More on GM

In my previous post I pointed out that GM’s claim that they paid back their loan to the government is true, but perhaps a bit misrepresented. This prompted the following response (via email) from GM spokesperson Tom Wilkinson:

Hey Josh,

Regarding the GM loan payback, what is happening here is what happens in bankruptcy. The major creditors (UST, EDC, UAW, VEBA, old GM) exchanged debt in the old company for a combination of debt and equity in the new. (All of this is detailed in Note 2 of our 2009 10-K, available on the SEC EDGAR or GM Investor site.) These new owners also provide liquidity so the new company can operate long enough to get on its feet and generate positive cash flow, and eventually, profits. Since we getting back on our feet faster than expected, we can pay off the loan portion of this funding ahead of time, with interest. This is a good thing for us and for our stockholders.

I understand why some pundits and politicians might want to make an issue of this. But if you are training as an economist and plan to cover business, you might want to go back and review the basics of bankruptcy.


Now, I will be the first to admit that I am not an expert on bankruptcy. I am not a lawyer or a business leader, I am a macroeconomist. HOWEVER, I do actually read things before hastily writing a post. Thus, allow me to explain the inner workings of what is actually happening with GM and thus defend myself from accusations that I am uninformed.

According to a report by the Office of the Special Inspector General For the Troubled Asset Relief Program (TARP), GM was given $49.5 billion dollars in accordance with the TARP program. Roughly $19 billion of this disbursement was given prior to bankruptcy and the remaining funds were dispersed during bankruptcy. What’s more (p. 5), “As of November 18, 2009, GM had used about $35.8 billion (72 percent) of the TARP funds…” The document then details how this money was spent. I won’t bore you on the details, but most of the money was spent to cover operating costs.

Regarding the $30.1 billion dispersed during the bankruptcy, a portion of the proceeds of this loan were placed in an escrow account. The escrow account was designed to ensure that the Treasury department could oversee the use of funds. The amount of funds in the escrow account totaled roughly $16.5 billion. GM used a portion of these funds, $2.8 billion, to resolve Delphi’s bankruptcy. This left a remaining balance in escrow of $13.7 billion. Further, as the report indicates (p. 6), “GM officials stated that they intend to seek release of additional escrow funds to repay its outstanding $6.7 billion loan to Treasury and $1.3 billion to the Canadian government.”

So what does all of this mean? Here is a simple breakdown of the disbursement:

  • GM received $49.5 billion — $14.5 billion pre-bankruptcy and $30.1 during bankruptcy.
  • Of the $30.1 billion, the $16.4 billion was placed in an escrow account.
  • $2.8 billion in the escrow account was used to resolve Delphi’s bankruptcy thus reducing the escrow account to $13.7 billion.

In exchange for the disbursement of $49.5 billion, the government received:

  • 60% stake in the new GM.
  • $7.1 billion in interest bearing debt ($0.4 billion was paid back in July 2009).
  • $2.1 billion of preferred stock.

Thus, the through TARP, the government gave GM $49.5 billion in exchange for a mixture of debt and equity. The government can therefore recoup its investment by selling shares of GM stock after the release of the IPO and through the repayment of the interest bearing bonds.

What GM has done is use the TARP money that was placed in escrow by the Treasury Department to repay the remaining interest bearing debt of $6.7 billion. Given that this money was not paid for with profits earned by the company it is effectively a debt-for-equity swap not a loan repayment. In other words, the Treasury approved the repayment of the loan with the escrow funds and the government therefore hopes to recover the remainder of their investment by selling common stock after GM’s initial public offering that is intended to take place this year. As I stated in my previous post, I am skeptical that the government will be able to fully recoup its initial investment through this process.

Thus, to re-iterate, GM did pay back its loan — sort of.

One response to “More on GM

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