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


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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?

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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.”



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