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The TARP Shuffle

A few weeks ago, General Motors and the U.S. Treasury Department took the dance floor together for a turn at the “TARP money shuffle.”

With much fanfare, the automaker’s chief executive officer Ed Whitacre announced that his company had fully repaid the bailout loans it received from the federal government. Five years ahead of schedule, no less.

It was great news for GM, which has been struggling to compete with Ford Motor Co., the only Detroit automaker to eschew government money. GM promptly broadcast a television ad trumpeting its accomplishment. Meanwhile, the government was pleased to have a chance to show that Troubled Asset Relief Program (TARP) funds haven’t been lost forever but will eventually find their way back to taxpayers. “We are encouraged that GM has repaid its debt well ahead of schedule and confident that the company is on a strong path to viability,” Treasury Secretary Timothy Geithner said in a statement.

But, while the announcement may have made for good public relations, there was not much substance behind the corporate chest-thumping. The money GM used to repay its debt to the government came, not from selling cars to customers, but from the government itself. And the repayment of $4.7 million to the United States, and another $1.1 billion to Canadian government entities, was just a tiny fraction of the company’s bailout money, most of which is in the form of equity rather than debt.

Sen. Charles E. Grassley, R-Iowa, took the lead in following the money. In a letter to Geithner, Grassley stated that he was “concerned...that this announcement is not what it seems.” He continued, “In fact, it appears to be nothing more than an elaborate TARP money shuffle.”

Drawing on testimony from Neil Barofsky, the Special Inspector General for TARP, and on SEC filings from General Motors, Grassley noted that the money was repaid out of an escrow account at the Treasury, rather than out of company profits. He concluded, “The bottom line seems to be that the TARP loans were ‘repaid’ with other TARP funds in a Treasury escrow account. The TARP loans were not repaid from money GM is earning selling cars, as GM and the Administration have claimed in their speeches, press releases and television commercials.”

Replying on Geithner’s behalf, Herbert M. Allison, Jr., Assistant Secretary for Financial Stability, acknowledged that the loan repayment came out of the escrow account. However, Allison argued that Grassley’s characterization of the situation was inaccurate, because the account was nominally owned by General Motors. “Treasury retained approval rights over GM’s use of the funds from the escrow account in order to protect the taxpayer, but the cash was still the property of GM,” he wrote. But ownership aside, the account was created during the company’s restructuring, and the money that went into it came from the governments of the United States and Canada, not from car owners.

The Treasury argues that the repayment is still a notable accomplishment, since it means that GM did not need to use the escrowed funds for other expenses. That interpretation received a boost this week when GM, somewhat surprisingly, reported that it earned $865 million in profit in the first quarter of the year, and that it generated $1 billion in cash flow. It was the company’s first profit since 2007, not counting the accounting adjustments that followed its bankruptcy reorganization last year, and it is the most solid evidence to date that the whittled-down automaker might have a chance to survive on its own.

But that does not mean the Treasury is likely to ever recover all, or even most, of the roughly $50 billion that taxpayers sunk into GM to keep it afloat. Whether taxpayers recover most of their investment in GM depends on the timing and value of an initial public offering, or IPO, that the company hopes to stage sometime this year but which may be pushed back because of recent market turmoil.

For taxpayers to be made whole, the company will need an estimated total value of $80 billion. That is hard to imagine, considering that in its old, much larger incarnation, GM’s peak market value has been estimated at $53 billion — and that was attained a decade ago.

The Obama administration has at least bought some time for a renovated GM to try to get itself off the ground. If it succeeds, the country may keep some auto-sector jobs that otherwise would have been lost, though that is debatable because any cars GM sells merely displace vehicles that other makers, many with U.S. plants, would have produced. It is too soon to see whether GM can survive in the long run, and too early to measure how much its turnaround is going to cost the rest of us.

And it is most definitely too soon to declare that GM is anything other than a ward of the state. This week’s favorable profit report is a nice first step, but all that hoopla about repaying the government was not much more than hot air.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us” and Chapter 4, “The Family Business."

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