GM's Profits Don't Mean Taxpayers Will Be Off the Hook

February 28, 2012

Three years after being rescued by a taxpayer bailout, General Motors (GM) recently announced some rather ambitious profit targets for 2012.  But even if it meets these targets -- a big if -- taxpayers should not wait on one foot to recover their remaining "investment" in the company, says Shikha Dalmia, a senior analyst at Reason Foundation.

How did investors react to all this hope and cheer?  With a giant yawn: GM's stock price, which has been hovering around $25 for months, barely budged -- that's $8 below GM's IPO price.

If investors aren't buying GM's rosy scenarios, it's for some good reasons, says Dalmia.

  • Peter De Lorenzo, editor of Auto Extremist, notes that GM is facing the most competitive market in history and investors are dubious that it can deliver.
  • GM's $8 billion in profits last year resulted partly from the tsunami in Japan that disrupted Toyota and Honda's global supply chain.
  • Both are back this year and more formidable than ever.

Tougher competition in North America is not GM's only worry.  Its sales in China are slowing.  Also, Europe will probably remain a trouble spot.  

  • GM suffered $2 billion in losses in Europe last year, thanks to Opel.
  • But GM has been unable to obtain permission from the German government to restructure its labor costs, even as European sales plummet in an economic meltdown.
  • What's more, GM's global pension obligations are underfunded to the tune of $22 billion -- about $10 billion in the United States alone.

If GM manages to address all these issues, notes Sean McAlinden of the Center for Automotive Research, its share price might go up $40 to $45, leaving taxpayers still $5 billion to $8 billion in the red.  But that's under the best scenario.  If stock prices remain at the current $25 level, the losses could mount up to $15 billion. That's not counting the $15 billion in tax write-offs that GM got as part of the bankruptcy deal.  All in all, taxpayers are facing somewhere from $20 billion to $30 billion in losses.

Source: Shikha Dalmia, "GM's Profits Don't Mean Taxpayers Will Be Off the Hook," Bloomberg, February 22, 2012.

For text:

http://www.bloomberg.com/news/print/2012-02-13/gm-profits-but-taxpayers-are-still-on-the-hook-shikha-dalmia.html

 

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