Introduction
The federal government has distributed some $80 billion of taxpayer funds thus far to the U.S. auto industry since December 2008 – about $800 per American taxpaying family. The intended purpose of this funding was "to prevent a significant disruption of the American automotive industry," according to the U.S. Government Accountability Office (GAO).[1] Virtually all of the money has gone to just three firms – General Motors, Chrysler and GMAC – with GM alone receiving more than $50 billion. The bailout is by no means over; GMAC is in line for a further major transfusion.
Most of these federal funds have been channeled by the U. S. Treasury through the Automotive Industry Financing Program, a part of the larger Troubled Asset Relief Program (TARP). The funding has involved both loans and equity investments. As a result, the federal government is now a major stockholder in each of the three firms.[2]
Company | Taxpayer funds (net) in billions to date | Equity owned by U.S. government |
GM | $52.9 | 61% |
Chrysler | $13.5 | 10% |
GMAC | $12.5 | 35% |
Total | $78.9 |
The U.S. Treasury's ownership of auto industry common stock was gained in exchange for part of the cash bailout. Treasury also has a sizeable further stake in the three firms, because some $27 billion of the cash took the form of loans extended and preferred stock acquired.
General Motors has been transformed into a new public corporation owned by just four shareholder groups – the U.S. Treasury (60.8%), the employees' agent (17.5%), the Canadian government (11.7%), and the old GM's bondholders (10%); the restructured Chrysler (not a public company) also has just four owner groups – the U.S. Treasury (9.9%), the employees' agent (67.7%), Fiat (20%), and the Canadian government (2.5%).[3] The first audited financial statements from the two new firms are not expected until March-April 2010; until then only limited financial information about their operations is available.[4]
The direct funding data shown in the table above understate the full burden that the bailout is imposing on taxpayers. Consider just one example. GMAC, which now provides financing services to both GM and Chrysler (supporting transactions with their dealers and customers) enjoys additional taxpayer help. GMAC is subsidized by the Federal Deposit Insurance Corporation (FDIC). The FDIC has agreed to guarantee repayment of some $7.5 billion of GMAC's private indebtedness. Such government guarantees are not available to most private firms. Moreover, GMAC operates a taxpayer-assisted bank – Ally Bank – that competes directly with private banks that have no access to government-provided equity.
To get some sense of the size of this GMAC subsidy, consider that three-year GMAC bonds without FDIC backing currently yield 8.8%; The Wall Street Journal put at 1.75% the yield of comparable GMAC bonds issued in early November with FDIC backing.[5] That seven percent difference saves GMAC about $500 million annually in interest costs.
Such government guarantees do not translate into an immediate call on taxpayer funds, but neither are they costless. Should default occur, the taxpayer would be hit twice – once as GMAC shareholder with declining equity value, and again as guarantor of GMAC debt.
Other forms of taxpayer support also have been directed to the auto industry this year. The Department of Transportation's Car Allowance Rebate System program ("Cash for Clunkers") provided nearly $3 billion in rebates to consumers who purchased more fuel-efficient vehicles. However, this substantial taxpayer cost appears to have provided only modest assistance to auto producers. One estimate puts the share of subsidized sales that reasonably can be regarded as attributable to the rebates at just 18%.[6] In addition, the Department of Energy is making loans for the development of motors and components that use advanced technology.
But let's focus solely on the $79 billion net bailout amount shown in the table above. (GMAC is widely expected to receive at least another $2 billion in the near future, which is not included in this report.) How can so large a number be made more understandable?
Relating this total taxpayer funding to the number of vehicles sold by GM and Chrysler provides one context for appreciating the bailout's magnitude. (Since the role of GMAC is to facilitate sales by GM and Chrysler, GMAC's bailout is here consolidated with the other two.) The data below report sales in 2008 and through October in 2009. [7]
During 2008, a total of 13,493,000 cars and light trucks were sold in the U.S. That included 6,813,000 cars and 6,680,000 light trucks. GM sold 21.93% of these vehicles, and Chrysler sold 10.77%.
During the first ten months of 2009, total U.S. vehicle sales were 8,653,000, down 25.4% from the same period in 2008. GM and Chrysler sales fell more sharply than those of other auto producers, down 33.4% and 38.9%, respectively. GM sold 1,706,000 vehicles and Chrysler sold 781,000 during the 10 months ending October 31, 2009.
Let us suppose total vehicle sales reach 10.5 million for all of 2009, and 12.5 million for 2010.[8] Suppose further that GM regains its 2008 market share of 22% while Chrysler (which has been harder hit) achieves a 10% market share. That would translate into annual GM sales of 2.31 million vehicles in 2009 and 2.75 million in 2010. For Chrysler, it would be 1.05 million in 2009 and 1.25 million in 2010. For the two firms combined, that amounts to 3.36 million vehicles in 2009 and 4 million in 2010.
