More on GM

After you read the letter below sent to Secretary of Treasury Timothy Geithner by Congressmen Paul Ryan, Jeb Hensarling, and Scott Garrett, you will cringe the next time you see the GM ad claiming that GM has paid back every dime plus interest of what the government loaned the company:

Dear Mr. Secretary:

On April 21, 2010, The Department of Treasury announced that General Motors (GM) repaid the final portion of its debt obligation under the Troubled Assets Relief Program (TARP), totaling $6.7 billion. But the remaining ownership interest of the U.S. government in GM is significant: $2.1 billion in preferred stock and 60.8 percent in common equity. Given this, it appears to be misleading that GM's Chairman and CEO, Ed Whitacre, wrote a piece in The Wall Street Journal called, "The GM Bailout: Paid Back in Full." It is also unclear whether, as you stated in a press release, this is "a positive sign for our auto investment."

In a recent letter, Senator Grassley stated, "It is unclear how GM and the Administration could have accurately announced yesterday that GM repaid its TARP loans in any meaningful way." The repayment of debt was not directly tied to teh automaker's profitability, but rather resulted from swapping capital GM received from TARP to pay down debt owed to Treasury.

The fact remains that the U.S. government still owns GM (60.8% of GM's common equity). Both before and during the bankruptcy of "Old GM," the government bailed out the automaker by "investing" about $48 billion in the company through the TARP Automotive Industry Financing Program. After bankruptcy, this "investment" was converted to $6.7 billion in debt, which GM has repaid with government funds, $2 billion in preferred shares, and an amount representing 60.8% of common shares. This means that roughly $39 billion from the TARP investment has been exchanged for what resulted in a common equity stake in post-bankruptcy GM.

Unfortunately, there is little publically-available information on the current financial health of GM, so it is hard to determine the exposure to the taxpayer. While current law and the changes the Administration is pursuing in financial services legislation calls for thorough, frequent, and transparent reporting by private companies on their financial condition, there appears to be a lack of transparency in the exposure to the taxpayer from the over $40 billion still outstanding in funds provided to GM. As a first step to disclosing necessary information, please answer the following:

• What are the market value of the government's preferred shares and the 60.8% share (in other words, what could taxpayers expect to receive in return if Treasury divested all of its common equity in GM today)?

• Do you have an updated estimate of the cost of the GM bailout to the taxpayer and if you do what is that cost after repayment of the $6.7 billion loan?

To put it in context, The Congressional Budget Office (CBO) reported in March 2010 that it expects the Federal Government to lose about $34 billion of the $82 billion disbursed to all TARP automotive programs, including investments in GM, Chrysler and GMAC. An April 23, 2010 letter you sent to Congressional leaders reports a total cost for auto industry support of $28 billion. Of the roughly $80 billion committed to auto financing program, GM is by far the most significant allocation, representing about half of the total commitments. Since the above estimates were made, the Administration and GM have gone out of their way to highlight the loan repayment and suggest that is has erased the government's exposure to GM. In light of these comments and press stories, it is important that the public get a revised estimate of the Federal Government's potential exposure and the current estimate of the cost to taxpayers.

It is critical the Administration be forthright and transparent that over $40 billion in taxpayer funds are at risk. We ask that Treasury provide an estimate of the market value of the preferred shares and the government's 60.8% stake in GM in comparison to what was spent to bail out GM, as well as any additional disclosures that would be expected of a public company to investors.

Thank you and we look forward to your response.

Spending is the Culprit

Opening Remarks delivered by Congressman Paul Ryan at the National Commission on Fiscal Responsibility and Reform:

Just about everything has been said but not everyone has said it. Let me try and say something a little different.

First to the two chairmen – Senator Simpson, Mr. Bowles – each of you has a great reputation of integrity, and I look forward to working with you in this effort.

Most of us were in Congress during the last economic crisis. That was a crisis where the Chairman of the Federal Reserve and the Treasury Secretary came rushing to the Hill in panic mode. We all got together and we governed in a panicked situation.

