Can we get a return on our $50 billion GM investment?
Filed under: Company News
If General Motors emerges from bankruptcy in 60 to 90 days, the U.S. (meaning we taxpayers) will own 60 percent of the new GM, a slimmed down version with brands Chevrolet, Cadillac, GMC and Buick. We've lent the old GM $50 billion -- $19.4 billion before the bankruptcy and $30 billion during it -- in the form of debtor-in-possession financing. Unfortunately, there is a very low probability that we'll ever see our $50 billion again.
Before getting into my reasoning for why our $50 billion is a lost financial cause, it's worth spending a moment discussing whether President Obama will be able to resist the calls he'll get from politicians around the country to stop the closure of plants and dealerships.
To answer these questions, it's worth revisiting why the U.S. decided to put $50 billion into GM in the first place. The primary reason was to limit the number of lost jobs -- some have estimated that two to three million people would have been fired if GM had simply liquidated.
Because of the job concerns that set the U.S. on a course to bail out GM, Obama will have a hard time avoiding these calls not to close down facilities. As a politician who will seek a second term, there is a limit to how many campaign contributors and vote gatherers he can anger by ignoring their pleas either not to close a plant or to locate a new one in their district.
Moreover, Obama has some objectives of his own. For example, he wants the U.S. auto industry to produce more fuel efficient vehicles. But unless the price of gasoline gets very high, there is a good chance that there won't be enough demand for such vehicles to earn a profit off the fuel efficient vehicles -- even if they were a much better value than those already made by competitors.
So why won't we get our $50 billion back? At its peak value on April 28, 2000, I estimate GM was worth $57.2 billion, which was 9.7 times GM's peak net income of $5.9 billion for the previous year (1999). Just for argument's sake, if the U.S. had owned 60 percent of that GM, its stake would have been worth a mere $34 billion, which is $16 billion less than the $50 billion that the U.S. has invested so far.
As it turns out, since $8.8 billion of the $50 billion will remain in the form of loans, the U.S. will convert $41.2 billion worth into its 60 percent equity stake. This means that In order to break even on that $41.2 billion equity portion of our investment -- this does not even take into account getting a profit for taxpayers after taking on the risk -- the new GM would need to have a market capitalization of $68.7 billion -- 20 percent higher than the old GM was at its peak.
With the North American vehicle market expected to be at best nine million units in 2009 -- 44 percent below its 16 million peak -- it is hard to imagine a scenario where the new GM would ever have a market capitalization over $68.7 billion.
Here are three things to consider:
- Managing GM to that level of value -- even with the world's best management team and board -- would be tough in this economic climate,
- Decision-making conflicts will arise from the trade-offs between political and economic considerations, and
- The new GM will be smaller -- taking out Hummer, Saab, Saturn, and Pontiac will bring GM's current 19.2 percent market share down to 16.4 percent at current rates -- which could make it harder to achieve the level of profit needed to justify a 20 percent-higher-than-peak net income.
Our $50 billion investment in GM is gone, baby gone.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He has no financial interest in the securities mentioned.
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Reader Comments (Page 1 of 9)
6-02-2009 @ 9:54AM
Dave said...
Any body who thinks that the tax payers will ever see the billions that have been dumped into Government Motors are living in a dream world. This was nothing more than Obama rewarding the UAW. Personally I think the UAW is a piece of shit that should be eliminated.
America is on the verge of destruction. "There is no insanity greater than electing a pathological narcissist as president."
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6-02-2009 @ 10:57AM
raffyprhr8 said...
hey dave i think your a piece of shit....you could go fuk yourself...come to lordstown oh and talk that...ill show you what a piece of crap this uaw worker is...you people talk a lot of mess behind the computer...
6-02-2009 @ 3:27PM
TC said...
WELL SAID!!!
6-02-2009 @ 12:35PM
John said...
Attn: Ralph Dawg or raffyprhr8
I would have to agree with Dave, someone had to say it. It's a pay back to the Unions.
