Another Government Bailout...
On Monday General Motors Corporation officially filed for Chapter 11 bankruptcy. This should have come as no surprise to the financial community as bankruptcy rumblings began as far back as 2005. Furthermore, on March 30th, 2009, the announcement of a chapter 11 filing by the auto giant on June 1st became a near certainty. If you recall March 30th, 2009 was the date that the Obama administration announced GM would have to submit an acceptable long term viability plan to the US government. At that time the administration indicated that if GM was to be eligible for more tax payer funds, the company would be required to submit an acceptable restructuring plan. This plan was to be turned in to the government within 60 days; now those days have come and gone and no acceptable plan was provided. Where does that leave us?
According to bankruptcy information made available Monday, the US tax payer will now own 60% of General Motors at the cost of roughly $50 billion dollars ($19.4 billion before bankruptcy; $30 billion while in bankruptcy). Shortly, after GM made the historic bankruptcy announcement President Obama came to the microphone:
"I am confident that the additional Federal help was justified by the changes being made at GM. GM and its stakeholders have produced a viable, achievable plan that will give this iconic American company a chance to rise again. But GM can't put this plan into effect on its own. Executing this plan will require a substantial amount of money that only a government can provide."
Per GM's official bankruptcy filing, as of Monday, the company had $82.3 billion in assets and liabilities of $172.8 billion; a shortfall of $90.5 billion dollars.
Obama went on to ensure taxpayers that the company would not need additional government help in the future, and would not be at risk of failure after it emerged from bankruptcy as a "New GM". He concluded by saying:
"We understand there are no second chances. We won't need one."
Exit Strategy; noun - A plan for removing oneself from a difficult situation if it arises - 1. "The method by which a venture capitalist or business owner intends to get out of an investment that he or she has made in the past."
As of June 1st, GM's bankruptcy filing indicated that it was $90.5 billion dollars short of being able to balance assets with liabilities. Also on Monday, the US government gave GM an additional $30 billion dollars and said the company would need no additional government help in the future. How can they be so certain of this? One thing to be certain of is what Barack Obama has told the American people:
"We [the US Taxpayer] are acting as reluctant shareholders because that is the only way to help GM succeed. What I have no interest in doing is running GM, [paraphrased] our only goal is to get GM back on its feet and then get out quickly."
Though Mr. Obama's comments are sound in principal, how will they play out in practice? Never once (to my knowledge) has there been a detailed discussion of what the government's exit strategy at GM will be. Not once have the US tax payers heard a reasonable explanation as to how they will get out of owning 60% of General Motors. But most importantly, not once during the "bailout era" have taxpayers heard a concrete solution as to how they will ever get any money back from any of their new found private industry holdings.
To illustrate this, I quickly listed several bailout recipients that the US taxpayers now own at least a percentage of. Then I tried to find any information I could on how the tax dollars would be paid back; this is what I found.
"Old GM" assets will begin to be purchased by "New GM" within the next 90-120 days. By October or November New GM will be a private company also called General Motors which tax payers will hold a 60% stake in. After this, New GM will be brought public through an IPO by mid to late 2010. At this time government auto task force leader Steve Rattner believes that as much as 10% of government holdings will be able to be paid back. From there it's anyone's guess when tax payers will get paid, estimates range from 2 to 10 years under "best case" scenarios.
For Consideration: The original $19.4 billion given to GM is highly unlikely to ever be paid back. As for the $30 billion given Monday, that too is likely to never be paid back. The last time GM's total market capitalization touched $30 billion was in January of 2004 when shares were trading around $55. Since that time GM has not shown an annual profit and has lost more than $82 billion dollars. For taxpayers to see their money, GM's market cap would have to exceed $50 billion under the current 60% ownership structure. This does not consider the $12.5 billion which was given to GMAC with no strings attached from the TARP. Further, it does not include the $3.5 billion which was also given to GM specific parts suppliers that will not come back. Most importantly however it does not consider the fact that there would be no conceivable way for 60% of public shares to be sold into the open market without diluting shareholder value.
Tax payers currently hold an 8% stake in Chrysler at a cost of $15.5 billion dollars. $7 Billion was provided to Chrysler ahead of its bankruptcy and will not be paid back. The remaining $8.5 billion will also likely not be paid back as it is being used to orchestrate a merger with Fiat. Chrysler Financial and Chrysler specific parts suppliers also received $1.5 billion dollars each. Financial information for Chrysler is not readily available as it was not operating as a public corporation prior to going bust. For Consideration: I could find no discussion of any exit strategy related to Taxpayer investments in Chrysler.
