TARP Payback Signals GM is Back -- Except Not Really

Ed Whitacre, the government-appointed chief executive of General Motors, boasts in a new TV commercial that the automaker has paid back government loans -- five years ahead of schedule. A ranking Republican senator, however, has questioned the financial transparency behind the accelerated prepayment.

"A lot of Americans didn't agree with giving GM a second chance," Whitacre says in the advertisement. "Quite frankly, I can respect that. We want to make this a company all Americans can be proud of again. That's why I'm here to announce we have repaid our government loans in full, with interest, five years ahead of the original schedule."

In a letter to Secretary of the Treasury, Tim Geithner, Sen. Charles Grassley (R-Iowa) argued that the source of funds for the $6.7 billion federal payback wasn't from GM earnings -- as previously claimed by company and Obama administration officials -- but rather a transfer of funds from another Treasury loan held in a restricted escrow account. In addition to creating goodwill with an American plurality opposed to the bailout, Grassley suggested that the automaker was motivated to rush repayment of its Troubled Asset Relief Program (TARP) borrowings by a proposed excise tax.

Notwithstanding typical opposition party politics, a review of other obligations competing for the "new" GM's available liquidity suggest Grassley's criticisms are valid:

The successor company continues to struggle with market share erosion and high fixed costs, especially in North American, where it posted a fourth-quarter pre-tax loss of $3.4 billion. For the three months-ended December 2009, total share of the U.S. market (cars and trucks) fell 130 basis points to 20.2 percent; global capacity utilization declined 11.6 percent to 61.5 percent.
GM has a significant amount of indebtedness, approximately $102.2 billion at December 31, with more than 60 percent of this debt scheduled to mature through 2012. Interest expense on this debt is draining cash, too, as fixed charges and required preferred dividend payments totaled $7.6 billion and $1.2 billion.
Legacy labor costs are straining liquidity. GM will need to add (at least) $12.3 billion into its pension fund by 2014, according to report by the Government Accountability Office (GAO).

GM denies deliberate intent to mislead the American public, countering that repayment terms had been fully disclosed. To the contrary, having forfeited the confidence of the American public when it relied on taxpayer funding for its long-term survival, the company is desperate to improve its image -- and sell more cars.

The federal Pension Benefit Guaranty Corporation is on the hook for approximately $42 billion in total unfunded auto industry pension liabilities, according to the GAO. Money shuffle or not at GM -- as the biggest stakeholder in the successor GM (owning about 61 percent), the Obama administration and the Democratic party desperately need a few economic wins before the November mid-term elections in November. Unfortunately, half-truths usually amount to even less than that.

David Phillips

David Phillips has more than 25 years' experience on Wall Street, first as a financial consultant and then as an equity analyst for several investment banking firms. He sifts through SEC filings for his blog The 10Q Detective, looking for financial statement soft spots, such as depreciation policies, warranty reserves and restructuring charges. He has been widely quoted in outlets such as BusinessWeek, The International Herald Tribune, Investor's Business Daily, Kiplinger's Personal Finance, and The Wall Street Journal.

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