General Motors Accused of Fraud Over Misleading Claim That It Paid Back Taxpayers; CEI Files FTC Complaint

by Hans Bader on May 4, 2010 · 4 comments

in Bailout Watch, Deregulate to Stimulate, Economy, Employment, Labor, Legal, Politics as Usual, Precaution & Risk, Regulation, Sanctimony, Zeitgeist

The Competitive Enterprise Institute filed a complaint today against General Motors with the Federal Trade Commission, over GM’s claims that it paid back what it received from taxpayers.  In recent TV ads, GM’s CEO, Ed Whitacre, has boasted that GM repaid its government bailout loan “in full, with interest, five years ahead of schedule.

President Obama’s tax-cheat Treasury secretary, Tim Geithner, recently trumpeted these claims, crowing that “GM had repaid in full the $4.7 billion balance it owed under the government’s Trouble Asset Relief Program.” But this so-called “repayment” was just a deceptive accounting trick. GM used government bailout money to make the “repayment,” as The New York Times noted.

More importantly, this “repayment” is just a drop in the bucket compared to what GM has received from taxpayers.  The federal government has yet to recover the lion’s share of the more than $50 billion it loaned the company.  Why?  Because that $50 billion was mostly “converted into stock held by the Treasury Department.”  That’s billions of dollars for stock in a company that, for all intents and purposes, was bankrupt. (GM just lost another $4.3 billion.)

The Competitive Enterprise Institute (CEI), a Washington think tank, argues in its FTC filing that GM’s claim is misleading to consumers, and therefore violates the Federal Trade Commission Act:

Most consumers would reasonably interpret GM’s ads as meaning both that GM has paid back all the money that it received from the government, and that those repayments were made with its own funds rather than with other government funds.  Neither of these interpretations is accurate.  .  .

GM’s ads also leave the false impression that it is on the road to profitability, since it is now able to pay off its debts. (In public statements, GM deliberately sought to reinforce that impression by linking the ‘repayment’ to increased sales of two cars produced by GM.)

In reality, however, GM used taxpayer money to make the repayment — government bailout money from the Troubled Asset Relief Program — and it was still losing money at the time of the advertisement.

This false impression matters to consumers . . . because a profitable automaker, unlike an automaker that goes out of business, can provide replacement parts for an automobile that a consumer purchased. And unlike a bankrupt automaker, it can be counted on to make good on its warranties.

Moreover, the only reason GM had enough government money left over to pay back any of what it received from taxpayers is because of Toyota’s recent safety issues and recalls, which drove car buyers away from Toyota to GM and Ford.  Only that kept GM from burning through all of the taxpayers’ money.

Even though GM still hasn’t paid back the $50 billion, and received billions in additional handouts through programs like the incredibly wasteful Cash for Clunkers (which cost taxpayers and used-car and car-parts businesses billions), Obama backers now claim that critics of the bailout owe Obama, GM, and the UAW “an apology.”

Ironically, GM would never have needed a bailout if it had just received relief from costly regulations such as CAFE rules (which wipe out at least 50,000 jobs) and dealer-franchise laws.  That’s so despite GM’s self-inflicted wounds from mismanagement, excessive union wages and benefits (worth up to $70 an hour), and rigid union work rules.

The Obama Administration left those wasteful work rules and excessive benefits largely intact, and gave the United Auto Workers Union (UAW) a big chunk of General Motors‘ stock, even though the UAW helped bankrupt the company, and the company has value today only because the federal government pumped billions of taxpayer dollars into the company (and engineered the wiping out of General Motors’ bondholders, some of whom were non-union employees who had invested their life savings in the company).

Veteran political commentator Michael Barone called the Obama administration’s treatment of Chrysler and GM bondholders “gangster government.” Law professor and bankruptcy expert Todd Zywicki called it an attack on “the rule of law.”

Back in 2008, Zywicki prophetically warned that a bailout would prove worse for the auto industry than for automakers to quickly file for bankruptcy without first seeking a bailout.  Zywicki noted that by enabling automakers to get rid of expensive union contracts and red tape, a “Chapter 11 bankruptcy filing will likely result in a stronger domestic industry.”   It would provide  ”a mechanism for forcing UAW workers to take further pay cuts, reduce their gold-plated health and retirement benefits, and overcome their cumbersome union work rules.”  It would also help automakers get rid of redundant auto dealerships that should be terminated but aren’t because of state dealer franchise laws.  Nobel Prize winning economist Gary Becker also argued that a bankruptcy filing would have been better than a bailout in achieving “needed reforms.”

But the federal government ignored their wise advice, and chose to embark an incredibly costly bailout instead.   The bailout of GM and Chrysler is similar in many ways to the British government’s unsuccessful auto bailout in the 1970s, which ultimately failed despite a cost in the billions.

The federal government used money from the $700 billion bank bailout for the auto industry bailout. Legal scholars at the Heritage Foundation, Clinton administration Labor Secretary Robert Reich and many other commentators have argued that using the bank-bailout money for auto bailouts was illegal.

In addition to the $50 billion it gave to GM, the administration gave another $17 billion to GM’s finance arm, GMAC.

Value Added May 4, 2010 at 1:12 pm

I wondered if this would happen. Kudos to the folks at CEI. Best of luck.

midas360 May 7, 2010 at 7:41 am

It's not fraud. Everyone was told what GM was getting when they were being bailed out. They did repay the $4.7 billion dollar loan. It shouldn't matter how the U.S. Government was paid back. Whether they used the loan to improve their business and then gave it back, who cares.

The Government still owns a good % of GM. They can sell the stock or GM can buy it back.

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