GM Plans To Pay Off U.S. Debt, Despite Falling Sales
MICHEL MARTIN, host:
Im Michel Martin, and this is TELL ME MORE from NPR News.
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But first, the company lost $1.15 billion from July to September, and dropped market share, too. But General Motors management sounded optimistic yesterday, announcing plans to start paying back a $6.7 billion loan to the U.S. government. That loan could be paid off by next summer, some five years earlier than expected. But is this is a smart move for a company that is still losing money and begging for a tax break from a struggling state government?
We wanted to know more, so we called Jerome Vaughn, he is news director at member station WDET in Detroit. Also joining us is John Stoll, he covers the auto industry for the Wall Street Journal. Hes also with us from Detroit. Welcome to you both. Thank you for joining us.
JEROME VAUGHN: Good to be with you.
Mr. JOHN STOLL (Reporter, Wall Street Journal): Thanks for having us.
MARTIN: John, Im going to start with you. One the one hand, GM declared what seems like a big loss, a billion dollars still seems like real money to me. So, how is it possible that they are in position to start repaying the debt earlier than expected and why do they want to?
Mr. STOLL: Well, basically, when GM went into bankruptcy court, the Treasury Department gave them the equivalent of about $30 billion to get through bankruptcy and to survive afterward. What - even with the losses that they encountered in the third quarter, it appears that they have more money on the books, so they were overcapitalized, which is a good situation to have. If somebody gives you too much money, it usually gives you a lot of options with your business.
In this case, I think that GM is arguing theyre doing the prudent thing and theyre going to begin, you know, taking that surplus of cash that they have and paying it back to the U.S. government.
MARTIN: And why do they want to? Why do they think thats prudent? I mean, weve seen where a number of the banks who also got federal bail money really just want to get out from the scrutiny of their compensation structure. Is that the case here?
Mr. STOLL: This will not get GM out of any scrutiny because the federal government in this case owns 60 percent of the company. And until that 60 percent stake is sold - which could be several years, it could be as long as almost a decade until thats gone - that scrutiny will technically still be there. That could change but we do know that - really I think theres two factors here that GM is looking at when it comes to paying down the loan.
One is being able to say that youre repaying the taxpayers is a tangible sign of progress when there are very few other milestones that you can point to. When youre losing a billion dollars on your net basis, when youre losing market share, when Europe continues to be a problem for them, at least they can say that were paying back our debt.
The second thing is there are very high interest rates that come with this debt. I calculate that they could easily pay this thing back with a surplus by next year, in fact. And if they can get under the weight of a 7 percent interest agreement with the government, it will definitely help them lower those costs. And I guess theres a third factor as well. Theyd like to be as private as they can be. And right now, they are as public as possible.
And so, if they can get this debt paid back, the $6.7 billion note that they owe the government, they could hopefully go out and find some banks that will lend them replacement revolving loans that then they can at least say, were becoming private as fast as possible.
MARTIN: Theres a question I have that I want to ask both of you to respond to. We called Warren Brown, who is - covers the auto industry for the Washington Post. He writes about cars and he also says that its a matter of the perception-reality gap. That GM has been turning out globally competitive products, but the public perception is not that. So that getting out from government scrutiny is one way to say that we are really back, we are strong. So, is this in part about perception, John? And then Jerome, I want to hear from you.
Mr. STOLL: I think theres some of that there. I dont give them that much credit at this point because I think they want the merit of their automobiles to tell the story. I think they do need to wash the stain of the bail-out off their hands, but theres also a very real feeling inside GM that they want their automobiles to stand on their own.
MARTIN: Jerome, what about you, how is Detroit reacting to this?
VAUGHN: Well, I think, overall, you know, were waiting to see whats going to happen. I mean, no one has been dancing out in the street because GM lost only, you know, $1.2 billion, you know, as opposed to $6 or $7, or $8 billion. I mean, I think people are relieved it isnt a much larger number. The, you know, plants had been closed for a while during restructuring and no one knew exactly how it was going to work when they came back up.
Cash for Clunkers didnt have the impact for GM that it did for, say, Ford or Toyota. So, I think people were holding their breath a little bit, but I think theyre relieved that it was only a billion. It is still a large chunk of money, but that the company have the ability to spin it as progress I think had some relief out in the streets.
The other thing, I think, is that there were no major lay-offs announced that were going to go with this quarterly announcement yesterday. And so I think that as well had an impact, an additional sense of relief on the part of average Detroiters.
MARTIN: But the Detroit Free Press is reporting this morning that GM may move 1,500 jobs out of Detroit, out of Renaissance and is seeking state tax breaks to keep workers there. How is that - I understand that this is new information, but Im just wondering, how are people responding to that? On the one hand the company wants to pay the federal government back but its still asking for concessions from state government, which is under quite a lot of pressure there owing to high unemployment. How do you think thats going to play?
VAUGHN: Well, I think it depends on where you live in Southeast Michigan. I think if you live in the city of Detroit proper, I think people are going to be a little miffed about that. People want to see GM jobs stay in the city. People want to see that tax base that the income tax provides stay in the city. And they want to see as many workers as possible remain in the Renaissance Center, GMs headquarters. If you live in the suburb of Warren, which is just outside of Detroit, which is where the Warren Tech Center is, you want to see those jobs move to Warren because, you know, if those jobs are in Warren, thats people eating at Warren restaurants and buying gas in Warren instead of in Detroit.