We have before us the most predictable economic crisis that we have ever had in this country. We all know that. We also are getting a good grasp of the size and the magnitude of this crisis. Sovereign debt crises are popping up all over the world, and we are kidding ourselves if we don’t think it could come to us next.

Here is one of the problems that we’re going to have to end up discussing: as we know, health care is the biggest part of this looming crisis. It doesn’t matter how you voted on this last bill, it’s law now.

We just took $529 billion of savings out of Medicare, not to go toward extending Medicare solvency, but to go towards a new entitlement. We just increased the size of Medicaid by a third. We now have a new health care entitlement. In entitlement speak we used to call it the “Big Three” – Medicare, Medicaid, Social Security. Now it’s the “Big Four”. That’s an issue we are going to have to talk about – what do we do about this new entitlement?

Also, just in this session of Congress, we have passed $1.8 trillion in new spending, coupled with $670 billion in new taxes. I would argue that our fiscal trajectory was bad and now it’s getting worse and that’s just from my own personal perspective.

I have put a number of ideas out there myself. I kind of think of myself as a canary in the mineshaft on entitlement reform. But if there is anything I’ve learned from my own experience, it’s that the American people are ready to be talked to like adults. They are ready to know the fiscal facts. If there is one thing we can accomplish with this effort, it is better public education about the nature of this problem and educating our colleagues in Congress on the nature of this problem.

I too, like [Congressman] Jeb [Hensarling of Texas] said, look at this with an open mind, not an empty mind. If you look at the math of all of this, spending is the culprit. Mathematically speaking, you literally cannot tax your way out of this problem. I don’t think we should go down that path of trying to tax our way out of this problem.

If you look at the Congressional Budget Office models of the future of our country, the economy shuts down mid-century. Their computers cannot think of any way out of this fiscal problem we have.

We know for a fact, it is irrefutable - we are giving the next generation an inferior standard of living. We have never done that before in this country. The legacy of this country has always been – you take on the challenges before you to make sure that your kids and grandkids have a better life. All of us agree on this legacy, but it’s going to take some heavy lifting to uphold it.

When you look at the spending problem, the sooner you act, the much better off you are going to be. Millions of our fellow citizens have already organized their lives around these programs. Acting very soon, you can assure that their lives will not be uprooted. They will not have the rug pulled out from underneath them. We can make prospective changes going forward so people have time to organize their lives around these reforms – running room so to speak. But if we keep kicking this can down the road and not confronting these massive spending challenges that kind of assurance to those who already organized their lives around these benefits, cannot be maintained.

We are in a situation where time is of the essence to deal with this. We have to spend our time on the spending side of the ledger because that is what is driving this. At the end of the day, the levels of personal and economic freedoms, standards of living, jobs, and international competitiveness have got to be the overarching concerns that drive the decisions we end up making.

Rhetoric and Reality

OUCH!

From a recent WSJ article:

103: The number of months it would take to sell off all the foreclosed homes in banks’ possession, plus all the homes likely to end up there over the next couple years, at the current rate of sales.

.......As of March, banks had an inventory of about 1.1 million foreclosed homes, up 20% from a year earlier, according to estimates fromLPS Applied Analytics. Another 4.8 million mortgage holders were at least 60 days behind on their payments or in the foreclosure process, meaning their homes were well on their way to the inventory pile. That “shadow inventory” was up 30% from a year earlier.

Say It Aint So

Last week, the independent actuaries at the Department of Health and Human Services’ Centers for Medicare and Medicaid Services (CMS) released an analysis of the newly enacted Democrat health care overhaul.

Below is a summary of the report's key findings.

• Health Care Costs Increase: “national health expenditures under the health reform act would increase by a total of $311 billion (0.9 percent) during calendar years 2010-2019.” [Page 4] The actuaries found the law bends the cost curve up by a greater degree than either the House or Senate-passed legislation, despite the Administration's claim that slowing national health spending was the "single most important" reason to overhaul the health system.
  

