On the Road to Recovery…A Free Ride for GM…

I couldn’t decide on a single title for this post…so I chose both that I was considering! You’ll see why shortly.

If you missed the news a month or so ago, the “new GM” (General Motors) has climbed out of bankruptcy and their stock “went public” – that is, their stock was re-listed on the New York Stock Exchange (NYSE) and is available for purchase, sale, trading, investing, etc. Their stock was up 3.6% on the first day of trading and closed at $34.19.

The offering's total value was around $23.2 billion, including $18.2 billion from the sale of common stock and $5 billion from selling preferred stock.

So who’s a big beneficiary of the offering other than GM? The federal government, actually, – bail-out’er of bail-out’ers – which took in about $13.6 billion from the offering after it sold shares, reducing its ownership in the company.

"But wait, didn’t GM already pay the government back?” you may ask. “How did they have ownership of GM stock in the first place?”

Good questions and I’m glad you asked. Yes, GM made a very public announcement about paying back the government years ahead of schedule in early spring of this year.

Watch the GM video here.

But there’s more to it than meets the eye (as always).

Let’s look a little deeper…

If you recall, the government bailed out GM to the tune of about $50 billion. The government didn’t actually cut a check and hand over $50B, however. The government actually gave GM a loan of $6.7 Billion (at 7 percent interest) and then purchased GM stock with the rest – giving the government approximately a 61% ownership of GM.

GM did pay back the government this year – but just the loan of $6.7 billion, not the full $50 billion – a little nugget they conveniently failed to mention to the public.

There’s something a little more disturbing just under the surface here, however.

If you stop and question, you may ask yourself, “how can a company that went into bankruptcy afford a $6.7B payback with interest? Isn’t that one of the reasons you go into bankruptcy – because you can’t pay your bills or service your debt? And isn’t the company still broke and not turning a profit?”

Again, good questions.

It appears as though GM is taking money out of one pocket and putting it in another. Believe it or not, when GM went into bankruptcy, the government put $13.4 billion in an escrow account as “working capital” for GM. It is from this escrow account that GM paid back the $6.7 billion!

Yes, that’s right…they used government money to pay back government money!

To further top this situation off, GM applied to the Department of Energy (DOE) for a $10 billion loan (at 5 percent interest) to retool plants to meet new fuel economy standards.

Folks, maybe it’s me, but I’m not buying into the “GM is a responsible company and turning things around – and as evidence we’re paying back our loan early” line. This isn’t about paying back debt – it’s about refinancing! Think about it. Is it better to have a loan with a 5% interest rate or one with 7% when you’re taking out a loan on billions of dollars?

Oh, but it gets better…

In spite of the shenanigans, GMs future is looking bright as our government decided to disregard years of precedent in taxation and bankruptcy laws.

“Wait, what’s that?” you ask?

Yes, the government has done GM a favor and allowed the newly created GM to assume the benefit of tax losses from the old GM.

For simplicity sake, a company with a net loss doesn’t have to pay taxes. If you make a profit, you have to pay taxes on that profit. If you don’t, the government doesn’t have you pay taxes on negative profit. But to complicate the matter, companies can utilize a “loss carry forward” – meaning that if you have a net loss one year, you can carry forward some of that loss and apply it to another year in the future (I believe it currently stands that you have to apply it within the next 7 years). The benefit of the loss carry forward is that you can apply the loss to the year in which you have a profit and pay less taxes. BUT…when a company goes into bankruptcy they have to forfeit the old company’s tax losses – thus eliminating the opportunity for loss carry forward.

However, the government decided that they will let GM exercise a tax-loss carry forward on roughly $45 billion of net operating losses from the old GM.

Translation: the new GM won’t have to pay $45 billion in taxes on future profits thanks to the carry forward (that’s, of course, assuming that they’ll make any profits – ha!).

Now, I understand the reasoning for this favor – the government is ensuring that GM will be profitable in hopes that ultimately their stock will rise (after all, the government owns shares of GM).

But what does this also mean? That’s a windfall of $45 billion in tax receivables for the government. What a great way to boost our revenue as a government while we’re at the very junction of trying to crack down on spending and look for ways to boost revenues! Waive off $45 billion…go ahead! Makes good sense to me (can you detect my sarcasm?)!

Call me crazy, but it would appear that the government has handed GM another bailout. Maybe it’s just me…

For those of you keeping score, that would be: $50B bailout (includes $6.7B loan) + $13.4B escrow + $10B DOE loan + $45B carry forward = $118.4 Billion!

At least GM said “thanks” to us, the taxpayers, for funding their incompetency (and for also funding the “thank you” commercial).

Watch GM’s “thank you” here.

What a great commercial, no? I’m getting all misty eyed. (Your sarcasm detector should be off the charts right now).

After watching that as a taxpayer, I’m thinking I want my money back from GM.

That $13.6 billion the government just got back from selling some GM stock isn’t looking so good anymore….I think I’m gonna be sick.

