Christmas in Congress - GM gets $25 Billion Loan

This went by completely unnoticed.

House passed $25B dollar loan to GM.

According to U.S. News & World Report:

  • It's much bigger than the Chrysler bailout of 1980
  • There are few strings attached
  • It props up a private companies
    • and:

      There's more aid coming. This year's $25 billion is just a down payment. The automakers now plan to ask the government for another $25 billion in loans next year. It's just spare change, after all.

      Update: GM builds new Volt Engine factory in Flint Michigan!

      About time! Excellent! Makes the loan much more palatable!

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Well Bob

I'm glad to see that this passed.

I honestly think that the Big Three need the money bad.

But I think that the deal would have been better structured if it had been an equity deal instead of a loan. This amount of money is (likely, GM's around 5.6 billion market cap, Ford around 11.26 billion, and Chrysler is anyone's guess, because it's privately held) larger than the all the company's market cap.

It would be a sweetheart deal, but if the government came in offering the money for a majority ownership stake achieved through the issuance of new stock diluting present ownership, then this could be a winner.

Let's take GM. Let's say the the government gave GM $8.55 billion in exchange for the issuance of 570 million new shares of stock at $15/share (a 50% premium on current the current market), that would give the government a majority stake (50.17% to be exact)

As recently as the start of 2004, GM had a market cap of around $27.7 billion (I'm calculating from their 2004 annual report)

I think that it's entirely plausible that the company could get back to the level if they can retool to get the Volt, the Cruze and the rest on the road. Let's say 5 years of conservatorship.

If that happened that would mean that the value of the government stake would be worth around $13.9 billion. A $5.35 billion increase in value. About a 63% ROI over 5 years. Or something around 10% annual return.

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now I am, read update!

They just announced a new VOLT engine factory in Flint that makes this more than worth it.

What I was concerned with is the actual loan was a "No strings attached" deal and last I had heard they were going to outsource the VOLT...

so this is good, finally!

Possibly no more Pets or Meat? for Flint?

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The $373 million Volt

plant in Flint has been the plan for the better part of a week publicly. Shipping costs are going to be a consideration, and if there's a dollar devaluation (which seems likely) then we are probably going to lose the benefit of having oil priced in out own currency.

Right now dollar drops (like against the euro) don't have an independent effect on the price of oil, because it's priced in dollars. But if the dollar drops by 25% against the euro, and oil's being billed in euros, then the dollar price of oil goes up 25%.

Same thing with shipping costs. If the dollar loses value then it has an independent effect on prices. And a 25% devaluation isn't out of the question. That means that the roughly $5500 it costs to ship a standard container from Shanghai to San Diego goes up to almost $6900.

You can fit maybe 23 engines in a standard container, so that means the shipping cost is about $300 per engine. And with a general dollar devaluation that's likely to be even higher. It changes the economics of production, but we've lost economies of scale, so the price is going to be higher than if we hadn't allowed our industrial capacity to got to shit.

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aren't you thrilled

that in order to get companies to create jobs in the United States we have to go basically to 3rd world status? I'm so thrilled!

I don't have the link now but I remember someone who was an expert in global supply chains posted on DK maybe 2 years ago, wrote a few posts, got 5 comments each, detailing how these global companies simply were not taking global supply chain costs into account at all.

We should dig him out, get him to post over here!

I didn't realize the Flint jobs where there at all. Last I had read almost the entire manufacturing of the Volt was going to Mexico so this is very good news.

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was planning to do the manufacturing for the new Chevy Cruze that's going to be built in Lordstown, OH at Reynoso in northern Mexico. The UAW went on strike over this among other things.

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