Software Nerd

Sunday, April 25, 2010

GM repays government loan with great fan-fare

A few days ago, GM announced that they were repaying, in full, the loans from the U.S. and Canadian governments amounting to $8.1 billion. This was being repaid years before schedule.

Yet, the curious thing is that GM reported a loss of $4.1 billion for the period since the company was reorganized (July 10th 2009) up to the Dec 31st 2009.

Of course, it is possible to have positive cash-flows while having losses. A company like GM has many huge non-cash expenses. So, when I saw those two figures, I assumed that GM must have done well on the operational front, gaining cash with which to repay the loan, but must have taken a loss by putting a more realistic estimate on the amount they will owe on their pension plan (a book entry which does not affect short-term cash, but shows as an expense).

Turns out that it is not so innocent. Actually, the government gave GM a loan of $52 billion. Then, during the re-org, GM wrote off its debts to all sorts of folk, and also converted $43 billion of the government's loan to equity. The net effect is that the government gave GM $43 billion and got an ownership interest, and the government also gave GM $7 billion and called it a loan. GM took the $52 million and paid back the $7 billion loan, even while they lost another $4 billion. It is easy to do, and they can do it a few more times, before the government's $43 billion is all gone. The structure -- paying you back with your own money, while making losses on the use of the money -- is the classic structure of a Ponzi scheme.

Now GM's CEO, Ed Whiteacre, has an ad with himself in it, touting the repayment. Watch the ad with the renewed knowledge that this guy is lying. (His college professor probably taught him there was no objective reality anyway.)

Here's a more detailed article on the subject.


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