The Role of TARP Assistance in the Restructuring of General Motors
Released: 2014-03-18T00:00:00

Summary:
In 2008 and 2009, collapsing world credit markets and a slowing global economy combined to create the worst market in decades for production and sale of motor vehicles in the United States and other industrial countries. Concern about the economic impact of a possible collapse of large parts of the U.S. automobile industry led both the Bush Administration and Members of Congress to seek legislative avenues to assist the automakers. Ultimately, General Motors Corporation (Old GM) and its successor General Motors Company (New GM) together received more than $50 billion in federal assistance through the U.S. government's Troubled Asset Relief Program (TARP). Using this assistance to restructure, GM closed plants, cut its hourly and salaried workforce, shed three brands, reduced debt, introduced new vehicles, and implemented changes to reduce retiree legacy costs.
In exchange for this financial support, the U.S. Treasury received 60.8% of the new company, with the rest of New GM held by the United Auto Workers (UAW) retiree health care trust fund, the governments of Canada and Ontario, and holders of Old GM's bonds. GM was not the only company that received TARP funds as a result of the 2008-2009 financial crisis. More than 700 institutions received support, with the U.S. government taking ownership stakes in five large companies: GM, Chrysler, GMAC (now called Ally Financial), AIG, and Citigroup. In general, ownership of private companies was not a goal of TARP, and the U.S. government has sought to reduce its ownership stakes when possible while maximizing the taxpayers' return from the assistance.
The federal government sold its shares in General Motors Co. in different ways over time, including (1) a large initial public offering (IPO) in late 2010, (2) sale of stock directly to GM in December 2012, and (3) ongoing sale of stock into the public market. For the U.S. government to have fully recouped the nominal value of its $50.2 billion assistance, the government would have had to receive an average price of more than $45 per share for its holdings. In reality, the government received between $27.50 and $38.32 per share as it sold stock between December 2010 and December 2013. GM stock reached its highest point since the 2010 IPO, nearly $42 a share, after the government finished selling its GM stock in December 2013.
Including both the sales of stock and principal recoupment, the government realized $11.2 billion in losses on the assistance for GM, which could be partially offset by $0.7 billion in net income for a final shortfall of $10.5 billion. With the final sale of stock, all of New GM's connections to TARP are complete. Restrictions arising from TARP participation, including a ban on New GM owning corporate jets, certain reporting requirements, and executive pay limits, have been eliminated.

subsections: section_title: Introduction
paragraphs: In 2008 and 2009, collapsing world credit markets and a slowing global economy combined to create the weakest market in decades for production and sale of motor vehicles in the United States and other industrial countries. U.S. light vehicle production fell by more than 34% in 2009 from 2008 levels, but the year-over-year fall-off was more acute for General Motors Corporation (Old GM), whose U.S. production dropped by 48%, and for Chrysler LLC (Old Chrysler), whose U.S. production fell by 57%. A similar pattern was reflected in U.S. light vehicle sales , which fell from just over 16.5 million units in 2007 to 10.4 million units in 2009.
The production and sales slides were serious business challenges for all automakers, and rippled through the large and interconnected motor vehicle industry supply chain, touching suppliers, auto dealers, and the communities where automaking is a major industry. Old GM and Old Chrysler were in especially precarious positions. The immediate crisis that brought these two companies to bankruptcy was a loss of financial liquidity as the banking system's credit sources froze and neither company had enough internal reserves to weather the economic storm. As a result, they turned to the U.S. government for assistance in November 2008.
In December 2008 and the early months of 2009, both automakers and two auto-financing companies received federal financial assistance from the Bush and Obama Administrations. As discussed later in this report, that funding enabled Old GM and Old Chrysler to begin restructuring their operations, a process that was continued in bankruptcy court.
Alone among the world's major automakers, Old GM and Old Chrysler filed for bankruptcy in 2009 and, with oversight from the Obama Administration as well as the bankruptcy court, restructured their operations in an attempt to become more competitive companies. New boards of directors were appointed for both New GM and New Chrysler, with New GM's board members initially chosen by the U.S. Treasury Department. Both reorganized companies had sizable ownership stakes held by the U.S. government and the United Auto Workers (UAW) union's retiree healthcare trust.
As auto markets improved in 2010, so too did New GM's balance sheet and its outlook. The company paid off its remaining $6.7 billion federal loan and repurchased $2.1 billion in preferred stock held by the U.S. government. This left the government holding more than 900 million shares of common equity received in return for assistance from the Troubled Asset Relief Program (TARP). The Treasury has reported that the effective original cost of these shares in New GM was $43.52 per share. Sales of stock made at lower prices result in losses being recorded by the Treasury.
