Wednesday, November 17, 2010

GM bailout looking okay


My back-of-the envelop calculation indicates that the taxpayers won't be made whole with the GM "bailout".

After the stock offering, I guesstimate about $35 billion left for treasury to collect from its common stock investment, but I could be wrong, because I don't have the prospectus. It's unlikely that amount of principal will be recouped in full, except over the extremely long term.

Taxpayers will be collecting between $200 and $300 million, potentially, in dividends, each year. That's a rate better than holding Treasury's own securities, no doubt.

In a favorable environment with an astute Treasury, the Government might limit its loss to $20 billion. In a cost-benefit, that has to be weighed against the lost tax revenue and benefits paid, including pension guarantees, due to massive unemployment that would have resulted had the company, its suppliers, and all its dealerships failed. From that perspective, it looks like a very wise move, wise "stimulus" spending.

From Barofsky, the special inspector general who is watching the numbers for us:

Regarding your question [Grassley] of how much Treasury needs to receive from the sale of GM stock in order to avoid a taxpayer loss on its investment, from December 31, 2008 through June 3, 2009 – bother before and during bankruptcy, Treasury provided $49.5 billion in loans to support the continued viability of GM. Treasury provided GM these loans under Treasury’s Auto Industry Financing Program. During bankruptcy, GM split into two independent companies: Motors Liquidation Company (“MLC”) and General Motors Company (“New GM”). MLC retained $1 billion of the $49.5 billion debt obligation from Treasury to cover wind-down costs, and transferred substantially all of its assets and its remaining $48.5 billion in Treasury loans to New GM. Also during bankruptcy, New GM signed an agreement with Treasury that converted the remaining $48.5 billion in debt into a $6.7 billion debt note, $2.1 billion in preferred stock, and a 60.8% stake in New GM’s common stock. The 60.8% stake amounts to 304,131,356 common shares.

Subsequent to emerging from bankruptcy, New GM retired the $6.7 billion in debt, leaving Treasury with $2.1 billion of referred stock and 60.8% of the common stock, which has a cost basis of $39.7 billion ($48.5 billion less $6.7 billion less $2.1 billion). In order for Treasury to recoup its common stock investment in the New GM and the $1 billion retained by MLC, New GM would need to receive an average of $133.78 per share, before giving effect to any stock splits that may occur. This figure does not include the underwriting, legal and other costs that Treasury will incur in connection with the IPO …

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