Digging Deeper on the GM Loan Repayment

Last week’s announcement by GM that is has fully repaid the loans it received from the U.S., Canadian, and Ontario governments (years ahead of schedule, and with interest) was greeted in most circles as another positive sign of the auto industry’s modest recovery.  Since the dark days of last June (when Chrysler was shut down entirely), the Canadian auto assembly sector has clawed back 5000 jobs — and another 4000 have been added in the even-harder-hit parts industry.  (Dont forget, though: That still leaves us 40,000 auto jobs below where we were 3 years ago … so we can’t possibly conclude that the crisis is over.)  Real GDP in assembly has rebounded by $4 billion (at annual rates) since June, and by $2 billion in parts.  Add in the spin-off jobs (7-to-1 for assembly, including the parts jobs), and this rebound constitutes a major portion of the gains in Canadian GDP that have been recorded in recent months.  Indeed, these two sectors directly account (not counting spin-off linkages) for about one-fifth of the growth in business sector GDP in all of Canada since June.

Derek DeCloet in the Globe and Mail was an exception to this positive response: there’s nothing the auto industry could possibly do to make Derek happy (except perhaps pack up and move away).  He grumbled that the government is still subsidizing this company, and ridiculed GM’s TV ads as a publicity stunt.  (Of course they were a publicity stunt, Derek.  That’s what advertizing is, you silly.)  Please stick henceforth to covering the government-subsidized state-protected financial sector, Derek, and spare us your Bay-Street-centric rants on the real economy (that is, the part of the economy that actually produces goods and services — rather than buying and selling pieces of paper).

On one hand, however, DeCloet is right, and we shouldn’t get too carried away with optimism about the repayment.  The loans represented only about a fifth of the total assistance GM received from the three governments (U.S., Canada, and Ontario).  The rest was in the form of equity, and it will take a lot longer before that ever gets “repaid” to the governments.  Nevertheless, who would have dreamed a year ago (when GM was on death’s door) that it could generate $8 billion (U.S.) in free cash flow to repay the loans.  And if the repayment generates a bit more confidence among GM consumers about the company’s long-run viability, that will have a reinforcing effect on its sales (and hence on jobs) – all the better.

 More good news came when GM announced $850 million (U.S.) in new capital spending in its engine plants, including a big swack in St. Catharines Ontario.  That new equipment will help GM fulfil the far-reaching Canadian content commitments it made in the powertrain area, as part of the rescue effort last year.  Canadian negotiators squeezed GM hard to increase their proportional commitments to Canadian production (of both assembled vehicles and powertrain) as the quid pro quo for the proportional Canada-Ontario commitment to the rescue effort. 

The main man in this regard was Mr. Paul Boothe, an unassuming, consummate federal civil servant who proved in the heat of battle that he could negotiate with the best of them.  If only all our public officials were as determined and skilful in their efforts to pro-actively win real investment and real opportunities for our industries.  The St. Catharines announcement is in large part the fruition of the efforts by Boothe (and all the other stakeholders in last year’s rescue, including the provincial government and the CAW) to negotiate a package that was much more than a bailout.  Rather, it was a recipe for a reaffirmed Canadian presence by these two lynchpin manufacturers (GM and Chrysler).

There are a couple of more dimensions to this fascinating story that are worth exploring:

1. The federal and Ontario governments have already recouped over $2 billion of their contribution to GM, and there is clearly more coming (though we don’t know when).  The Harper government’s decision last year to write off every penny of the auto aid and thus build it all into last year’s deficit calculation (which I questioned at the time as curious and even misleading) has already been proven wrong.  Since the money was already “written off” by Ottawa as a loss (on grounds that they had little confidence it would be repaid – contradicting their own assurances at the same time that it was an “investment,” not a bail-out), any repayment will come as a gain that can be recorded in the budget on the revenue side.  Jim Flaherty has learned from past Finance Ministers (especially Paul Martin) that it’s always politically better to make the budget situation look worse than it is (even when the bottom has fallen out of the balance), thus positioning yourself to triumphantly announce “surprising good news” (due, no doubt, to “careful fiscal management”) down the road.  The auto package could thus generate as much as $10 billion in “surprising good news” for Ottawa in the years to come (depending on the ultimate worth of the public equity share).  It should never have been written off as a “deficit” in the first place (it really is an investment, I would argue).