Where were all you Union clowns when B.J. Bill Clinton signed NAFTA, I don't recall and Union or Union Leader standing up screaming @ Clinton for doing it. I worked in Union shops, they are bullshit. But, every time there is an election, the Unions Leader from their Ivory Tower tell there Sheep Union people VOTE for the Democrat, we don't care if he lied under oath or had a bj in the White House.
By the way We won't see a fukin nickel back from GM or you for that Matter..
Explain how you can compete with Toyata bulding better cars then you and only paying $48.00 per hour verses your Union and all the bullshit baggage @ $78.00 per hour. Then, you want the Middle Class that is going backwards to buy your Cars, please explain that to me.
But, I do own a Hummer H-3 and the Chrysler 300C.
Your Leader OBama is taking us down the Road to Socialism, but you don't give a crapshit.
I do wish you the best however :-)
6-02-2009 @ 2:21PM
Kate P. said...
This, for the last time, is not the UAW's fault. This starts with upper management, the banks loaning to people who cannot afford to pay back (2nd and 3rd mortgages) and do not have to suffer the consequences, not to mention all the Bernie Madoffs out there who have scammed innocent people. This is how it all started, not to mention the gas prices several months ago. The UAW made many concessions back in 2007 and continue to make concessions. If it weren't for the UAW, our jobs and benefits would not be protected.
All of you Union haters are sick jealous individuals that don't care about the many lives this economy has badly bruised. For God's sake, this catastrophy is affecting millions of people and we should all be in this together, but I see now after reading many of these blogs, that we are not. That is a true shame!!
6-02-2009 @ 2:49PM
Linn said...
DAMN RIGHT
6-02-2009 @ 3:04PM
Tom said...
Are you speaking of the former president?
6-02-2009 @ 5:49PM
Debbie G. Peterson said...
You are so right! What does Obama know about running a corporation anyway? Let alone that little mindless person that is 31 years of age. You are not an engineer, you don't know anything about running a manufacturing facility. You are going to oversee GM and it's progress!!!!!. What in the hell does Obama know about anything? He got there because all his brothers and sisters were told to vote, and God knows they are the majority these days, and they do not understand any of these issues. The unions destroyed GM, Chrysler and what we know as manufacturing in the USA. Thanks Mr Obama. Stay out of their way and they will do fine. Get in their business and they will fail. Is this what you want? You suck as a president.
6-02-2009 @ 9:55AM
nick said...
You got to be kidding us Peter Cohan, this is a massive give away to bribe the unions to keep voting for Obama and his slime machine. Here we got a poor GI being killed by a bro who went rag head, and do you hear the Huffington Post or the New York Times, NBC coming out and saying how awful this is, but when it comes to a doctor who has killed 60,000 little ones they are so hurt that the doctor was killed, no one wants to see folks take things into their own hands, but these liberal slime bags make me sick with their one side reporting, trying to blame the guy on FOX, these butt holes suck.
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6-02-2009 @ 10:45AM
Tom said...
I think you have forgot to address massive mismanagement that has gone on by most automakers, GM included, for decades. All the while the executives awarded themselves with gross compensation packages plus perks. And don't forget the boards of directors who must have been asleep...
6-02-2009 @ 9:58AM
bailoutsos said...
In a word, no. How will a bankrupt government manage to turn around a bankrupt company?
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6-02-2009 @ 10:06AM
Mike Sanders said...
I think President Obama is smart enough to realize, that micro-managing GM would consume far too much time and distract him from the copious duties, which a head of state oversees. Would he (Obama) put a bug in someone's ear, so far as plant closings? All other logistic factors being equal, yes I believe he would. So what! GM politics have governed such matters for decades... Plants would be "whipsawed" against one another, to compete for the right to build a product line... F-bombing J.T. Battenburg III, once cost a plant it's second shift for a long, long time. Having over 20,000 local grievences at contract time is also bad karma. Most decisions will be made out of logistical necessity, not politics. GM has always been very political internally, so I don't think President Obama could improve on that. Anyway, congratulations to the GM Wentzville Assembly Plant... Your commercial, ful-sized van capacity and capabilty, make you an essential player (you won't close) in the new, Lean and mean GM. Go Wentzville!
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6-04-2009 @ 5:59PM
larry said...
