By on November 1, 2010

Ever since it became clear that the government would rescue General Motors and Chrysler, the Treasury Department has made it clear that it would stay out of “day to day” decision making at the rescued automakers. Allowing the rescued firms to operate independently was a political calculation based on the desire to keep politics from affecting sales at the two rescued automakers, but according to a Reuters special report, Treasury has not been able to keep its hands completely out of important decisions concerning the future of the two firms. Particularly in terms of setting up GM’s Initial Public Offering, Reuters found that the Treasury made important decisions affecting

its speed and size, the fees paid to the bankers and the potential involvement of offshore investors

Though this has kept the IPO out of election season and all of its potential for political problems, there is some downside to the Treasury’s involvement, particularly because it will not be exiting its equity position in GM until about 18 months after the IPO. As a result, analysts predict problems securing investors in a firm that may still be subject to ongoing government control. Morningstar’s David Whiston tells Reuters

I’m sure that there will be some institutional investors, and even some individual investors, that it scares away

Earlier political backlash against the auto bailout is also affecting decisions surrounding the IPO, including whether or not GM’s forthcoming IPO roadshow should make use of private jets, after the automakers received bitter criticism for arriving at the initial bailout hearings in separate private jets. GM plans to continue to use commercial flights as its sells its IPO around the country, but that could change. According to Reuters

Nothing has to be set until the road show begins, but if the bankers have their way, the taxpayer-owned automaker will use private jets for the IPO, sources said.

Said one person involved in the deal: “It is nuts to think people are going to go wait through security lines. And the possibility you would have a missed flight and that that would affect your ability to sell stock? It would be the stupidest decision on the face of the planet.”

“It’s just dumb. It would be so penny-wise, pound-foolish it would be ridiculous,” said the banker.

Government ownership has also complicated GM’s advertising policies, particuarly in regards to preventing backlash against politically-themed advertising. According to the report

GM quietly dropped a plan for a commercial for the Chevy Cruze small car that would have featured Sarah Palin, the polarizing Republican politician, and her comic doppelganger, Tina Fey

Treasury may not have directly intervened in the decision, but its mere ownership of The General clearly affected the decision to keep politics out of advertising. After Ed Whitacre became the company’s CEO, Treasury became more hands-off, allowing the former AT&T exec to run the company as he saw fit. Prior to Whitacre’s ascnt to GM’s top spot, however, CEO Fritz Henderson had far more government interference to deal with. For example, Henderson’s plan to move GM headquarters from the Renaissance Center to nearby Warren, MI, was scuttled by the White House auto task force.

But even Whitacre had to temper his desire for independence with a cooperative approach to GM’s largest stakeholder. Whitacre was infamously eager to push the government out of itst ownership stake during the initial offering, but faced pushback from the government. At that point, it became clear that Treasury would be running the IPO, with investment bank Lazard (former employer of Auto Task Force head Steve Rattner) as its principal adviser. Because Whitacre cared less about which banks underwrote the IPO and more about getting rid of government ownership, one source tells Reuters that the IPO underwriting bids

opened a lobbying circus for Treasury.

Goldman Sachs created a real problem for Treasury when it pushed fee bidding to the ultra-low point of .75 percent. But because of Goldman’s unpopularity in the wake of the Wall Street bailout, Treasury was unwilling to go with the investment bank, even though its fees were lowest. Instead of settling on Goldman, Treasury used its low bids to drive down fee requests by the eventual lead underwriting firms, JPMorgan and MorganStanley. BofA/MerrilLynch and Citi were eventually added as lead underwriters as well after leading GM’s quest for a $5b revolving line of credit, despite protests from JPMorgan and MorganStanley. And the addition of Citi was not inconsequential:

The U.S. Treasury, which owns 61 percent of GM, also owned 12 percent of Citigroup’s common stock. At its core, that set the government up to be potentially both a buyer and a seller of GM stock.

Another area in which the Treasury has played a major role in the lead-up to GM’s IPO: determining which foreign investors could be courted for the IPO. Reuters explains that GM’s Chinese partner SAIC was key in allowing foreign ownership stakes in the new GM:

Bankers involved in the deal argued that funds like the Kuwait and Qatar investment authorities could serve as “cornerstone” investors that could buy and agree to hold a big chunk of the deal in an otherwise tough market.

