Why The Auto Bailout Is Far Costlier Than Treasury Claims

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Via Instapundit, the Treasury Department now estimates taxpayers' losses on the auto bailout at $25 billion. This figure, however, relies on some optimistic assumptions; the reality is likely to be far worse.

One optimistic assumption is noted by the Detroit News in the linked article: GM's stock price. The $25 billion figure (equal to 46.7 solyndras) is based on GM's closing price at the end of May, $22.20. However, the stock has continued to decline through the Summer and despite rallying off its late July lows, the stock now stands at $20.47, at which price the loss on GM is $850 million (or 1.6 solyndras) greater than in May. Were the stock to retest its 52-week low of $18.72, the loss would be $1.75 billion (or 3.3 solyndras) more than the Treasury estimate.

Optimistic assumptions are also embedded in GM's balance sheet, for example in its pension plan accounting. At the end of 2011 GM estimated that its domestic pension plans were underfunded by $25.4 billion, but this figure relied on an assumed long term return on plan assets of 8.00%. When ten-year US Treasuries are yielding 1.65%, "optimistic" doesn't quite capture the full measure by which GM's estimate is detached from reality. The term "lunatic" springs to mind as a more accurate substitute.


A recent market transaction illustrates just how faulty GM's accounting is. GM is ridding itself of what it claims are $26 billion in pension liabilities, mainly by shifting them to Prudential. If the $26 billion estimate were accurate, then that should be roughly what it costs GM to rid itself of the liability. How much is GM actually spending? Try $32 billion: $29 billion to Prudential, plus $3 billion in pension buyout costs. If GM has similarly underestimated the value of the rest of its pension obligations, then the actual level of underfunding at the end of 2011 was not $25.4 billion but $50.5 billion, roughly double the claimed amount.

Then there are the assumptions we can't see, for example, those surrounding the Bank of Obama, aka Ally Financial. Best known now as a retail bank with cutesy commercials, Ally is really just the old GMAC - the financing arm of GM. The government directly owns 74% of Ally, and effectively controls another 9.9% still owned by GM.

How much will we lose on Ally Financial? Nobody knows, because we don't have a market value for it. The planned IPO was pulled in June, allegedly due to poor market conditions. In other words, going ahead with Ally's IPO this Summer would have made explicit, heading into an election campaign, just how many billions of taxpayer dollars were squandered propping up GM's own subprime mortgage lender. Better to pull the IPO and let the full scope of the loss remain unquantifiable, lest the proles start asking questions.

I could keep going but you get the idea: a taxpayer loss of $25 billion on the auto bailout isn't so much an estimate as a wish.