• Over One-Half Trillion in Medicare Cuts: The Medicare actuaries found that the new health law cuts “$575 billion” [Page 4] from Medicare.

• Seniors’ Access to Care Jeopardized: As a result of the cuts to Medicare, the actuaries found, “absent legislative intervention, [providers] might end their participation in the program (possibly jeopardizing access to care for beneficiaries).” [Page 10]
  
• Workers & Seniors Can’t Keep the Health Plan They Have and Like: “We estimate that such actions would collectively reduce the number of people with employer-sponsored health coverage by about 14 million.” [Page 7] Furthermore, 2 million Americans who currently have employer-provided health coverage will be dumped into Medicaid. [Page 3] Additionally, the actuaries predict millions of seniors will lose their Medicare plan because massive cuts to the program will result in, “about 50 percent” of seniors no longer being in a plan. [Page 11].
  
• Long Wait Lines Resulting From A Shortage of Doctors and Hospitals: “For now, we believe that consideration should be given to the potential consequences of a significant increase in demand for health care meeting a relatively fixed supply of health care providers and services.” In other words, Americans should be prepared for doctor and hospital shortages under the new law. [Page 20]
  
• False Promise to Those With Pre-Existing Conditions: “By 2011 and 2012 the initial $5 billion in Federal funding for [high risk pools] would be exhausted, resulting in substantial premium increases to sustain the program.” [Page 16]
  
• Massive & Unworkable Entitlement Expansion: “First, an estimated 18 million would gain primary Medicaid coverage as a result of the expansion.” [Page 3] In addition to burdening both Federal and state budgets, the actuaries caution this expansion will fail to provide meaningful access to health care. “Therefore, it is reasonable to expect that a significant portion of the increased demand for Medicaid would be difficult to meet, particularly over the first few years.” [Page 20]
  
• Millions Will See Their Health Benefits Taxed for the First Time: “It should be noted, however, that an estimated 12 percent of insured workers in 2019 would be in employer plans with benefit values in excess of the thresholds (before changes to reduce benefits) and that this percentage would increase rapidly thereafter.” [Page 13]
  
• Budget Gimmicks Revealed: President Obama’s actuaries found that the new government-run long-term care program that Democrats had touted as saving $72 billion dollars over the next ten years, will “face a significant risk of failure.” [Page 15]
  
• New “Medicare Tax” Doesn’t Go To Medicare: “The Reconciliation Act amendments introduced a new 3.8-percent “unearned income Medicare contribution” on income from interest, dividends, annuities, and other non-earnings sources for individual taxpayers with incomes above $200,000 and couples filing joint returns with incomes above $250,000. Despite the title of this tax, this provision is unrelated to Medicare; in particular, the revenues generated by the tax on unearned income are not allocated to the Medicare trust funds.” [Page 9]

Whatever you are......

The story below from James Lileks reminds me of Abraham Lincoln's quote, "Whatever you are, be a good one."

At the grocery store on Saturday the clerk was bagging the groceries, and doing a damned fine job. I admit I make it easy: I load the belt by category and destination. Everyone does, don’t they? It’s part of planning ahead. If I arrange the items so it’s meat / vegetables, then bladders of liquids, then dry food, then domestic goods, everything’s in bags that can be ferried to their property destination without rooting through a bag that has bacon, razors, socks, and cereal. She stocked the bags well, and respected the genre classifications I’d set up.

“Nice framing,” I said. That’s the term for bracing a bag so it has walls, and everything fits together.

“Thank you,” she said. “They don’t teach us.”

“They don’t?

“No, they show us a video on how it’s supposed to be done, but they don’t train anyone. Everything I learned I learned from Byerly’s.”

That’s the high-end grocery store. They have one person to run the belt and another to bag. Half the baggers are retirees, half 20-somethings. I don’t mean a hellish vivisectioned conjoining of the two. They’re all good, and I don’t just mean they don’t put coffee cans on top of grapes. They frame well. That’s the skill of grocery-store bagging: the ability to look at the items on the belt and see the frame.

