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GM Bailout Payback Lie

Reason‘s Nick Gillespie, resplendent in his ubiquitous black jacket, explains, “How The Hell Did GM Pay Back Its Loans “in Full And Ahead of Schedule”? Well, It Didn’t.”

The script:

General Motors CEO Ed Whitacre has bragged in TV commercials and newspaper columns that GM has paid back its bailout “in full and ahead of schedule.”

As with the Pontiac Aztek, an ugly exterior masks an ever darker problem: Whitacre is being fanciful to the point of deceit. GM received $50 billion in TARP funds (never mind that TARP was only supposed to cover financial institutions). About $7 billion of that came in the form of a straight-up, low-interest loan. And about $13 billion came in the form of an escrow account.

So how has GM, which lost $38 billion in 2007 even as it sold 9.4 million cars, paid back its debt? It took money from the escrow account to pay back the $6.7 billion loan.

Do you remember when you were a kid and your parents gave you $20 to buy them a Christmas present? You bought them something worth $3 and pocketed the rest? That’s what GM has just done.

Oh, and do you remember when you hit your parents up for college? GM has applied for a $10 billion, low-interest loan from the government to modernize its plants so its cars will meet new federal mileage standards.

If you think all this constitutes paying back their debt in full and ahead of schedule, you might want to check out the new line of GM cars. And hope that the company’s safety engineers are better at math than their CEO.

Via Ed Morissey, I see that NYT’s Gretchen Morgenson is on this one, too, in a piece titled “Repaying Taxpayers With Their Own Cash.”

AS we inch closer to a clearer understanding of the products and practices that unleashed the credit crisis of 2008, it’s becoming apparent that those seeking the whole truth are still outnumbered by those aiming to obscure it. This is the case not only on Wall Street but also in Washington.

[...]

G.M. also crowed about its loan repayment in a national television ad and the United States Treasury also marked the moment with a press release: “We are encouraged that G.M. has repaid its debt well ahead of schedule and confident that the company is on a strong path to viability,” said Timothy F. Geithner, the Treasury secretary.

Taxpayers are naturally eager for news about bailout repayments. But what neither G.M. nor the Treasury disclosed was that the company simply used other funds held by the Treasury to pay off its original loan.

[...]

Armed with this information, [Senator Chuck] Grassley fired off a letter to Mr. Geithner on April 22, asking for details of the transaction. “I am concerned … that this announcement is not what it seems,” he wrote. “In fact, it appears to be nothing more than an elaborate TARP money shuffle.”

Mr. Grassley heard back from the Treasury last Tuesday. Herbert M. Allison Jr., assistant secretary for financial stability, confirmed that the money G.M. used to repay its bailout loan had come from a taxpayer-financed escrow account held for the automaker at the Treasury.  Emphasizing that the cash in the account was “the property of G.M.,” Mr. Allison said that the department had approved the company’s use of the money to retire the original debt because it was “consistent with Treasury’s goal of recovering funds for the taxpayer and exiting TARP investments as soon as practicable.”

One can at least understand GM’s motivation for telling a big fat lie through the vehicle of a technical truth.  But having the Treasury Security of the United States go along with it?

Of course, since the government now owns GM, the two are one and the same thing.  What’s good for General Motors actually is what’s good for the country.  So, it’s in the mutual interest of GM and the Treasury to perpetuate the myth that not only is GM a good citizen but a thriving auto company.   But, my, what a conflict of interest.

And, while I’m so far from an expert in securities law that I hesitate to go out on a limb here, this has to be mighty close to illegal.  After all, the motivation of both GM and Treasury here is to artificially inflate GM’s stock price.

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About James Joyner
James Joyner is the publisher of Outside the Beltway, an associate professor of security studies at the Marine Corps Command and Staff College, and a nonresident senior fellow at the Atlantic Council. He's a former Army officer and Desert Storm vet. He has a PhD in political science from The University of Alabama. Views expressed here are his own. Follow James on Twitter.

Comments

  1. Dave Schuler says:

    Yeah, I posted on the GM dog and pony show over paying back the loan the day it was announced. The governments of Canada and the United States now own roughly 70% of GM. I don’t see this move as maximizing shareholder value.

    Like or Dislike: Thumb up 1 Thumb down 0

  2. john personna says:

    This is a good story to promote. I believe that some banks and such have also made similar, false, claims. You may also remember some banks with “hey, we are profitable again” stories, also neglecting the special benefits they are receiving. It’s pretty easy to turn a short-term profit when uncle Sam will loan to you at 0% and borrow back from you at 5% (borrowing short, lending long).

    But I don’t think that’s a reason to be sloppy in this story, with the line “Of course, since the government now owns GM, the two are one and the same thing.”. The government has too high a stake, but it is not 100%. Here is a recent roundup from Business News:

    — GM: Government owns 60.8 percent, a $40.7 billion investment.

    — Chrysler: Owns 9.9 percent after investing $12.5 billion.

    — GMAC: Owns 56.3 percent after investing $17.2 billion.

