General Motors and President Obama: The $48 Billion Lie

President Obama just can’t seem to tell the truth to the American people. Two months ago I wrote how healthcare reform would cost the American taxpayer at least $700 billion, yet President Obama used ridiculously unrealistic assumptions to claim that the legislation would actually save money. Some readers criticized me for calling Obama a liar when technically he was just knowingly employing faulty assumptions. That’s a distinction without a difference in my book.

General Motors and Debt Repayment

But in the case of what he said about General Motors on April 24th, there is no such wiggle room; even his most diehard supporters can’t rescue him this time. What exactly did the President say? In his weekly address, he said that General Motors – and I quote – “paid back its loans to taxpayers with interest, fully five years ahead of schedule.” 

This was a lie. A bald-faced lie on par with Richard Nixon’s “I’m not a crook” and Bill Clinton’s “I did not have sexual relations with that woman.”

In a Form 8-K filed with the SEC on April 22nd, General Motors explained that its payment of $5.8 billion was really nothing more than a debt reshuffle:

Following the repayment of the obligations under the [U.S. Treasury] Credit Agreement and the Canadian Loan Agreement, funds in an amount of $6.6 billion that were held in escrow have been released to GM Holdings.

In other words, GM paid $5.8 billion but received $6.6 billion, for a net increase in cash received from the government of $800 million. Do you get the picture? GM and Obama conspired to say that GM’s loans to the U.S. treasury were paid off when in fact GM received $800 million in additional assistance. Unbelievable. It’s this kind of Orwellian double-speak that spawned the Tea Party movement and which will cause a huge Republican victory in November’s Congressional elections.

Since When Are Loan Proceeds the Property of the Debtor?

When confronted with this obvious lie, the Obama administration said that the $6.6 billion cash in escrow that was released was “the property of GM.” Oh really? Not true, unless you consider the cash a borrower receives from a lender to be his property until he is required to pay it back. In fact, that is exactly the Treasury Department’s interpretation of property, because it admitted later in the same letter that:

The money used to fund the escrow account came from a portion of the proceeds of a loan made by both the Treasury and the Canadian Government. 

Bottom line: GM paid off one loan to the Treasury by accessing escrowed funds of another Treasury loan. The only difference is that the paid-off loan was considered short-term debt whereas the second, partially-escrowed loan was money received by GM in exchange for issuing the Treasury 304 million common shares and 84 million preferred shares. The U.S. government is the controlling shareholder of GM, with a 61 percent ownership interest. As Iowa Senator Charles Grassley wrote in a letter to Treasury,

It is unclear how GM and the Administration could have accurately announced yesterday that GM repaid its TARP loans in any meaningful way. In reality, it looks like GM merely used one source of TARP funds to repay another. The taxpayers are still on the hook, and whether TARP funds are ultimately recovered depends entirely on the government’s ability to sell GM stock in the future. Treasury has merely exchanged a legal right to repayment for an uncertain hope of sharing in the future growth of GM. A debt-for-equity swap is not a repayment.

Grassley was not the only one miffed by GM and Obama’s lie about debt repayment. The Competitive Enterprise Institute (CEI), a Washington think tank, filed a complaint with the Federal Trade Commission, alleging that GM’s statement amounted to deceptive advertising.

The Government’s Stock Ownership Remains a Form of Debt

Some may argue that stock ownership is not debt that needs to be repaid.  It’s true that if you or I were to buy stock through our broker that we would have no right to demand that the company redeem our shares. But stock purchased as part of an emergency government bailout is completely different. As the CEI complaint states, “the federal government views all of this money as funds for which repayment is expected.” This intent is made crystal clear in the Congressional Budget Office’s (CBO) March 2010 report on the Troubled Asset Relief Program (TARP). On page five of the report, the CBO states that “$48 billion in financing is still outstanding for GM.” There is no distinction between equity and debt. GM owes the U.S. government $48 billion period. This number did not change one iota based on GM and Obama’s phony announcement of “debt repayment.”

Not only does GM continue to owe the American taxpayer $48 billion, but it is extremely unlikely that it will ever repay this loan in full.  In fact, page three of the CBO report estimates that the government will lose $31 billion on its loans to U.S. automakers, a majority of which is owed by GM.

