Uncle Sam, are you helping GM or not?

Posted by: David Welch on February 2, 2009

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As if the government’s bailout efforts haven’t been silly enough, now General Motors has something else to worry about. If GM can get its bondholders to swap debt for equity—just like members of Congress and the Obama Administration want—the automaker will have to report the reduced debt as taxable income. That means that GM could end up with a tax liability as big as $7 billion, according to a report in the New York Times. That’s enough to bankrupt the company.

So GM is frantically lobbying Congress to get the liability waived. And well they should. If Congress and the Administration don’t waive the liability, it is tantamount to a tax on restructuring. It also throws into bankruptcy a company that the government is trying to keep solvent. This reminds me of President Reagan’s decision in 1986 to tax unemployment benefits, only the stakes are of Hummeresque proportions. Come on Uncle Sam, are you helping GM or not?

At least there seems to be a stomach for waiving this kind of tax liability. Three Senators, Kentucky Republican Jim Bunning, Olympia Snowe (R-Maine) and Arkansas Democrat Blanche Lincoln, pushed to suspend taxes on unemployment compensation. Maybe Congress will work to ditch this tax liability as well. If they don’t, then the loan program will be for naught.

The Federal Government could defer the liability. But even that is dicey. GM has made the case that it will be a money maker in a few years. If its restructuring plan slashes the debt by 70% like the plan says, and the company can replace veteran workers making $28 an hour with new hires making half the wage its labor and interests cost will drop big time. The company will have a shot at real profits. Off loading all of those retiree healthcare costs into a trust controlled by the union, which is supposed to happen in 2010, will save billions a year, too. But saying that GM will be a profit generator also assumes that the car market can get back to the 16 million or so cars a year that auto executives think is normal, and that GM will still have 20% market share.

Neither is a cinch. GM may be able to restructure itself back into the black in a couple of years. But generating the kind of cash to pay off its still-massive debt, develop new technology to meeting stiff fuel economy rules, engineer the models to compete with stronger Japanese rivals and then pay a deferred tax liability is a very tall order. I think the government is in for a dime and in for many dollars on this one.

Reader Comments

Ballbuster

February 2, 2009 8:00 PM

Many years ago, there was a slogan that what's good for General Motors is good for America, and vice versa. Somewhere in recent decades, the slogan has changed to what's good for GM is bad for the American people. Building inferior cars that many Americans refused to buy, GM's market share plunged from 75% to 22% within two decades. Mean while its capitalization capsized and needed taxpayer money to stay buoyant. After a massive $15Billion taxpayer bailout, GM still cannot see any light at the end of the tunnel. Come this March, GM will beg for another $15Billion from taxpayers without a promise of a turn-around while their corporate executives placidly collect million dollar salaries. All this at a time when the struggling working-stiffs are trying to hang-on to any job just to put food on the table and a roof over their heads. The taxpayers who are lay-off are told it is their own fault that they do not have valuable or broader job skills necessary to sustain them over this economic collapse. Ironically, at insolvent GM, Executives Wagoner, Lutz, and Wellburn, who have mismanaged the company for a decade, continue to receive free taxpayer money for their incompetent services. While the first slogan may be construed as not contemporaneous with the current economy, another equally illuminating slogan from an old published book is appropriate: On a clear day you can see General Motors.

Paul (Vw)

February 2, 2009 10:09 PM

Is there no end in sight to what the American taxpayer will have to dole out to Detroit?

Talley

February 2, 2009 10:35 PM

As an American citizen, if I borrow money from a bank, and that bank forgives the debt, then I as a taxpayer must consider it income for tax purposes. Sounds reasonable to me. According to your logic, however, GM should be given preferential treatment in this regard, in addition to that "silly" bailout they begged for. Pathetic, simply pathetic...

aaron cerny

February 3, 2009 5:01 PM

"building inferior cars that americans refuse to buy"........wow!?......what evidence do you have that GM cars are inferior?...fox news?.....think about it...how are YOU qualified to call GM products inferior?...what do YOU truley know about the engineering, manufacture, and marketing of automobiles?...if you don't like the bailouts, thats fine. but too many americans think they are experts on the big 3 business plans, and we are not.we don't know what it takes to be one of the biggest (and probably the most important) auto makers of all time. congress does'nt either. stop beating these guys up. they didn't gamble away their money on bad investments like AIG. they are dependent on consumer credit.and they pay taxes to the USA...not japan. whats good for american companies and american workers, is GOOD for the USA...try and deny that!

GM Employee

February 3, 2009 5:45 PM

There is certainly a large amount of animosity and misinformation in the public space concerning the Automotive Industry. This article brings to light some factual information and the authors opinion on it in an honest and supported way. However, some people like "ballbuster" enjoy using red-herring arguments to further their own self importance without substantially supporting they're ideas with clear facts. Yes, GM's market share has dwindled since the heyday of the 1970's; however, on a unit basis (actual number of cars sold) GM has increased their sales to some of the highest #s in its history in recent years. Just because 7 out 10 is a higher precentage than 20 out of 100 doesn't mean that no-one is buying GM cars. In fact, US Market share numbers suggest that GM sold 22% of the vehicles in 2008. Toyota was around 17%. Moreover, if Mr B. had actually spent the time to read the GM Turn-around plan or paid attention to the details, he would know that Senior management including the Board of Directors will be working for $1 salaries until GM is profitable. Will they have other compensation? Yes, performance based compensation like stock options and the like will be paid to them; no-one works for free. Lastly, the money GM received is a loan! For goodness sakes, why cannot anyone seem to remember the difference between a bailout and a loan? Free money my fat fanny; the US Government will make money on this transaction in the long run just like they did with Chrystler in the '70s. And even if GM needs more money in March, something that is highly likely in my opinion, although I am in engineering not finance, that too will be a loan which will be paid back with interest. Please share your opinions with the larger community but if you do so please base them on factual information like "Talley".

happy to pay

February 3, 2009 10:23 PM

I couldn't agree more. As a student in the U.S. with a tiny income as a tutor I couldn't believe how labyrithine the tax forms were. Now, as a Canadian working in Hong Kong, it takes me five minutes to file my annual taxes here, and zero minutes to file my Canadian taxes as my income is earned outside the country. The only allowable deductions are for charitable contributions, while interest and dividends are tax free. I almost look forward to filing [though not paying of course. ]

Broc

February 4, 2009 12:22 AM

Are you kidding me?! What we've given to GM is a drop in the bucket compared to what we've given to the banks. At least GM is moving mountains to put their house in order!!

That's more than I can say for Citigroup, JP Morgan, and Bank of America.

Robert Wilson

February 6, 2009 9:39 PM

Absolutely ridiculous. Give upwards of $700Billion to banks then watch then conduct offsites and pay bonuses. Give $15Billion to a company that supports upwards of 2 million jobs in this country alone and grill them at every turn. You people better realize that if you get your wish and our auto industry goes down that we will all struggle for decades to come. No one really knows what a Depression is - at least no one that anyone in the current generations have the guts to listen to.

Ken

February 8, 2009 2:55 PM

I would suggest that the article is "mislabled". Instead, IMHO, it should read "GM, Are You Helping GM or Not?" !!!

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Want the straight scoop on the auto industry? Our man in Detroit David Welch, brings keen observations and provocative perspective on the auto business.

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