New GM's stock was offered in an initial public offering (IPO) in November 2010, with the U.S. government selling more than 412 million shares, thus reducing the government's ownership share to 32%. No shares were sold for over two years following the IPO.
The U.S. government began selling its remaining 500 million shares of New GM stock in December 2012, with the announced plan of divesting its remaining shares by early 2014. The final sales of GM stock closed ahead of this 2014 deadline, in December 2013. All of these sales were made at prices below the government's $43.52 per share average cost. (See " Assessing the Cost of TARP Assistance for GM ," below, for more information.) These sales effectively end federal assistance to GM, although there are some government claims still outstanding in the bankruptcy process of Old GM.
section_title: General Motors' Capital Crisis in 2008-2009
paragraphs: General Motors Corporation was a publicly traded company from 1916 until it filed for bankruptcy in June 2009. It faced a capital crisis in 2008 and 2009 because the normal avenues for raising capital were unavailable: auto sales were plummeting; the company had limited success in selling off assets; its efforts to cut costs were affected by the long timeline required to determine the efficacy of such steps; and sources of capital in the open market were frozen by the financial meltdown. As a consequence, the company's executives tried to arrange U.S. government bridge loans beginning in the fall of 2008. As Old GM's then-Chief Executive Officer (CEO) Fritz Henderson stated in the company's bankruptcy court filing:
By the fall of 2008, [Old GM] was in the midst of a severe liquidity crisis, and its ability to continue operations grew more and more uncertain with each passing day. The Company previously has recognized the need for bold action to modify and transform its operations and balance sheet to create a leaner, more efficient, productive and profitable business; and it had expended a tremendous amount of resources and effort, on operational, strategic partnering, and financial fronts, to accomplish this task. Unfortunately, because of the continuing and deepening recession, aggravated by the collapse of Lehman Brothers Holdings on September 15, 2008, GM was not able to achieve its objective. As a result of the economic crisis, the Company was compelled to seek financial assistance from the federal government.
When capital markets are functioning normally, companies might arrange for debt financing through a major investment bank. In 2007, Alan Mulally, Ford Motor Company's president and CEO, arranged for Ford to borrow $23.5 billion to finance restructuring. Private capital was still available at that time, allowing Ford to mortgage all of its assets to obtain a large loan. 
As Old GM's bankruptcy filing indicated, these avenues for raising capital were not available in 2008 and 2009. By then, Old GM was facing extreme financial stress, for several reasons: 
Decline in the U.S. auto market. In 2008 and the first half of 2009, U.S. auto sales were in a freefall, ultimately dropping further than at any time in three decades. The 2009 combined U.S. sales of Old GM and GM fell by 30% (compared with 2008 sales), a much steeper decline than any other automaker, except the combined sales of Old Chrysler and Chrysler. The decline in sales further dried up financial resources that Old GM could have used. Steady loss of U.S. market share. General Motors—which at its peak sold 51% of all autos in the United States—saw its market share slide from over 28% in 2000 to under 20% in 2009 (see Table 1 below). Break-even point for car making was too high. The break-even point is the volume of sales at which net sales (i.e., gross sales less discounts, returns, and freight costs) equal costs. According to Old GM, sales in the U.S. market would have needed to hit a rate of 11.5 million to 12 million vehicle units a year for it to break even. U.S. sales in 2009 were 10.4 million units. Exceptional labor and retiree health care costs. The Detroit 3 automakers (Old GM, Ford, and Old Chrysler) negotiated contracts with the UAW over the years that expanded benefits for union workers to a level the companies could not sustain when imported vehicles began to take large shares of the U.S. market. Old GM estimated that its retiree health care and pension costs added $1,500 to the cost of every U.S.-made vehicle and exceeded the cost of the steel used in the vehicles. At the time of the bankruptcy, Old GM had obligations of nearly $30 billion to fully fund retiree health care and pension funds. Corporate culture. It was alleged at the time of bankruptcy that Old GM's corporate executives had been too bureaucratic and out of touch with U.S. car buyers' preferences. The Auto Task Force at the Treasury Department, which oversaw restructuring of Old GM (and Old Chrysler), repeatedly said that changing GM's senior executive corps and the internal corporate culture would be one of the most important steps in Old GM's transformation to a more competitive company. The Obama Administration's firing of Old GM's then-chairman and CEO, Rick Wagoner, in 2009, and its appointment of new board members and a new chairman and CEO, were intended, in part, to emphasize to all stakeholders the importance of changing the business model. Higher gasoline prices. In 2008, gasoline prices rose to over $4 a gallon in many parts of the United States, adversely affecting demand for large vehicles with low fuel efficiency. These vehicles, such as pickup trucks and sport utility vehicles, had been critical to Old GM's profitability.
