General Motors and “Repaid” Debt

I usually don’t go in for thought experiments, but for once I’ll make an exception. Let’s pretend for a moment that I need $50,000 to maintain a struggling business, and you, being the wealthy and charitable individual you are, provide me with $50,000 in the following manner:

1) $30,000 in ownership (a share in future profits, if any)
2) $13,000 for emergency cash (to be repaid at no interest)
3) $7,000 in debt (at an interest rate 7% lower than I could get elsewhere for accepting a similar risk)

Not too many angel investors, venture capital funds, or private equity funds would sign up for such an arrangement, and that, dear reader, is why I am relying on your generosity. After one year, the business still has not made a profit. However, I have managed to “pay back” the initial $7,000 in debt in the following manner:

1) I borrowed an additional $10,000 from you for environmentally friendly investments.
2) I used some of the $13,000 in emergency spending cash to pay back the $7,000.

In other words, at the beginning of the year, you provided me with $50,000. I now owe you $53,000 (plus the emergency spending cash I used and the interest you’ve lost), with no real prospects for paying the money back. However, I am confidently assuring my customers and you(!), of all people, that I have “repaid my loan in full,” by which I mean the $7,000 in debt, not, of course, the $53,000 you provided that has not yet been returned. Change the thousands in the thought experiment to billions and the debtor to General Motors (as long as you pay income taxes, you remain the lender), and this appears to be the story General Motors CEO Ed Whitacre is trying to sell the public in this Wall Street Journal Op-Ed and the following commercial:

(The numbers in the thought experiment above were provided by an excellent article by Shikha Dalmia at Forbes. The entire article is worth reading.)

I recognize that General Motors and Mr. Whitacare are in a tough spot given the economy, intransigent and politically influential labor unions, and the excess capacity for cars worldwide. That does not excuse, however, the transparent dishonesty of this advertisement, and, by extension, the Obama Administration (the U.S. government  has a majority stake in the General Motors, and, as you will recall, President Obama forced the resignation of the previous CEO, Rick Wagoner, about a year ago). HL Mencken famously quipped that “no one ever went broke underestimating the intelligence of the American people.”  General Motors and the Obama Administration appear to be putting that maxim to the test.

2 Responses to General Motors and “Repaid” Debt

  1. Given the scale of both the government lending and GM’s problems, I must admit to fearing that GM will be on the government books more or less indefinitely.

  2. Donald R. McClarey says:

    Bravo John Henry!

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