Posted by: David Welch on April 29, 2010
You’d think that General Motors Chairman and CEO Ed Whitacre, who built AT&T with $200 billion worth of deals, would be a savvy poker player. Well, judging from the grousing over his recent television ad, in which he talks about paying off the government’s loans ahead of schedule, he may have overplayed his hand. Yes, GM paid off $8.4 billion in loans to the U.S. Treasury and the governments of Ontario and Canada about five years early. But crowing about it in a television commercial has generated some controversy.
You don’t have to go too far to find someone in the commentariat grousing about how GM paid back the loans. The gripe is that GM paid the debt portion of the government’s investment with cash the company got from the government’s equity investment. Here’s how it works. When GM emerged from bankruptcy, it got $49.5 billion in cash. The U.S. Treasury and governments of Ontario and Canada gave GM $8.4 billion in loans. The rest of the money was given to GM in exchange for stock. The U.S. government owns 61% of the company and Canada owns 11.7%. Back in July, the feds decided to give GM enough cash to get through a longer, deeper recession, according to a former member of President Obama’s Auto Task Force, who asked not to be named because the discussions were private. As the economy started to recover and auto sales have climbed, GM found it had more cash on hand than it needed. Repaying the government loans wasn’t such a hard thing to do. So when Whitacre goes on television saying “we have repaid our government loans, in full, with interest, five years ahead of the original schedule,” his comments raised a few hackles. “They were repaying Uncle Sam with money they already got from the government,” snapped Maryann Keller, an independent consultant in Stamford, Conn. Senator Chuck Grassley (R-Iowa) weighed in during his weekly webcast calling Whitacre’s television appearance, “a little bit disingenuous.” He also said, “They’re paying it back with bailout money that they have from the federal government in the first place.”
To be fair, there is plenty of politics in play. Some critics simply didn’t like the bailout in the first place. The early payment is a small sign that GM’s business is getting back on track. If the company’s sales were tanking and cash flow was a problem, they’d keep all of the money until things turned around. GM’s sales are up 18.4% this year. GM-North America President Mark Reuss has done a commendable job of reining in incentive spending, giving GM better pricing on its cars. The company may turn at least an operating profit this year. So far, Whitacre and GM are doing many of the things they need to do to turn the business around.
The problem is that the early payoff shows only that GM is stable enough to give some money back. They aren’t making big profits yet. It’s one small benchmark on a longer haul. Going on television raised a hue and cry to a feat that some see as pretty marginal. There’s one other problem with Whitacre’s ad. He kicks it off by saying, “a lot of Americans didn’t agree with giving General Motors a second chance. Quite frankly, I can respect that.” Why would Whitacre want to remind Americans that the company needed to be bailed out? GM has a bit of momentum in the market. Vehicles like the Chevrolet Camaro, Buick Lacrosse sedan and Cadillac SRX and Chevy Equinox SUVs are red hot. Clearly, plenty of consumers are getting past the now-tired “Government Motors” tag and buying GM’s cars on their merits. If Ed goes on TV again, he might want to start with that.