases for GM, has already received two infusions of taxpayer assistance totaling $12.5 billion. Now, the feds say it needs up to $5.6 billion more. Sen. Chris Dodd, chairman of the Senate Banking Committee, was among the first to break the news. “There will be an infusion, I’m told, beyond what they’ve already seen,” he told the Dow Jones news service. “But I’ve also been assured by the administration that this is the last of it.”

Really? Bear in mind, this is the same Chris Dodd who called Fannie Mae and Freddie Mac “viable, strong institutions” a few weeks before they collapsed into a sucking vortex that vacuumed half a trillion dollars out of the U.S. Treasury. The taxpayers’ commitment to GM, including the previous two GMAC bailouts, already stands at $62 billion. The failed automaker and its federal backers have promised us much in return. How are those promises holding up?

1. GM will not require more taxpayer money. When the Obama administration announced that it would provide $30.1 billion to see GM through bankruptcy (on top of $19.4 billion provided by the Bush administration), it stated, “the U.S. Treasury does not believe or anticipate that any additional assistance to GM will be required.” But if the administration provides GMAC with a third bailout, as it is expected to do, you can consider that a broken promise. A bailout for GMAC is a bailout for GM.

GMAC is in trouble primarily because of its ill-advised adventures in subprime mortgage lending. Its mortgage-banking arm has been losing over $1 billion a quarter for almost two years. Considered separately, GMAC’s mortgage business is no larger than several other mortgage lenders that have been allowed to fail. But GMAC’s connection to the auto industry makes it “systemically significant” in the eyes of the administration. As Brian A. Bethune, an economist at IHS Global Insight, told the New York Times, “Without GMAC, General Motors would probably not be able to survive.”

The reverse is also true: If the government didn’t need to prop up General Motors, GMAC would probably be allowed to fail.

2. Taxpayers will get a return on their investment. When GM filed for bankruptcy, CEO Fritz Henderson told taxpayers to think of the bailout as an investment. “What the task force has certainly been indicating . . . was the desire for General Motors . . . to get a return on the investment of the taxpayer, who is now a major shareholder.” Ron Bloom, one of several “car czars” in the Obama administration, echoed this line, saying that the public had a “reasonable probability” of getting its money back. The GMAC bailout is necessary to sustain the illusion that this promise — not so much a broken as an empty one — created.
           
Much of the taxpayers’ “investment” in GM is held in the form of preferred stock. Two government watchdogs — the Congressional Oversight Panel (which oversees the Troubled Asset Relief Program) and the Government Accountability Office (GAO) — concluded that GM’s market capitalization would have to rise to $67 billion for taxpayers to break even. At its peak, which it reached in 2000, GM’s market cap was $57 billion. “Treasury’s own analysis suggests that the circumstances necessary for the companies to reach market capitalizations high enough for Treasury to fully recover its equity investments are unlikely,” the GAO report stated.

Not only will taxpayers lose money on their GM “investment,” there is a good chance they will lose most of it. GM’s restructuring plan relies on highly optimistic assumptions about its market share. In a document submitted to the administration earlier this year, GM based its viability expectations on the assumption that it could maintain 21.5 percent of U.S. auto sales. As of September, GM’s actual market share was only 19.6 percent. GM is about as popular in the American auto market as a hobo in an elevator. If that state of affairs continues, taxpayers will get back only what they can recover in liquidation.

3. The White House will not manage GM. Car czar Ron Bloom said that the White House is a “reluctant shareholder” of GM and will stay clear of business decisions. In a conference call announcing the bailout, a senior Obama administration official said the government’s role would be limited to “core governance issues” and that “in its effort to protect taxpayers’ resources . . . the government intends to be extremely disciplined as to how it uses even these limited rights.”
 
The administration’s definition of “core governance issues” is pretty broad. In March, another car czar, Steven Rattner, asked GM chairman and CEO Rick Wagoner to step down. The administration picked Henderson to succeed Wagoner. After the bankruptcy, it appointed all but two of the members of the company’s board of directors.

The administration also made demands that had nothing to do with corporate governance, or even with returning the company to profitability. It rejected GM’s initial proposal in part because it did not include enough support for hybrid cars. The administration also forced GM to agree to produce a set percentage of its vehicles in the U.S., even if shifting manufacturing abroad might be better for investors (i.e. taxpayers). GM also agreed to abide by compensation caps, even though they might hinder the company’s ability to recruit top executives.

This is to say nothing of the political favors the administration handed out during the bankruptcy process, such as letting the United Auto Workers cut in front of secured creditors to receive a 17.5 percent stake in the new GM. Obama’s promise to stay out of GM’s business decisions was broken from the start. The structure of the bailout determined the kind of company GM would be.


4. GM will maintain transparency about its finances. GM promised to remain transparent even after becoming a private company. Chief financial officer Ray Young told a Detroit radio station that the new GM would be “the most public private company” around. Fritz Henderson took out a full-page ad that read, “Over the coming days, months and years, we will prove ourselves by being more transparent, more accountable and, above all, more focused on you, our customer.”

At the same time, GM announced that it would stop filing 10-Ks, 8-Ks, and a host of other forms required of public companies. The automaker is still turning information over to Treasury and other shareholders, but taxpayers can no longer access the disclosures. If you divided $50 billion by the number of tax filers in America, each would own roughly $380 worth of GM.

At least GM is no longer a public company. But GMAC’s mortgage-banking unit has also stopped providing quarterly filings. GMAC’s chief financial officer, Richard Hull, spun it as a “cost-saving measure, pure and simple.” Taxpayers pour in more money, and have less of an idea how it’s being spent.

5. Little green cars can save GM. In part because of government pressure, and in part because its management has bought into the idea that green cars are the future of the American auto industry, GM has a lot riding on the development of new hybrid and alternative-technology vehicles. Specifically, the automaker has made some audacious statements about the Chevy Volt, an electric car scheduled to debut in showrooms next year. GM says the Volt will get around 230 miles to the gallon, a claim that, according to Consumer Reports, “might be the exaggeration of the century. . . . The numbers don’t add up.”

The Volt is not expected to help GM financially. Steven Rattner, who has stepped down from the administration’s auto task force, wrote, “The Volt . . . could initially cost GM about $40,000 to produce while competing with conventional cars that sell in the $20,000 range. Even with the new $7,500 tax credit for plug-in hybrids, it will take years of improved efficiencies to make it profitable for GM.”

GM is beginning to recognize that, once again, it might have overpromised. In September, the Baltimore Sun editorial board noted that the automaker’s executives were trying to lower expectations for the Volt. “A year ago, when a group of GM executives came to The Baltimore Sun . . . they couldn’t stop talking about the Chevy Volt,” the board wrote. “A lot has changed since then.” A GM representative who visited the Sun the week before the editorial ran didn’t mention the Volt on his own, and when asked, “talked about the car . . . as exciting but far off, something the company would likely sell on a small scale, and at a loss, in the near future as it worked out the real-world driving kinks and sought to lower the cost.” 

GM and its enablers in Washington refuse to admit that they’re breaking promises. They continue to insist that GM can become a viable company and repay taxpayers by making little green cars in high-wage union shops. And they will continue to break their biggest promise — that GM won’t need another bailout — by disguising the bailouts as “Cash for Clunkers” or as capital injections for the company’s “systemically significant” financing arm. Despite what anyone says, GM and GMAC will remain wards of the state — or, as Chris Dodd likes to call such firms, “viable, strong institutions” — for many years to come.

— Stephen Spruiell is an NRO staff reporter.