TARP Watchdog Reiterates: Billions Loaned to Automakers Likely Lost
November 13, 2009

Top executives at General Motors Co. and Chrysler LLC have both gone out of their way in the past week to say their once-bankrupt companies are positioning themselves to pay back the tens of billions of dollars loaned to them by the federal government.

The man charged with overseeing the U.S. Dept. of Treasury program through which the money was loaned doesn't share their confidence.

Neil Barofsky, the special investigator assigned by Congress as the watchdog for the $700-billion Troubled Asset Relief Program, said at a conference in Washington D.C. that while GM and Chrysler may pay back some of the approximately $65 billion extended to them, the U.S. probably won't ever see full payback.

"Tens of billions of dollars are likely to be lost on the automotive bailout," Barofsky said flatly.

This is not the first time Barofsky has expressed the same sentiment, and the downbeat opinion has been supported by other recent assessments.

Uphill Struggle

Earlier this month, a candid report from the Government Accounting Office also threw cold water on the prospects for GM and Chrysler repaying the billions loaned to them through the TARP program.

"(The Dept. of) Treasury is unlikely to recover the entirety of its investment in Chrysler or GM, given that the companies' values would have to grow substantially above what they have been in the past," the report said. The Treasury Dept. loaned GM nearly $50 billion and Chrysler about $14 billion in TARP funds.

And in September, a report by the Congressional Oversight Panel also expressed skepticism GM and Chrysler will anytime soon be in the position to pay back the TARP monies.

"The automotive sector in the United States is risky and these companies have a legacy of failure," the Congressional Oversight Panel report stated. "Treasury's best estimates are that some significant portion of those funds will never be recovered."

GM, Chrysler Assume Contrarian View

But last week Chrysler presented the media and financial and auto-industry analysts with a wide-ranging plan for how it will turn around the company. A cornerstone of the 5-year plan's financial assumptions: Chrysler will fully repay what it calculates is the $5.7 billion it owes the Treasury Dept. by 2014.

In his first public speech since assuming the role as GM chairman, Ed Whitacre insinuated GM doesn't see it the bureaucrats' way, either, saying there's a sense of urgency to pay back the TARP loan.

"I can't tell you when (GM will pay back the government)," Whitacre said, "but it'll be sooner than you think."

Numbers Say Otherwise

GM and Chrysler's ability to repay billions of dollars is predicated on the notion the companies can soon become distinctly profitable and structure some type of plan to obtain public and private funding - in the case of GM, particularly, that plan likely would take the form on an initial public offering.

But critics of the often-expressed notion GM could engage an IPO as early as sometime next year usually point out that investors would have to believe the company has a worth that would make it a viable investment.

Assuming the company appears healthy enough to make an IPO viable, to fully pay back the TARP funding, GM then would have to attract investment equivalent to a book value the company has never achieved.

The GAO report says that for GM to repay its indebtedness in full, it would have to achieve a market capitalization of $66.9 billion, nearly 20 percent greater than the company was ever valued.

Chrysler would have to build a market capitalization of $54.8 billion - more than 50 percent higher than the $37 billion the company was appraised to be worth when it merged with Daimler AG in 1998. - Bill Visnic, senior contributing editor

Photos:

1. Neil Barofsky, TARP special investigator

2. GM chairman Ed Whitacre

Posted by Bill Visnic at 8:10 AM under Business , Chrysler , Companies , GM , News | Comments (2) | digg this | Seed Newsvine

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