Tuesday, August 9, 2011

The New GM: It Should Do Well With No Debt

The new GM reported a profit of $2.5 billion for the second quarter of 2011. This compared to a loss of $15 billion in the same quarter of 2010.

Indeed, the new GM appears to be doing a lot of things right. It has reduced its labor force from 263,000 to 208,000. It operates fewer plants. It made slightly more cars, and it has reduced its buyer incentives.

The Obama administration will use this success story as his major economic achievement. He saved GM with the government’s $50 billion bailout. He did not save the shareholders of the “Old GM.” They lost everything.

There is one fact missing in this optimistic story. The $50 billion bailout wiped out $40 billion of GM debt. It is a lot easier to make a profit if you have no debt payments.

In the second quarter of 2011, GM had no interest expenses. Ford, which borrowed money to stay in business, has around a half billion in interest expenses each quarter. The government bailout, in effect, gave GM a huge competitive advantage over its rivals. Without the bailout, GM would be paying more than $2 billion a year in interest costs.  Its second quarter profit would have been $1.7 billion instead of $2.5 billion.

GM now faces an increasingly bleak third and fourth quarter. If its profit drops to, say, $800 million, virtually all of that is due to the bailout of its debt.

Is GM the success story we are told it is?

1 comment:

  1. I would love to read a blog on:
    From the News:
    "When it comes closing the gap on the country's $1+ trillion deficit on $14+ trillion in debt, Stiglitz says the country can turn things around in 4 relatively easy steps:
    1. Repeal the Bush-Obama tax cuts for the richest Americans.
    2. End the wars in Afghanistan and Iraq, "that have not improved our security" and are costing trillions of dollars. In 2010 Stiglitz published the book: The Three Trillion Dollar War: The True Cost of the Iraq Conflict.
    3. Get Americans back to work. Stimulus and works programs are politically untenable right now but Stiglitz says spending on these programs will ultimately reduce the debt because if we put people to work and "our tax revenues will increase enormously"
    4. Reform Medicare Part D - Under the current law, big pharma sets their own prices. Stiglitz says if that provision is eliminated and the government can negotiate drug prices it would save taxpayers $1 trillion over the next 10 years."