President Obama will have lost many billions of dollars – the estimates include figures in the range of $30 billion in cash – of taxpayer funds by the time the bailout of General Motors is sorted out, paid up and put on a balance sheet, according to experts who have analyzed the unprecedented takeover of an American company by a president.
It was former GM CEO Charles "Engine Charlie" Wilson during his 1953 confirmation hearing for Secretary of Defense for the Eisenhower administration who was asked how he would handle conflicts of interests in the department's dealings with GM, and he said, "For years I thought that what was good for our country was good for General Motors, and vice versa."
There are those today who would not subscribe to that assumption, not just because of the actual dollars involved, but of the precedents that have been produced when an elected politician intervenes in a company's decisions to the benefit of some and harm to others.
Some even go so far as to suggest that the intervention has been used politically.
"Since GM's multi-billion dollar bailout … the Obama administration [is] treating the success of the initial public offering of the new GM as proof positive that the auto industry rescue and much of the rest of Obama's economic policies must be good for the country," said John Berlau, the director of the Center for Investors and Entrepreneurs at the Competitive Enterprise Institute.
But analysts confirm that the real cost of the GM bailout, in jobs and precedent as well as dollars, is something along the lines of:
- The concept that secured creditors can be punished while favored political allies such as the unions can be rewarded:
- The $45 billion in tax-loss carry forwards GM was allowed to keep;
- The lost opportunity to get billions of dollars in production assets (estimated at $65 billion to $82 billion) out of the hands of taxpayers who have been subsidizing them;
- The collapse of what creditors were owed, from $54 billion to $15.6 billion, although the mix of secured and unsecured debt remains unclear;
- The collapse of $20 billion that was owed to retirees down to $9.4 billion;
Based on these calculations, GM's creditors (the taxpayers) will come up some $30 billion short when the balance sheet for investments, loans, repayments and other money transfers is totaled, analysts say.
Meanwhile, there's no lack of enrichment going on. As one analyst explained, the $45 billion in tax-loss carry forwards GM was allowed to hold onto typically are structured to offset future tax bills.
Bankruptcy law routinely mandates companies going through bankruptcy lose those. But since the federal government invested in GM, it decided to allow old tax losses to flow into the new company even as debt was left behind. The Wall Street Journal documents some $18.9 billion of GM's carry forwards were from the pre-bankruptcy GM, and that the firm has a windfall profits of $45.4 billion in future tax savings.
The government's position is: "The profit-shielding tax credit makes the bailed-out companies more attractive to investors, and that the value of the benefit is greater than the lost tax payments, especially since the tax payments would not exist if the companies fail."
"Instead of 'buyer beware' the message here seems to be 'creditors beware' – it may be bad business to invest in large U.S. companies that may be subject to government bailouts," said one commentator.
Further, Berlau wonders "what exactly is so remarkable about a company coming back to life after a $65 billion taxpayer bailout, additional billions in tax breaks not available to other companies, and even as amazing 'sovereign immunity' exemption for this IPO from anti-fraud securities laws and lawsuits?"
In fact, the manipulations may go further. Fox News previously reported that the inspector general for the Troubled Asset Relief Program, known as TARP, documented that General Motors was repaying some of the TARP money it was allocated by President Obama with other TARP money.
At the time the report came out, a few months ago, Sen. Chuck Grassley warned, "It appears to be nothing more than an elaborate TARP money shuffle."
And at Reason Magazine, columnist Shikha Dalmia wrote that when GM CEO Ed Whitacre boasted about "The GM Bailout: Paid Back in Full," many would assume he was referring to the initial $49.5 billion the government advanced the company.
"But when Whitacre says GM has paid back the bailout money in full, he means not the entire $49.5 billion … he means only the $6.7 billion loan amount."
Dalmia wrote that the rest of the money was advanced to the company for equity stakes.
According to ex-Car Czar Steven Rattner, who helped organize the GM bailout, estimates are that the total taxpayer bailout cost to be as high $82 billion (the range of the cost of the bailout) minus what is being paid back and what investors are willing to pay for GM shares – and that will be in the "single-digit billion range."
