Will General Motors Ever Pay Us Back?

Unless you've been living under a rock, you've probably heard by now that General Motors is going public (again) -- or more specifically, that the U.S. government and other GM stakeholders are preparing to sell some of their holdings in the open market.

Some of their holdings.

Speaking to reporters on Thursday, General Motors CEO Dan Akerson confirmed what many had suspected: It'll be a couple of years -- at least -- before the government sells all of its 60.8% stake in the automaker it spent $50 billion bailing out last year.

In other words, American citizens, don't expect to get paid back anytime soon.

Is this an outrage?
It's certainly easy to get mad at GM -- the company, once one of America's industrial crown jewels, was (in retrospect) shockingly mismanaged for decades before skidding into bankruptcy court as a pile of smoldering wreckage last year. While GM is hardly the only old-line U.S. company to face a hard reckoning -- big names from Delta Air Lines to Pacific Gas & Electric have had their own trips through bankruptcy courts in recent years -- it is unique in that it received a very big, and very unpopular, government bailout.

That bailout, of course, was part of an unprecedented high-speed restructuring process that saw labor unions favored over bondholders, leading some (OK, lots) of people to accuse the Obama administration of discarding hundreds of years of legal precedent to reward a favored political constituency.

So yeah, you might say there are some hard feelings here. And those feelings were stoked in April when then-CEO Ed Whitacre made a big show of having "paid the government back" -- after returning a mere $6.7 billion of the $50 billion bailout.

That was certainly a lousy PR move, in retrospect. But here's the thing: Technically speaking, Whitacre was right. The GM stock held by the government, plus that $6.7 billion, technically constitutes full repayment of the bailout money.

But technicalities won't let GM off the hook. And unlike certain past executives, GM's current leaders aren't fools. They know that.

The IPO won't pay us back
Every auto analyst on Wall Street has run the numbers, and while the specifics of their results differ, it's pretty clear that the government's 60.8% stake in GM isn't going to be worth the $43.3 billion GM has to pay back.

At least, not yet.

This is why the government's sell-off will likely take a few years: As the world's economies improve, as global auto sales get back to pre-crash levels, as GM itself continues to invest in and upgrade its product line, GM's value should go up. Waiting to sell the bulk of its holdings should (we hope) help the government get closer to breaking even.

Closer to breaking even. Actually breaking even would require GM to have a market cap a bit north of $70 billion, by my back-of-the-virtual-envelope calculations. For comparison, Ford's (NYSE: F  ) market cap is around $43 billion, and Honda's (NYSE: HMC  ) is about $63 billion ... and Ford's profits are outpacing GM's at the moment, though Ford still carries a heavy debt burden. On the other hand, Toyota's (NYSE: TM  ) market cap is about $112 billion, and given GM's Toyota-like global sales levels and low post-bankruptcy debt overhang, that may be a better comparison.

But on the other hand, that's Toyota, whose credit rating and sustainability are, shall we say, not really in doubt. And for all the damage Toyota's brand has taken over the last year's recall kerfuffle, it's not really comparable to the damage GM's brands like Chevrolet have taken since GM started its long, slow power-slide into product oblivion in, oh, 1980 or so.

Long story short, if GM can manage a Ford-like turnaround, it's entirely plausible that the company might someday be worth a premium to what the government "paid" for its shares ... but today is not that day.

But in terms of paying back the U.S. taxpayers, I'm not sure that matters.

Why we'll probably get paid back ... eventually
Here's the bottom line, as I see it: Just as Ford still has to pay back $20-billion-plus of the private loans that paved the way for its spectacular turnaround, GM is morally -- if not legally -- obliged to pay back the remaining $43 billion it owes the U.S. government (and several billion more owed to the government of Canada).

GM's new CEO Dan Akerson is a former U.S. naval officer with what appears to be a keen sense of patriotic duty. And that, combined with GM's fervent desire to be done with this whole "Government Motors" business once and for all, is why I think GM's current management will see that the government gets paid back, one way or another, even if it takes several years -- and even if it requires some kind of additional payment after all of the government's stock is sold.

