A New G.M., but Not an End to the Bailout Era
After the bailout, now comes the bail-in.
Sixteen months after the wheels came off General Motors, the remodeled
G.M. is racing back to the stock market.
It seems hard to believe. G.M. actually has Wall Street panting.
Investors are lining up for what is expected to be one of the largest
initial public stock offerings in American history.
This offering, expected to be priced Wednesday, is a significant
milestone for G.M. and the entire era of big bailouts.
But as G.M. moves into its post-bailout period, Washington is still
contending with other costly rescues stemming from the financial
collapse of 2008. While the G.M. offering is expected to raise at least
$16 billion, the federal government remains deeply enmeshed in American
business. Tens of billions of taxpayer dollars have yet to be repaid.
Many billions, in all likelihood, never will be.
The final accounting is still years off. Some experts warn that now that
Washington has come to the rescue of big companies once, it will be far
easier for it to do so again. The bailouts of big banks, Detroit
automakers and others, like Fannie Mae and Freddie Mac, have, to some,
laid the groundwork for future bailouts.
“If you can do this for one of the largest companies in the U.S., what
happens when the next big crisis approaches,” said Hirotaka Takeuchi, a
professor at Harvard Business School. “It may send the wrong signal to
the rest of the world.”
What is more, though a boom on Wall Street has enabled the government to
actually make a profit on many of the stakes it took in financial
companies, Washington will probably never recover all of the money
handed out to other beneficiaries, like the mortgage giants Fannie Mae
and Freddie Mac. And in some cases, billions more may still have to be
Even in the best case, the government will have to pour an extra $6
billion into Fannie Mae and Freddie Mac, whose implicit public
guarantees suddenly became explicit when the housing market deteriorated
in 2008. A more likely projection calls for a $19 billion injection,
according to the Federal Housing Finance Agency.
And though most of the big banks have repaid the money the government
provided at the height of the financial crisis, Washington still owns
nearly all of the American International Group, the insurance giant that
has swallowed more than $130 billion in government aid.
In fact, the government’s stake in A.I.G. is going up, not down, rising
to 92.1 percent from 79.8 percent under a complex restructuring plan
that will be completed early next year.
Then there is GMAC, now known as Ally Financial. Washington anted up
about $17 billion to keep it afloat in 2009, but the aid came with fewer
strings attached than the financial support for General Motors and
Chrysler. The government will not recoup that money any time soon, and
it retains a 55 percent stake in the lender.
Indeed, the government’s involvement in a broad swath of industries will
continue to linger.
The boards of G.M. and GMAC include several members that the Treasury
helped hand-pick, while regulators are swarming the trading floors and
mortgage collection operations at the nation’s biggest banks to try to
avert a replay of the financial crisis. And the government is still on
the hook for tens of billions in guarantees it provided on debt issues
by banks during the financial crisis.
Jonathan Koppell, director of Arizona State University’s School of
Public Affairs, said that although the General Motors offering was a
step in the right direction, “it doesn’t mean this strange period of
government ownership is in our rear-view mirror.”
“Once you introduce the possibility of state intervention in support of
failing firms,” he said, “the marketplace is fundamentally altered, even
after government relinquishes its ownership.”
To be sure, the government has reaped a $28 billion profit on what has
been repaid so far. But bailout beneficiaries still owe $180 billion to
Washington, or just under half of the $384 billion of federal money laid
out during the crisis. Even the $25 billion the government will earn in
the coming months as it sells its remaining stakes in G.M. and Citigroup
will not make much of a dent in paying it all back.
Before that happens, both companies have to follow through with exit
At G.M., the government injected about $49 billion to stabilize the
company and help it through bankruptcy.
G.M. has repaid $7 billion, and the government will receive $12 billion
more this week from its share of the stock offering, assuming the shares
are priced in the upper range of expectations, from $31 to $33. Even
then, the Treasury Department could be sitting on a $7 billion to $9
billion loss. The investment in Citigroup is expected to fare better,
yielding a profit of more than $11 billion.
All told, the government estimates that its other bank investments will
yield a lifetime gain of over $9 billion. Most of that comes from the
dividend payments and other income it took when the big institutions,
like Bank of America, Goldman Sachs and Morgan Stanley, paid back their
bailout money. About 590 smaller lenders have yet to repay roughly $38
After its controversial rescue of A.I.G., the government is now on track
to realize a $17 billion gain from that investment when it eventually
sells its 92 percent stake. The Federal Reserve is also on track to reap
an $11 billion windfall from the assets it took when it made an enormous
loan to A.I.G. at the height of the crisis.
The path to profitability from the government’s investments in Chrysler
and GMAC is less clear. For now, the government retains a 10 percent
stake in Chrysler, as well as a large loan backed by the company’s
assets. It also owns a 55 percent stake in GMAC and could ultimately
wind up owning more than 80 percent of that company. Exit plans have not
been completed, but they could involve an initial public stock offering
or another stock sale.
But the real money pits are Fannie Mae and Freddie Mac, the
government-controlled mortgage finance giants. So far, they have been
kept alive with $150 billion in taxpayer money. Even after the dividends
it will receive from the two companies over the next decade, the
government could ultimately sustain a $55 billion loss, according to
administration data for the 2010 budget. Some of that money could be
recouped from income from the assets in the companies’ portfolios.
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