But the Treasury was sensitive to the potential backlash. Had U.S. taxpayers bailed out GM to subsidize its purchase by foreign governments in the Middle East, Singapore and China? After all, the GM IPO was expected to be priced at a discount of up to 20 percent from what bank analysts determined would be its theoretical value.

By September, the question became more pressing because GM’s partner in Shanghai, Chinese automaker SAIC, had expressed an interest in buying a “single digit” stake, sources said.

That trial balloon put the pressure on Treasury to clarify how investors would be treated. After deliberations involving Bloom and Herb Allison, a former Merrill Lynch executive who was then overseeing the Treasury’s bank bailout fund, Treasury delivered its verdict late on a Friday in mid-September.

In a statement posted online, the Treasury said the GM IPO would be open to the widest range of investors as it looked to “maximize returns” on its stake. The bankers had a green light to pitch the likes of Kuwait and Qatar.

By early October, GM IPO bankers had kicked off meetings with sovereign wealth funds, according to people with knowledge of the proceedings.

GM has since met with Singapore-based GIC and Temasek Holdings, Kuwait Investment Authority, Qatar Investment Authority and the Abu Dhabi Investment Authority, despite early worries over political backlash against foreign ownership of the bailed-out firm.

But GM had already become used to managing the government’s concerns, whether big or small. When Whitacre pounced on subprime lender AmeriCredit, creating a new in-house finance unit, the government was concerned about the move’s effect on former captive finance unit, GMAC.

GM did not consult the Treasury during the discussions and the government was troubled at the last-minute notice before the announcement, people familiar with its thinking said.

U.S. officials were also concerned about how the deal would affect Ally, which is 56 percent owned by the Treasury and remains a major lender to GM, the sources said.

And government backlash even extended to Whitacre’s day-to-day decisions, even if the pressure didn’t always come directly from Treasury.

Whitacre, an enthusiastic outdoorsman, even brought [board member and adviser  Steve] Girsky along on a weekday trip to Windsor, Ontario, to get a Canadian fishing license so he could fish both sides of the Detroit River, according to a person with knowledge of the trip.

On the return back through the tunnel that connects Windsor with Detroit, Whitacre and Girsky were stopped by a border patrol agent who seemed puzzled by their story. “Let me get this straight,” he said. “You work for GM and you took off on company time in a company car to get a fishing license?”

The constant pressure of keeping the government happy wore on Whitacre, according to Reuters’ sources, and when the government made it clear that it would not completely exit its ownership stake during the IPO, Whitacre’s frustration boiled over, and he quit suddenly. Not only was the uncertainty bad for GM’s image, but more troubling still, it raised the question of who was really in charge of GM’s future. After all, if Whitacre was the government’s hand-picked choice to run GM and he was leaving over frustrations with the government’s interference, what would future CEOs face?

With Whitacre gone, and the government poised to remain a major shareholder in GM for at least another year, questions over the Government’s role in running General Motors do not seem likely to disappear. Indeed, if GM uses private jets for its IPO roadshow, or if foreign firms take major stakes in the re-launched form, political backlash could push the government into taking a more active role at the automaker. And investors like The Gordian Group’s Peter Kaufman will be stuck asking tough questions without obvious answers.

Are they running this company for profit to shareholders or for other, more political, goals? As long as the government runs this company, that will be a key question.

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19 Comments on “The Invisible Hand Of The United States Treasury...”


  • avatar
    FleetofWheel

    “The U.S. Treasury, which owns 61 percent of GM, also owned 12 percent of Citigroup’s common stock. At its core, that set the government up to be potentially both a buyer and a seller of GM stock.”
     
    Industrial planning makes for strange bed fellows.

    • 0 avatar
      SVX pearlie

      GM and Chrysler aren’t releasing their October sales numbers as “on time” tomorrow.

      They could (and should) release sales right as polls open, but for whatever reason, GM and Chrysler are both delaying the release until *after* the polls close.

      That’s the hand of the Treasury there.

  • avatar
    jpcavanaugh

    This is the first straight explanation I have seen on the cause of Whitacre’s departure. 