But hey, the new Volt looks cool right?

Bonus video – Spoof of the “we paid back our loan video”

Bonus video 2– yet another dumb GM commercial. How many companies want to draw attention to their failures? Is this supposed to inspire me to run out and buy their vehicles? After watching this, I can't help but ask "what took you (GM) so long to 'get down to business'?"

Lying With Statistics (part 2)...

As a follow-up post to “Lying with Statistics”, here is a little more information that was requested by one of our readers.

I compiled the chart below from a couple of sources. You’ll notice the “official unemployment” rate goes all the way back to the 1940s, yet the U-5 and U-6 numbers begin in 1994. Here’s some background as to why I’m showing it this way:

For starters, you need to know that the Bureau of Labor Statistics (BLS) uses statistical information compiled from the Current Population Survey (CPS). The CPS is a survey conducted by the United States Census Bureau for the BLS.

The CPS began in 1940, and responsibility for conducting the CPS was given to the Census Bureau in 1942. In 1994 the CPS was redesigned as a result of research that started in 1986 and a complete overhaul occurred relating to how the CPS was administered and what type of questions were asked.

Prior to 1994, the alternate measures of unemployment had different names because the BLS drastically revised the questions in the CPS and renamed the measures. U-3 and U-4 were eliminated and the U-5 (the “official” unemployment rate reported up to 1994) remained the same measure but was renamed U-3. U-6 and U-7 were revised and renamed U-5 and U-6.

Confused yet?

Let’s show it this way:

CPS alternate measures of unemployment before 1994:

• U-1 Persons unemployed 15 weeks or longer, as a percent of the civilian labor force
• U-2 Job losers, as a percent of the civilian labor force
• U-3 Unemployed persons aged 25 and older, as a percent of the civilian labor force aged 25 and older (the unemployment rate for persons 25 and older) *To be eliminated after 1994*
• U-4 Unemployed persons seeking full-time jobs, as a percent of the full-time labor force (the unemployment rate for full-time workers) *To be eliminated after 1994*
• U-5 Total unemployed persons, as a percent of the civilian labor force (“official” unemployment rate)
• U-6 Total persons seeking full-time jobs, plus one-half of persons seeking part-time jobs, plus one-half of persons employed part time for economic reasons, as a percent of the civilian labor force less one-half of the part-time labor force *To be renamed U-5 after 1994*
• U-7 Total persons seeking full-time jobs, plus one-half of persons seeking part-time jobs, plus one-half of persons employed part time for economic reasons, plus discouraged workers, as a percent of the civilian labor force plus discouraged workers less one-half of the part-time labor force *To be renamed U-6 after 1994*

CPS alternate measures of unemployment after 1994:

• U-1 Persons unemployed 15 weeks or longer, as a percent of the civilian labor force
• U-2 Job losers and persons who completed temporary jobs, as a percent of the civilian labor force
• U-3 Total unemployed, as a percent of the civilian labor force (“official” unemployment rate – formerly U-5)
• U-4 Total unemployed plus discouraged workers, as a percent of the civilian labor force plus discouraged workers
• U-5 Total unemployed, plus discouraged workers, plus all other marginally attached workers, as a percent of the civilian labor force plus all marginally attached workers (formerly U-6)
• U-6 Total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers (formerly U-7)

With such changes occurring in 1994, I think it’s best to simply start the data there to reflect the new way of reporting for U-5 and U-6. Anything I could find for U-6 or U-7 data before 1994 was scarce at best as well as conflicting. So as to not make a possible error in reporting U-5 and U-6 before 1994, I’ll show it this way. What did carry forward was the “official” unemployment rate (regardless of it being U-5 before 1994 or U-3 after) – I’m showing that all the way back to 1948.

I’ve also included a chart showing 1994 to present.

And now, to the charts!

Note: the blue shaded areas represent recessions.

Click on the image to open a larger view in a new window.

I would like to take a moment and share some of my reflections with you, dear reader. Here at Candid Financial Conversations, I admit, I write a lot of sarcastic and jabbing posts. I probably step on toes. As I’ve said before, my attempt in this blog (aside from general education for the common investor) is to make you feel a bit unsettled. If you don’t get uncomfortable about the current situation, how can you expect to have any movement whatsoever? The worst enemies to democracy, change, and helping shape the future are apathy and comfort.

All that being said, know that I don’t take the reality of unemployment lightly. We have and are continuing to undergo a truly historic economic and financial downturn (in spite of what you may hear from those on TV – our beloved “sensationalist talking heads”). This downturn affects individuals, families, and communities. It’s because of this very reality of unemployment and job loss due to these kinds of circumstances that I feel a duty to pull back the curtain and expose the wizard. What I cannot stand is for those in power to mislead through the use of spurious and fallacious statistical trickery for the benefit of political gain and/or repression of the masses. It is truly unacceptable.

Some of you may have been or are currently affected by the current economic situation and have lost a job. My heart goes out to you and you have my prayers…

Respectfully,
~Aaron