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GM Used Bailout Funds to Repay Loan: Mostly Irrelevant

This article was written by in Economy. 13 comments.


Update: According to news reports, GM paid back one loan in order to qualify for a new government loan at a lower rate. This basically negates my original opinion regarding the loan repayment announcement. Read further at your own risk.

Ever since General Motors announced that it paid back its $6.7 billion government loan, a number of people have pointed out that the company isn’t telling the full story. GM simply shifted the money it received through the TARP bailout and directed those funds back to the government. While there is truth to this matter of accounting, it doesn’t really matter.

First, the idea that the TARP bailout funds no longer need to be used for other purposes like balance sheet padding, capital expenditures, or operating expenses show that the company is in at least a slightly better position than it was when it received the loan. If the cash it has is better suited repaying a loan and reducing future interest expenses, then don’t leave it sitting in a bank account.

Second, there’s no reason TARP funds can’t be commingled. This is easily illustrated on a smaller scale, in your own bank account.

On Monday, you receive a gift of $100 from your friend and deposit it into your account. On Wednesday, you get paid for some work you performed and deposit $100 into your account. On Friday, you have $200 in your account and you can finally buy a $100 cell phone without danger of brining your bank account down to zero. Did you buy the phone with gift money or your income? It doesn’t really matter. Both sources helped you reach the point where the purchase was possible.

Now add a loan into the mix. On Tuesday of that same week, before you got paid for your work, you borrowed $100 from a friend. Rather than buying a phone on Friday, you repaid that friend $100 plus interest. Did you use the gift or income to pay back the loan? Once again, it doesn’t really matter. Once the funds are commingled, a dollar is a dollar.

It’s right to criticize GM. The company was too big and didn’t adapt to changing consumer needs. They should have been allowed to fail, and would have if it weren’t for the belief a GM failure would have significant repercussions throughout the global economy, already in a weakened state.

It does look bad if a company appears to use TARP funds to pay off a government loan, particularly when the CEO boasts about it publicly, but it’s not a major issue. GM is in a better position now, and although this loan is only a small portion of the funds received from the government, this is at least a move in the right direction.

Updated April 28, 2010 and originally published April 27, 2010. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 13 comments… read them below or add one }

avatar Apex

You are right that it’s a smart move for them to do so because they can tout it and it might save them a little interest. And you are right that it is likely an indication that they someone thinks they are in financially better shape than they were before they were able to make this shift (unless the shift was just a result of loosened govt regs on how the money could be used … I have no idea why the money is suddenly available now and wasn’t then).

But what we do know is that the company has not made any profit (reported profit) since taking the money, so they haven’t gotten healthier as a result of shoring up their balance sheet. Perhaps someone rated them as more stable and reduced their debt costs and released some cash reserve requirements etc.

All that means is that someone (either inside or outside of GM) decided that they used to need a cash buffer of X to be safe and now they need a cash buffer of something less than X. So it tells us that someone thinks the whole environment that GM operates in is now less risky.

But it doesn’t tell us a single thing about whether or not GM has made themselves better as a company (they very well may have), or if they are going to get on a path to profitability (they might), or if they are going to produce better cars, stop losing market share, and learned the lessons of the past to correct their previous mistakes (maybe, maybe, and maybe).

So in that sense it is quite important to understand where the money came from.

A classic example would be when you go to get a loan (when banks actually did proper underwriting and are starting to again) you have to show them where you are getting the down payment assets from. And they want to see that you have had these assets for a while and didn’t just recently receive them. Why is that? Because they want to know that you have the ability to make the funds, save the funds and put your own skin in the game. If you just get a gift from dear old dad, your dad has skin in the game but you don’t and the bank worries that doesn’t give them a good indication of your dedication to paying off this loan and not losing your own money.

That’s a very important thing to have correct and the banks used to understand that. In this case GM has not yet shown any ability to make its own money to stand on its own two feet and they don’t have any of their own skin in the game. They just paid off govt loans with govt bailout funds. This isn’t the same as paying off their loans with money they had earned via profits because it doesn’t show they have the means to do it on their own and they didn’t put any of their own skin in the game.

And to go on TV and brag about paying it off 5 years early is frankly ripe with hubris. (wow what a red flag that is, how does a company that has yet to make any profit pay off a 7 billion dollar loan 5 years early? Clearly they are shifting money around cause I don’t have to be smarter than a 5th grader to do that math). I hope they have learned many things and get better. I long for the “American” car companies to do something right and produce quality cars (Ford seems like they have been on the right path for a number of years now and that is great to see).

So to say that using accounting gimcks (all perfectly leagal) to allow them to pay off the loans is irrelevant, thats a bit rich.

What I am curious about is why you feel compelled to be an apologist for GM? Is it because the govt bailed them out and you want to prove that it was a good idea? Maybe it will be and maybe GM will be great one day. But to tout these gimmicks as an indication of anything is not a credible reason to justify any statement about the bailouts at all. The only thing worth saying about them is that they are being used as a propaganda tactic to give the impression of a turnaround that as of yet has not materialized in the least. When it does, go ahead and tout it. But touting this is kind of like crying wolf. Do it enough and when there is something actually worth touting no one will be interested in listening anymore.

