RKMBs Forums .::Important::. Politics and Current Events Democrat Leaders Want Automaker Bailout

MEM, you voted for a genius.

General Motors Corp. may no longer be the world's biggest automaker, but it still operates the country's largest pension fund. The threat to its pension plans has always been an issue, butit took on a new urgency when GM disclosed April 7 that its plans were underfunded by more than $27 billion, with more than half of that being owed to U.S. workers and retirees. Across town, a post- bankrupt Chrysler faces its own pension shortfall. Moreover, a report last week from the Government Accounting Office (GAO) says the pension crisis in the auto industry could create an unprecedented crisis for the federal Pension Benefit Guarantee Corp., a government-sponsored organization to backstop company pensions.

When the two automakers emerged from bankruptcy reorganization the pension problems were seen as a more distant issue, and presumably one that would be eased by economic growth. But the auto industry is facing a slow recovery, and neither the new GM nor the new Chrysler has produced a profit. Christopher Liddell, GM's new chief financial officer, has stopped short of predicting that GM will be profitable this year, while Chrysler CEO Sergio Marchionne is hoping Chrysler can break even this year. Both GM and Chrysler are also moving to build smaller vehicles, which have traditionally produced smaller profits. The pension funding crisis could begin in 2013, or before either company is fully profitable.

Here are the chief questions raised by the potential pension crisis:

• Could taxpayers really be on the hook for UAW pensions?
  
  Yes. GM could face a funding crisis in 2013 or 2014 when, under the current projections, the automaker will be required to make more than $12 billion in contributions to its pension funds to keep them solvent, according to the GAO analysis. Chrysler's estimated future pension obligation is $3 billion. If the companies cannot meet their funding obligations they may have to terminate their plans, and the financial responsibilities (up to government limits) would be assumed by the Pension Benefit Guarantee Corporation. The funding could easily become a serious challenge for the PBGC, which says it is now facing $168 billion in possible plan terminations across a range of companies, many of them auto suppliers. The PBGC is privately funded, but since it was created by an act of Congress and its board of directors consists of the Secretaries of Labor, Commerce and Treasury, it's possible that the U.S. Government would step in if the agency came up desperately short of funds. Of course, the Obama Administration could allow GM or Chrysler to defer their pension contributions, but there would likely be stiff resistance to another wink-and-a-pass for automakers.
  
  Won't a successful IPO of new GM stock resolve the pension funding problem?
  
  No. The actual timing of the initial public offering and the amount of money it raises will depend on market conditions. However, even if an IPO is successful the money would go to the U.S. Treasury to repay it for supporting the company through bankruptcy. In addition to direct aid of $8 billion that GM plans to repay, the government also loaned GM another $49.98 billion in exchange for a 61% stake in the automaker with the understanding the GM would do a public offering of stock as a way for the government to get repaid. The same holds true for Chrysler if and when it gets around to an IPO, which CEO Marchionne has said is unlikely before 2012.
  
  What happens to GM and Chrysler pensioners if the PBGC takes over the funds?
  
  The retirees could face dramatic cuts. The PBGC promises a certain level of benefits, but $35 billion of the two automakers' promised pension benefits fall beyond the PBGC guarantees. In 2010, a single 65-year old retiree is guaranteed a maximum of $54,000 per year under the PBGC guidelines, and many GM retirees have earned benefits in excess of the PBGC limits. Last summer, the PBGC did take over the salaried pension plans belonging to GM's former subsidiary, Delphi Corp. Most of Delphi's 20,000 salaried pensioners, many of whom started out working at GM, saw their pensions cut. Thus, a termination of GM's or Chrysler's pension plans could likely result in pain for both pensioners and taxpayers.

The Treasury Department said Monday it will lose $1.6 billion on a loan made to Chrysler in early 2009.

Taxpayer losses from bailing out Chrysler and General Motors are expected to rise as high as $34 billion, congressional auditors have said.

Treasury said Monday that Chrysler repaid $1.9 billion of a $4 billion loan, which was extended before the company filed for Chapter 11. The government hopes to get another $500 million from the company that emerged from bankruptcy, Chrysler Group LLC.

Treasury officials said that the government had no plans to boost its stake in the new Chrysler to cover those losses. It also acknowledged another $1.9 billion in potential losses from a separate loan that had been made to the company that went through bankruptcy proceedings. It indicated slim hopes of recouping much if anything from that separate $1.9 billion loan.

The original $4 loan was made in January 2009, when the Bush administration was scrambling to rescue Chrysler, GM and their auto financing arms.

The Congressional Budget Office estimated in March that the government's $85 billion bailout of the automakers would cost taxpayers $34 billion.

Much of it will depend on how much the government recovers from its eventual sale of nearly 61 percent of GM and about 10 percent of Chrysler.

GM has said it could conduct a public stock offering later this year. Chrysler officials have said a public stock offering is not likely before 2011.

The Treasury Department made the announcement about the loss from Chrysler on a day when GM reported its first quarterly profit in nearly three years. That moved GM closer to a stock offering that would repay at least part of the $43 billion it owes the government.

Chrysler Holding is the parent company of the old Chrysler. It is owned by private equity firm Cerberus Capital Management. Cerberus bought Chrysler from Daimler AG in 2007.

Chrysler came close to running out of money at the end of 2008, so the U.S. government stepped in, authorizing $15.5 billion in aid and appointing Fiat SpA to run the new Chrysler after it emerged from bankruptcy protection. The old Chrysler's assets, along with its finance arm, became Chrysler Holding.

Treasury said it has received repayments of $3.9 billion to date, including the $1.9 billion repayment and a $1.5 billion loan paid off by Chrysler Financial. Chrysler also assumed $500 million of Old Chrysler's debt, reducing the debt to the government.

