Search Penny Hill Press

Wednesday, May 15, 2013

The Role of TARP Assistance in the Restructuring of General Motors

Bill Canis
Specialist in Industrial Organization and Business

Baird Webel
Specialist in Financial Economics

In 2008 and 2009, collapsing world credit markets and a slowing global economy combined to create the worst market in decades for production and sale of motor vehicles in the United States and other industrial countries. Concern about the economic impact of a possible collapse of large parts of the U.S. automobile industry led both the Bush Administration and Members of Congress to seek legislative avenues to assist the automakers. Ultimately General Motors Corporation (Old GM) and its successor General Motors Company (New GM) together received more than $50 billion in federal assistance through the U.S. government’s Troubled Asset Relief Program (TARP). In exchange for this financial support, the U.S. Treasury received 60.8% of the new company, with the rest of New GM held by the United Auto Workers (UAW) retiree health care trust fund, the governments of Canada and Ontario, and holders of Old GM’s bonds. In its restructuring, GM closed plants, cut its hourly and salaried workforce, shed three brands, reduced debt, introduced new vehicles, and implemented changes to reduce retiree legacy costs.

The federal government has sold its shares in General Motors Co. in different ways over time, including (1) a large initial public offering (IPO) in late 2010, (2) sale of stock directly to GM in December 2012, and (3) ongoing sale of stock into the public market. Following public stock sales in the first quarter of 2013, the U.S. Treasury owns approximately 17.7 % of New GM with announced plans to sell remaining shares by March 2014. Following the December 2012 stock sale, the U.S. Treasury removed restrictions on New GM owning corporate jets and eliminated certain reporting requirements, but retained TARP-imposed executive pay limits. The issue of executive pay has been the topic of a House Oversight and Government Reform Committee hearing during the 113
th Congress.

GM is not the only company that received TARP funds as a result of the 2008-2009 financial crisis. More than 700 institutions received support, with the U.S. government taking ownership stakes in five large companies: GM, Chrysler, GMAC (now called Ally Financial), AIG, and Citigroup. In general, ownership of private companies was not a goal of TARP, and the U.S. government has sought to reduce its ownership stakes when possible while maximizing the taxpayers’ return from the assistance.

To date, the U.S. government has realized an $8.4 billion loss of on its investment in General Motors. Future sale of the remaining GM shares could result in gains that would offset this loss. For the U.S. government to fully recoup the nominal value of its $50.2 billion assistance, however, the price of the government’s remaining shares would need to approach the $80 per share mark, between two and three times the price that has been received by the U.S. government in past sales. The strength of New GM’s stock price, and the related recoupment of government assistance to the company, have hinged on two major factors: the success of GM’s restructuring and the performance of the global economy, including retail auto sales. New GM’s finances have strengthened since its emergence from bankruptcy.

In addition to questions regarding recovery of taxpayer funds, Congress has also expressed an ongoing interest in oversight of the TARP assistance for GM. Of particular note have been questions regarding the treatment of retirees from Delphi Corporation, a former Old GM subsidiary, with both hearings and legislation (H.R. 6404/S. 3544) addressing the issue in the 112
th Congress.

Date of Report: May 9, 2013
Number of Pages: 19
Order Number: R41978
Price: $29.95

To Order:

R41978.pdf  to use the SECURE SHOPPING CART


Phone 301-253-0881

For email and phone orders, provide a Visa, MasterCard, American Express, or Discover card number, expiration date, and name on the card. Indicate whether you want e-mail or postal delivery. Phone orders are preferred and receive priority processing.