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GM Bankruptcy Filing

The Facts and the Impact on the Economy


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.

1. 2007 - Why Toyota Replaced GM as Number 1 Automaker

girl putting gas pump to temple
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.

2. Nov 08 - Congress Refuses to Bail Out Automakers

the big hand of government
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."

3. Nov 08 - Most Agreed the Big 3 Should Go Bankrupt

Barney Frank and Chris Dodd
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.

4. Dec 08 - What's Good for GM Is No Longer Good for the Economy

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." However, that statement is no longer true.

The bailout will really only make a difference for GM, since Chrysler was sold off and Ford didn't really need the cash. With or without the bailout, GM will cut production, jobs and dealerships, as it should have done years ago. Ford, Toyota and Honda will pick up market share and increase factories and jobs in the U.S. once the recession is over. The loss of GM will be like the loss of Pan Am, TWA and other companies that had a strong American heritage, but lost their competiveness -- perhaps a tug on the heartstrings of America, but not really bad for the economy.

The auto industry contributes 3.6%, or $500 billion to total U.S. GDP output. This means that the current 30% decline in auto sales will translate directly into a 1% decrease in economic output. However, these figures include foreign-owned as well as the Big 3 auto makers. The economic slowdown is causing GM to slash its employment and production, whether it receives a bailout or not. Furthermore, once the recession is over, Toyota and Honda will continue to increase their U.S. factories. As a result, the auto industry bailout is not seen as critical to the U.S. economy as the rescue of AIG or the banking system, and not a good use of the $700 billion bailout fund.

5. Dec 08 - GM, Chrysler Receive Bailout Funds, Not Ford

Former Treasury Secretary Hank Paulson
Paulson agreed to bail out the Big 3 using TARP. Photo: Getty Images
President Bush 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.

6. Mar 09 - Feds Take Over GM, Chrysler to Protect U.S. Auto Industry

auto factory
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 require that Chrysler merge with Italy's Fiat SpA. In return, the government will loan both companies enough funds to stay afloat and provide incentives to spur new car purchases. In effect, the government is nationalizing the two auto-makers just as it did AIGFannie Mae and Freddie Mac. Obama's goal is to force the companies to change strategy, and become more competitive in the global economy.

Government funding provided many incentives for new car buyers.

7. May 09 - Obama's Auto Efficiency Standards Good for Competitiveness

GM's fuel cell vehicle
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.

8. May 09 - Chrysler Bankruptcy Closes Dealerships

cars on a lot
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.

9. Summary of the Auto Industry Bailout

gas pump
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.

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