A must see site for information on the status of the US government 2008 crisis bail-out money is here at Propublica. They’ve given us a complete list of the banks who took bailout money. They also tell us whether or not the government ever recuperated the money, and if they made a profit. Any profit the government made would have gone to US Treasury.
Notice the entries in the Propublica site for General Motors and Chrysler; these aren’t banks, they’re car manufacturers! The $700 Billion bailout was not strictly for banks. One component of the bail-out was the Troubled Asset Relief Program, aka TARP. TARP was for the banks. The $125 Billion that US Treasury used to buy preferred stock in banks came from the funds allocated to TARP. From The Balance and Propublica, we see that GM, GMAC, and Chrysler were allocated about $81.3 Billion from the federal government. General Motors specifically, the company that suffered the most, and a company I owned shares in at the time, went through the most extraordinary series of events:
First, GM received money from both the US and Canadian governments. It only makes sense because GM is a large employer in both the US and Ontario. The exact amounts were…
$52 Billion from the US Government..and $9.5 Billion from the Canadian and Ontario governments.
Although it is a smaller number than the $52 Billion from the US government, GM also received a bailout for GMAC. That one was for $17.2 Billion. In other words, GMAC was nationalized for $17.2 Billion. What is GMAC you asked? GMAC was the General Motors Acceptance Corporation. It was a bank that lent money, at first strictly to people buying GM cars, but before long, it got into the mortgage business. and was nationalized. In 2014, the US government sold its stake in GMAC, making a profit of $2.4 Billion. By that time, GMAC was renamed. It’s now Ally Financial!
The US Government forced GM into bankruptcy after the bailout. According to CNN,
“According to GM’s bankruptcy filing , the company has assets of $82.3 billion, and liabilities of $172.8 billion. That would make GM the fourth largest U.S. bankruptcy on record, according to Bankruptcydata.com, just behind the 2002 bankruptcy of telecom WorldCom.”
In exchange, it said that it would offer GM up to $30 Billion of additional loans. Bankruptcy, of course, wiped out shareholders, including myself. The US government wiped out equity holders again, just as they had done to Fannie and Freddie. They were able to do it because at that point, they owned 60% of GM. The Canadians owned 12%. In all fairness, bankruptcy was probably the only option given GM had $95 Billion of debt. What was the main source of this debt? Mismanagement. Health insurance liabilities and underfunded pensions were a huge part of GM’s downfall. The United Auto Workers, the Union that organized most, if not all, of the Big Three auto workers, shifted $50 Billion of health care liabilities for retired union members onto itself. GM completely shuttered its Saturn, Hummer, and Saab, after already having shuttered Oldsmobile and Pontiac. Furthermore, new employees would get much crappier health insurance than the old laid off employees. How many were laid off you ask? About 65,000. This was a roundabout way for GM to get rid of expensive legacy workers, and hire new, much cheaper workers, as it emerged from bankruptcy. The most impactful of all was the $27 Billion debt for equity exchange that the US government forced down the throats of GM bondholders. These bond holders owned UNSECURED GM bonds. What is UNSECURED debt? The Balance gives a great explanation. Unsecured debt means the loan has no collateral. So if you owned GM unsecured bonds, you couldn’t, for example, repossess a factory, or a welding machine. The only thing you can do as a unsecured debt holder is pursue the debt in a court of law. The most common form of unsecured debt is something consumers use on a daily basis: credit cards! The investors that owned unsecured GM debt had no choice but to accept the swap; instead of the bonds, they now owned common shares in the new GM. Common stock sits at the lowest level on the hierarchy of company ownership. Bondholders have first dibs to the company assets, preferred stockholders next, and common stockholders at the bottom. That’s why common stockholders get NOTHING in event of bankruptcy. So old GM bondholders were getting downgraded to common stock status. The US government took their place on the top of the totem pole, owning GM preferred stock and debt. All told, the new GM reduced its debt by over 80%, from $95B to a mere $16B.
Two final things on GM; first, Forbes has a great piece written by Jay Alix, the guy who organized the restructuring of GM. Before the bankruptcy happened, plans were already being made to split the company into two; there would be New Co, and Old Co. Old Co. had all the toxic assets and debt, whereas New Co had all the stuff that would make GM successful in the future. Jay Alix talks about how it was done, a very interesting first hand perspective worth a read.
Lastly, just like many companies, GM had and still has pension liabilities. During the bankruptcy, pensions were NOT invalidated (declared insolvent, failed), thankfully. This piece from the Economic Policy Institute explains why the invalidation (failure) of GM pensions would have been an absolute disaster. The biggest reason is that the US government insures private pension funds. When a pension fund closes, it leaves retirees with nothing; to guard against that, the US government created the Pension Benefit Guaranty Corporation (PBGC). You can read more about it here and here. The PBGC is a government chartered corporation. It is a government owned business, which means it is a socialist construct. The way it works is that private pension funds, for example GM’s employee pension fund, pay an insurance premium into the PBGC. So think of a pension fund going bankrupt as a hurricane; if that hurricane causes way too much damage, the insurance company could very well find itself unable to pay out claims. This is what would have happened in 2008-2008 if GM’s pension fund was closed; the PBGC would have had to pay out, and most likely, as the Economic Policy Institute puts its,
“…if the companies had not received the federal bailouts, and instead had undergone uncontrolled bankruptcies, their pension plans would have been terminated and billions of dollars in unfunded pension liabilities would have been transferred to the Pension Benefit Guaranty Corporation (PBGC), threatening the financial stability of that agency… the termination of the pension plans would also have made retirees aged 55 to 64 eligible for the federal health care tax credit. This would have put the federal government on the hook for billions of dollars in retiree health care liabilities. Moreover, the PBGC would not have guaranteed significant portions of the pension benefits earned by retirees, such as supplements for early retirees. The net result is that many retirees would have been hit with a major drop in their pension income.”
Notice how GM’s bankruptcy would have triggered a series of events, all negative. This is why bailouts happened in 2008 and 2009, because the government realized how interconnected government and private industry had become. They realized that, in actuality, there was no private and public sector in a crisis scenario; there is one entity, the country. This is the difference between the Great Depression era US economy, and the current US economy. Today’s economy has been back-stopped by numerous government agencies and government controlled corporations. Those agencies/corporations are nothing more than insurance companies. During good times, everything works great, and government involvement is minimal. In reality though, if the government is going to be involved, it must always be involved, during good and bad times. We have a habit in America of praising capitalism in good times, and demanding socialism in bad times. If the government is going to be involved in bad times, It must raise taxes, monitor, and fine offenses during good times. Unfortunately, we don’t do this, and it’s because we are determined to keep our reputation as capitalist, even though true capitalism disappeared many decades ago.