THE TAXPAYERS WILL NEVER SEE A DIME OF THE MONEY--OBAMA THE STUPID HAS SPENT THE U.S. INTO A DEFICIT POSITION THA T CAN NEVER BE REPAID-------------------------------------------------------------------
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6-02-2009 @ 10:18AM
B.O stinks said...
I have a better question CAN TAX PAYERS RECOUP THIER MONEY ?????????????? I dont think so from what I have been hearing they must sell 1million bama mobiles in ONE year to survive !
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6-02-2009 @ 10:19AM
RUSTY said...
Considering all the billions we DUMP on projects and missions with close to ZERO return, if we HOPEFULLY can get the auto industry productive and employing Americans, we wil lat least see some good come out of it. When we saw how poorly we mismanaged the war in Iraq, to the tune of HUNDREDS of BILLIONS of dollars and thousands of American lives, we did not hear our leaders express any remorse. Let's get out industry and economy PRODUCTIVE again. ReBuild America.
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6-02-2009 @ 12:22PM
Mike Sanders said...
Rusty makes an excellent point... When you look at where our tax dollars go, a disproportionate (to say the least) amount always ends up in the defense budget... The federal budget bar-chart would make any sane man believe, that we are paranoid!
IF ANYTHING NEEDS TO BE RESTRUCTURED, THEN THE US MILITARY MUST BE RESTRUCTURED, TOO... IF THIS COUNTRY IS GOING TO SUPPORT A BANKRUPT AUTOMAKER, THEN WE MUST ADJUST THE FEDERAL BUDGET (IN A BIG WAY). RIGHT-SIZING THE DEFENSE DEPARTMENT WOULD HELP THE FEDERAL BUDGET DEFECIT AND ENABLE THE RECAPITALIZATION TO PROCEEED.
Sorry for shouting, but this is a BIG problem and has been for 30-40 years... We put so much in the defense stack, which could go towards constructive human services and endeavors. I understand that we must protect our homeland, but must we be involved in every countries affairs? We value our national sovereignty, so why should we interefere in all but the most essential cooperation with other nations and maintain a limited list of allies and periodically reassess the cost of be involved, at the level we are now... Having complex and esoteric alliances, all over the world, is not just a logistic nightmare, it actually works against our sovereign will to be at peace and defend our freedoms, which we've enjoyed over many decades. A period of "bankruptcy" may be required to break the tangled alliances and begin anew, with a 21 century view.
6-02-2009 @ 1:36PM
david said...
Rusty you are indeed a fool, naieve at best. Weakening our defense is the wrong way to go. whether you like it or not
we have a responsibility to the free world to remain strong.
The fact is about the war in Irag is that fewer Americans have died than in any other war.
Government is noit capable of making AMerica productive again it is the small business owners that do it time and time again. Obama's tax and destroy approach is making it
impossible to grow, survival is the most any are hoping ar and waiting for the next 3-3/4 years pass. In hopes of a more AMerican minded goverment being elected. Socialism, facism and communism coming soon to a neighborhood near you
6-02-2009 @ 10:22AM
richard said...
All that money will never get repaid to the government. I would venture to guess that there will be more money dumped into the sinking ship in the near future as they blow through even more cash.
Boycott GM and Chrysler unless the money is repaid in full with heavy interest.
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6-02-2009 @ 10:22AM
TX CHL Instructor said...
"Moreover, Obama has some objectives of his own. For example, he wants the U.S. auto industry to produce more fuel efficient vehicles."
Huh? "Fuel efficient" is just the cover story. He wants to buy union votes, just like he did last year. Only consideration for the current administration is "What's in it for BHO?"
Major problem with subsidizing stupid mistakes is that you get a lot more of them.
You are right, though about that money being GONE.
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6-02-2009 @ 12:09PM
Randy said...
What demented dream world are the bureacrats and left wing loon politicians squatting in to believe true Americans want to drive pipsqueak peddle cars? The best selling vehicles in the USA are full size cars, pickups and SUV's... just like they are the best selling vehicles in the largest market for vehicles on the planet - China. Obamobiles will be the same kind of bomb the Vega and Pinto were.