Whatever You Do, Don’t Buy Old GM Stock

When GM emerged from bankruptcy in July 2009, a new GM — currently a private company – emerged from the ashes of the old GM, now called Motors Liquidation (Other OTC: MTLQQ.PK). Motors Liquidation still trades for 55 cents per share, although I don’t understand why since management of the company has expressly stated the stock is completely worthless:

Management continues to remind investors of its strong belief that there will be no value for the common stockholders in the bankruptcy liquidation process, even under the most optimistic of scenarios. Stockholders of a company in chapter 11 generally receive value only if all claims of the company’s secured and unsecured creditors are fully satisfied. In this case, management strongly believes all such claims will not be fully satisfied, leading to its conclusion that the common stock will have no value.

An IPO For New GM Won’t Be Enough

But I digress. The government’s ownership stake is in the new GM. What’s important is that the new GM plans an initial public offering (IPO) either later this year or in 2011. The only way the government’s equity stake could be worth $48 billion is if GM’s market cap after the IPO equals $79 billion ($48 billion/61% ownership stake).  If you subtract out $2 billion for the preferred stock, then the magic number is $77 billion. Such a high valuation is extremely unlikely when one considers that GM’s peak market cap only reached $56 billion in 2000. And GM is a much weaker and smaller company today than it was in 2000.

Gone are Hummer (shut down), Pontiac (shut down), Saab (sold), and Saturn (shut down), as well as GMAC (now called Ally Financial), its auto-financing arm. All that’s left are the four core brands of Chevrolet, Cadillac, Buick and GMC, along with little European brands Vauxhall (England) and Opel (Germany). GM’s world market share continues to fall, now down to 11.2% from 50% at its peak in the 1960s.

Granted, GM is virtually private-debt-free (obviously not public-debt-free), whereas Ford (NYSE: F) holds $32 billion in private debt.  But Ford is much more profitable than GM and Ford’s market cap is only $39 billion.  Only a crackpot could argue that GM is worth double Ford. . . .

I Hate Wall Street

Enter Wall Street. If there was any doubt that Wall Street analysts can’t be trusted, it should be completely erased by their absurd valuation estimates on GM:

Analyst Firm

GM Valuation Estimate

JP Morgan Chase

$90 billion

CRT Capital

$75 billion to $78 billion

Deutsche Bank

$64 billion

Why are Wall Street analysts so dishonestly optimistic? Because their firms want a piece of the IPO deal, which could land them fees equal to 7% of the IPO value. Just as a homeowner is more likely to list his property with a realtor who tells him what he wants to hear concerning his house’s worth, so too do investment banks hope the U.S. government will use a firm that says it can sell GM to the public for an astronomical price.  According to Reuters, the U.S. government’s short list of investment banks to lead the IPO are Greenhill & Co., Lazard, and Perella Weinberg Partners. I wonder why Goldman Sachs (NYSE: GS) didn’t make the final cut? Oh yeah, the government is suing Goldman for fraud.

Some Hope for GM, But Not Too Much

This past Monday, GM posted a first-quarter profit of $865 million, its first quarterly profit since 2007. On the conference call, CFO Chris Liddell self-servingly called it “extremely good” and said that there is a “good chance” that the entire 2010 fiscal year will be profitable. Then he backtracked and advised analysts to be “reasonably cautious about the rest of the year.”

I’m not impressed by GM’s “turnaround” because it is entirely based on its bankruptcy filing.  Consider this: more than 100% of its profit was due to interest expense dropping by $893 million year-over-year.  In other words, if GM had not been allowed to shed its debt through the bankruptcy process, it would have lost money. Furthermore, GM’s European operations continue to be a black hole of red ink, losing more than $500 million in the first quarter. 

An IPO in 2010? Don’t count on it. The public won’t buy GM’s shares until it is solidly profitable and one quarter of phony profits does not a company of sustainable profitability make.

And don’t expect GM to ever fully repay the $48 billion it owes the U.S. government.

Or President Obama to ever start telling the truth.


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