section_title: U.S. Government Assistance to the Motor Vehicle Industry
paragraphs: The initial U.S. government loans to assist the U.S. motor vehicle and motor vehicle financing industries were made by the George W. Bush Administration in December 2008 and January 2009. At that time, $24.8 billion in assistance was provided to four companies, the first of what would eventually total nearly $80 billion in assistance through the Troubled Asset Relief Program. TARP was authorized by the Emergency Economic Stabilization Act (EESA), enacted in the fall of 2008 to address the ongoing financial crisis. This statute specifically authorized the Secretary of the Treasury to purchase troubled assets from "financial firms," the definition of which did not mention manufacturing companies. According to the Treasury,
The overriding objective of EESA was to restore liquidity and stability to the financial system of the United States in a manner which maximizes overall returns to the taxpayers. Consistent with the statutory requirement, Treasury's four portfolio management guiding principles for the TARP are: (i) protect taxpayer investments and maximize overall investment returns within competing constraints; (ii) promote stability for and prevent disruption of financial markets and the economy; (iii) bolster market confidence to increase private capital investment; and (iv) dispose of investments as soon as practicable, in a timely and orderly manner that minimizes financial market and economic impact.
The authorities within TARP were very broad. When Congress did not pass specific auto industry loan legislation, the Bush Administration turned to TARP for funding, arguing that failure to provide assistance to the auto industry would make the recession much worse and would impose other costs on federal taxpayers, such as providing unemployment benefits for displaced workers. 
After it took office, in 2009, the Obama Administration built on this precedent, and both Chrysler and GM received additional TARP loans. GMAC/Ally Financial received additional capital infusions, enabling the company to survive the downturn in the auto market as well as large losses on its mortgage operations. Chrysler Financial, in contrast, required no additional aid and relatively quickly repaid the TARP loan it received. The assistance for the auto industry was not without controversy, and questions were raised about the legal basis for the assistance and the manner in which it was carried out.
 Table 2 summarizes the TARP assistance given to the U.S. motor vehicle manufacturing and financing industries.
section_title: U.S. Government Assistance for GM Through Bankruptcy
paragraphs: In December 2008, Old GM received $13.4 billion from the U.S. Treasury, the first of several loans made through TARP. Old GM received additional loans from TARP of $2 billion in April and $4 billion in May 2009. These loans kept Old GM's operations alive as it went through a drastic restructuring overseen by the Auto Task Force. (A complete listing of GM's TARP loans and related payments to the government can be found in the Appendix .)
Old GM's Viability Plan of February 2009, which was a U.S. Treasury requirement to obtain additional loans after the initial loan of December 2008, laid out a plan of recovery based on changes in operations, labor costs, and other factors. President Obama rejected that plan at the end of March 2009, saying it was insufficient for a total recovery of the company. The Administration gave Old GM two months, until June 1, to devise a more thorough restructuring and thereby qualify for more U.S. government aid.
Throughout the spring of 2009, Old GM worked with various stakeholders, including the UAW, bondholders, creditors, dealers, and suppliers, to devise a new restructuring plan that would be approved by the Auto Task Force and avert bankruptcy. While the company succeeded in reaching tentative agreements with most stakeholders, a group of creditors would not agree to the terms offered, thus prompting GM to file for bankruptcy on June 1, 2009.
During the bankruptcy proceedings, the government provided a final installment from TARP: a $30 billion loan to facilitate the transformation to a new, smaller company, bringing total U.S. government loans related to GM to more than $50 billion. While much of the $30 billion was used by GM during the restructuring process, a majority of it was not used, and $16.4 billion remained in an escrow account on September 30, 2009. One continuing issue from the bankruptcy that has drawn particular congressional interest is the treatment of some retirees of Delphi Corporation, which had been a GM subsidiary until 1999, as Old GM had certain liabilities related to Delphi's pension plans. The House Committee on Oversight and Government Reform held two hearings on the GM assistance and Delphi pension issues during the 112 th Congress. In addition, legislation entitled the Delphi Pensions Restoration Act of 2012 was introduced in both the House ( H.R. 6404 ) and the Senate ( S. 3544 ). To date in the 113 th Congress, the House Committee on Oversight and Government Reform has held two additional subcommittee hearings focusing on Delphi pension issues.
