General Motors chairman and chief executive officer Ed Whitacre took to the pages of the Wall Street Journal last week to announce “The GM bailout: Paid back in full.” Whitacre wrote: “General Motors is announcing that it has made a payment of $5.8 billion to the U.S. Treasury and Export Development Canada. We’re paying back–in full, with interest, years ahead of schedule–loans made to help fund the new GM.”
Sounds like good news. But is Whitacre being entirely frank? He acknowledges that the governments of the United States and Canada remain GM’s largest shareholders. Well, so what?
Paul Ingrassia responded two days later in the Journal:
[GM's] early loan repayment represents a little more than 10% of the money it got from both governments. Understanding why means peering under the hood of last year’s government-sponsored bailout and bankruptcy.
A year ago at this time President Barack Obama’s automotive task force decided against letting the company be liquidated, but it wrestled with the issue of how to usher GM through bankruptcy quickly and give it the best chance for survival.
The old GM was being crushed under a mountain of debt, much of it incurred so the company could pay pensions to its retirees. So the new GM, the task force decided, would be restructured with a pristine balance sheet.
It was both a financial and a political decision. Financially, saddling the new GM with lots of debt might doom the company to Failure 2.0. If the new GM collapsed after the government pumped in tens of billions of dollars, the political fallout for the Obama administration would be enormous. (Being tarred with bailout was bad enough.)
So the U.S. and Canadian governments decided, more or less arbitrarily, to classify some $6.7 billion of its aid as debt and a ballpark estimate of $52 billion in equity. That $52 billion represents nearly 90% of the government money given to General Motors. None of that has been repaid.
Ingrassia judges: “Mr. Whitacre should have acknowledged that directly. He would have enhanced the company’s credibility compared with the old GM, which seemed to declare victory every other week even in the face of disaster.”
Among other things, the federal securities laws take a dim view of a company omitting the disclosure of information that is necessary to make disclosed information not misleading. The omission of such information is known as lying through omission: “Lying through omission consists of making statements that paint an incomplete or inaccurate picture, and not revealing other material information necessary to present the entire truth. The federal securities laws require public companies, whenever they speak, to disclose all material information that would be necessary to present the truth entirely.”
But that’s not all. GM does not appear to have repaid the public funds denominated a loan out of operating profits, as Whitacre’s column implies. Fox News reports the comments of TARP Special Inspector General Neil Barofsky: “I think the one thing that a lot of people overlook with this is where they got the money to pay back the loan. And it isn’t from earnings….It’s actually from another pool of TARP money that they’ve already received. I don’t think we should exaggerate it too much. Remember that the source of this money is just other TARP money.”
Barofsky told the Senate Finance Committee the same thing Tuesday, and said the main way for the federal government to earn money out of GM would be through “a liquidation of its ownership interest.” Senator Grassley comments here; Ed Morrissey has more.
Remember: Whitacre is the chairman and chief executive officer of GM. He isn’t some salesman peddling the goods (though he is doing that as well) with an allowance for puffing. If Whitacre’s column were subject to the securities laws, Whitacre would be guilty of fraud. Or so it appears to me.
UPDATE: A reader points out Megan McArdle’s examination of GM’s financial condition. McArdle links to a newspaper account of GM’s most recent operating results. The newspaper article quotes GM chief financial officer Chris Liddell: “As the results for 2009 show, there is still significant work to be done. However, I continue to believe we have a chance of achieving profitability in 2010.”