When it comes to the auto bailout, should repayment be the only matter of concern or the loss expected to be borne by the taxpayers? Will it finally replicate the success of bank bailout?
The government did not bother about the repayment really, as saving the jobs was much greater an issue than considering the bailout fund as an investment and profiting out of it. But what is the deal with taxpayers? Let us see where they stand at present.
What Constitutes Taxpayers’ Money in Auto Bailout?
More than four years have passed since the Senate passed the $700 billion bailout bill on Oct 3, 2008 and the Troubled Assets Relief Program (TARP) was initiated. Although the TARP program was mainly aimed at saving large financial institutions after the downfall of Lehman Brothers, saving millions of jobs in the highly interconnected automotive industry also became an imperative.
Two of the three Detroit’s then-problem children, General Motors Company (GM - Analyst Report) and Chrysler, received $62 billion under the TARP program. The U.S. Treasury also injected $18.7 billion into their lending affiliates – including $17.2 billion for 74% stake in GMAC, currently known as Ally Financial Inc., and the remaining $1.5 billion to Chrysler Financial – in order to make auto loans available for car buyers.
As far as the TARP debt is concerned, a significant amount has been repaid by General Motors (about 61%) out of its $49.5 billion loan and by Chrysler (nearly 90%) out of its $12.5 billion loan. This should definitely trigger optimism among the taxpayers but unfortunately the TARP funding alone doesn’t account for all the taxpayers’ money during the crisis, even if we leave the mostly irrecoverable funding to the auto lending affiliates.
In 2009, the Obama administration set a goal of putting 1 million electric cars on the road by 2015. In order to achieve that goal, again the taxpayer’s money has been used by the U.S. Department of Energy (DOE) for lending more than $8.5 billion to a few automakers in the name of reducing dependence on oil, curbing greenhouse gas emissions and creating new jobs.
The beneficiaries of DOE loans included Ford Motor Co. (F - Analyst Report) - $5.9 billion, Nissan Motor Co. (NSANY) - $1.6 billion, Tesla Motors Inc. (TSLA - Analyst Report) - $465 million, Fisker Automotive - $529 million, and the Vehicle Production Group - $50 million.
Although the DOE loan was disbursed for producing energy efficient vehicles, it echoed the same purpose served by the TARP funding at a time when the automakers desperately needed funds to stay afloat.
The Big Picture
Going back to the original idea of the auto bailout, dodging the risk of massive job loss was the primary intention. This is because the automotive industry is dependent on too many diversified ancillary industries, which build thousands of parts for manufacturing automobiles. As a result, suspending auto production would mean downfall of all those ancillary sectors, triggering a widespread job loss.
The auto industry lost 400,000 jobs with the bankruptcies of General Motors and Chrysler. According to a report by Mich.-based think tank, Center for Automotive Research (CAR), the industry would have lost more than 1 million jobs in the first year itself if GM and Chrysler were not bailed out. However, the bailout helped recovering about 1.5 million jobs till 2012 in the U.S.
Further, CAR estimated that if GM and Chrysler were allowed to collapse without the bailout fund, the U.S. government would have lost about $28.6 billion in tax revenues. Also, it would have been difficult for the government to address the unemployment created in the first two years of their bankruptcies.
If we look at the effectiveness and utilization of taxpayers’ money, things would look not that bad. Both GM and Chrysler returned to profitability and started gaining market share by producing more meaningful vehicles.
GM is also making investments across the globe that looks like a fruitful reinvestment of taxpayers’ money. The company has committed to invest $1.5 billion in its North American plants in 2013 as part of $8 billion annual investment plan for its global operations for new vehicle development.
On the repayment front and from an investment perspective, GM stands at a much favorable position given its surging stock price. Shares of the company hit new 52-week high of $34.01 on May 20, which is above the Initial Public Offering (IPO) price of $33.00 (held in November 2010) for the first time since May 4, 2011. The rising stock price would definitely help the government recover its pending $19.1 billion bailout fund as much as possible.
Chrysler was the fastest growing automaker among the Detroit Big Three in 2012. Although the automaker could not repay the remaining $1.3 billion of its bailout fund, its parent company Fiat has undoubtedly succeeded in pulling out the automaker from low point.
Among the DOE loan recipients, Ford and Tesla are the two bright examples. Ford utilized the DOE loan for retooling two plants for small-car production and developing fuel-efficient vehicles like the Ford Focus EV and C-Max Energi plug-in hybrid. The automaker revealed that $577 million of the loan is due in 2013, and the full amount will be repaid by Jun 15, 2022.
Ford plans to build new plants by raising its capital spending to about $6 billion annually by mid-decade from $4.3 billion in 2011. In order to keep pace with the expansion, Ford also plans to double its workforce by hiring 1,200 employees by 2015.
Tesla became the first government loan recipient to repay the full amount and that too much earlier than expected. The electric vehicle maker paid off the remaining $451.8 million loan using the near-$1 billion proceeds from the common stock and convertible senior note offering made last week. The company reported its first-ever quarterly profit of $15.4 million or 12 cents per share (on an adjusted basis) in the first quarter of 2013.
To these, add the recovering auto market in the U.S. Auto sales in the U.S. grew 13.4% to the five-year high of 14.5 million vehicles in 2012. Strong pent-up demand due to aging vehicles on the U.S. roads along with falling unemployment rate and easier car loans continued to be the key factors in driving the auto sales in the U.S. From here, tax payers should definitely expect a journey on the winding road to prosperity.