Surprise! GM and Chrysler won’t be able to pay us back

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Big shocker! General Motors and Chrysler probably won’t be able to pay back all those loans we’ve extended them! From the just-released September report of the Congressional Oversight Panel assigned with keeping an eye on the Troubled Asset Relief Program:

Although taxpayers may recover some portion of their investment in Chrysler and GM, it is unlikely they will recover the entire amount. The estimates of loss vary. Treasury estimates that approximately $23 billion of the initial loans made will be subject to much lower recoveries. Approximately $5.4 billion of the loans extended to the old Chrysler company are highly unlikely to be recovered. The Congressional Budget Office earlier calculated a subsidy rate of 73 percent for all automotive industry support under TARP and recently raised its estimate of the cost of that assistance by approximately $40 billion over the previous estimate.

This comes as we’ve been getting mostly good news about the money Treasury extended to banks last fall. Even Fannie Mae and Freddie Mac might, if we gave them long enough, be able to pay us back eventually.

Why the difference between financial firms and automakers? Part of it is just that GM and Chrysler were struggling companies that had been losing market share for years before the financial crisis hit, while U.S.-based financial firms were doing quite well. The banks simply aren’t in the same competitive bind GM and Chrysler are. But another really important part of the equation is that it’s pretty easy for the Federal Reserve to create conditions that allow banks to make lots of money—mainly by keeping short-term interest rates really low—whereas doing that for the automakers is much harder. Cash for Clunkers was definitely a gift to the auto industry, but compared with all the Fed’s lending programs it wasn’t very big, and it benefited other companies  more than it did GM and Chrysler. The only way to guarantee GM and Chrysler’s profits would probably be to impose a big surcharge on cars made by other manufacturers. Which ain’t going to happen. Basically, it’s politically easier in the U.S. to extend corporate welfare to banks than to carmakers. Strange, no?

Does this mean the GM/Chrysler bailout was a failure? Well, as the Elizabeth-Warren-led COP points out again and again in the report, it depends on what the Administration was trying to accomplish:

Was the primary purpose of this intervention to provide bridge funding to the automakers, with the expectation that these were viable companies that could eventually repay taxpayers in full? Was it to prevent an uncontrolled liquidation because such a prospect posed a systemic risk to the financial markets and the overall economy? Was it to advance broader policy goals, such as improving fuel efficiency or sustaining American manufacturing and jobs? Or was it some combination of these? To date, Treasury‘s public statements provide little clarity, as each of these objectives has been cited at various times.

Sure seems like that second reason—”to prevent an uncontrolled liquidation”—is the one Treasury ought to be playing up. Because by that standard the bailout has been a spectacular success.