    — Citigroup: Owns 27 percent after investing $25 billion.

    — Small banks: $69.1 billion invested in 641 small banks.

    — AIG: Owns 79.8 percent in return for $47.5 billion invested. Federal Reserve has lent an additional $63 billion.

    — Fannie Mae: Owns 79.9 percent after providing $75 billion.

    — Freddie Mac: Owns 79.9 percent after providing $57 billion.

    Like or Dislike: Thumb up 1 Thumb down 2

  3. john personna says:

    After all, the motivation of both GM and Treasury here is to artificially inflate GM’s stock price.

    I don’t think that’s the motivation.

    The common thread with bank “success” stories is that the bailout “worked”, that the market triumphs, and that regulation is not required.

    You may remember some commenter here buying into the line that banks didn’t really need funds, were forced into them, and had paid them back … hence they don’t need to be regulated.

    I am still prefer markets to governments. I still want the majority of our economic activity to be taking place in the private sector. (I still think total government spending as a percentage of GDP is the key measurement.) We should have just enough government regulation and oversight for stability. No more.

    But there are still groups that like private profits and socialized losses. The “payback” stories are part of their campaign to keep that machine running.

    Like or Dislike: Thumb up 0 Thumb down 0

  4. john personna says:

    Boy, I shouldn’t go back and re-edit my sentences. The dyslexia really kicks in.

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  5. Idiot says:

    There is no current stock to trade or increase in value by making a false statement. There is, however, something important for government and GM – the appearance of a success rather than actual success. What Whitacre was thinking is beyond my comprehension in allowing his reputation to be used when it seems painfully clear that what actually happened would be found out in days.

    Like or Dislike: Thumb up 0 Thumb down 0

  6. Herb says:

    What Whitacre was thinking is beyond my comprehension

    I’ll give you some insight into what he was thinking when he made these commercials.

    “We gotta sell some cars!”

    Although I’m not sure the “elaborate TARP money shuffle,” as Grassley put it, is something to raise an eyebrow over. Paying off a “low-interest” loan from money sitting in an escrow account may seem elaborate, but I’d argue it’s an “elaborate” way to reduce your exposure to interest payments.

    If this was your personal bank account, and you used money sitting around in escrow to pay off a loan, would you be doing something underhanded, sneaky, or stupid? No. You’d be saving yourself some money, eliminating a liability, and probably improving your credit score.

    Now say your Mom supplied the funds in your bank account as well as the funds in escrow. Would that change the underlying logic at all? Would it make saving money and paying off debts a dumb move?

    Of course not.

    Either way, that’s $6.7 billion that the tax payers get back. Fonzi with his white board has nothing to complain about.

    Like or Dislike: Thumb up 1 Thumb down 0

  7. Zelsdorf Ragshaft III says:

    Good deal Herb. Give me $100. $20 of which is a loan. I will repay you the $20 out of the hun. Then I will tell you how well I am doing because I paid you back. Notice how good you will feel when you get that 20 back. I take it, you do not hold a position in the financial sector.

    Like or Dislike: Thumb up 1 Thumb down 0

  8. Steve Verdon says:

    Either way, that’s $6.7 billion that the tax payers get back. Fonzi with his white board has nothing to complain about.

    So they can get $10 billion in low interest loans….yeah, spin it Herb.

    Like or Dislike: Thumb up 2 Thumb down 0

  9. Drew says:

    Please tell me you are not serious, Herb. That’s just laughable.

    Like or Dislike: Thumb up 1 Thumb down 0

  10. Franklin says:

    Yeah, I posted on the GM dog and pony show over paying back the loan the day it was announced.

    I thought I saw some a quote from some GM guy that day (or the next) that made it quite clear what they were doing. Sure, the commercials were spin and the taxpayers are getting a raw deal, but this wasn’t some big secret. Anyone who cared to know, knew.

    Like or Dislike: Thumb up 1 Thumb down 0

  11. [...] James Joyner [...]

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  12. Herb says:

    So they can get $10 billion in low interest loans….yeah, spin it Herb.

    A business seeking funding to operate? OMG! Soooo controversial. I’m calling the Ministry of Finance on my red phone immediately.

    Like or Dislike: Thumb up 1 Thumb down 0

  13. Herb says:

    PS. In the video, Gillespie appeals to graduates of 3rd grad math.

    I encourage those 3rd graders to calculate the interest payments on a $6.7 billion loan over 5 years.

    And then calculate how much money you can save by paying it off early. (Admittedly, you’re gonna need more than 3rd grade math to figure this one out…)

    Besides…

    Crying about a commercial and a press release? C’mon back to the real world. Commercials try to sell things, and (I shouldn’t have to explain this) they often do that by emphasizing the positive and ignoring the negative. Shocking, I know.

    And a self-serving press release? That never happens. (Er, okay…they’re always kind of self-serving.)

    Spin? Me? Dude, guess who voted FOR the bailout and is up for re-election this year? I’ll give you a hint. It’s not me.

