Is GM Overhyping its “Loan Repayment?”

By Chris Haak

Since Wednesday, GM has been making a big deal about its repayment of the remaining $5.8 billion balance of government loans ($4.7 billion to the US and $1.1 billion to Canada).  GM Chairman and CEO Ed Whitacre had this to say.  “GM is able to repay the taxpayers in full, with interest, ahead of schedule, because more customers are buying vehicles like the Chevrolet Malibu and Buick LaCrosse we build here in Fairfax.  We are now building some of the best cars, trucks, and crossovers we have ever built, and customers are taking note.  Our dealers are increasing their sales, we are investing in our plants, and we are restoring and creating jobs.”

That’s all well and good, but the reality of the situation – reinforced by an audit report provided to Congress this week by the TARP inspector general, Neil Barofsky – is the GM repaid the money with “other TARP funds currently held in an escrow account.”

At the time that GM was exiting bankruptcy (and began its reincarnation as the “New GM”), the governments of the US and Canada provided some $50 billion in assistance to the automaker.  Most of that aid came in the form of an equity stake in GM; as has been well-documented, the US Treasury owns 61 percent of General Motors Company.  Some of the assistance came in the form of loans – those were just repaid.  There was also an escrow account set up, from which GM could draw funds if necessary under extraordinary purposes.  Basically, the escrow account was part of the cash cushion that GM was given to fund its operations and any continuing losses while it restructured, and part of the deal with the government’s 61 percent stake.

So when Senator Charles Grassley (R-Iowa), the senior Republican on the Senate Finance Committee, pointed out yesterday that GM was really just shuffling some TARP money to another account, he was actually mostly accurate.  The company literally did repay government aid with other government aid.  But since the government owns most of GM, until the company has an IPO (which it’s apparently in the process of working on) and sells shares to the public, anything that it does will be with government money.

The repayment is just a step in the company’s journey back to self-sufficiency.  Repaying loans when the government owns most of you is not, in this writer’s opinion, a reason to act as if your company is free from the “Government Motors” name once and for all.  That is particularly true if the money used to repay the loans was funds set aside by the government.

Senator Grassley is correct in his assertion – contrary to the one that Ed Whitacre made – that the repayment comes from a government-established escrow account and not from earnings (the company says it is still losing money, though at a much slower pace than before bankruptcy).  But to GM’s credit, if the company feels confident that its improving prospects make the draw-down of the escrow account possible, that is an achievement in and of itself.  (Assuming that GM’s financial projections are realistic, of course).

It’s easy to see why GM wants to get out from under government ownership as quickly as possible; there are compensation issues, public perception issues, and more that come along with that $50 billion.  But it’s premature to trumpet the loan payback as a bigger deal than it really is (including an advertising campaign that notes how the company paid back the loans early – “with interest!”), before the IPO and we really know the full extent of how much money the US Treasury will lose on its GM investment.

GM needs to get to work on designing, engineering, building, and selling cars.  Sales results, and therefore financial results, will determine when GM is healthy enough for an IPO and what kind of price Wall Street is willing to pay for the company.