GOP presidential candidate Mitt Romney told the Detroit News that one of the first things he would do if elected president is to completely divest of the government’s stake in GM. He made the case to the paper that the Obama Administration is holding onto its 26 percent stake in GM solely so that the extremely-likely loss that would come from the shares is not locked in.
GM’s IPO occurred in November 2010 at $33 per share. At the time of the IPO, the government would have had to sell its stake for about $43 per share to break even on GM’s bailout, but instead, it sold a portion of its stake at the IPO price. This means that the 26.5% of GM that the Treasury still holds would have to sell for over $50 per share in order for the US Treasury to break even on its bailout of GM. With GM’s common stock currently hovering around $21.71 (as of 11:11 AM EDT on 6/6/2012), it seems unlikely that the stock will hit such lofty numbers anytime in the near future.
So what’s the problem? Romney may be right that the Administration is delaying the sale of the shares for political reasons, so that the loss from the bailout is not real, and is only theoretical at this point. However, Romney stating that he would sell the stake in GM immediately would also be mostly for political purposes. Namely, he wouldn’t have to worry about the government being in the car business anymore, and he could pin the loss on his predecessor, beginning his term with a clean slate.
As usual, the truth likely lies somewhere between the two poles. Though the politically-astute Obama team is likely well aware that a sale of the GM stake a half of the price it needs to be would be a tough sell in November’s general election, it also would love to get out of the car business. It’s a matter of market timing. If they sell now and GM rises to a level close to the $33 IPO price less than a year later, they will have “wasted” billions of taxpayer dollars when there aren’t any spare billions lying around. If, however, GM stock stays where it is, or falls further (and that may be a possibility given the company’s troubles in Europe likely to get worse before they get better), a quick sale may be better.
The most recent estimate of losses from the US bailout of GM stands at about $21.29 billion. Not chump change, but also far below the original $44 billion estimate at the time of the bailouts. There’s the economic benefit of GM and Chrysler not liquidating and not costing hundreds of thousands of supplier jobs (and their communities) the burden of unemployment as well.
As with everything in politics, there are two sides to every narrative. The Treasury could sell its shares right after the election, even if Obama wins, and the president could claim that the government has recovered nearly all of the money that his administration invested in the bailout (conveniently forgetting about the tens of billions loaned by the Bush Administration at the end of 2008). See? Everyone wins but the taxpayer.
I’m a liberal. Ok that’s done. I’m also no business wiz, but, it seems to me that if the gov’t were to hold on to stock until it reached a higher value would maybe make some money. Also, what is so wrong with the gov’t owning stock anyway? Additionally, why do candidates make statements like this and then after (or if) they’re elected they can’t/won’t do what they said? I mean what if there is more to the stake in GM than he knows about right now? It’s like when Obama said he would close Gitmo and after he was elected, he realized that it wasn’t possible to do. Anyway this is about cars, so let’s drive!
@ Tom D.
I don’t want to get into a political debate, this isn’t the forum for that, but I do want to address a couple of your points. First, like the article points out, it is extremely unlikely the government is ever going to “make some money,” as the stock would have to rise to around $50 for the government to break even. Yes, if the stock rises a bit from it’s current $22, the government could trim some of it’s losses, but the stock could also fall, widening losses. Second, the problem I have with the government holding stock in a public company is the conflicts of interest that arises from the government being the regulator of the industry the company operates in (EPA, NHTSA, NLRB), and “public good” concerns that could adversely affect how the company is operated (simple example: a Michigan Congressman preventing GM from closing a union plant, in order to appease voters).
I’m not saying the government has been anything but a mostly silent shareholder, but the risk is there. The government should just sell its stake and chalk up the losses as welfare for the overall good of the country.