Wednesday, May 18, 2011

Picking whiners

This morning I got up to find a letter I wrote in the State Journal.
Taxpayers gave 'new' GM about $40 billion, which was converted to common stock. In November, the Feds sold 480 million GM shares for $20 billion. If taxpayers are to break even, the remaining 350+ million taxpayer-owned shares need to be sold above $55. GM is trading at $31.36 as I write.

The Feds gave 'new' GM $14 billion in future tax breaks, even though the losses of the 'old,' defunct GM had to be counted to justify the largesse. That accounting sleight-of-hand had never been allowed before.

GM is presently profitable. This is better than the alternative. But celebrating profitability resulting from an interest free $40 billion loan, and a $14 billion tax-avoidance gift – after giving your major creditors a major haircut and while your stock sinks below its IPO price – is premature.

If taxpayers had given each of GM's 75,000 pre-bankruptcy hourly workers $250,000, we would have be ahead compared to the cost of the bailout and tax breaks.

Picking winners is bad. Picking losers to make into winners is worse.
Tonight I find out GM wants billions more in tax subsidies. Sigh.


Mitch said...

Here's a few nuggets to consider that makes this a little worse:

I did a quick analysis, the "new" GM was able to carry over its Net Operating Losses (NOLs) from the old GM to the new returns. My educated guess is that they have enough losses not to pay any income tax for several years at least.

Second, GM is not profitable. Yes, they are showing income on their financial statements - all their profit should be going to easing their unfunded pension and benefit liabilities. I recall seeing an analysis where it was estimated that GM would have to make $6 billion/year in order to keep its unfunded liabilities in check.

This is why I would never buy the stock. The company is a hedge fund that incidentally runs a car company. Just looking at how competitive the car market is, and I think it would be near impossible for GM's pension assets to earn its way in this poor market, this company is due for another bankruptcy.

Chrysler and Ford have the same problem The difference is that Ford is in better much better shape to address the problems. This is why the next set of UAW negotiations will be so critical. More concessions are needed to address these unfunded pension and benefit liabilities or the big three will no longer be going concerns.

Anonymous said...

The accounting "sleight of hand" has never occurred before for the reason that it was illegal. And unless Congress slipped an exemption into say the health care takeover bill, it is still illegal.

GM's income statement should include the cost of interest payments to bondholders who were robbed. And the balance sheet should have liabilities to the same bondholders.

GM's income statement should also include the cost for giving technology to the Chinese in exchange for access to its market.

I agree with Mitch with one quibble. Rather than a hedge fund, I think of GM as another entitlement program for the enablers of the elites.

The auto companies are an icon for what ails America. Crony capitalism. Don't work hard. Create a monopoly for the benefit of your group. Reward membership, not achievement. Borrow from the future.


-Lady Astor