GM also benefited financially during and after the bankruptcy process from previous policy rulings by the Internal Revenue Service (IRS). Under normal circumstances, a corporation undergoing bankruptcy is not able to carry forward previous tax losses, since the bankruptcy process is considered a change in the control of the company. Government holdings through TARP, however, generally have not been treated by the IRS as causing such a change in control. Because of this, New GM was able to carry forward $45 billion in losses and other costs incurred by Old GM, allowing it to avoid paying taxes on future profits for up to 20 years. Included in this figure are net operating losses of approximately $16 billion. These tax savings are not counted as part of TARP support. In theory, these tax rulings should have raised the value of the shares held by the Treasury as well as those held by other common shareholders.
section_title: Post-Bankruptcy General Motors
paragraphs: A new company was established in July 2009, after just 40 days in federal bankruptcy proceedings. New GM began with smaller U.S. operations than its predecessor company and a major presence overseas. GM operates as five divisions: GM North America (GMNA), GM Europe (GME), GM South America (GMSA), GM Financial, and GM International Operations (GMIO). In 2012, over 47% of GM's vehicle sales were outside North America and Europe, primarily in developing countries in Asia. In China alone, in the first nine months of 2013, GM's joint ventures sold more than 2.3 million vehicles, approximately 32% of all its worldwide sales. 
 Table 3 shows GM's sales and earnings worldwide from 2010 through 2012. It is noteworthy that GM's North American sales are more lucrative, as the larger cars, pickup trucks, and SUVs widely sold in North America carry higher profit margins than the smaller vehicles popular elsewhere in the world. Of the $7.9 billion earned in 2012, $7.0 billion was earned in North America. Most other divisions lost money or broke even; GM's GMIO division earned $2.2 billion.
According to GM, since 2009, it has announced investments of $10.1 billion in its U.S. facilities, creating or retaining more than 26,500 jobs. GM's annual reports show its worldwide employment in Table 4 , by major corporate divisions.
The New GM of 2009 differed in a number of ways from the Old GM:
Employment was cut. Old GM had 91,000 U.S. employees in 2008; new GM had 75,000 immediately after bankruptcy. Its worldwide employment fell from 243,500 to 209,000 during the same time period. Plants were closed. Old GM announced that, of the 47 U.S. plants it operated in 2008, 13 would close by 2010. The closed plants and machinery remained with Old GM. Brands were shed. The Pontiac, Saturn, and Hummer brands were terminated, and Saab was sold to a Dutch company. Among its remaining brands, GM's U.S. market share fell from 22% in 2008 to 19.8% in 2009 and further declined to 19.1% in 2010. In 2011, GM's market share rose to 19.7% but dropped to 17.9% in 2012 and 2013. In addition, its sales in China rose by nearly 30% in 2010, exceeding U.S. sales for the first time. Health care costs for retired U.S. union workers were transferred to the UAW. Old GM reached agreement with the UAW in 2007 to transfer the financial responsibility for U.S. hourly workers' retiree health care to the union's VEBA (Voluntary Employee Beneficiary Association), thus removing $30 billion in obligations. The UAW signed similar agreements with Ford and Old Chrysler. The Detroit 3 agreed to fund the VEBAs with cash or stock. The union made additional concessions concerning retiree health care in 2009 negotiations. The GM restructuring agreement gave the VEBA a significant ownership stake in GM because the company did not have the financial resources to provide cash. Many expensive liabilities were jettisoned . Left with Old GM were environmental liabilities estimated at $350 million for polluted properties, including Superfund sites; certain tort liability claims, including those for some product defects and asbestos; and contracts with suppliers with which New GM would not be doing business.
The U.S. government was the majority owner of the company that emerged from the bankruptcy process, as the majority of the TARP loans made to GM were converted into an initial 60.8% government ownership stake in New GM. In addition, $6.7 billion of the TARP loans remained outstanding after the bankruptcy and the U.S. government received $2.1 billion in preferred stock. Following positive financial results in the quarters after emerging from bankruptcy, New GM used cash in the escrow account that held its TARP borrowings to pay off the $6.7 billion in outstanding loans by April 2010. The $2.1 billion in preferred stock was repurchased by New GM in December 2010, following the company's IPO.
section_title: Elements of U.S. Government Ownership
paragraphs: In addition to its ownership of GM, the U.S. government acquired large common ownership stakes in Chrysler, GMAC/Ally Financial, Citigroup, and AIG through TARP funds and other assistance during the financial crisis. It has sold its stakes in Citigroup, Chrysler, GM and AIG, retaining only the large common shareholdings in Ally Financial. Table 5 details the government ownership stakes in these companies.
