Administrative And Selling Expenses In Statement Of Cash Flows The TARP Shuffle

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The TARP Shuffle

In May, 2010, General Motors and the US Treasury Department took the dance floor together for a turn at the “TARP Money Shuffle.”

To much fanfare, the automaker’s CEO Ed Whitacre announced that his company had fully repaid its bailout loan from the federal government. (1) Five years ahead of schedule, not less.

That was good news for GM, which is struggling to compete with Ford Motor Co., the only Detroit automaker to avoid government money. GM promptly aired a television commercial announcing his achievement. Meanwhile, the government was happy to have a chance to show taxpayers that Troubled Asset Relief Program (TARP) funding is not lost forever but will eventually get their way. “We are encouraged that GM has paid off its debt ahead of schedule and believe the company is on a strong path to viability,” Treasury Secretary Timothy Geithner said in a statement.

But, although the announcement was made for good PR, there was little behind the corporate chest beating. The money GM used to pay off the government debt came from the government itself, not from selling cars to consumers. And repayments of $4.7 million to the United States and another $1.1 billion to Canadian government agencies were only a small portion of the company’s bailout money, most of it in the form of equity rather than debt.

Sen. Charles E. Grassley, R-Iowa, took the lead in following the money. In a letter to Geithner, Grassley said he was “concerned … that this announcement is not what it seems.” He added, “In reality, this appears to be nothing more than an elaborate TARP money manipulation.”

In testimony by TARP’s special inspector general, Neil Barofsky, and in General Motors’ SEC filings, Grassley noted that the money was returned from an escrow account at the Treasury, rather than from company profits. He concluded, “The bottom line appears to be that the TARP loans were ‘paid off’ with other TARP funds into a Treasury escrow account. The TARP loans were not repaid with money GM was making from selling cars, as GM and the administration claimed. His speeches, press releases and television commercials.”

Responding on behalf of Geithner, Herbert M. Ellison, Jr., the assistant secretary for financial stability, acknowledged that the loan was repaid from an escrow account. However, Allison argued that Grassley’s description of the situation was inaccurate, as the account was nominally owned by General Motors. “Treasury retained approval authority over the use of funds from GM’s escrow account to protect the taxpayer, but the cash was still GM’s property,” he wrote. But ownership aside, the account was created during a company restructuring, and the money that went into it came not from car owners, but from the governments of the United States and Canada.

The Treasury argues that the repayment is still a remarkable achievement, as it means GM does not need to use the escrow funds for other expenses. That interpretation got a boost this week when GM, somewhat surprisingly, reported that it made $865 million in profit in the first quarter of the year and that it generated $1 billion in cash flow. (2) This was the company’s first profit since 2007. , not counting accounting adjustments following its bankruptcy restructuring last year, and is the most concrete evidence to date that the whittled-down automaker may have a chance to survive on its own.

But that doesn’t mean the Treasury will ever recoup all, or even most, of the roughly $50 billion taxpayers have sunk into GM to keep it afloat. Whether taxpayers recover most of their investment in GM depends on the timing and value of the initial public offering, or IPO, which the company hopes to stage sometime this year but could be pushed back by recent market turmoil.

To satisfy taxpayers, the company would need an estimated total valuation of $80 billion. That’s hard to imagine, given that in its older, much larger incarnation, GM’s peak market value was $53 billion — and that was achieved more than a decade ago.

The Obama administration has at least bought some time for a revamped GM to try to get itself off the ground. If it succeeds, the country could keep some auto-sector jobs that would otherwise be lost, though that’s debatable because any car GM sells only displaces vehicles that would have been produced by other manufacturers, many at US plants. It’s too early to see if GM can last long, and too early to gauge how much its turnover will cost the rest of us.

And it is certainly too early to declare that GM is anything but a ward of the state. This week’s favorable earnings report is a good first step, but all this fuss about paying back the government was nothing more than hot air.

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