GM is back in bankruptcy court today, trying to piece together what the company will look like going forward. An article from the Washington Post today indicates that many find prospect of GM becoming profitable enough to pay back its $50 billion bailout unlikely. From the Post:
It's sure to be a stretch. For the United States to fully recover its investment, the value of General Motors stock will have to reach levels it has never before attained.
The stake will be worth enough to fully cover the government's direct investment only if GM's stock rises above $68 billion. Even at its recent 2000 peak, GM's stock was worth only $56 billion.
"It's very unlikely" that the government will recover its money, said David Whiston, auto equities analyst at Morningstar. "GM will be a smaller company after the bankruptcy and there are going to be more foreign automakers entering the market that will make GM's efforts more difficult."
There are few scenarios that would lead to the U.S. getting its money back. The article explains that they hinge on passing the U.S.'s potential losses onto GM's creditors:
Bloom and GM chief executive Henderson have suggested that by shedding so much of its debt through bankruptcy, the company's value would be less encumbered and its stock prices freer to rise.
We'll see. The earlier arguments seem stronger to me. Even without as heavy a debt burden, Whiston's arguments still apply.
Maybe nobody is surprised that Uncle Sam might be on the hook for a significant portion of GM's bailout. Yet, most of the bailouts advertised by the Bush and Obama administrations indicated that the taxpayers would come out virtually unscathed. In the case of banks, I think that's true. Banks have already begun paying back their bailout money. Even those who are having more trouble than others generally seem likely to survive. So why can't GM do the same?
GM's problems were not due to a sudden cataclysmic event. It's had problems for decades. Legacy benefits piling on over a period of time, high costs compared to its competitors and inferior products led to its demise. Bankruptcy finally came now because its credit finally dried up, so it had no financing to continue to tread water.
Banks, on the other hand, made very stupid bets on very ugly investments. Other than that gigantic error, they have been generally profitable over the past several decades. It's far more plausible that their future profits can overcome those losses. That means the government's investment in most of those banks should be much safer. Of course, for banks, the government bailout also amounted to a much smaller share of government ownership.
Some people may have assumed that bailout money was meant to be a government handout. I think many believed, however, that these funds were temporary loans to be paid back when firms get back on their feet. That doesn't seem to be the case for GM.
This also raises the question -- how will the government ever get out of the auto market? Will it sell its ownership share for a loss, or will it just hold on indefinitely? Questions like these show why it's so messy when the government gets involved in bailouts of this variety.
Don't forget that the most recent proposal call for the UAW VEBA to hold 6.5 billion in preferred stock at 9%. GM will have to come up with 585 million each year to pay that. Then VEBA gets a 2.5 Bil note to be paid off by GM through 2017. So every year GM is going to have to come up with the money to pay off the UAW. That hurts their profitability bigtime.
Meanwhile, creditors are supposed to take it up the ass, surrendering 27 Bil in debt for a grand total of 10% ownership of common stock (while the UAW gets 17.5%). If it goes through, they won't forget that, according to GM and the US Gov't, the union is numero uno and everyone else is of no consequence. GM will pay dearly for any private sector loans in the future, if they can get them at all. That doesn't say much for GM's long term prospects.
If the overall auto market improves, parts suppliers - who are among the creditors getting hosed to keep the UAW happy - might find that selling to GM is not as rewarding as selling to Toyota or Honda or, hopefully, Ford. They might think that they should charge GM a lot more for product (considering the risk) than other auto makers. If the auto market gets real good, parts makers could demand payment up front from GM if they feared getting hosed again.
Given the above, and the fact that GM is weak in the CAR market, the chances of the stock climbing are not good.
GM had been lucky to survive as long as they did. Even without the economic meltdown they would have been in serious trouble. The 1970's apparently proved nothing to them. Their products were bad and their strategic decisions worse.
Remember the VOLT? Imagine if GM had made the opposite decision and had not only continued development of the VOLT but actually invested in R&D of electric cars. They would have been the market leader with a timely and viable product today. Instead it is Toyota, to a lesser degree.
The real question is can GM re-invent itself? Can they finally learn, react quickly and use their prominence and the goodwill of the American public to become a market leader again? Given their current situation it is a very long shot at best.
The country will survive without GM and some other company will rise to be the flagship of U.S. business for the 21st century. Let's hope that that company sees valuable lessons in GM's performance - in what to do and what not to do.
If you can't bailout GM, there is no point in bailing out the banks. The only possible point of having banks at all is to make productive loans to companies like GM. Alas, there are not enough viable entities to absorb all the dollars the banks can create (and yes, the banks, not the gov't, creates money). Hence, the new money has gone mainly to speculative instruments, "equities" that were pure bets. But the Damon Runyon rule still holds: All gamblers die broke.
Hence, the bailouts must fail, even if they appear to succeed. They best they can do is restore that gambling casino that was the pre-crash economy. But they cannot restore a vibrant economy capable of making its own stuff and growing its own food, and do so without the enormous and unsustainable inputs of capital and energy that went into what little we did make. The whole structure will have to be rebuilt from the ground up. From local entities and communities able to provide for their own subsistence, with a little left over to trade with other local communities.
The author is right. GM can't be bailed. It, and everything else, can only be rebuilt from the ground up.