Monday, May 03, 2010

Random Thoughts on GDP and GM...

Follow-up to the GDP numbers - Amidst all of the news on Goldman/Greece/Oil spill/ the Times Square Nutmeg bomber, the GDP numbers lost their punch on Friday. While the data was decidedly mixed the consumer spending number seemed surprisingly strong. A little digging reveals the truth behind the data...

Total personal consumption expenditures were up about $130 billion which led many to cheer the return of the consumer. However, we can see that the entire jump in "spending" generated by "reduction of savings of $88 billion" and government social benefits to persons which jumped $61 billion. This is neither healthy nor sustainable.

GM paid us back right???

I have to thank my Mom for inspiring this post. I was ranting the other day about how GM can't be bothered to tell the truth, instead they hold press conferences and run commercials on how "they paid us back EARLY". Sounds good, right? Except it's not the whole truth.

What troubled me when I first heard the news that GM was repaying the TARP money was that they are still losing money and have negative cash flow. How can they be repaying us when they're still bleeding cash?

Don't hold me to these exact numbers because they are ballpark estimates but here's the breakdown.

We gave GM roughly $49.5 billion. GM swapped about $42 billion of this debt for equity in the new GM or shares in the new company. In theory if GM ever became a profitable business again it might have some value but it's unlikely we'll ever see that $42 billion again. It's like loaning your kid $100 to start a lemonade stand and then watching your kid say "You see I'm not going to pay you back your $100 but you now own 60% of my failing lemonade stand!!"

This however, is the least dishonest part of the "Hey, John Q. Public we paid you back!" ads.

There was still the matter of about $6.7 billion of true debt to be repaid and GM did repay that, but how? When GM went into bankruptcy the government set up a $13 billion working capital line of credit. Think of this as a credit card with a $13 billion credit limit. It's not debt, but it's available for emergencies. So in order to rid themselves of all of those painful compensation restrictions associated with TARP recipients GM basically took a cash advance on their $13 billion credit card for $6.7 billion and wired that cash to government and said "OK we repaid the TARP loan, now we're free to pay our CEO whatever we want!".

Basically, GM paid off their Visa bill with their Mastercard and bought ad time to tell us how "healthy they are now". GM has also recently applied for additional loans to the tune of $10 billion to retool their plants.

So, in summary while it's TECHNICALLY true that GM repaid a small portion of their TARP debt (13% of all the money we gave them) they repaid it with more government loans and they did it so they could apply for MORE loans.

Let's never let the facts get the way of a good story......

The best joke of the day:

"President Obama stated clearly that BP would be held responsible for the cost of the oil spill in the Gulf of Mexico. BP's CEO responded 'We would like to apply for status as a Bank Holding company. We believe BP is a critical lynch pin in the global economy and we'd like some Fed bailout money to ease the burden of this clean-up.'

When asked about this concept Chairman Bernanke responded 'Seems to make as much sense as anything else we've done'."


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