So, we hope there was going to be some more regional cooperation along this line and not have this sort of territorial war. Well see how it works out. The governor is supposed to make some remarks on that today.
MARTIN: If you are just joining us, this is TELL ME MORE from NPR News. Were talking about the latest news on the auto industry, especially General Motors plans to begin repaying government loans, part of a government loan that it was given last year. Were speaking with Jerome Vaughn of member station WDET, and John Stoll of the Wall Street Journal.
John, Ford actually reported sizeable profits last quarter. Ford has been kind of, what would you say, the sort of the bright spot in the industry. What is the difference - if you would kind of help us, obviously these are two different companies, whats the difference?
Mr. STOLL: Ford got started a lot earlier on the real cut to the bone restructuring that they needed to do. They hired Alan Mulally, an outsider who had been in the airline industry, a key figure at Boeing for about three decades. They hired him in 2006. And he went right about making changes that GM really is getting to now, particularly, you know, rebalancing the balance sheet and he went out and got all of that.
But they began cutting in, and I think, its an indication that Ford is much further along in its restructuring than GM is. GMs loss is largely attributed to the fact that they arent as small as they promised to be yet. Theyre going to get there hopefully, but theyre still servicing brands like Pontiac and Saturn, which they committed to get rid of. Thats very costly to run liquidation sales. You have to incentivize the vehicles and youre not making on those.
Ford isnt there. Now they have a slimmer line-up right now. They have a power-packed product portfolio, and they also have a situation where people are paying more of a premium for their vehicles right now.
MARTIN: So, Jerome, I understand that going back to the sort of local news in Detroit, I understand that even one of the mayors businesses is up for sale. Now, he gave, Mayor Dave Bing, newly reelected, elected again. Its sort of a complicated situation owing to the resignation of prior Mayor Kwame Kilpatrick because of legal problems.
And so, there have been a number of elections in a short period of time, but Dave Bing reelected to a full term and he, as I understand, he gave up operational control of one of his businesses when he took the mayors seat. But is that, you know, what does it say when one of the mayors businesses, which had been a successful business is now up for sale or going into bankruptcy?
VAUGHN: Well, I think, it shows that, you know, the entire industry that feeds into automotive, you know, production is on the rocks, in one way or another. I mean, you know, among the products that the Bing Company made, you know, steel for automobiles and, you know, different parts to go to auto parts makers. You know, theyre still struggling and theyre going to continue to struggle for a while.
I mean, with General Motors cutting production earlier in the year and many of their plants were down for a while that have ripple effects. The auto parts makers werent selling parts because, you know, there was no one to sell them to, and then that rippled down the line. And the Bing Company dealt with those same issues. I think, the only thing it says though is that Mayor Bing is really looking forward. Hes got a lot of work to do to help this city over the next four years. Hes got to focus on that, and I think thats part of the message as well that he is really looking to focus on that job as opposed to his financial holdings.
MARTIN: And finally, John, Im not sure if you know the answer to this question but how is the United Auto Workers responding to the news about GM paying back their loan or beginning to pay back the loan early? Are they responding favorably to that?
Mr. STOLL: Theyve been quite silent on the issue thus far but they do have a member of the board that represents them Stephen Girsky. And you definitely Steve had to be behind this. He had to vote in favor of it if it was going to happen. And you have to remember, the United Auto Workers are a stakeholder in a stockholder in GM. They own a significant percentage of the company.
And at the end of the day, this will make GM a healthier credit risk and hopefully, for the companys sake, make them a better performer on the New York Stock Exchange when they go public. And that pays huge dividends for the United Auto Workers. So, in the end, I believe that the fiscal argument is in favor of the United Auto Workers right now.
Mr. STOLL: Yeah, theyd like to see that in their members pockets, but theyd also like to see the stock do well when the company goes public.
MARTIN: And, Jerome, finally to you, and I understand that this is kind of a vague question, but can you just tell me whats the mood in the city right now? The city has been through a lot. Its been through a lot in terms of governance. Its been a lot in terms of the industry. What is the mood right now - optimistic, pessimistic, looking forward?
VAUGHN: I think, you know, the mood is one of, you know, maintenance, its survival. I mean, weve gone through this economic upheaval. We still have ways to go before we get out of it but, you know, Detroit has been through crises like this before economically speaking. And so the thing is to bear down and, you know, keep working as hard as you can and eventually its going to turn around.
VAUGHN: And people have seen that before.
MARTIN: All right and well keep working too. Jerome Vaughn is a news director at NPR member station WDET. John Stoll covers the auto industry for the Wall Street Journal. Theyre both kind enough to join us from the studios of WDET in Detroit. Gentlemen, thank you.
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MARTIN: Just ahead on our weekly conversation about personal finance, we ask is that free credit report really free? The brewing battle between freecreditreport.com and the government-backed annual creditreport.com. Well hear more on TELL ME MORE from NPR News. Im Michel Martin.
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