  • avatar

    The authors of the Reuters report worked hard to find what they wanted to find. And still didn’t find much.

    The IPO is not the day-to-day operations of GM. As taxpayers, we should be glad that the government is working to maximize its return on the shares it owns. The problem would be if it were not doing this. GM might like them out sooner, but as before it doesn’t have shareholder interests at heart. Rather, it likely longs for the day when it can again do what it wants to do without regard to shareholder interests.

    Sarah Palin isn’t in an ad? Big deal. Personaly, I don’t think she belongs in car ads. Including her in an ad could come across as a political endorsement, which would not be appropriate.

    Rattner singles out the RenCen as a rare case where politics were a factor. But this was hardly a typical day-to-day decision. And it was being made at a time when Fritz Henderson was throwing tons of things against the wall, checking to see which would stick. (Most didn’t.) The government made the right call.

    The bits on Whitacre lack detail. We have an anecdote about a drive across the river, but nothing about a specific instance where the government kept him from making a decision he wanted to make and should have had the right to make. The timing of the government’s divestment is not a decision he had the right to make. The shareholder, not the company, gets to decide when shares are sold. At any rate, dealing with the government was probably a cakewalk compared to dealing with GM’s bureaucracy and culture.

  • avatar
    CamaroKid

    So let me see if I have this right… After roughly 18 months of working under Government “control” the best we can come up with is
    1) They are forced to sit in the back of a commercial plane with the great un-washed, they might miss a flight, cause they can’t get to the airport on time,
    2) They declined a Cruze commercial with Sarah and Tina Fey and
    3) Some junior boarder guard asked why the CEO was fishing on company time?

    Really?  This is the best we can dig up?

    • 0 avatar

      This is how I read it. A less slanted story would have said “we looked hard, but our fishing expedition found little aside from…a fishing expedition.”

      There’s your headline:

      “Fishing expedition discovers fishing expedition”

  • avatar
    jkross22

    “Said one person involved in the deal: “It is nuts to think people are going to go wait through security lines. And the possibility you would have a missed flight and that that would affect your ability to sell stock? It would be the stupidest decision on the face of the planet.””

    Yes, because an IPO that is months in the planning just has to have private jets on stand-by as you never know when you might miss a flight for a key meeting.  Riiight.

    Here’s a thought – if the meeting is that critical, leave the night before and stay at Hilton/Westin/Marriott/Whatever.

    Or just fly the private jets and watch the pitchforks and torches crew make their presence known.
     

  • avatar

    If GM ends up with lots of foreign owners (specifically Arab SWFs, Chinese Automakers, Russian bankers), the government’s role in the IPO will be questioned… otherwise, I agree that government interference at the bailed-out automakers has been admirably limited. At least that’s what the evidence suggests.
    On the other hand, Whitacre’s departure hints at how subtly government involvement can affect decisions at GM… although at this point I’d be more likely to blame Whitacre’s temper for his unexpected departure than interference from activist bureaucrats. On the other hand, I’m also not convinced that holding onto GM equity is the right move for the Treasury… unless the car market comes roaring back in the next 18 months, I think losing Whitacre over unwillingness to dump the entire stake was a bad call. I also think the decision not to exit at the IPO is due largely to A)political backlash from a big one-time writedown, rather than a slow trickle and B) the desire to let the UAW cash out its equity position first without putting too much stock on the market and driving the price down. Those are two political decisions that could well have had a materially negative impact on GM and its IPO in order to benefit the administration and the UAW.

    • 0 avatar

      The government’s intent was to keep these companies alive and hundreds of thousands of people employed in the U.S. If they were limiting who could buy shares, then they could be accused of letting politics harm the value of their stake. In the end, ownership will be determined by who’s willing to pay the most. Imagine that.

      The government should only cash out quickly if it doesn’t believe in the long-term viabilty of GM. As such, cashing out quickly would be a huge warning sign that could and should harm the value of the shares. If they believe GM will do well, and that the stock value will rise after the IPO, they should hold on to their shares. GM’s future performance is far from clear at this point, so the issue price will reflect a high level of uncertainty.

      These companies should have learned that the government can in fact operate as a profit-oriented investor with the first Chrysler bailout. Iacocca tried to keep the government from exercising its stock warrants. Instead, the government forced Chrysler to pay market value for them, netting a profit in the hundreds of millions in the process.

