In November 2013, one of the largest bankruptcies in U.S. history came to an end when the Treasury Department announced it would sell its remaining 31.1 million shares by the end of the year. The $51.043 billion bailout will only cost taxpayers $10.4 billion. Treasury recouped the other $39.6 billion by selling its shares of GM stock. Treasury also gained back $12.23 billion of the $16.29 billion it invested in GMAC. The automaker's finance arm has been renamed Ally Financial Inc., and it's still mostly owned by taxpayers. (Source: WSJ, U.S. to Sell Rest of GM Stake by Year-End, November 22, 2013)
The government's goal was to make GM more efficient, so it could become profitable when U.S. auto sales returned to 10 million vehicles a year. Sales hit a peak of 17.296 million in September 2005, but fell until they hit their low point of 9.545 million in June 2009 -- the same month GM filed for bankruptcy protection. Sales returned to 10.758 million in Julu, when GM emerged as two separate companies. Old GM held most of the debt, while New GM held the assets, $17 billion in debt, the contract with unions, and its underfunded pension funds. (Source: Macrotrends, Auto Sales Historical Chart )
The U.S government bought 60% of GM in return for the funding needed to keep the company afloat while it was reorganized. Canada bought 12%. A union health trust received 17.5% stock ownership in lieu of the $20 billion needed to cover benefits for 650,000 retirees. Bondholders received 10% stock ownership in lieu of $27 billion in bonds. GM shut-down 11 factories and closed 40% of its 6,000 dealerships. On May 2, 2009, GM stock fell below $1 a share for the first time since the Great Depression. (Source:CNN, "Bankruptcy Judge Approves Sale of GM Assets," July 6, 2006; Washington Post)
Here's a timeline of GM's bailout, explaining why it happened.
High gas prices shot SUV sales. Credit: Getty Images
Toyota beat GM to become the world’s leading auto maker. Demand
for smaller cars in the U.S. and Europe
drove sales of Japan
’s auto makers. Toyota’s strategy was to build plants, especially in the U.S., to meet surging demand. GM's only strategy was to offer zero percent financing to sell SUV's and other large vehicles. As gas prices soared, GM's sales plummeted.
Automakers assumed the big hand of government would be there to bail them out. Photo: Getty Images
GM, Chrysler and Ford asked the government for a
$50 billion bailout to avoid a bankruptcy that would create three million layoffs.
The lame-duck Congress sent them back to Detroit empty-handed. Senate leaders required the Big 3 to return only when they could "...present a responsible plan that gives us a realistic chance to get the needed votes."
Legislators balked at bailing out more fat cat businesses. Photo: Getty Images
Most Americans, and Congress, agreed that the automakers had brought this on themselves by not being competitive with Japanese and German firms. They should have cut production, jobs and dealerships years ago.
GM should have focused on smaller cars, like this Nano. Credit:Tata Motors
In 1953, former General Motors President Charles Wilson said "What's good for our country was good for General Motors, and vice versa." In those days, auto production was the heartbeat of the American economy. However, that statement is no longer true. GM's bailout and subsequent bankruptcy was a result of it not remaining competitive.
Paulson agreed to bail out the Big 3 using TARP. Photo: Getty Images
and Treasury Secretary Hank Paulson
agreed to lend GM, GMAC and Chrysler $23.4 billion out of TARP
funds. Ford did not really need any of government help, since it had enough cash to avoid bankruptcy. It only asked for funds to avoid being penalized, since the government was helping its competitors.
President Obama didn't want to risk losing more U.S. jobs. Photo: Getty Images
The Federal Government took control of GM and Chrysler. The Feds fired GM CEO Rick Wagoner, and required Chrysler to merge with Italy's Fiat SpA. In return, the government lent both companies enough funds to stay afloat and provided incentives to spur new car purchases. In effect, the government nationalized the two auto-makers to force them to be more competitive.
GM should have stuck with this fuel cell vehicle. Photo: GM
The Feds set new auto efficiency standards to increase the competitiveness of the U.S. auto industry. National leadership is required to motivate car makers to make the expensive changes needed. Once U.S. autos are more fuel efficieent, they will compete more effectively against foreign automakers, who have been leading the global auto industry in this arena.
Dealerships stocked with unsold Chryslers. Photo: Getty Images
Chrysler closed underperforming dealerships as part of its bankruptcy proceedings. The Federal Government merged Chrysler with Italy's Fiat SpA, creating the world's sixth-largest automaker.
American auto companies ignored small and low-mileage cars, leading to their demise. Photo: Getty Images
Here's the entire auto industry bailout story, including Chrysler, Ford and auto suppliers. Find out the importance of the industry to the overall economy, and how the taxpayer has made out.