To better appreciate the scale of the bailout, it is instructive to divide the taxpayer's contribution of $79 billion by the number of vehicles the two firms sell. If the two sell 7.36 million vehicles during 2009 and 2010, the subsidy represents $10,700 per vehicle. That (plus interest forgone) would be the direct taxpayer burden (a) were no further subsidy granted and (b) the firms do not survive beyond 2010.
As to (a), the Treasury has stated that no additional U.S. taxpayer bailout funding is anticipated for GM and Chrysler.[9] Yet GM indicated on November 3 that it needs $4.45 billion more in government financing, which it intends to seek from European governments.[10] And the U.S. appears about ready to grant at least $2 billion (possibly as much as $5.6 billion) more to GMAC.[11] As to (b), the longer the firms survive, the smaller will be the taxpayer burden per vehicle. Should either GM or Chrysler fail before 2011, the taxpayer subsidy would exceed $10,700 per vehicle sold.
The taxpayer cost per vehicle is considerably higher for GM than for Chrysler. Assume that the GMAC bailout benefits Chrysler and GM in proportion to their sales. The 2009-10 sales projected above total 5.06 million for GM and 2.3 million for Chrysler, or 69% and 31%, respectively. The total GMAC bailout now stands at $12.5 billion, which can be apportioned between GM products (69%, or $8.6 billion) and Chrysler's (31%, or $3.9 billion). The result is a GM/GMAC bailout of $61.5 billion ($52.9+$8.6), and $17.4 billion ($13.5+$3.9) to Chrysler/GMAC. On a per vehicle basis, that amounts to $12,200 for GM and $7,600 for Chrysler.
Of course one could adopt a more optimistic set of assumptions, developing a scenario in which this rescue turns out so successfully that most (but certainly not all) of the taxpayers' investment ultimately is returned, perhaps indeed with some profit. In that event, most of the taxpayer burden would disappear. But the plausibility of such rosy assumptions is not easy to defend. For starters, some $6.4 billion of the bailout funds, in the form of loans to the former (now bankrupt) GM and Chrysler, are not legal obligations of the newly-structured GM and Chrysler.[12] More importantly:
- The GAO, which the Congress has directed to monitor closely all TARP funding, concluded in its October 2009 report that "whether the reorganized Chrysler and GM will achieve long-term financial viability remains unclear."[13]
- Chrysler's prospects are in even greater doubt than GM's. Business Week in November 2009 reported that "even for an industry as troubled as this one, the numbers have been shockingly bad," questioning Chrysler's survival chances.[14] And from the December 2009 issue of Consumer Reports: "As for Chrysler, we couldn't recommend any of its products in last year's survey because of mediocre performance, poor reliability, or both."[15]
- The head of the White House Auto Task Force, Steven Rattner, who managed the restructuring of Chrysler and GM, offered in November 2009 a highly guarded assessment of the firms' future prospects, concluding that whether Chrysler can recover depends on its uncertain prospects of meeting a need "to regenerate its product line and manage a significantly leveraged balance sheet," and as to GM, whether it "can implement the massive cultural change that is essential."[16]
- According to the GAO, "Treasury's own analysis suggests that the circumstances necessary for the companies to reach market capitalizations high enough for Treasury to fully recover its equity investment are unlikely."[17] Put more bluntly, the U.S. government does not expect to recover the taxpayers' funds.
In sum, every new vehicle sold by GM and Chrysler now is accompanied by a substantial taxpayer subsidy, with little credible evidence that either firm will survive for long, barring further assistance in the future. If survival is only to the end of 2010, the taxpayer bailout burden could amount to some $10,700 per 2009-10 vehicle sold. Any earlier failures would increase this burden per vehicle sold, as would another grant to GMAC. For each year of survival beyond 2010, the burden per vehicle would decline – so long as no additional government funding is provided.
Most observers expect that the government eventually will reprivatize the auto industry, restoring private ownership of the three firms, assuming they manage to survive. For this to happen in a way that protects at least a portion of the taxpayers' investment will require a thoughtful exit plan, and yet the GAO this month concluded that no such exit plan exists:[18]
- "Treasury officials…have not identified criteria for determining the optimal time and method to sell," and
- "Regardless of the option pursued…Treasury is unlikely to recover the entirety of its investment in Chrysler or GM."
Conclusion
Viewed from today's vantage point, the auto bailout is troublesome in a number of respects. As already noted, the bailout has become a taxpayer quagmire, escape from which will be a major public policy challenge. The recommendations offered by the GAO have much merit, especially those focused on developing an exit plan and on ensuring during the interim that management of the three firms is insulated from political pressures. Sound business practices, not special interest advocacy, should prevail. Both require that a qualified, objective and independent team be given full access to current information about the firms' operating and financial conditions.
