Last November, General Motors’ IPO set a record for money raised at 20.1 billion dollars. This is all money returned to the taxpayers’ Troubled Asset Relief Program (TARP). The success of the IPO was not only driven by new investors, but also by stockholders and lenders who had been “stiffed” in GM’s Chapter 11 bankruptcy of 2009. The company recently reported its highest quarterly profit in more than a decade, helped by demand for fuel-efficient cars and a big gain from selling its stake in its former auto parts business. The biggest U.S. automaker said Thursday that it earned $3.2 billion, or $1.77 per share, in the first quarter. It was a great start for the year considering the spike in U.S. gasoline prices, a trend that would have sunk the company just a few years ago when it relied on gas-guzzling pickups and SUVs for profits. Earnings will accelerate if U.S. auto sales continue to creep back up toward the 15-million to 17-million vehicle-per-year sales rates the U.S. industry last saw in 2007.
"GM is making a lot of money at ‘depression levels’ of sales. As the market improves it should make even more money." said Dave Cole, chairman emeritus of the Center for Automotive Research.
The U.S. Treasury will remain GM's largest shareholder for now. It will likely take several years to unload the entire stake to keep from diluting its stock price. Taxpayers still own about 33% of GM shares. The stock price will need to rise to about $48.00 for the U.S. government to break even on its follow-on stock sales. At $48 per share, GM would have a market value of more than $90 billion.
Chrysler Corporation paid back more than 7.5 billion in loans to the American and Canadian governments in May. Chrysler had until 2017 to repay the loans, so this was six years ahead of schedule. The company has now paid back most of the loan money that saved it from going under. The government loans were high interest loans, about which Fiat/Chrysler Sergio Marchionne recently opined. Instead of merely complaining about “loan shark rates,” the company did something about it. The high interest on the U.S. Government loans certainly induced Chrysler’s partner FIAT to borrow the money to pay off the bulk of Chrysler’s outstanding government loans. Chrysler raised just over 3 billion through a bond sale and took out 3 billion in lower interest loans to come up with the money to pay back the government loans. This will save more than $300 million a year, according to the company.
The automaker still owes taxpayers about $2 billion. Treasury could get most of that back by selling its remaining 8.6 percent stake in the company, which it was given in exchange for the loans. Chrysler’s IPO has yet to be scheduled but FIAT just announced it is increasing its stake in Chrysler to 51% from the current 46% in advance of the upcoming IPO. As Marchionne recently observed, “The longer we wait, the more it costs,” referring to FIAT’s intention to buy shares from the U.S. Treasury.”
Chrysler’s recent earnings have also been strong, despite a market impacted by high fuel prices and a weak, but recovering, economy. Both companies stand to do extremely well as the economy improves and the SAAR rises to recent historical levels.
Both companies have announced initiatives to increase production and rehire thousands of workers. Chrysler alone has added more than 8,000 jobs since its bankruptcy.
In the meantime, Ford continues to do well in the still recovering economy despite having to bear the weight of interest on debt it accumulated to ride out the economic storm without having to seek taxpayer involvement. Ford has benefited from union concessions it received to maintain parity with its competitors.
The auto industry bailout, financed through the Bush Administration’s TARP program, spared the GM, Chrysler, AND Ford from liquidation and saved hundreds of thousands of manufacturing jobs at those companies and its suppliers.
To add perspective, had either company been forced into liquidation, the cost dropped on the taxpayers in the form of the Federal Pension Benefit Guarantee Fund would have been at least $38 billion. This in addition to the damage that would have been done to the North American industrial base, including military procurement at a time of two wars.
While Americans have been known to pile on “losers,” failures, and those who make mistakes, they love “redemption.” While there are those who refuse to buy a GM or Chrysler vehicle OR buy their stock because they were bailed out by the government, the companies’ strong sales and profit results indicate that, on balance, they are achieving a large measure redemption. The popularity of Chrysler’s “Made in Detroit” advertising campaign is further evidence.
In the meantime, the 2012 election campaign is getting underway and yes, it looks like the bailout of the auto industry could end up being one of many points of debate. One can expect Democrats to replay videos of Republicans who opposed the bailouts ad nausea. Already an ad paid for by the Democratic National Committee recaps positions taken by Mitt Romney, Newt Gingrich, and Tim Pawlenty.
Romney takes a significant hit in the ad. The former Massachusetts governor, whose father was governor of Michigan as well as the top executive at American Motors is being reminded of the hard-lined position he took in a 2008 New York Times Op Ed, “Let Detroit Go Bankrupt.” Yet Romney and others continue to use opposition to the bailouts as a campaign point, advocating a free-market system free of bailouts and subsidies. They maintain that even now it still looks like the bailout came at quite a cost to taxpayers, despite substantial evidence to the contrary. They maintain that allowing the automakers to go into liquidation wouldn’t have been such a terrible thing, which is easy to say since it didn’t happen.
Democratic candidates will point to the relative success of TARP and the auto company bailouts and paint a picture of what would have happened had TARP not been enacted and either company had liquidated.
As politics heats up leading up to the 2012 national elections, expect debate over the auto bailouts to play a major role in determining political winners and losers.
David Ruggles has spent his working life in every phase of the retail side of the auto business, new and used, sales and management, including consulting and training in both the U.S. & Japan. Ruggles has been a dealer for Mercedes-Benz, Chrysler, Dodge, GMC, Ford, Mazda, and Subaru, and has consulted for one of the world’s largest privately owned Toyota dealer groups located in Japan. He blogs at autosandeconomics.blogspot.com and writes regular columns for several publications.
