Auto industry payback may surprise U.S. taxpayers

July 20, 2010

Auto industry payback may surprise U.S. taxpayers

BY JUSTIN HYDE
FREE PRESS WASHINGTON STAFF

WASHINGTON — Saving Detroit’s auto industry may be a better deal for U.S. taxpayers than anyone expected.

A Free Press analysis suggests that taxpayers could get back about $74 billion of the $86 billion the government made available in 2008 and 2009 to save General Motors, Chrysler and Ally Financial, the former GMAC.

So far, the industry has paid the government $18.3 billion in debt, interest and dividends, and the prospects for payback have improved thanks to a rebound in vehicle sales and profits at the three companies. That includes the $1.5 billion Chrysler Financial has paid off and a $5-billion aid plan for suppliers that turned a profit.

Although no independent analysis has found that the government could break even, GM, Chrysler and Ally have promised to try to pay back the U.S. Treasury entirely.

The reduced losses still would leave the auto industry efforts more costly than the rescues of Wall Street and the banking industry, which are turning a profit for the U.S. Treasury.

But even with a slower recovery, a successful GM stock sale and profits at Chrysler and Ally could help lift public anger at the industry and the Obama administration’s rescues.

"The prospects have modestly exceeded expectations," said David Sowerby, chief market analyst at Loomis Sayles & Co. "The outcome, due to the health of the patient, has made the doctor look better."

Where Uncle Sam’s money is

One year after the Obama administration pulled General Motors and Chrysler through bankruptcy while saving Ally Financial from collapse, the outlook for all has improved — even as the path for the government to unwind its investments remains cloudy.

Any estimate of how much those stakes are worth today involves many assumptions, and the U.S. Treasury may need several years to unwind its stakes. But based on interviews, company data and forecasts, here’s a detailed look at where the federal stake in each company stands today:

General Motors

With 60.8% of GM’s equity, and more than $50 billion spent on its rescue, the government’s return on its GM stock is the elephant in the room as a factor in the cost of rescuing Detroit’s auto industry.

Based on the value of GM’s old bonds, the company has a market value of about $51 billion as of Monday, placing the U.S. Treasury’s equity stake at about $26.3 billion. Combined with the $7 billion already paid back and the $2.1 billion it holds in preferred shares, the government’s investment in GM would be worth $35.5 billion, for a paper loss of $14.6 billion.

Yet some Wall Street analysts believe GM will be worth far more — perhaps as much as $100 per share. They point to the company’s low debt, a stream of new models and the ability to generate cash thanks to sharply lower costs.

Last month, JPMorgan analyst Eric Selle estimated GM’s equity was worth $70 billion, while CRT Capital Group analyst Kirk Ludtke estimated GM at $75 billion. At $70 billion, Treasury’s GM shares would be worth $36 billion, with the government’s entire investment valued at $45 billion.

But GM has many risks: new management, a costly and flailing European arm and sluggish U.S. market share in a shaky U.S. economy. Nathan Mersereau, president of Planning Alternatives, a Bloomfield Hills-based investment firm, says the GM name can only go so far.

"The economic environment poses a huge risk, because consumers have to be able to buy vehicles," Mersereau said. "There has to be a robust enough economy to support growth."

The Treasury has declined to say how many of its shares might be sold up front, or how long it would take to sell its stake.

Chrysler

While the U.S. government has the wheel at General Motors, it’s not even in the front seat at Chrysler, and the company may be the hardest to value among all the government’s stakes.

The UAW’s trust fund for retiree health care owns 55%, while Fiat owns 20% and the Treasury holds 9.9%.

Chrysler has repaid $2.5 billion of the $12.8 billion spent by the Treasury, and in addition to its equity stake the U.S. government holds another $7.14 billion in Chrysler’s debt — essentially an IOU with interest. CEO Sergio Marchionne has vowed to pay it back by 2014.

Fiat can only gain a majority control of Chrysler after the automaker pays off its government loans. The retiree trust can only earn a maximum of $4.25 billion on its stake; if the shares are worth more, shares or the cash go to the U.S. government.

So far, Chrysler appears to be making some progress toward financial targets laid out by Marchionne. Based on a Free Press analysis, if Chrysler hits its goals and goes public a year from now, the company could claim a value of $13.6 billion. Depending on what options Fiat has exercised, that would leave the government with a value of about $1 billion on its shares, and a net loss of $2.4 billion.

There could be another strategy for Marchionne: buying Chrysler outright. U.S. officials and VEBA overseers have said they don’t want to run an automaker. If Marchionne can prove to Wall Street that Chrysler’s finances are in order, he could pay off the U.S. debt with private debt and buy out the other shareholders.

Ally Financial (GMAC)

The turnaround at Ally hinges more on houses than cars.

Ally, the lending business formerly known as GMAC, is struggling with the hangover from the mortgage bust, trying to find a way to fix its ResCap mortgage unit while bolstering auto lending.

The Treasury owns 56.3% of Ally’s equity, has named a majority of its board of directors, and holds an additional $11.4 billion in convertible and preferred shares. The Obama auto task force has never given an estimate of how much it expects to lose from Ally. But Ally CEO Michael Carpenter has said the company was making progress in its turnaround plan. It paid the government $1.57 billion in dividends on its preferred shares.

Two months ago, Carpenter told investors that Ally and the Treasury were in talks over how to take the government out of the company, including a possible public offering of shares. Ludtke said last month that based on the value of similar auto lenders, the Treasury could lose as little as $200 million on its stake.

Ally spokeswoman Gina Proia said the company had set its sights even higher.

"Our intention is to pay back the taxpayer investment in full," she said.

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