Bottom line on the bailouts

December 21, 2012 

The editorial excerpted here appeared in Friday’s Washington Post:

The 2009 federal bailout of General Motors and Chrysler was a major theme of the 2012 presidential campaign. According to President Obama, the $61.5 billion commitment was pure upside: an industry rejuvenated, a million jobs saved nationwide. Certainly it helped the president make his case that the precise total cost of the rescue, which includes the cost of not using the money for some other purpose, could never be known. And the knowable cost had not yet materialized. Specifically, the government still owned 500 million shares of GM, or about 26 percent of the total; until it sold, any loss to taxpayers would remain hypothetical.

Well, now the election is over and the Treasury Department has decided to start selling out. GM will buy back 200 million shares at $27.50 each (slightly above market price), using $5.5 billion of the $31.6 billion cash pile it has accumulated since the bailout. Treasury will dispose of the remainder over the next 12 to 15 months.

Bottom line? Surely GM, which has made tremendous strides toward profitability, will benefit further from losing the stigma of “Government Motors” as well as restrictions on compensation it can offer executive talent. But there’s no realistic near-term scenario under which GM’s stock reaches $53, Washington’s break-even price.

Factoring in previous realized losses, and assuming that the government sells its remaining 300 million shares at or near $27.50, it would end up losing roughly $19 billion of the $49.5 billion it poured into GM. Coupled with the $1.3 billion it lost on its $12.5 billion Chrysler commitment, the total taxpayer loss on the auto companies comes to $20.3 billion. That’s $20,300 each for the million jobs saved. Too much? Let history judge.

The auto bailout’s results look different, though, when viewed in conjunction with another controversial federal rescue: that of the global insurance firm AIG.

According to many a pundit, the American people would never get back the $182 billion that the Treasury and the Federal Reserve, fearing a global financial meltdown, committed to propping up AIG. No doubt the critics were justifiably exasperated that AIG’s reckless derivatives trading had necessitated a taxpayer-backed rescue. But it did not, in fact, follow that taxpayers would inevitably get soaked. On Dec. 10, Treasury announced the sale of its last shares in AIG – and a positive return as a whole of $22.7 billion.

Yes, the auto bailout was an issue in the campaign. But, contrary to much punditry, the federal financial bailout fund that paid for it was not. The quiet success of the AIG rescue is one reason for that. In fact, the AIG profit might just offset the GM-Chrysler losses.

The Washington Post

News & Observer is pleased to provide this opportunity to share information, experiences and observations about what's in the news. Some of the comments may be reprinted elsewhere in the site or in the newspaper. We encourage lively, open debate on the issues of the day, and ask that you refrain from profanity, hate speech, personal comments and remarks that are off point. Thank you for taking the time to offer your thoughts.

Commenting FAQs | Terms of Service