In bankruptcy hearings that went late into the night on Tuesday and resumed again on Wednesday, executives from General Motors laid out the pricey process through which the company will be restructured.
Company officials testified that it would cost approximately $1.25 billion to wind down the old GM, which is being retired in hopes of building a leaner, more modern company. Then an infusion of an additional $30 billion would be required to jump start the new GM. Any deviation from the plan, such as a refusal on behalf of the bankruptcy judge to allow the company to sell off assets, could result in liquidation.
The numbers and testimony provided remarkable window into how the company, once considered the pride of the U.S. economy, has collapsed. They also were a reminder that, as GM goes through a massive process of consolidation and rebirth, it is the taxpayer who will be footing the bill. Already the U.S. government has given the car company more than $19 billion for restructuring. The final tab will surpass $50 billion.
With lofty sums like these being granted for an expedited bankruptcy process, there is a heightened demand to know just where the money is going. But tracking the checks the government is writing is a difficult process. Even seasoned automotive industry and financial reporters say they're not entirely sure where to look.
"If you figure it out, I'd like to know myself," said Bill Visnic, a veteran automotive journalist. "When you give a company money there starts to be certain questions asked about how it is going to be used and what is it going to pay for. And it gets pretty murky when you start looking at how a company spends money on its operations. For me, I guess, I think it would be nice to know broadly: Are you spending the money to pay for improvements on your fixed assets, which are always an ongoing investment? Or is it going to go to a softer side of the business -- the advertising and the marketing? I would guess that if you start to touch those buttons too hard with the general public that is the stuff that would raise some scrutiny."
At this point it is nearly impossible to see detailed breakdowns of how GM is spending taxpayer money. The bankruptcy process will determine what portion of debts are repaid and assets sold. But the government is also paying to keep the company operational during these proceedings. Details regarding these expenditures are, as GM itself acknowledges, largely nonexistent.
"The easiest way to describe this is that the bridge loans were intended for general U.S. operating and restructuring expenses while GM and the [Treasury Department] worked on a long-term restructuring plan," said Tom Wilkinson, a spokesman for the company. "You can't say that Treasury loans went to X, while revenue from ongoing operations went to Y. The goal from day one was to stabilize and rapidly restructure GM so that it could return to health and start paying back the taxpayers. And so far, we are making good progress on that path."
Would more transparency and a different funding structure necessarily be a good thing? Wilkinson noted that if the GM bailout was funded by earmarks, the process of restructuring the company would "slow down... and cost more money in the end." Meanwhile, as Visnic and others note, opening up GM's books could be a double-edged sword, presenting problems both politically and economically.
Taxpayers, the argument goes, should be told exactly where their money is going. But as GM attempts a complicated and massive restructuring, disclosing proprietary business information, such as how much money the company is investing in a particular type of battery technology, could put it at a competitive disadvantage.
In addition, while the U.S. government will become the majority shareholder of the restructured company, with 60 percent of the stock, the administration is acutely sensitive to charges that it is meddling in private industry.
"The people managing these companies are so afraid of being called socialist that they can't do anything at all. But then it ends up that they are acting like bad capitalists," said Susan Helper a professor of economics at Case Western Reserve University and an expert on the automotive industry.
"I agree that we want to avoid micro-managing," Helper added. "On the other hand I also feel that we should use our investments to promote our interests and that the taxpayer has a slightly different interest than other investors. We should be spending money to keep people employed and building green cars. At the very least, the government should be considering a long-time horizon growth -- a patient-capital-type private investor. More controversial would be if the money was being spent on externalities... Are they spending it on retooling a plant in China, or revamping an office?
"I think the view that the administration's take is that these are managers and they know how to spend the bailout money," Helper concluded. "It is crazy because here are these managers who are so bad at managing that they are calling on the government for support. But somehow it is our role as taxpayers to only hand them the money and then hands off from there."
There are some ways to chart some of the money going to GM, but observers and watchdogs say that the data is hard to access and vague. For example, the president's Automotive Industry Financing Program is part of the Troubled Asset Relief Program and so, amidst the detailed transaction reports listed on the Treasury Department's website, one can get a general sense of how much capital has been transferred to the company. But the explanations of what that money has purchased is not clear. On April 22, 2009, General Motors Corporation was granted $2 billion from Treasury for the purposes of "Debt Obligation" On June 3, the $30 billion payment was made, again for "Debt Obligation."
As part of the latter transaction, the U.S. government will receive roughly $8.8 billion in debt and preferred stock in the new GM. The company, in turn, will establish an independent trust, valued at $9 billion in funds and preferred stock, to provide health care benefits to retirees and TO continue to honor consumer warranties. The company has set aside a pool of funds ($361 million) to provide a backstop for payments on warranties for cars sold during the bankruptcy transition.
In addition, the Treasury Department has made many documents public related to General Motor's pledges and plans to streamline its operations. This includes a 264-page credit agreement between the company and the U.S. Treasury dated from April and a 117-page restructuring plan that GM presented to Treasury in February. Both of these files provide a detailed framework for where taxpayer money is going and for what purposes. In terms of tracking individual expenditures, however, those details are lacking.
Finally, the president has assigned an independent team of economists, energy experts and business managers, to oversee the restructuring of General Motors. And as a Treasury official noted, because "all the money that has been committed to GM comes out of TARP funding" the company is now "subject to all of the same corporate governance and compensation guidelines as any TARP recipient."
But, in the end, a large portion of the plan for rebuilding the company is being conducted away from the public's view. It may be, as Wilkinson notes, part of the normal bankruptcy process. "All loans and the [debtor-in-possession] financing are for use in general operating and restructuring activities here in the U.S.," he said. "That's as precise as this gets." And it could simply be because the U.S. government, as the Treasury official argued, "isn't interested in managing the day to day operations of any TARP recipients."
"As the majority shareholder on behalf of taxpayers," the official added, "the U.S. government will be involved in discussions in the same way a private investor would be."
But with taxpayers in uncharted waters in terms of the size of the monetary investment in a private company, some observers feel more transparency (regardless of the administrative costs associated with it) are deserved.
"This is an important public policy decision with unprecedented money involved," said Douglas Elliott, a fellow at the Brookings Institute who has followed the automotive bailout. "And it would be nice if it were clear how much money were used and for exactly what."