2. Likewise, calling the auto aid “stimulus” was also misleading.  Remember the government’s fishy claim that their total stimulus effort amounted to $40 billion or more (over two years)?  Almost a quarter of that was the auto aid.  It was important for preserving jobs, for sure.  But does it count as “stimulus,” in the sense of stimulating expenditure?  I don’t think so.  It was more in the realm of a balance sheet transfer that kept an important company going.  If the auto aid was “stimulus,” then so too was the much larger line of credit which Ottawa advanced to the banks (they could have tapped $200 billion under Mr. Flaherty’s EFF mechanism) – all of which was also repaid.  In that case, Ottawa’s “stimulus” was more like a quarter-trillion dollars … far outpacing everyone else in the OECD as a share of GDP!  Of course that’s nonsense.  This was just one of many ways that Ottawa inflated the true value of its stimulus effort last year (including counting as “stimulus” the increase in EI payouts that automatically accompanied last year’s mass layoffs).

3. The loans that GM repaid came from the Export Development Corporation, which runs a usually low-profile business assisting Canadian exporters with lines of credit, payment insurance, and other financial intermediation.  Amidst the crisis last year, the federal government gave EDC a much broader mandate (including investment banking to support key Canadian exporters), backed by modest contributions of new share capital (which, again, count as an investment, not a current “expenditure,” and hence don’t count in the deficit).  EDC, like any other bank, is then allowed to leverage its capital into multiplied amounts of lending to businesses.  That’s what private banks do all the time.  The only difference is that private banks do this to maximize their own profits (hence generating the bankers’ cycle, through which the volume of credit created for the economy fluctuates wildly and destructively, depending on the collective mood swings of the bankers).  EDC, in contrast, is mandated to create credit it in the public interest.

This proves the value of something that Canadian lefties (including me, Andrew Jackson, and various incarnations of the Alternative Federal Budget have been advocating for years): the creation of a National Industrial Investment Bank to channel steady, attractively-priced capital into strategic Canadian industries in the real economy.  Utilizing public vehicles of credit creation (rather than relying solely on private banks and other private channels, like the stock market) would be a very valuable tool to support real industrial development in Canada.  And this lending is NOT government “spending.”  Rather, it’s using the power of credit creation for the public good, rather than private greed.  In my view, the EDC should keep the money repaid by GM and reinvest it in further industrial lending to support other key export-oriented businesses.  In essence it would thus become the public investment bank we have been advocating.  Derek DeCloet and his ilk would go bananas about the intrusion of politicized government into a realm that they assume should be the exclusive preserve of rational, private bean-counters.  I think that after the last two years, we can all come up with about a dozen counter-arguments to the assumption that “private is best,” when it comes to lending and finance.

4. Finally, GM’s quick repayment of the loans has whetted the appetite of some commentators (including DeCloet) for the ultimate repayment of the full government contribution.  That would occur through the issuance of public equity by GM and Chrysler, creating a market for those stocks into which the government would presumably sell its shares.  There is even some nefarious language in the rescue packages requiring the government to sell off its shares within specified, relatively aggressive timelines.  The more I think about it, the less this makes sense – neither for the auto industry, nor for taxpayers.  Why not hang onto the equity stake?  If the companies recover and the equity gains market value, then the government will be able to claim that on its balance sheet (hence officially recouping the cost of its written-off contributions and creating a budgetary gain).  That could well generate better value for the government than a quick, premature sale.  More importantly, the government’s continuing equity participation would help to maintain the company’s focus on the public interest (not just the private interest) that the Canadian footprint succeeded in introducing.  There are other highly successful automakers in the world where host governments maintain an important minority stake (including Volkswagen and Renault).  The Canadian and U.S. governments should investigate doing the same thing, before rushing to dump an asset which could, ironically, turn out to be one of the best investments they’ve made in decades.


