DealZone

GM’s debt designs

November 16, 2009

Announcing a third-quarter operating loss, the government-owned automaker said it would begin paying down its $6.7 billion debt to the U.S. government ahead of schedule. Most financial experts would agree that paying off debt is a good thing.

The government extended almost $50 billion in financing to GM but agreed to convert most of that into a 61 percent equity stake in the automaker. A congressional oversight panel said the government was unlikely to recover all of the financing it provided GM.

Banks that paid off their government bailouts early were able to shrug the pay czar off their backs and return to the time-honored practice of paying their executives whatever they pleased. It’s unclear whether GM will be able to do the same once it pays off the government. After all, taxpayers will still be majority shareholders after all debts are paid. Ken Feinberg may well wind up with a desk at GM’s HR office.

So why pay this money back before it is due? It’s not as if the prepayment is being funded from genuine earnings. In effect, GM is using money borrowed from taxpayers to pay them back. With expectations so low, and markets gradually accepting that the worst may be behind it, is this trip really necessary?

Comments
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Yeah GM is in a big mess and they are not making intelligent decisions.. I can’t see them to be profitable in the near future

 

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