US Treasury Cuts Forecast Loss from Auto Bailouts, Industry Contributes USD135 Bil. in Tax Revenues

The US Treasury Department has updated the US Congress on how much the government expects to lose on its USD85-billion bailout of the auto industry. Thanks to a 19% first-quarter improvement in General Motors' (GM) stock price, the US Treasury has reduced its estimate of losses by nearly USD2 billion to USD21.7 billion, down from USD23.77 billion. GM's stock has risen to USD24.07 per share in 2012, but this is still well down from its initial public offering price of USD33.00 per share, meaning that the US government would stand to lose money if it sold its remaining 500 million shares in the company today. The government initially held 61% of GM but sold a major stake in a first tranche IPO, and it now holds only 26.5% of the company's stock. In order for the government to break even, however, GM stock would have to rise to USD53.00 per share, something that is viewed as highly unlikely in the short term, forcing the US government to hold off on a sale of GM until after the November 2012 election.

As for other holdings, the US government has already booked a USD1.3-billion loss on its USD12.5-billion bailout of Chrysler; that company repaid its government loans and is now out from government oversight. Ally Financial, formerly Cerberus Capital Management-owned financier GMAC, is the other major government-owned project. The US Treasury currently holds 74% of Ally, which has remade itself as both a commercial bank and auto financier. The government is reportedly looking at selling off the money-losing ResCap mortgage unit of Ally to a competitor as part of a managed bankruptcy process. Of the total USD79.7 billion that has been loaned to the auto industry, the US Treasury says that USD48.5 billion has been recovered, and USD31 billion is outstanding. A USD5-billion auto supplier support loan programme originally counted in the calculation has been shuttered (not that it was well used), and is no longer included.

Despite the losses that look likely to be incurred from the auto bailout programme, a new study carried out by the Center for Automotive Research (CAR) and sponsored by the Alliance of Automobile Manufacturers (AAM) trade association claims that the auto industry plays a critical role in terms of tax revenue generation in the United States. According to the study released earlier this week, in 2010 the auto industry accounted for USD135 billion in tax revenues nationwide at the federal and state level. "The automotive industry accounts for 13 percent of all state government tax revenues", said Kim Hill, director of the Sustainability and Economic Development Strategies group at CAR and the study's lead author. "This analysis furthers our understanding of how the automotive sector has a substantial impact on the U.S. economy by contributing to the fiscal stability of state and federal governments. As economic conditions continue to improve, auto companies could see an increase in sales and employment that would generate additional state and federal tax revenues." The contribution to state tax revenues ranged from a high of 23% of the state budget in Oklahoma to just 2% in Alaska, with most states looking something like California, which derived 10% of its 2010 state budget from auto-related revenue. This includes both the sale and manufacture of vehicles and parts, as well as use fees and fuel tax revenue, maintenance, and repair.

Outlook and Implications

As campaigning for the 2012 federal election starts to get under way, the topic of whether or not the auto industry bailout was money well spent is sure to come up again. The President Barack Obama administration has maintained, using numbers generated from the CAR and other sources, that the economic impact of letting the industry fail would have been catastrophic, and that the USD85 billion invested in the rescue and bankruptcy financing was money well spent, considering the alternative. However, even the measured USD135 billion in tax revenue generated by the industry during 2010 (in what was still a down year for the industry) is still a small number compared with the overall impact of the industry. According to the study, some 8 million Americans are employed in the auto industry, whether through sales, service, maintenance, assembly, engineering, or supply base. Those 8 million people earn a collective salary of USD500 billion, money that is pumped into the economy and also taxed as revenue through income tax. Although the tax revenue numbers are more heavily weighted to the fuel tax and registration fees side of the equation, the fact that at least one-third of all that revenue comes from the construction and sale of vehicles is significant, and shows just how deeply the industry touches every single community in the nation. This eye-opening piece of information was actually spotlighted after the bankruptcies at GM and Chrysler sought to reduce the footprint of the national dealer body, opening up US eyes to the fact that a failure of the auto industry would affect communities far beyond the industrial car-making Midwest,

As for when the US government is likely to divest itself of the remaining shares in GM, this is anyone's guess. It is unlikely to happen before the November election, as a loss on the investment would be political fodder for the administration's opponents, regardless of the overall net benefits that saving the auto industry has had for tax revenues and beyond. After the November election, it may be more politically palatable to make such a decision, regardless of which party is in control of the White House. Neither side has any desire to maintain a non-controlling stake in the automaker for any longer than is absolutely necessary, which would probably mean that either side would push for a sale not long after the election, economic conditions permitting. It is unlikely that GM is going to get to USD53.00 per share anytime in the foreseeable future, but that does not exclude the possibility of another automaker (or even GM itself) buying out its remaining stake, should its fortunes remain on their current positive course.