Investing Caffeine

General Motor’s Amazing Debt Trick

Now you see it, and now you don’t. General Motors claims that it has pulled off an amazing trick – the CEO of the troubled automaker, Ed Whitacre, claims in a recently released nationwide commercial, “We have repaid our government loan, in full, with interest, five years ahead of the original schedule.” (See video BELOW):

Blushing Pinocchio

Even Pinocchio would blush after listening to those statements. The loan that GM is claiming victory over is roughly $7-8 billion in TARP (Troubled Asset Relief Program) loans made from the U.S. and Canada. What Mr. Whitacre failed to acknowledge was how investors will be made whole on the whopping balance of around $45 billion.

How did GM miraculously pay off this debt? Whitacre would like taxpayers to believe booming sales or an operational turnaround has funded the debt repayment. Rather, these debt repayments were funded through other government TARP loans held in escrow with U.S. Treasury oversight. Effectively, GM has paid down one Mastercard (MA) bill with another Visa (V) credit card, and then gone on to brag about this financial shell game through a multi-million dollar advertising campaign. It’s bad enough that politicians and so-called media pundits attempt to “spin” facts into warped truths, but when a government-owned entity steps onto a national loudspeaker and spouts out blatantly distorted sound-bites, there should be consequences to these actions. American taxpayers deserve more honest accountability and transparency regarding their tax outlays rather than quarter truths.

GM’s Future

As Jedi Master Yoda’s famously quotes, “Uncertain, the future is,” and “Always in motion is the future.” GM is not out of the woods yet – the company lost $3.4 billion in the 4^th quarter of 2009 alone and remains 70% government-owned. Nobody is certain how much (if any) of the $43 billion will be repaid by General Motors. For reference purposes, GM lost $88 billion from 2004 until 2009 when they declared bankruptcy  (see AP article)  If all goes according to plan, the former debt holders (now equity holders) and government stockholders will get a return on their capital infusions if and when GM does an equity offering to the public sometime later in 2010. If achieved, the company will have come full circle: public to bankrupt; bankrupt to private; and private to public.

While executives at GM are confident in their repayment capabilities, less convinced are certain branches of our federal government. Maybe these government agencies have taken note of the horrific train wreck occurring in the automotive industry over the last few decades (see GM Fatigue) Take for example the Office of Management and Budget, and the nonpartisan Congressional Budget Office (CBO) – they see TARP losses exceeding $100 billion, including about $30 billion from the auto companies…ouch.

The probability of success will no doubt hinge on some of the dramatic transformations made over the last year. First of all, GM has axed the number of brands in half (from eight to four), cutting Pontiac, Saturn, Hummer, and Saab. Cutting costs is great, but chopping expenses to prosperity cannot last forever – at some point you need compelling products that will drive sales. The rubber will hit the road late this year when GM is scheduled to release the “Volt,” a plug-in hybrid, which the company is using as a launching pad for new products.

TARP on Right Track but Not to Finish Line

Given the heightened political sensitivity in Washington regarding the banks and Wall Street it’s not too surprising that many of the banks wanted to be out of the governments crosshairs and pay back TARP as soon as possible. Beyond political pressure, banks have accelerated TARP repayments in part due to the massively steep and profitable yield curve, along with signs of an improving economy. According to the Treasury Department less than $200 billion in bailout money is outstanding for what originally started out as a $700 billion fund ($36 billion of automaker bailouts is estimated as uncollectible). Even though there has been progress on TARP collections, unfortunately non-TARP losses associated with AIG, Fannie Mae (FNM), and Freddie Mac (FRE) are expected to add more than $150 billion in bleeding.

I don’t believe anyone is happy about the bailouts, although some are obviously more irate. Accountability and transparency are important bailout factors as taxpayers and investors look to recover capital contributions. The next trick GM and Ed Whitacre need to pull off is paying off tens of billions in taxpayer money with the benefit of sustained profits – now that’s a television commercial I want to see.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

*DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds and in a security derived from an AIG subsidiary, but at the time of publishing SCM had no direct positions in General Motors, AIG, FNM, FRE, MA, V, or any security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

April 25, 2010 at 11:40 pm 6 comments