Taxpayers Will Come Up Short on GM's Bailout

Strong new products like the 2014 Chevrolet Silverado have helped the overhauled GM earn steady profits. Photo credit: General Motors Co.

Remember the auto bailouts? The huge loan that General Motors (NYSE: GM  ) got from the federal government? Not too many people have forgotten. But you might not know that GM has already paid the loan back, with a mix of cash and stock. The Detroit giant has completely satisfied the terms of its agreement with the U.S. Treasury. 

But taxpayers still don't have all their money back -- and they might not ever get it. 

The loans were repaid, but the numbers don't add up
The loans to GM from the U.S. government added up to $49.5 billion. That money was used to keep GM operating through a high-speed bankruptcy proceeding, and to help it get back on its feet after it emerged from that bankruptcy.

Under the terms of those loans, the government would be paid back with a mix of cash and GM stock. The stock -- 912 million shares -- was handed over up front: When GM emerged from bankruptcy, the U.S. Treasury Department was by far its largest shareholder, with 60.8% of GM's total shares outstanding.

GM was also obliged to pay back part of the loan in cash. As I'll explain in a moment, those payments have been made in full. Officially speaking, the payment of those loans is a done deal. The cash and stock have both been handed over to the government, and GM is off the hook.

But there's a problem: GM's stock price isn't high enough to cover the balance due on the loan. The government has been selling it off slowly, but it's looking likely that when all is said and done, taxpayers will come up short.

$36 billion recovered so far, with more stock left to sell
How much short? To figure that out, let's look at what has been repaid so far. The loans totaled $49.5 billion, as we said. Of that amount, the U.S. Treasury has recovered about $36 billion. Some of that was recovered via payments of dividends and interest, but the big items break down like this:

  • $6.7 billion, paid in several installments, the last in April of 2010. That was when GM ran those TV ads saying that it had paid the loans back "in full", which led to a big public outcry. 
  • The Treasury received $13 billion more when GM went public late in 2010. GM's IPO didn't actually raise any money for the company -- it was all about helping the government sell off its holdings.
  • $7.6 billion more was repaid when GM bought its own stock back directly from the Treasury -- a batch of preferred stock late in 2010, and a big chunk of common stock last December.
  • And Treasury has recovered about $8.6 billion since the beginning of 2013, when it started selling off its remaining GM common stock holdings on the open market.

That leaves about $13.5 billion unpaid. But at current prices, the remaining GM stock held by the Treasury won't come close to covering that -- it's worth about $3.5 billion.

Is that a problem? That depends on your perspective.

What will happen when the Treasury comes up short?
Right now, the U.S. Treasury holds about 7% of GM's common stock. But it's being sold off at a brisk pace. The Treasury sold $570.1 million worth of GM stock last month, it said Thursday. It's likely that it will sell the last of its GM stock sometime in the next few months, probably early next year. 

It's also likely that Treasury will come up about $10 billion short on its $49.5 billion loan to GM. But: GM will have satisfied the terms of the original deal. (In fact, they did it ahead of schedule.) 

What happens then? I think that depends on how much political hay gets made out of the shortfall, and that in turn will probably depend on what else has Congress's attention at the moment that Treasury makes its final report.

It could be a big political firestorm, and a big PR hassle for GM. GM might even feel obliged -- or pressured -- to make up some or all of the difference.

Or it could end up being no big deal, if the country is otherwise preoccupied. Old news.

Any prediction I might make about how this will go would simply be a wild guess.

But I would bet on two things. First, the Obama Administration's political opponents will try to make hay out of the shortfall. And second, GM's current management has a plan for handling whatever happens.

How do you think this will play out?

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