  • something that Canadian lefties … have been advocating for years: the creation of a National Industrial Investment Bank to channel steady, attractively-priced capital into strategic Canadian industries in the real economy.

    Umm, why is this a ‘lefty’ project? How and why will it reduce poverty and inequality?

    I mean, I can see how it will ease the lives of those who work the auto sector, but that capital will have to be diverted from other sectors. What’s so special about the “real industrial” sector? Are workers in other sectors somehow less worthy?

  • hey Derek your the best, here’s looking at you! (your still the biggest hole the Globe has digging for them.)

  • First, thanks Jim for answering a question I had in the back of my mind. I was surprised to hear GM had paid off its loans when I saw their ads on TV, and was wondering how much of the government assistance they received was actually in the form of loans. That answers it.

    But I think Stephen has a really good point with his comment. Why should government get in the lending business? If there is room for government to start “using the power of credit creation for the public good,” why haven’t greedy private banks already stepped in to lend and thus increase their private benefit? Is there a market failure in the private banking sector that justifies government intervention?

  • Before the crash banks where leading to the most profitable direction, which was all the junk mortgages and inflating the housing bubble, rather then into industries that make stuff and employ large domestic workforces of middle income earners.

    A government bank would lend to people who want to do thing that will bring real benefits to regular people, rather then always the most profitable directions.

  • I think the junk mortgages/inflating the housing bubble problem was more in the U.S. than in Canada, Darwin, but I could be wrong on that.

    I also thought the most profitable directions are the ones that bring real benefits to regular people — supporting initiatives that aren’t profitable seems to me like it’d be helping to create products that people don’t want, or create make-work jobs when people could be doing something more productive with their labour.

  • “I also thought the most profitable directions are the ones that bring real benefits to regular people”

    I’m not sure the evidence supports that.

    There has been substantial economic growth in the last 30 years, but if you look at income distribution virtually the only ones who benefited are those in the top 10% or 20% of incomes. Everyone else has had flat or decreasing income.

    If a government bank was directing investment to those initiatives that would benefit the other 80% of the population, that would bring real benefits to regular people. The top 20% may not even have to sacrifice any of their growth.

  • Jim, excellent points about the auto bailout’s effect on the supposed size of stimulus and deficits. Great minds think alike.

    When the bailout debate was raging last year, Kevin Gaudet, Andrew Coyne and other right-wing pundits categorically asserted that taxpayers would never get any money back and that the auto companies would soon be requesting further bailouts.

    Now that events have proven them wrong, they should be eating humble pie. So far, I have not seen any of them admit their error.

    My prediction remains that governments will ultimately make money on the auto bailout, as the U.S. government did last time it bailed out Chrysler in 1979. However, I agree that hastily selling the public’s equity stake is unlikely to provide the best return.

    The bank bailouts also appear to have been good deals for taxpayers. The Canadian government certainly made money on its mortgage purchase program. The American government seems set to make money on TARP.

  • Kelsey Kirkland

    Derek Decleut is disappointing in his analysis on his GM and did no better the following week on his column about Greece. Perhaps he is echoing the climate in Ottawa. Even our PM Mr Harper is defending the Financial Industry. I don’t know where this absolute trust comes from, considering State of Bavaria has terminated its relationship with Goldman Sachs. Because it is believed the Deutsche Bank and Goldman Sachs follow similar practices and lawsuits have been filed against both in US courts


    When Charlie Rose interviewed Goldman Sachs CEO Lloyd Blankfein this week, the CEO did not mention their operations in any country by name (not accidental) except for China. Mr Rose could not have missed the desperation of Goldman Sachs to have friends. As it happened only a couple of weeks prior to this interview Mr Rose sat with James Chanos of Kynikos Associates in whose view the US companies do not have a good history of surviving in China and he gave the example of two Investment firms which failed.

