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The Great Obama: Pulling A GM Profit Out Of His 'Box of Cash'
Posted By Gerrit Lansing On June 4, 2009 @ 1:10 pm In Economics | Comments Disabled
From June 4th’s Wall Street Journal :
Like a magician who artfully controls his audience’s attention, the government’s General Motors investment is all about financial diversion.
Here’s the fancy trick: It won’t be very hard for a revamped GM to succeed at making a buck. Its debts will be cut from about $73 billion to about $17 billion. Its labor costs will be reduced by as much as $2 billion a year.
On Wednesday, GM got even more help. GMAC, which funds dealers and car buyers, began issuing $3.5 billion in three-year debt backed by the federal government. This should cost GMAC about 2.2% annually. Ford Motor Credit just priced a five-year bond. It’s paying 8%.
“New GM” will thus have a far easier road to turning a profit over the next 12 to 18 months. And you can bet that first profitable dollar will be cause for celebration in Washington and Detroit.
But let’s break the magician’s credo and show how the trick works. Beneath the magician’s table is a black box. It happens to be stuffed with about $65 billion in cash.
That’s taxpayer money. Some $20 billion of it was given to GM over the past few months, and another $30 billion is being used for the company’s reorganization. About $15 billion of it goes to support GMAC, which the Obama administration says is essential to keeping GM alive.
Like any lender, the government would be expected to demand this money be repaid. But that’s not really happening here. Save for $8 billion in debt and another $2.1 billion in preferred stock, the money is being converted into an illiquid 60% stake in GM.
Why didn’t the government take more debt and less equity in GM? It worried that GM couldn’t bear the interest expense. Explained another way: The new GM may “succeed” at getting to profitability, but only as much as taxpayers have absorbed tens of billions of losses in upfront equity.
Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org
URL to article: http://blog.heritage.org/2009/06/04/the-great-obama-pulling-a-gm-profit-from-his-box-of-cash/
URLs in this post:
 Wall Street Journal: http://online.wsj.com/article/SB124407303149083199.html
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