Sure, it might be expensive. But I don't think they can afford not to.

Read more of the Fool's global auto coverage:

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Fool contributor John Rosevear thinks the Chevy Citation was the car that sealed GM's downfall, but invites dissenting opinions from readers. He owns shares of Ford, which is a Motley Fool Stock Advisor selection. The Motley Fool has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 17, 2010, at 6:16 PM, TMFBreakerRob wrote:

    One little tidbit that gets little press is this: http://www.theoaklandpress.com/articles/2010/08/20/business/...

    The message? GM has over $27 billion in pension shortfalls....and owes an additional tbd (large) amount to fund the union VEBA health care fund.

    This added burden is a significant risk factor for anyone buying into the IPO....and probably won't help accelerate the day that taxpayers receive the "final reckoning"....whatever *that* shortfall may be. The bright side might be that the IPO could be a promising short candidate. ;)

  • Report this Comment On September 17, 2010, at 6:48 PM, rd80 wrote:

    Didn't bondholders and the UAW get some warrants that would dilute the gov't if GM hits some upside target?

    The gov't holding on waiting for a higher price to avoid a loss is a two edge sword. There's no guarantee GM will ever reach the market cap needed to make the gov't whole or even be in a better position than right now to sell the stock. If the investment bankers advising Treasury don't think there's enough demand to absorb the full amount, then trickling it out over time makes sense. But holding on to try and break even is gambling on the business and/or markets improving - hardly a sure bet.

    As for GM investing to upgrade its product line - if it needs to raise capital, it'll have to either dilute the US gov't, UAW and Canadian gov't, issue preferred shares or tap the bond market. Doubtful there'll be much appetite for additional common being floated and given the uncertainties, I suspect preferred or debt issue pricing would be a pretty steep cost of capital. I guess we'll find out how steep since you noted in a response to another article that there is a preferred issue piggy backing along in the IPO.

    Good article.

  • Report this Comment On September 17, 2010, at 8:22 PM, TMFMarlowe wrote:

    @TMFBreakerRob: It does get little press... but it did get some coverage here at the Fool:

    http://www.fool.com/investing/general/2010/08/20/is-general-...

    Long story short: It won't be a problem 'til 2014; that's a lot of time for the pensions' investments (the decline of which caused the shortfall) to recover; might still be a big problem then, but don't bet the farm on that short (at least not for that reason, not yet).

    John

  • Report this Comment On September 19, 2010, at 8:14 PM, Latinus wrote:

    "Will General Motors Ever Pay Us Back?"

    -

    This overly long article is not about "us"; it is about U.S.

    This is what I want John Rosevear (or some other expert) to write about: What does the future hold for GMS and other bonds and debentures?

  • Report this Comment On September 20, 2010, at 8:53 AM, TMFMarlowe wrote:

    @Latinus: As of last Friday, the "bellwether" Old GM bond -- the one watched by most analysts, the 2033 8.375% -- was trading around $0.32 on the dollar. In the aggregate, the face-value bond liability is roughly $32 billion.... so $0.32 implies an aggregate current value of around $10 billion.

    What the future holds? Analysts who've done deep dives into this stuff figure that the bondholders as a group will get around 20% of GM's equity when everything's settled. If that 20% is currently worth about $10 billion, that implies a market cap for GM of around $50 billion. Watch GM's actual market cap after the IPO and you'll have a read on what the future's likely to hold for those bonds.

    Thanks for reading.

    John Rosevear

  • Report this Comment On September 20, 2010, at 4:12 PM, Turfscape wrote:

    +1 rec for working the word "kerfuffle" into this article. You are a beacon of hope in a linguistically-challenged world!

  • Report this Comment On January 06, 2011, at 1:10 AM, stx53550 wrote:

    Off yourself you dolt

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