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FAQ: Was the General Motors bailout really worth it?

Signs stand in front of the General Motors world headquarters in Detroit, Michigan. The U.S. Treasury will sell its remaining stake in the company over the next year or so.
Signs stand in front of the General Motors world headquarters in Detroit, Michigan. The U.S. Treasury will sell its remaining stake in the company over the next year or so.
Bill Pugliano/Getty Images

The day has finally arrived. The U.S. Treasury will sell off its stake in General Motors, the automaker that, along with Chrysler, was bailed out in 2009 before it declared bankruptcy and  returned to the public markets via a massive $20 billion IPO in 2010.

The government put $50 million into GM and has gotten back about $30 billion. That figure includes a pre-loaded GM buyback of 200 million of its own shares from the Treasury at $27.50 a pop, a modest premium on Tuesday's closing price that amounts to $5.5 billion.

The remaining $2o billion (more or less) and the government's 300 remaining shares will be dealt with in slow motion fashion over the next 15 months, to avert a big dump of shares on the market. To make back the $20 billion, GM's stock price would have to rise to $72, a highly unlikely event. So the Treasury is admitting that it will "lose" money on the deal.

GM, for its part, has agitated for a share buyback for some time. It wants to shed the "Government Motors" tag and go after higher-priced executives (the Treasury's capped compensation as a condition of the bailout). GM execs also want their private jets back.

The decision to allow GM to do the buyback and the Treasury's engagement in an orderly equity liqudation isn't a surprise. The Treasury wasn't going to hold on to its stake forever, and now that the election's over, nobody can use the taxpayer loss on the bailout as a campaign issue.

Now the debate can move on to a critical question: 

Q: Was the bailout worth it?

A: It was, for various reasons, but one critical reasons that rarely gets highlighted (Except by certain auto journalists...). Here's Matt Yglesias at Slate, in the context of arguing that the GM bailout was worthwhile for policy purposes, totally unrelated to making money:

The total collapse of the Michigan-centered auto industry would, for better or for worse, have opened up new market opportunities for other automaker with production facilities located elsewhere.

Maybe. But it would have taken a long time, and remember that in 2010 the U.S. auto market cratered. Then, in 2011, the Japanese earthquake and tsunami decimated Toyota's and Honda's saw their supply chains. If GM hadn't been bailed out, it wouldn't have been able to enter a restructuring bankruptcy, despite allegations to the contrary by Mitt Romney, because the credit markets were locked up and there wasn't enough private financing available for a massive corporate Chapter 11.

Liquidation would have followed. Chrysler was also headed for bankruptcy and in position to fill the massive hole in production that GM's demise would have left. Ford avoided the bailout but saw its business nearly collapse in 2009 (its stock price fell below $2 a share a one point). At the time, GM held about a fifth of the U.S. market. The Japanese and the Germans couldn't have filled that void. Neither would they have wanted to in the upper Midwest — they build their plants in southern right to work states, where the United Auto Workers holds no sway.

The upshot of all this is that when the auto industry did begin to bounce back strongly last year — a highlight in an otherwise weak recovery — there would have been a car shortage. A shortage! At a time when the average age of a vehicle on the U.S. road was 11 years, an all-time record, and when pent-up demand was pushing annual new vehicle sales toward what will likely be more than 15 million this year.

Q: What about Midwestern auto workers?

A: The Center for Automotive Research [via CNN] estimated earlier this year than no bailout would have ultimately cost the government upwards of $100 billion or more in social welfare payouts to GM's army of unemployed workers and in lost tax revenues. So, no bailout would have meant double the cost. Spend $50 billion to avoid spending $100 billion. If you think that through, you can turn the Treasury's "loss" into a double-its-money gain.

Q: Did the United Auto Workers pull off an incredible deal with the bailout?

A: You hear this all time from bailout critics: That the UAW and its benefits fund were moved to the front of the bankruptcy line, a political move designed by the Obama Administration to secure labor support. GM's debtholders got elbowed aside and the UAW wound up owning the company. Mitt Romney called this "crony capitalism," but PolitFact dismantled that argument. What really happened was that the UAW's benefits trust received GM equity in exchange for abandoning claims against the company, said Steve Rattner, the former investment banker and New York Times journalist who served as the "Car Czar." There was pain to be shared all around in the bailout and bankruptcy. And it didn't spare the UAW.

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