CBO Bullish on TARP and Autos

I never thought that I’d be calling the Congressional Budget Office (CBO) a hidden bullpen. In large part because the CBO doesn’t typically analyze investments and it definitely doesn’t give advice to investors on where their money should be. The TARP and other components of the 2008 bailout have changed the workings of CBO a bit. Now that the US government owns shares (or the right to buy shares through warrants) in many companies, CBO’s reports now include a bit of corporate forecasting.

In its latest report, CBO estimates that TARP will cost taxpayers less than predicted by the White House’s Office of Management and Budget.

CBO estimates the program will cost $109 billion. That figure is $18 billion less than the $127 billion predicted by OMB. CBO gets the lower cost in two ways, first by estimating that the government will recover an additional $14 billion form its loans to AIG. Given that only a small portion of AIG’s business (and not a part of its namesake insurance business) was the hardest hit by the crisis it’s encouraging that the firm may be better able than expected to repay.

CBO’s second “savings” is more normatively ambiguous. CBO predicts that the Home Affordable Modification Program, which gives direct grants to homeowners will cost less than OMB predicts. CBO admits that these grants were never meant to be repaid. So the only way that CBO obtains a lower cost is by assuming that Treasury doesn’t spend all the money allocated to the program. If the government spent less because no one was losing their home, we’d cheer but numerous reports have shown that the program can be too slow to help homeowners, or just deny them help outright. So the Treasury spends less outright but it’s not clear the economy gets in better shape.

Lastly, yesterday’s report takes a buoyant view of the auto company loans. I’ve been crucial of these loans several times in the past. In an early auto loans report, CBO predicted a subsidy rate (the amount of money that will not be paid back) at 64 cents on the dollar. That figure has declined over time, even though little money has yet to be paid back. In the most recent report CBO expects the taxpayers will only lose 41 cents on the dollar. GM’s CFO Chris Liddell must share CBO’s improved outlook, saying that GM could profit as early as this year. I’m not surprised there but I am that CBO beat him to showing optimism. Although I must admit, I'm glad for it.

The New GM Theory

I haven’t written about the auto bailout in sometime. I mostly skipped writing about Cash for Clunkers. I’ll say now that the program appears to have increased the price of used cars by scrapping many of the clunkers. Americans who decried bailouts to risk taking banks sadly saw little resemblance to having their investments in their cars propped up to the disadvantage of first time car buyers.

But Cash for Clunkers, which cost about $2.8 billion, looks about as expensive as Goldschlager looks gold-dense when compared to the funds given to auto companies directly. The first annual report of the Office of Financial Stability shows that the US government still has almost $15 billion in loans out to Chrysler, GM, and GMAC. The figure below shows how these loans were converted into government ownership of Chrysler and GM.

Now the government at least bought into GM near a historic low point for the company, so any uptick could generate some returns but the company’s ownership has been radically reorganized. Chrysler will face challenges from being majority-owned by VEBA, a representative of employees and their pension funds. GM faces a less clear future being owened largely by governments that say they don't want to own auto companies. Further complicating GM is that the company is co-owned by the American and Canadian government.

Now let’s think this through. We now have a large firm, with high fixed costs, a lagged cycle for innovation and high costs to making one year of bad products, owned by multiple governments, facing tough international competition. I think I’ve seen this game before, in fact I think applying it to Airbus helped win Paul Krugman a Nobel Prize. Yet the now classic Boeing-Airbus game doesn’t say that governments should dump their corporate investments but should instead encourage domestic production in such markets.