GM Bailout Could Get Much Worse
by: P.J. Austin
WasteWatcher, January, 2013
When the decision was made to bail out the auto industry, it was widely known that taxpayers would be saddled with a multi-billion dollar price tag, although no one knew what the exact cost would be. The Obama administration claimed that the cost would be worthwhile because of the number of jobs saved by the bailout. However, the administration may want to rethink its stance; if an upcoming court case is not decided in General Motors’ (GM) favor, taxpayers could be poised to lose another $31.3 billion on top of the current, optimistic projection of $25.1 billion.
According to a December 6, 2012 article in The Washington Free Beacon, “A New York federal judge may rule imminently on a case that could reverse the General Motors Bailout and send the company back into bankruptcy. At issue is a backroom deal hatched by GM to fulfill the Obama administration’s demand for a quick bankruptcy, draining the automaker of nearly all of its cash on hand and leaving it in worse shape than it was when it collapsed in 2009.”
As part of its bailout agreement, GM was required to reinforce its overseas subsidiaries. According to the Beacon article, “On the eve of entering bankruptcy, [GM] cut a $367 million ‘lock-up agreement’ with several major hedge funds to prevent GM Canada from failing. The agreement ensured that GM could spin-off its liabilities to ‘old GM,’ while using a multi-billion dollar bailout to create a new company. All of that could be reversed if bankruptcy judge Robert Gerber reopens the process and rules in favor of old GM trustees, who are suing the hedge funds at the center of the lockout agreement.” This particular case involves $1.3 billion in liabilities, but bringing any of GM’s assets back on the table could open the door to lawsuits regarding the additional $30 billion that old GM held in debt and product liabilities. Further, legal fees and damages from subsequent court cases could increase that amount.
When the government first trimmed its holdings of GM stock at the company’s initial price offering in November, 2010, shares were trading at $33. However, fears of recession in Europe and a corresponding drop in car sales sent the company’s share price tumbling. As of December 18, 2012, GM stock was trading for $24.98 per share. According to an August 15, 2012 article in The Wall Street Journal, “To break even, the U.S. Treasury would need to sell its remaining stake – about 500 million shares – at $53 apiece.” Had the government dumped all of its GM stock on August 15, when GM shares closed the day at $29.97 a share, taxpayers would have lost around $11 billion, a relative bargain in hindsight.
A November 21, 2008 WasteWatcher article written at the time the bailouts were being discussed in Congress suggested that lawmakers should have let General Motors enter into Chapter 11 bankruptcy. This would have allowed the troubled automaker to embark on much-needed restructuring while continuing to operate. Regardless of the New York court’s decision, the bailout remains a misguided and very expensive endeavor.