    Like or Dislike: Thumb up 0 Thumb down 0

  14. Mark says:

    Herb,

    You are so right! Why GM is just doing the smart thing here. By taking the free money given to them by us and paying off the loan given to them by us to avoid paying interest to us they improve their credit rating and market perception and increase their value, thereby adding value for us.

    brilliant! and so easy to understand! this is just good business. nothing devious at play here at all.

    I can see why they’d make ad’s declaring this as a sign of fiscal stability to, again, increase their market value. Clearly they have turned a corner here. What a success story. It must be spreading too. Why, just the other day my son found $20 in a parking lot. He was hailed the next day as an up-and-coming business leader.

    Like or Dislike: Thumb up 0 Thumb down 0

  15. Herb says:

    Sorry, man, but the “too big to fail” ship has already sailed. They didn’t fail. We bailed them out. It’s in the history books already.

    Yes, they took the tax payers money. Yes, they’re horrible bastards. But no, I’m not getting all bent out of shape because they’re paying off their debts. That remains prudent, even if you’re a horrible bastard with gobs of taxpayer money.

    Like or Dislike: Thumb up 1 Thumb down 0

  16. Mark says:

    But no, I’m not getting all bent out of shape because they’re paying off their debts. That remains prudent, even if you’re a horrible bastard with gobs of taxpayer money.

    hey, I supported and still support them being bailed out.

    what I dont support is them playing with the books with our money to make themselves look good when they aren’t in the interest of increasing their market value for what amounts to an accounting trick.

    They are using shady accounting to avoid paying interest that is due to us. and doing it with our money.

    this isn’t them “paying off their debts” prudently. It’s a shell game to prop up the company as something it’s not. and the govt appears to be complicit. James is right to question the legality.

    and you dont get that? astonishing.

    Like or Dislike: Thumb up 1 Thumb down 0

  17. j says:

    Herb, when they use their OWN money from their OWN revenue to pay US back the money WE gave them, then you can say they reduced their public debt. Until then, pass over some of that KoolAid you are drinking, it must be good.

    Like or Dislike: Thumb up 0 Thumb down 0

  18. Steve Verdon says:

    Good one Herb, nice to know you believe in corporate welfare.

    Yes, they took the tax payers money. Yes, they’re horrible bastards.

    But Herb they are just seeking business funding. Better get on your red phone.

    Man…what a complete douche.

    Like or Dislike: Thumb up 0 Thumb down 0

  19. Herb says:

    Man…what a complete douche.

    You learn that in 3rd grade too? Or did you pick it up in junior high?

    Like or Dislike: Thumb up 0 Thumb down 0

  20. chad says:

    seriously, they DID pay back the money.

    the borrowed: $50 billion
    the now owe: $43 billion

    would it make a difference if they used their own revenue to pay off the loan, then 6 months from now used the escrow account for funding operations? nope.

    they would still owe $43 billion.

    the math is simple, the deception is they are shortchanging tax payers by avoiding the interest… but on the other hand, this may help them go public sooner and at a higher market value, so the tax payers can get out of their ownership position all together…

    were these commercials the best way to explain this? nope. but that doesnt make it wrong.

    Like or Dislike: Thumb up 0 Thumb down 0

  21. James Joyner says:

    were these commercials the best way to explain this? nope. but that doesnt make it wrong.

    But you’ve just explained why it was wrong: They left the impression that they’ve paid back their loans in full when in fact they still owe 43B of the 50B they borrowed.

    Like or Dislike: Thumb up 0 Thumb down 0

  22. Mark says:

    would it make a difference if they used their own revenue to pay off the loan, then 6 months from now used the escrow account for funding operations? nope.

    Actually, yes. Especially if they are giving the impression that the company IS using revenue to pay off these loans (which the commercials clearly do).

    A)If they offer a perception of viability to increase shareholder value using nothing but tax payer money they had to use for whatever they wanted rather than revenue generated from sales (which is the underlying message they’re giving), that’s a lie. It’s a false perception to increase value and it’s a questionable practice at best. Esp if the govt was mum or worse, complicit in that lie.

    and B) whether it’s taxpayer money or not, what you do with equity matters to shareholders. Using it to pay off debt to then ask for more debt at a lower rate does nothing to increase real value in GM’s situation. Revenue matters. Margins matter. Better they take this money and use it to do something to up revenue and pay off the loan over time while increasing real company value.

    my guess is, someone in GM thought this was good marketing. They think Ford is kicking their ass because they have the public perception of being “clean” of govt debt. So, they pulled this shell game so they could say “we paid off our loans” as a marketing tool, nothing more.

    I think they’re right, frankly. I think Ford has benefited from that perception.

    But as a taxpayer I say tough shit! Start doing things to make your company profitable again through direct investment in real change. I think GM is still too big and lazy to do what hurts in the short-term. And we’re just funding more bad behavior at this point.

    They deserved a chance. They got it. They are blowing it. Time to start closing the wallet.

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