Greater transparency should be achieved so that taxpayers will be better able to understand both issues and outcomes. In particular, taxpayers as part-owners of each of the three firms should be given the same information, on the same timely basis, that public corporations routinely would be required to provide shareholders.
More generally, the bailout has been a sobering experience whose adverse consequences cannot be corrected easily. Auto producers whose products American consumers find most appealing have been notably missing from the roster of bailout recipients. Our subsidies instead have gone to the poor performers, firms whose past management decisions proved faulty. As a result the bailout has created moral hazard problems, inadvertently handicapping the progress of stronger, non-subsidized producers. The problems extend beyond just the auto industry, as favored status for one financial company and its bank necessarily complicates prospects for non-subsidized rivals. The time has come to stop such bailouts, and in an orderly way, to seek at least some recovery for taxpayers.
About the Author
Thomas D. Hopkins is Professor of Economics at the Rochester Institute of Technology in Rochester, New York. Hopkins held senior management positions in two White House agencies during the Ford, Carter and Reagan Administrations; in 1979 President Carter appointed him a charter member of the federal government's Senior Executive Service. In the early 1980s, he served as Deputy Administrator, Office of Information & Regulatory Affairs, in the Office of Management & Budget. He co-authored a 2001 SBA report, "The Impact of Regulatory Costs on Small Firms," as well as National Research Council reports on marine transportation, the Exxon Valdez oil spill, and trucking/rail/barge transportation. He previously was on the faculty of American University, University of Maryland, and Bowdoin College.
Notes
[1] U.S. Government Accountability Office, "Troubled Asset Relief Program," October 2009, GAO-10-16 (GAO October 2009), p. 13. The GAO November follow-up report, GAO-10-151 (GAO November 2009), Table 1, pp.6-7, put the net auto bailout to September 20 at $78.9 billion ($81.0 billion advanced less $2.1 billion principal repaid).
[2] Data drawn from GAO and two U.S. Treasury reports: "Troubled Asset Relief Program, Transaction Report for Period ending November 4, 2009 – Automotive Industry Financing Program as of 10/30/09," and "Troubled Asset Relief Program – Monthly 105(a) Report – September 2009," October 9, 2009, p. 23.
[3] Treasury October 9, 2009 report, p. 23. The employees' agent is a VEBA (voluntary employee benefit association), a retiree health care trust fund, as distinct from direct employee ownership. The United Auto Workers Union has a role in but does not fully control either VEBA.
[4] GAO November 2009, p. 13.
[5] Romy Varghese, "GMAC Offers $2.9 Billion in Debt," The Wall Street Journal, October 29, 2009.
[6] Edmunds.com, "Cash for Clunkers Results Finally In: Taxpayers Paid $24,000 per Vehicle Sold," October 28, 2009.
[7] The sources of the reported vehicle sales data are The Wall Street Journal (Autodata Corp) and wardsauto.com.
[8] 10.5 million is the auto industry expectation for 2009 as reported by Matthew Dolan and Jeff Bennett, "Ford Stirs Hope of Car U-Turn," The Wall Street Journal, November 3, 2009. For 2010, Morgan Stanley's Adam Jonas forecasts 14.5 million (The Economist November 7, 2009, p. 59), a considerably more optimistic forecast than that of 11.5 million offered last month by GM's chief executive Fritz Henderson (Peter Whoriskey, "GM Expects Car Sales to Stay Slow," Washington Post, October 8, 2009).
[9] GAO November 2009, p. 8.
[10] John D. Stoll and Vanessa Fuhrmans, "GM Advances Opel Restructuring," The Wall Street Journal, November 7, 2009, p. B5.
[11] Dakin Campbell, "GMAC Reports Third-Quarter Loss Tied to Loan Defaults," Bloomberg.com, November 9, 2009.
[12] Treasury loans in the amounts of $5.4 billion to Chrysler and $986 million to GM, made prior to the restructuring, remain obligations of the bankrupt entities. They are not recognized as obligations of the "new" Chrysler and GM and are unlikely ever to be repaid, according to GAO November 2009, pp. 7, 26.
[13] GAO October 2009, p. 23.
[14] David Welch, "Fiat's Cars May Not Save Chrysler," Business Week, November 9, 2009, p. 22.
[15] "Cars," Consumer Reports, December 2009, pp. 61-62.
[16] Steven Rattner, "The Auto Bailout: How We Did It," Fortune, Nov. 9, 2009, p. 71.
[17] GAO November 2009, p. 27.
[18] GAO November 2009, "Highlights."