Exercising managerial control was not a stated goal of acquiring shareholdings in these companies. Instead, the stated purpose was to compensate taxpayers for the assistance given the companies while not saddling the companies with large liabilities that could hinder recovery. The Obama Administration laid out four core principles to guide the management of the government's ownership stakes:
The government has no desire to own equity any longer than necessary, and will seek to dispose of its ownership interests as soon as practicable. In exceptional cases where the government feels it is necessary to respond to a company's request for substantial assistance, the government will reserve the right to set up-front conditions to protect taxpayers, promote financial stability, and encourage growth. After any up-front conditions are in place, the government will manage its ownership stake in a hands-off, commercial manner. As a common shareholder, the government will only vote on core governance issues, including the selection of a company's board of directors and major corporate events or transactions.
Disposing of large ownership stakes in companies can be done in a variety of manners, including large-scale public offerings of shares, negotiated sales of large blocks of shares to other entities, and gradual share sales in the stock market. All of these sales methods have been used by the government in disposing of holdings of the companies discussed here. 
Following its emergence from bankruptcy, New GM was not publicly traded, thereby precluding a gradual sale of stock into the stock market, as was done in the case of the U.S. government's holdings in Citigroup. The size of the company and of the government's stake in New GM made a negotiated private sale to another entity unlikely, and any private sale would have been subject to questions about whether the government received a fair price. Thus, the U.S. government chose to participate in an initial public offering in which it and other shareholders could sell significant amounts of their GM stock. In December 2012, the U.S. government also sold 200 million shares directly to GM at a 7.9% premium over the market price at the time. It sold the remaining shares in stages, ending with a final sale on December 9, 2013.
 Figure 1 shows the ownership structure of GM in 2009 when the new company emerged from bankruptcy and its structure after the Treasury sold the last of its stock in December 2013. 
section_title: Assessing the Cost of TARP Assistance for GM
paragraphs: As detailed in the Appendix , the U.S. government through TARP aided the combined Old GM and New GM with approximately $50.2 billion in loans in 2008-2009. After the bankruptcy process in 2009, the government held the following assets: (1) 60.8% of the equity in New GM, (2) $7.4 billion in loans aiding New GM, (3) $2.1 billion in preferred stock, and (4) nearly $1 billion in claims on the old GM in the bankruptcy process.
The government recouped the following from the assistance:
$29.3 billion from equity sales; $7.4 billion in loan repayments; $2.1 billion in preferred stock repurchases; $0.2 billion in bankruptcy recoveries; and $0.7 billion in net dividends, interest and other income.
These, like all proceeds from TARP, are specified by the TARP statute to "be paid into the general fund of the Treasury for reduction of the public debt." The total recoupment from the GM assistance sums to approximately $39.7 billion. Comparing this amount to the $50.2 billion in loans results in an approximately $10.5 billion gap between the amount outlaid and the amount recouped.
The $10.5 billion shortfall between outlays and recoupment, however, is not the sole method economists might use to establish whether the government gained or lost on the assistance. In assessing the extent to which the government has recovered its investment, economists might also include a number of other factors, such as the cost to the government to borrow the funds that it then provided to GM, a premium to compensate the government for the riskiness of the loans, and the cost to the government of managing the assistance given.
The budgetary scores produced by the Congressional Budget Office (CBO) and the Office of Management of Budget (OMB) have taken some of these additional factors into account. The TARP statute required that TARP assistance be scored in the government budget in a similar manner to loans and loan guarantees under the Federal Credit Reform Act. Specifically, the expected present value of actions under TARP is to be estimated using risk-adjusted market interest rates and reflected on the federal budget at the time of the estimate. The estimates produced according to these formulas, however, have only been reported in aggregate. For example, CBO estimated in May 2013 that the budgetary cost of TARP assistance for the entire auto industry would be $17 billion, and the Treasury in coordination with OMB estimated lifetime cost as of September 30, 2013, to be $14.7 billion. Neither of these analyses, however, reports separately the individual gains or losses on Chrysler, GM, and GMAC/Ally Financial. No complete cost estimate has been performed since the final sale of GM stock. 
subsections: section_title: Appendix. U.S. Government Financial Support for GM through the Troubled Asset Relief Program