The federal government didn't exhaust all its options before it committed tens of billions of taxpayers' dollars to bail out the American International Group during the height of the 2008 financial collapse, according to a new report from a congressional watchdog panel.

The Congressional Oversight Panel , which was created to monitor the spending in the 2008 bank bailout bill known as the Troubled Asset Relief Program, or TARP, detailed in its latest monthly report the government's extraordinary rescue of AIG and its lingering effects on taxpayers and the financial markets.

AIG, once one of the largest and most successful insurance companies in the world, collapsed in 2008 when it couldn't meet the collateral demands of its customers. The firm, the oversight panel said, had an "insatiable appetite for risk" but a "blindness to its own liabilities."

When it was clear that AIG was going to collapse, the Federal Reserve and the Treasury Department stepped in to save it. The government provided more than $100 billion in assistance, and the oversight report says it's unclear whether taxpayers will ever be repaid in full.

McClatchy reported Tuesday that then-Treasury Secretary Henry Paulson and senior Federal Reserve officials pushed the rescue either without understanding AIG's financial situation and the risks it posed to taxpayers — or were less than candid about one of the largest corporate bailouts in U.S. history.

In addition, McClatchy reported that AIG, the company through which more than $90 billion in federal money flowed out the back door to some of the same Wall Street banks whose risky behavior fueled the nation's financial crisis, is now being accused of short-changing its customers.

Attorneys for hundreds of injured workers say AIG is dragging out insurance payments that their clients need to cover home mortgages, failing to pay full compensation benefits and refusing to pay medical bills.

A key finding of oversight panel's new report is that the government "failed to exhaust all options" before committing the first $85 billion to the AIG rescue.

The government has said — and said again Wednesday in response to the report — that it was under extraordinary pressure and had to move quickly to prevent the chaos that would have resulted from a meltdown of AIG, which was linked to major financial firms around the world.

Elizabeth Warren , the Harvard professor who chairs the oversight panel, said the panel doesn't agree with that all-or-nothing conclusion.

"The panel rejects that analysis," she said in a conference call Wednesday. "Time was short in part because of the decisions that had been made over the preceding three days and the preceding three months."

As early as the summer of 2008, for example, there were signs that AIG was in serious trouble. The government could have acted earlier and more aggressively to organize a private rescue of AIG, but it was focused on another company at the time and left AIG to try to arrange its own private financing.

Treasury spokesman Andrew Williams countered that it's "easy to speculate about how things might have been done differently, had there been more time."

However, he added, the "choices and tools available to the government were extremely limited and the potential outcomes were deeply uncertain. At that perilous moment, we took the actions that were most likely to protect American families and businesses from a catastrophic failure of another financial firm and an accelerating panic."

He also said that "we learn nothing new from this report," and that the Treasury Department "has spent more time in meetings with (the oversight panel) answering questions about the decisions made on September 15 (2008) than the government had to make those decisions."

AIG said in a statement that, "We are well on our way to remaking AIG into a more streamlined and focused company. AIG is focused on repaying taxpayers, strengthening our companies, and building shareholder value."

Taxpayers could profit on pre-owned GM
(Reuters) - When GM was sputtering toward collapse last year, it was hard to see how the U.S. auto market leader could keep selling cars -- let alone how it could one day sell itself as a success story to investors.

Deals

But almost a year after emerging from an unpopular government-funded bankruptcy, GM is driving toward a stock listing that could deliver a paper profit to U.S. taxpayers and an important political win for the Obama administration.

Analysts estimate that a GM initial public offering could value the company between $70 billion and $90 billion -- above the peak of the automaker's market value near $60 billion in 2000 when it was riding high in a booming market for SUVs.

GM and the U.S. Treasury are now readying an initial public offering of GM stock that would reduce the U.S. government's nearly 61 percent ownership stake.

The Treasury, which has hired Lazard Ltd (LAZ.N) as adviser on the IPO, said on Thursday it expected to sell part of its stake when GM goes public as early as the fourth quarter.

JPMorgan Chase & Co and Morgan Stanley are set to be named underwriters for the GM deal, a source told Reuters on Friday.

Figuring out how investors will value the new GM is tricky, but analysts say trading in bonds issued by the pre-bankruptcy automaker and a comparison with its closest rival, Ford Motor Co (F.N), underscore the surprising scale of its turnaround.

Any equity value for GM above $70 billion will result in a paper profit for the U.S. Treasury, which poured more than $50 billion into GM and retains a 60.8 percent ownership stake.

"Everybody will look at this valuation as a sign of success for this corporation and the bailout," said a person who has worked with the Obama administration's autos task force, but who was not authorized to discuss the matter for attribution.

Based on bonds issued by the old GM, the new GM could be worth as much as $88 billion after going public again.

The $27 billion in bonds issued by the pre-bankruptcy GM represent a 10 percent equity stake in the new company under the terms of the restructuring negotiated by the White House.

The old GM bonds have been trading at between 31 cents and 32.5 cents on the dollar this week as talk of an IPO heated up. That represents an implied equity value of between $8.4 billion and $8.8 billion for bondholders and up to $88 billion for the whole company.

A valuation for GM at the high end of that range would also mean taxpayers could be sitting on unrealized profits of about $10 billion on the government's stake in the automaker.

U.S. auto sales are expected to rise 10 percent to over 11.5 million vehicles in 2010 after tumbling to a 27-year low last year. But most expect a still-tentative recovery in 2011.

They're talking about the tax payer ending up with a profit. That's better than "a little better". This is looking like the bailout worked.