  • avatar
    mtr2car1

    Normally this kind of stuff would bother me, but then again we are talking about GM.  To me it sounds like the Treasury is doing what it can to keep GM from shooting themselves in the foot.

    –Whitcare was the one in the ad saying “look what we paid back” when they really just gave back what they didn’t use.
    –Whitcare was the one pushing hard to go “all in” on unloading the Treasury’s shares for the sake of getting out from the Government Motors label but giving little regard for the $ payback
    –Whitcare was also the one that threw together the subprime bank deal at the last second.

    It was only this past week that GM looks to have choked down some pride and taken a page from the Ford playbook to set themselves up for a more successful IPO – GM is clearly not yet ready to ride w/o their training wheels and I’m glad the Treasury is keeping them away from the big hills until they are.

  • avatar
    GarbageMotorsCo.

    “GM quietly dropped a plan for a commercial for the Chevy Cruze small car that would have featured Sarah Palin, the polarizing Republican politician, and her comic doppelganger, Tina Fey”

    Seems like a waste of money since it’s the Dems who are in bed with the UAW. Conjuring up ads with Sarah Palin would have most definitely had a negative affect on the voters whom Obama is counting on to repay the favor and get him re-elected……

  • avatar
    carguy

    This is essentially a privatization of a public asset, which is nothing new to most governments. Most large or partial privatizations happen in stages so the idea of selling off the government’s holdings over an 18 month period is also nothing unusual – if anything it’s quite an aggressive time line.

  • avatar
    Flipper

    Gee … thanks for leading this article W/ a pic  that includes Presidents Obama’s campain symbol. Its OK I had completely forgot how long the GMdeathwatch posts were on this site B4 the 2008 election. And that TARP took place B4 Jan 20 2009.It was Dec 19 2008 that The Treasury announced that it will make loans to General Motors and Chrysler to prevent bankruptcy.
    Please keep this site party neutral. Or call it G(M)WB motors for some balance

  • avatar
    tparkit

    “…there is some downside to the Treasury’s involvement, particularly because it will not be exiting its equity position in GM until about 18 months after the IPO. As a result, analysts predict problems securing investors in a firm that may still be subject to ongoing government control. Morningstar’s David Whiston tells Reuters.”

    This is a preposterous bit of boob bait, concocted to position GM as a genuine business venture yearning to be free. Nothing could be further from the truth. All of GM’s special advantages – endless cash, labor peace, a confiscatory bankruptcy, guarantees for its pension obligations, the bashing and strongarming of GM’s competitors,  to name a few – come from its relationship with government. If investors have a fear, it is that these benefits might be curtailed somehow. Further, the fabricated absurdity that Whitacre quit because he wanted GM to be free of Washington’s largesse is something no one should believe.

    Let’s look at another red herring:

    “Are they running this company for profit to shareholders or for other, more political, goals? As long as the government runs this company, that will be a key question.”

    When did these become incompatible? Ever since Washington “muscled” its way into Wall Street, profits and bonuses at the latter have never been higher. What, will you not treat us to the laments of Wall Street executives crying out to be liberated from the incestuous, revolving-door relationship they have spend decades building between themselves and the federal government’s agencies?

  • avatar
    MikeAR

    There is a two word term for everything in this article, the first word is cluster, guess the second. Even after all that has happened GM still hasn’t a clue. The genius that came up with Sarah Palin and TIna Fey in an ad ought to be fired immediately if not taken out and shot. Whing about having to fly commercial, buying a sub-prime lender, pretty much everything they have done just says that they are incapable of running their business. Even if the IPO goes smoothly they’re going to screw it up again. It’s inevitable, they can’t help themselves.

    • 0 avatar
      jkross22

      Agreed.  This type of housecleaning normally happens in a bankruptcy.  Too bad GM never had the benefit of receiving the corporate culture colon cleansing it still desperately needs.

  • avatar
    FleetofWheel

    The US govt is a colossus that prints money, sets mfg regulations, oversees banking and enforces labor law among its many other powers.

    How anyone could think that such a powerful entity can act as a regular ‘investor’ in capital markets is not keeping their eye on the big picture.


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