It may never be known exactly what money went to whom and for what. Nor exactly what the results have been or why those results came about.
The 19th French philosopher Frederic Bastiat's theorized about "That Which is Seen and That Which is Unseen" factors of economic development, but Rattner apparently has been unwilling to acknowledge the costs that are unseen. Those unseen costs include:
- The added uncertainty that pervades the private sector and assigns higher risks and thus higher costs to investing and hiring, because of uncertainty about the next targets of favorable government treatment.
- The diversion of resources from productive to political purposes in the business community (instead of buying that machinery to churn out better or more lawn mower engines, better to hire lobbyists to keep Washington apprised of how important we are or how this or that policy might be beneficial to the national employment picture);
- Excessive risk-taking and other uneconomic behavior that falls under the rubric of moral hazard from entities that might consider themselves too-big-to-fail (perhaps, even, the New GM);
- Growing aversion to – and rising cost of – corporate debt (don't forget what happened to Chrysler's "preferred" bondholders in the bankruptcy process);
- The sales and market share that should have gone to Ford or Honda or VW as part of the evolutionary market process;
- The fruitful R&D expenditures of those more disciplined companies;
- The expansion of job opportunities at those companies and their suppliers;
- Productivity gains passed on to workers in the form of higher wages or to consumers as lower prices;
- The diminution of the credibility needed to discourage foreign governments from meddling in markets, often to the detriment of U.S. enterprises.
Cato Institute Fellow Daniel J. Ikenson has suggested even this list is incomplete.
Since the federal government takeover under Obama, the American taxpayer is now a minority stakeholder owning about one-third of the company.
And while the president claimed, "We are finally beginning to see some of these tough decisions that we made in the midst of crisis pay off," critics have said that's not really supported by evidence yet.
Obama had argued that the restructuring "would take a substantial amount of money that only a government can provide."
"What I have no interest in doing is running GM," said Obama.
But political foes said explicitly the government should not be stepping in at all.
U.S. Rep. John Boehner, likely the next House speaker, asked, "Whether anyone really believed that the government could steer a huge company to economic viability?"
M.P. Narayanan, who teaches business at the University of Michigan, said it's clear that the government has because the restructuring saved jobs and led the company to make attractive cars.
But taxpayers still are on the hook.
"Clearly the government is going to pay a price," said Narayanan, "because it doesn’t look like the government is going to recoup all of their investment in GM. It looks very unlikely."
Ikenson said the money that was advanced to the company may not have helped at all.
"GM's bankruptcy would have provided the company with fresh talent and federal dollars gave GM an unfair advantage. Worst of all now, businesses in trouble will be able to think that they can turn to Uncle Sam when they are in trouble," he said.
It was Fox News' Glenn Beck who cited the benefits to the United Auto Workers.
"You'll be pleased to hear that the United Auto Workers made a nice tidy sum of money with the shares they received in the government bailout," he reported. "Four billion dollars, their sale of one third of the shares…"
There also is concern that what the government spent on GM, and the results, will not be represented accurately.
Berlau, who estimates taxpayer liability for the GM bailout at $65 billion rather than the conventional estimates of $50 billion, said, "Since [the] IPO, prominent news outlets have erroneously reported that Chrysler and GM have added 75,000 jobs since the bailout. National Public Radio's Mara Liasson reported that Obama 'said that since GM and Chrysler have emerged from bankruptcy, they've created more than 75,000 new jobs.'"
But the actual statement said since GM and Chrysler have emerged from bankruptcy, the auto industry has created that many jobs.
Berlau noted those figures represent additions by all makers – foreign and domestic.
"That means," said a commentary in the Daily Caller, "Toyota jobs, Hyundai jobs, Ford jobs or any other job creation from an automaker so long as they were residing in America."
The bottom line, say analysts, is that there is the potential for large problems stemming from the situation, above and beyond the dollars that have flown.
Todd Zywicki, professor of law at George Mason University, wrote in the Wall Street Journal, "By stepping over the bright line between the rule of law and the arbitrary behavior of men, President Obama may have created a thousand new failing businesses. That is, businesses that might have received financing before but that now will not, since lenders face the potential of future government confiscation."