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Friday, April 30, 2010

GM Repays Bailout Loan With Bailout Investment

This story was pretty funny. GM repaid its bailout loan. This made them eligible to borrow even more money at a lower interest rate.

I like the trend to call GM "Government Motors". Even without bailout money, GM executives benefit from regulations that make it hard to start a small car manufacturing business. Each regulation is a tax on small manufacturers, and there are a *LOT* of regulations in the auto industry.

GM received two types of bailout money from the Federal government. The first was a loan of $6.7B. The second was an equity investment of $42.8B. This led to the obvious accounting trick. The equity investment money was used to repay the loan!

The Federal government is holding on to its equity investment in GM. They are waiting for an IPO of post-bankruptcy GM. They are hoping to sell for a profit, so they can claim success. That is unlikely, because GM needs a market capitalization of more than $60B for the investment to be sold at a break-even value. Even if the Federal government does sell its GM "investment" for a profit, it probably won't be a real profit when compared to true inflation. That money/wealth would have been more profitably spent elsewhere.

Also, the Federal government got a really bad deal on its equity "investment" in GM. They overpaid, in price per share. This was a bailout of GM's other creditors. For example, if they overpaid by $5B, it's like a gift of $5B to GM's other bondholders. That's the reason the government was negotiating with GM's other creditors; they were negotiating over how much of a bailout they would get!

It's pretty embarrassing that GM repaid the bailout loan with other bailout money. The mainstream media hyped this as "Hooray for GM and the State!" GM still doesn't have a profitable car manufacturing business.

However, GM does have a profitable business. GM excels at lobbying for bailout money! That's all that really matters.

It is immoral for a business to receive bailout money, and then spend some of that money lobbying Congress for favors. Unfortunately, that's the way the State economy and political system works. GM is doing the same thing as the banksters!

Real interest rates are negative. Interest rates are less than true inflation. Suppose GM has $50B in debt, and real interest rates are negative 20%. It's like GM executives are receiving a bailout of $10B per year. They can repay the loan with devalued money.

As long as GM can borrow more and more money, the scam continues. Inflation is high and interest rates are low. This makes it seem like the total debt stays the same size over time! GM does own some tangible assets, like factories/land and the State car manufacturing monopoly/oligopoly. Inflation means these assets increase in value. Inflation in these assets can keep place with the interest payments due on loans.

GM has easy access to capital. Non-insiders can't borrow money. This gives the State and banksters the power to decide which businesses succeed and which ones fail.

The cost of GM's bailout isn't free. Everyone else pays the cost via inflation. GM gets their bailout. Someone who tried to start/grow a business via reinvested savings/profits gets ripped off by inflation.

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