    Our leaders and journalists can continue to ignore the obvious that the affiliated Credit Rating Agencies which failed miserably on the Subprime fiasco (the ink is not even dry yet on those papers) are now rating Sovereign nations but the Asian media is watching.


    Can you imagine how will they perceive the judgment of our leadership in this matter – more importantly there will be questions about their Power whether they are leaders or are just figureheads.

    If the Eurozone leadership was sincere in helping Greece they shouldn’t have exacerbated and prolonged the crisis by making insincere statements like Greece does not need aid and their media should not have slandered the Greek and their culture. If the CDS prices on Greek debt had fallen on March 9 from their previous high on February 4, what changed afterwards except that the markets perceived not wrongly that their was no will on part of EU to help resolve Greece’s economic crisis. Meanwhile the money took flight from deposits in Greece banks exacerbating the problem. And it was the wealthy who withdrew billions making the situation dire for banks.

    What is shocking is that there is no outcry from the Foreign Pension Funds which hold 80% of Greece debt (20% is owned by the Greece pension funds) .Could it be that the pension fund managers are cognisant of the tactics employed by the markets and politicians? They understand implicitly when there are assurances there will be no default it means the resolution will be by substantial haircut to the Greek debt. If that is the case then markets understand that too but created uncertainty and increasing the Volatility even if it means a sovereign nation at the brink is taken even further to the edge precariously. Like the game kids play when they push you down from the high wall and at the same time hold on to a corner of your garment. Saved ya!! A cruel game.

    There is willful blindness amongst the critics for the woes that burden Greece is the unfortunate timing that soon after Greece adopted euro in 2001, it hosted Olympic games in 2004 incurring a huge debt and moreover ongoing costs of maintaining the venues.

    We need a watchful media not one in compliance with ones who have a stake in disrupting the economies of nations. Don’t let the scrupulous firms pull the strings on you.

  • Randy Robinson

    Nice piece, Jim. On the subject of equity stakes, Ontario has four big commercial enterprises in which it holds a 100 per cent stake: Ontario Power Generation, Hydro One, OLG, and the LCBO. In research we’ve been doing, it has become clear that most voters are well aware of how much money these companies make — more than $4 billion a year in pure profit — and they very much like the idea of owning them. People agree wholeheartedly that it makes sense for governments to own revenue streams other than taxation. Why not car companies?

  • im just curious as to the state of these “loans” to gm.its all well and good that the “loan portion of this bailout package has been repaid but from what iv read and understand,for the government to be able to make back what it put into the equity portion of the bailout gm’s stock valuations would have to be priced at unprecedented values.what people also fail to consider is that this bailout didnt happen in a bubble.in the years leading up to the bailout of 08 gm canada recieved large amounts of government money,both federal and provincial.i seem to recall in 2005 gm oshawa being given $500 million and even in late spring/early summer of 08,a mere months before the big bailout,gm got a further $275 million.why are these amounts not used in any debt repayment calculations?it also seems very coincidental that all these government “investments”seem to happen in the years that caw contracts come up for renegotiation and usually seem to involve massive payouts to caw represented workers at the gm plants that recieved the “investments”.two prime examples of this would be in the “investment” made in spring/summer of 08,when gm and the caw were negotiating a new contract.the same week those two parties resolved their contract was the same week the provincial government announced their investment of $275 million and coincidentally part of the contract agreement involved a signing bonus for caw represented workers at gm worth $3700/worker.the other example being the main bailout being recieved by gm,coincidentally,the same week caw represented workers were due to get their christmas bonuses of $1700/worker.the christmas bonus,by the way,was extended to even laid off workers and oddly enough didnt have to be reported to ei as extra income.im not sure,weather or not all these “investments” are paid back that taxpayers can afford anymore “investments” in the auto industry so lets hope they can manage on their own fo a good long while

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