American Insurance Group (AIG)*
The US government has committed $180 billion dollars in tax payer money to AIG. As of today roughly $70 billion of that many has been consumed. Taxpayers own roughly 80% of the former insurance giant via acquisitions through the Treasury Department and the Federal Reserve. For Consideration: On April 21st, 2009 congressional representative Jeb Hensarling asked Tim Geithner directly: "...What is the exit strategy for AIG?" Geithner responded: "We came into this crisis without a legal framework to manage the risks posed by AIG. That was the tragic failure of this country; we [the Treasury and Fed] still do not have that authority today." Hensarling: "Not even as majority shareholders of AIG?" Geithner: "No. We do not have the ability or tools that were designed in the wake of the crises of the past decade given to the FDIC. We would like to work with Congress to legislate authority over the coming weeks." Translation -> there is no exit strategy.
*To read more detailed bailout information, visit Prorublica.org and search for any company which has received government funds.
Barack's Iraq and Afghanistan
As shown by the details above, the US government has virtually no exit strategy regarding how it will recover trillions of tax payer dollars used to bailout "too big to fail" companies. In addition by not establishing sound criterion for an exit strategy or concretely determining who is eligible to be "bailed out" serious questions are raised:
-What will happen if Ford needs to be bailed out down the road? How will they compete against restructured companies with artificially lowered debt burdens?
-What if another bank is on the cusp of failing? Will it be eligible for bailout funds?
-Are funds available to a state such as California, Nevada, or Florida? If so at what price?
-If states are to be bailed out; will those states remain sovereign if the Federal government forces them to make decisions via bailout concessions?
As the questions above indicate, with no clear exit strategy or defined rules on how bailout funds are to be administered and/or recovered, it is apparent that the current administration is in quite the financial quagmire. This situation is not dissimilar to our war strategy in the Middle East; history it seems is repeating itself.
Although President Obama inherited the US military conflict in Iraq and Afghanistan he did not inherit the majority of the bailout burden. The President had difficult choices to make regarding situations that occurred outside of his influence. What's done is done and there certainly is no reason to cry over spilled milk. However, crying over milk which continues to spill and flow off the edge of the table is a different story entirely. The President, The US Congress, and the bailed out institutions must work together to determine an appropriate exit strategy for the US Taxpayer whom they serve. If they do not develop an exit strategy soon, they risk fighting a new war that is unlikely to ever truly end.
Looking to history as an example, there was no clearly defined exit strategy in place at the beginning of the Afghanistan or Iraq wars. At that time American's were called to "Act quickly or face peril" and by acting quickly they faced peril. Now, as a result of poor planning and acting quickly, we still have no clear exit strategy, have spent roughly $865 billion dollars on the wars, and are likely to receive little if any benefit for our sacrifice of life and finance. Does this sound at all familiar to how the financial crisis has played out?
Wading Out of the Swamp
Over the past several years discussions have raged over appropriate war time exit strategies. These discussions, in conjunction with previous drawn out military experiences (Vietnam, Desert Storm, Korea etc.), have allowed for the following ideology on war time exit strategies to be developed. First, questions must be asked and mock scenarios engineered to simulate the stability of the region if the US were to leave. Then, if conditions upon withdrawal seem to be acceptable, guidelines must be set to determine the successes and failures of the military operation being debated. After this, the established predetermined objectives must be met one by one in a timely fashion. Finally, only after key objectives are met, the withdrawal process can begin but must move forward slowly to ensure a smooth transition into stability. These same steps must now be followed in order to ensure the bailout train has a clear destination and appropriate stops along the way.
Scenarios must be run to determine the feasibility of a US taxpayer financial withdrawal. These scenarios must be realistic and take into consideration true worst case events; they cannot be run like the Stress Tests at the banks last month. After this, concrete goals must be established for the bailed out companies to determine successes and failures. Then a review board must be assembled to evaluate the successes and failures of the bailed out companies against these predetermined criterion. After this, payments back to the US Taxpayer must be required on a timely basis in order to move forward into stability. If these goals are not met, or cannot be met within a specified time frame, the companies must be scuttled and the experiment must end.
The time for the Obama administration to implement concrete exit strategies for bailout monies is running short. If decisions cannot be made quickly the US tax payer will be fighting never ending wars on four fronts: Social Reform, Financial Reform, Iraq, and Afghanistan; all of which are no longer affordable to taxpayers within the United States.