The Treasury Department says in a new report the government expects to lose more than $25 billion on the $85 billion auto bailout. That’s 15 percent higher than its previous forecast.
In a monthly report sent to Congress on Friday, the Obama administration boosted its forecast of expected losses by more than $3.3 billion to almost $25.1 billion, up from $21.7 billion in the last quarterly update.
The report may still underestimate the losses. The report covers predicted losses through May 31, when GM’s stock price was $22.20 a share.
On Monday, GM stock fell $0.07, or 0.3 percent, to $20.47. At that price, the government would lose another $850 million on its GM bailout.
The government still holds 500 million shares of GM stock and needs to sell them for about $53 each to recover its entire $49.5 billion bailout. At the current price, the Treasury would lose more than $16 billion on its GM bailout.
Obama says that both companies would have gone under without the bailout (started by George W. Bush, with the arm-twisting bankruptcy run by the Obama administration), but a greatly-reduced Chrysler ended up being sold off to Fiat anyway. Ford, meanwhile, didn’t take the bailout — and managed to do just fine. The only thing accomplished by the Obama administration was the protection of UAW contracts and the shift of liabilities tied to pensions and benefits from GM to taxpayers. Those kinds of liabilities could have been addressed in a normal bankruptcy without government intervention — but it would have turned out much worse for Obama’s allies in Big Labor.
So how costly could the bailout get, anyway?
A lot depends on whether GM can alleviate its current woes, especially in Europe. And a lot depends on when, exactly, the U.S. government decides to sell all the shares of GM that it currently holds.
Let’s break down the cost of the auto rescue. The government has already sold its shares of Chrysler, incurring a loss of about $1.5 billion. That money can’t be recovered. It also has a large stake in Ally Financial, an auto finance company. If those two firms continue to struggle, then the U.S. Treasury will have to sell its stock at a loss. That’s where the cost estimate of $25.1 billion comes from.
GM, for its part, has hit a rough patch. The U.S. auto market is still relatively soft, with auto sales this year projected to hit 14.2 million. That’s much better than the past few years, but it’s still below the economy’s potential — which might be as high as 16 million cars per year. Worse still, the recession in Europe is wounding GM, which has a lot of factories running at low capacity overseas. Here in the United States, GM was able to restructure its operations and renegotiate its union contracts to deal with the recession. That’s harder to do in Europe, where labor laws are stricter. And GM is still trying to fill a $25 billion hole in its pension obligations to workers.
While GM’s stock price is hovering at around $20.25 per share, some analysts think the company has a chance of recovering, with the share price rising higher. If GM’s stock were to rise to $35 per share (this is just hypothetical), taxpayers would take a smaller — though still substantial — loss.
“That’s led a lot of people to ask why the government should sell its shares now, with the market not yet recovered,” says Sean McAlinden, chief economist at the Center for Automotive Research. He notes that there are still reasons for optimism with GM. “It’s a leaner company now, they’re making better cars,” he says. In North America, at least, GM is making roughly $2,200 on each car it sells — about five times as much as it did before the bailout forced it to restructure.
But, of course, there’s also the risk that GM could continue to struggle. If that happens, taxpayers could lose even more money. The Treasury Department is unlikely to offload its GM or Ally Financial stock before the November elections. But it’s unclear what will happen after that.