Quote of the Day

"Wisdom might plan, but virtue alone could execute." Samuel Johnson

Talking About a Revolution?

You really do wonder if people are going to sooner rather than later say enough's enough.

GM - Paid in Full?

Rick Moran in the American Thinker makes a very interesting point regarding GM's claim that they have "paid back" the government bailout it received.

Uncle Sam gave GM $49.5 billion last summer in aid to finance its bankruptcy. (If it hadn't, the company, which couldn't raise this kind of money from private lenders, would have been forced into liquidation, its assets sold for scrap.) So when Mr. Whitacre publishes a column with the headline, "The GM Bailout: Paid Back in Full," most ordinary mortals unfamiliar with bailout minutia would assume that he is alluding to the entire $49.5 billion. That, however, is far from the case.

Because a loan of such a huge amount would have been politically controversial, the Obama administration handed GM only $6.7 billion as a pure loan. (It asked for only a 7% interest rate--a very sweet deal considering that GM bonds at that time were trading below junk level.) The vast bulk of the bailout money was transferred to GM through the purchase of 60.8% equity stake in the company--arguably an even worse deal for taxpayers than the loan, given that the equity position requires them to bear the risk of the investment without any guaranteed return. (The Canadian government likewise gave GM $1.4 billion as a pure loan, and another $8.1 billion for an 11.7% equity stake. The U.S. and Canadian government together own 72.5% of the company.

But when Mr. Whitacre says GM has paid back the bailout money in full, he means not the entire $49.5 billion--the loan and the equity. In fact, he avoids all mention of that figure in his column. He means only the $6.7 billion loan amount.

The Fear of God

Financial guru James Grant has some great thoughts on what real financial reform should look like:

The trouble with Wall Street isn't that too many bankers get rich in the booms. The trouble, rather, is that too few get poor -- really, suitably poor -- in the busts. To the titans of finance go the upside. To we, the people, nowadays, goes the downside. How much better it would be if the bankers took the losses just as they do the profits.

Happily, there's a ready-made and time-tested solution. Let the senior financiers keep their salaries and bonuses, and let them do with their banks what they will. If, however, their bank fails, let the bankers themselves fail. Let the value of their houses, cars, yachts, paintings, etc. be assigned to the firm's creditors.

......."The fear of God," replied George Gilbert Williams, president of the Chemical Bank of New York around the turn of the 20th century, when asked the secret of his success. "Old Bullion," they called Chemical for its ability to pay out gold to its depositors even at the height of a financial panic. Safety was Chemical's stock in trade. Nowadays, safety is nobody's franchise except Washington's. Gradually and by degree, starting in the 1930s -- and then, in a great rush, in 2008 -- the government has nationalized it.

.......The substitution of collective responsibility for individual responsibility is the fatal story line of modern American finance. Bank shareholders used to bear the cost of failure, even as they enjoyed the fruits of success. If the bank in which shareholders invested went broke, a court-appointed receiver dunned them for money with which to compensate the depositors, among other creditors. This system was in place for 75 years, until the Federal Deposit Insurance Corp. pushed it aside in the early 1930s. One can imagine just how welcome was a receiver's demand for a check from a shareholder who by then ardently wished that he or she had never heard of the bank in which it was his or her misfortune to invest.

........Like one of those notorious exploding collateralized debt obligations, the American financial system is built as if to break down. The combination of socialized risk and privatized profit all but guarantees it. And when the inevitable happens? Congress and the regulators dream up yet more ways to try to outsmart the people who have made it their business in life not to be outsmarted. And so it is again in today's debate over financial reform. From the administration and from both sides of the congressional aisle come proposals to micromanage the business of lending, borrowing and market-making: new accounting rules (foolproof this time, they say), higher capital standards, more onerous taxes. If piling on new federal rules was the answer, we'd long ago have been in the promised land.