Taxpayer Losses on GM Bailout Are Going to Be Massive

November 22, 2011

Last week the Treasury Department revised its loss estimate for the General Motors (GM) bailout from $14.33 billion to $23.6 billion, thanks to the company's sinking stock price.  GM's September 30 closing price, on which the new estimate is based, was $20.18, about $13 less than its December IPO price and $35 less than what is needed for taxpayers to break even, says Shikha Dalmia, a senior analyst at the Reason Foundation.

  • The $23.6 billion represents a 25 percent loss on the federal government's $60 billion direct "investment" in GM.
  • But that's not all that taxpayers are on the hook for.
  • As explained previously, Uncle Sam's special GM bankruptcy package allowed the company to write off $45 billion in previous losses going forward.

This could work out to as much as $15 billion in tax savings that GM wouldn't have had had it gone through a normal bankruptcy.  Why?  Because after bankruptcy, the tax liabilities of companies increase since they have no more losses to write off.  This means that the total hit to taxpayers, who still own about a quarter of the company, could add up to $38.6 billion.

Although GM will never make taxpayers whole, taxpayer losses could be mitigated if GM's stock price rises before the Treasury sells its remaining equity, something it was supposed to do by year-end but has postponed under the circumstances.

GM actually has been doing quite well in North America and China with profit margins of 10 percent, among the best in the industry.  The company's big weak spot right now is Europe for two reasons: One, thanks to political pressure and labor resistance, it hasn't been able to address its bloated cost structure there.  Two, Europe's economy is imploding, weakening car sales.

All of this shows why forcing taxpayers to wager their hard-earned dollars on a risky venture was exactly the wrong thing to do.

Source: Shikha Dalmia, "Treasury Admits What Everybody Already Knew: Taxpayer Losses on GM Bailout Are Going to Be Massive," Reason Magazine Blog, November 17, 2011.

For text:

http://reason.com/blog/2011/11/17/treasury-admits-what-everybody-already-k

 

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