When it comes to General Motors, President Barack Obama has stressed that federal officials are "acting as reluctant shareholders," as he put it June 1. But his decision to plow $30 billion more into the company for a majority ownership stake makes it clear that the government is investing in earnest.
So what would it take for that investment to pay off? Judging from the figures so far: ample patience. At the most basic level, GM's market value will have to surpass that of McDonald's (MCD)—rising to nearly $69 billion just for taxpayers to break even. On May 29, as investors resigned themselves to GM's bankruptcy, the company's market capitalization was less than $500 million. In a background briefing the day before GM's filing, a senior Obama Administration official said it's unclear how taxpayers will fare. "I don't know how much we're going to recover. We hope to recover as much as we can," he said.
Before this week, the government had shelled out about $20 billion in loans for General Motors, and on June 1 officials said U.S. taxpayers would plunk down an additional $30 billion. Most of those loans, about $41.2 billion worth, will be converted into equity, giving Uncle Sam 60% of the new GM if it emerges from bankruptcy in 60 to 90 days, as planned. The remaining $8.8 billion would persist as loans under the reorganization plan.
"A Highly Speculative Investment"
So if 60% of the company cost taxpayers $41.2 billion, the revitalized company's stock-market value must reach $68.7 billion for the investment to break even. Broadly similar results are yielded by Canadian contributions to the reorganization—$9.5 billion for a 12% stake and $1.7 billion in debt and preferred stock—and the holding that a union benefit plan would get in return for some of its claim on the automaker: a breakeven point between $62 billion and $69 billion.
With the company's market value hovering recently around $500 million, there's a steep financial slope to climb at the very least. And some are more skeptical. "The likelihood of it getting to the equity being worth anything seems very slim to me," says Kurt Brouwer, a financial adviser in Tiburon, Calif., who grew up in Grand Rapids, Mich., and has relatives who still work at U.S. automakers. "If you want to call it an investment, you'd have to call it a highly speculative investment."
Far more is at stake for the government and taxpayers than a financial play. Policymakers are worried that the uncoordinated bankruptcy of a company GM's size would throw tens of thousands out of work when the economy can little withstand such a shock.
Chrysler's Profitable 1979 Bailout
Nor do long odds mean taxpayers are necessarily out of luck. As officials from both parties were fond of reminding the public last fall, bailouts sometimes turn a profit for the government. As lawmakers struggled with how to address the foreclosure crisis last fall, for example, many cited the Home Owners' Loan Corp.—the Great Depression's HOLC—which bought and refinanced home loans and is widely described as having turned something of a profit over its nearly two decades in existence.
More to the point, when the federal government bailed out Chrysler in 1979 with $1.2 billion in loan guarantees, or $3.5 billion in today's dollars, the automaker repaid the loans by 1982—ahead of schedule. Taxpayers collected $311 million by auctioning off the Chrysler stock warrants received as part of the arrangement.
In the case of GM and Chrysler, plans to foster low-emission, high-efficiency vehicles could pave the way for the auto industry to recover and become profitable. But it's sure to take time.
"It's got to be looked at as a long-term investment," says James Holtzman, a certified financial planner and CPA with Legend Financial Advisors in Pittsburgh. "But you've got to look at it speculatively before that, probably for at least five years."
It will certainly take a while. Sources close to the United Auto Workers and the Treasury Dept. say neither wants to hold the stock for long. But it will take 6 to 18 months before the company is again publicly traded—and longer still for GM to appreciate in value. Says GM President and CEO Frederick "Fritz" Henderson: "This is a question of years, not months."
Francis is a correspondent in BusinessWeek's Washington bureau.