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avatar Luke Landes ♦127,505 (Platinum)

I don’t see myself as an apologist for GM. I’ve criticized them and other car companies. they deserve criticism for making a big deal out of paying back the loan while the government still has a significant iterest in the company. I also believe, however, that this particular issue, doesn’t matter all that much. they got a loan to satisfy those that believed they needed to hold onto cash, they repaid it when they believed that need no longer existed. I’m all for keeping the company accountable and getting the government out of the auto business as soon as feasible, and I’m glad they paid back the loan portion. Whether they paid it back with cash reserves or income isn’t all that important, as long as they didn’t pay it back with a new government loan. I think it’s also important that they start profiting, but that’s a different discussion.

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avatar Art Bell

Tax payer money shouldn’t be construed as “cash reserves,” and yes – there is a difference between paying back a loan with more TARP money, and income/profits. One shows the company is still in the red, the latter would demonstrate they’re a solvent operation and on the right path. It’s your right to believe in, and suport TARP loans, but you can’t be on both sides of the argument. I never liked the “too big to fail” theory, and thought a restructuring bankrupcy would force them to make the right decisions and put them back on track. Now what we have is tax payer money supporting a failed business model with no end in sight.

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avatar Art Bell

This article is the more of the same rationalizing, or illogic that got us into this mess. The bottom line: GM is still posting a huge loss, and tax payers are still funding their operation. Any measurable success would include GM becoming solvent, and not needing tax payer involvement.

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avatar Troy

Hold on. A company is given 50+Billion dollars and is now somehow miraculously in slightly better financial shape. Really? And they pay back 6B of that with some of the original “gift” and they are to be applauded, however slightly.

This is no different than a consumer boasting about paying off a CC debt with a home equity loan.

Debt was erased with other debt. I understand the remaining TARP funds are not considered a loan, but they were still unearned.

The boasting and advertisement is low class. It assumes their customers are dumb. Maybe thats the case?

Is inheriting money a sign of success. I think not, but some think so.

I do love the Vette though.

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avatar Steve

To me, How GM paid the loan wouldn’t ordinarily be such a big deal, but it is a big deal to the lender. The unwilling lender in this automotive bailout (you, me, Joe Taxpayer) deserves more transparency in how the borrower is managing this borrowed money. It is a wise move (on the part of GM) to move from an arrangement costing 7% interest to a 2% arrangement; still for Ed Whitacre to brag to everyone that “We are able to repay the taxpayers ahead of schedule because we are designing, building and selling the best cars and trucks GM has ever produced,” is a flat out lie, since they’re not yet generating a profit. link

Also intentionally misleading (read: lie) was the five-page report released by the Obama Administration pointing to the fact that GM paying off its government loans early showed that the auto bailout was a success. Not a word about what money was used to make payment. link

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avatar Samie Mac

This is a 10 (b)(6) violation by which a CEO maninulates public perception about the value of a company. It’s a federal crime not just tolerated but supported by the current administration. This is exactly what put Enron in the tank and their execs in prision. If GM’s public relations people thought this was just putting a positive spin on the facts, they blew it big time!

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avatar darrel

your blog misrepresents the entire transaction. In fact. GM used other TARP funds to repay the original TARP loans while not repaying about $2.5 billion to the union. The reality is that GM got additional TARP billions from a Treasury escrow account filled with taxpayer dollars. Taxpayers have not been paid back “in full” and are still on the hook for the TARP stock investment in GM. Whether taxpayer funds are ultimately recovered depends upon the administration’s ability to sell GM stock at a profit some day.

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avatar Luke Landes ♦127,505 (Platinum)

Nowhere does the article state the TARP investment was paid back. The article states the loan is only a small part of the full government/taxpayer investment in GM.

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avatar Financial Samurai

One of the most interesting things Flexo and others is Ally Bank, a GM spinoff, whose motto is “straightforward”. How many people know ally Bank is ex GM and got TARP money to bail em out? I don’t think many people relaize this.

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avatar The Biz of Life

I think the issue here is that Government Motors, which needs to recapture the faith of not only the American consumer, but the world consumer, put out a pat-themselves-on-the-back add that at best was misleading, and at worst false. Reputation is everything is business. The US taxpayer is still on the hook for $40 billion plus with GM. It is going to take some serious stock appreciation for us to recoup that money. This doesn’t even include GMAC (Ally) or the union pension funds.

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avatar Peter

In reading an article on Forbes this morning about this issue, it seems there is something else that is being left out. One big reason why GM repaid the $6.7 billion government loan (with taxpayer funds) was not necessarily because they were doing so well and didn’t need the money, but because they were in the process of wanting to get another large loan from the government – and having this outstanding loan made it politically toxic and bad PR for GM to ask for ANOTHER loan.

So what loan is GM trying to get now? GM is in the middle of trying to get a $10 billion loan at 5% interest from the department of energy in order to meet tougher CAFE standards. As was stated in the Forbes article,

In short, GM is using government money to pay back government money to get more government money. And at a 2% lower interest rate at that. This is a nifty scheme to refinance GM’s government debt–not pay it back!

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avatar Luke Landes ♦127,505 (Platinum)

That’s interesting, thanks for sharing the link. There’s always more to know beyond what the PR folks are willing to say.

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