04.12.2012
Treasury’s Nightmare: The $17.2 Billion Bailout of GMAC
original article written by Net Advisor™
Detroit, Michigan. Ally Financial is the former GMAC Financing (General Motors Acceptance Corp) – the lending unit that was once ran by General Motors (GM). The Obama Administration via the U.S. Treasury bailed out GMAC to the tune of $17.2 Billion (Source: NY Times, PDF).
The U.S. Treasury decided not to force GMAC into formal bankruptcy because it could have cost U.S. taxpayers some $40-50 Billion (Source: Reuters). Now the Obama Administration wants to get rid of this losing liability. The U.S. Treasury is apparently considering breaking up Ally Financial and selling the finance business back to General Motors.
Why Sell Ally Back to GM? IPO Prospects Not Favorable
Why sell Ally back to GM? We’ll, the Treasury believes that selling Ally to the public in an IPO would not do too well.
“People familiar with the matter told Bloomberg the Treasury wants to make such moves because it no longer believes an initial public offering of Ally stock would succeed.”
— Source: Automotive News (original link) (PDF)
Based on the 2011 financials of Ally (link bottom page), the company is still technically insolvent. So an IPO would likely fail according to the Treasury, and the company could end up in bankruptcy. Government’s Solution? Sell the company back to the same people who caused it to fail in the first place.
Ally Financial Continues to Struggle
Ally Financial reported a revenue loss of $9.736 Billion in 2011. The total value of the company is currently <$19.37 Billion> in the hole. What this means is, even after the $17.2 Billion U.S. government bailout, the company is still technically insolvent.
On March 19, 2012 Ally announced a renewal of a $15 Billion revolving credit facility. Basically Ally just got approved to borrow money so it can lend it out (again). It is probably reasonable to assume that the U.S. Treasury (U.S. taxpayer) is guaranteeing the $15 Billion credit line Ally received. Who would loan to a government controlled entity losing billions of dollars unless they had some assurance that the government would guarantee the loans right?
Obama “Saves Jobs,” but at a Taxpayer Cost of $1.228 Million Each
Ally is located in Detroit, Michigan and employs some 14,000 people and performs auto financing, on-line banking, and mortgage loans. The Obama Administration has touted that they have “saved or created” three million jobs (Source: Wall Street Journal, PDF). This ideology was called a “White House Fantasy” (Source: Bloomberg, PDF). Part of this was due to that some jobs claimed ‘saved or created’ by the Administration occurred in districts that did not exist (Source: ABC News, PDF).
If we calculate the 14,000 jobs (“saved”) into the $17.2 Billion bailout costs of Ally Financial (GMAC), that works out to be $1,228,571.43 (~$1.228 Million) cost to taxpayers to save each job.
— Source: Math by NetAdvisor™ based on said government bailout data & number of jobs at Ally.
Analyzing The Bailout Cost: Probably Not the Best Move for Taxpayers
As much as no one wants to be laid-off, but was it really the best idea to save 14,000 jobs at a taxpayer cost of over $1.228 million each? Perhaps it would have been cheaper to not bailout the company, liquidate the assets under a Chapter 7, and just pay the employees free money for 99 weeks (unemployment benefits) giving them time to find other work.
This government socialization of business to save jobs at extreme costs to taxpayers just doesn’t make financial sense. For the employees, it still would have been cheaper in addition to unemployment benefits to pay a severance pay of say $300,000 each, still saving taxpayers $11.67 Billion.
More Math. Example: Say the average Ally worker is paid $50,000/ year, that’s $961.54 per week, times 99 weeks (unemployment benefits) = $95,192.31 cost to taxpayers. Now give the employees a $300,000 severance each; this still saves taxpayers $11,667,301,660 (roughly $11.67 Billion) or $833,378.69 per job if the government did not get involved with a bailout, and the company just liquidated.
The U.S. Treasury (aka the taxpayers) currently own 73.8% of Ally financial (Source: Ally Financial PDF).
___________________________________________________________________________
Further reading: Ally Financial 10-K SEC Filing for FY 2011 (403 pps) (short link) (PDF, 3.92MB)
Graphic: Ally Financial
original article content, Copyright © 2012 NetAdvisor.org™ All Rights Reserved.
NetAdvisor.org® is a non-profit organization providing public education and analysis primarily on the U.S. financial markets, personal finance and analysis with a transparent look into U.S. public policy. We also perform and report on financial investigations to help protect the public interest. Read More.
___________________________________________________________________________
