Should The Treasury Dump Its GM Stock?

Today’s Rasmussen poll results, which show that Americans are arguably less likely to buy from a bailed-out automaker, raise some interesting questions. Like, does receiving a bailout constitute an inviolable black mark on an automaker? Do the size of the bailout, and the amount the government recovers make a difference? With a presidential election looming, these factors are worth knowing: after all, the government still has the choice of when to divest its shares in GM. And with GM’s stock down over 40% from its $33 IPO price last November, the government is looking at a significantly larger loss than it would have endured had it divested immediately aftter the IPO. So, should the government dump now, anticipating larger losses in the near future, or should it hang on in hopes of a rebound, increasing the risk that “Government Motors” will become a political hot potato going into 2012? The latest clue, via CNBC, remains as cryptic as ever…

Jim Cramer: GM, you had a great IPO, stock’s come down. What do you do? Shareholders are really getting hurt on this, but at the same time, should the government really blow out the rest of its stake here?

Timothy Massad, US Treasury Dept. assistant secretary for financial stability: No. we’ll be patient in our disposition of GM as well as our other assets. We have to balance the goal of divesting these stakes because the government should not be in the business of owning stakes in private companies, with the goal of maximizing taxpayer returns. [Emphasis added]

It’s too bad Cramer and company didn’t press Massad any harder on this (but hey, at least Jim Cramer disclosed that he’s an old school chum of Massad’s…), because the two implicit answers seem to be at odds with one another. The only reason for the government not to sell its GM exposure yesterday is that the stock price has been depressed for much of this year… one need look only at the recent Ford “bailout ad” kerfluffle to understand the political risks of holding onto a GM stake. In other words, exercising the “patience” that Massad advocates only makes sense if you’re trying to maximize the taxpayer return.

The Obama Administration has long emphasized the “balanced” approach to auto bailout divestment, likely to avoid the obvious political downsides of being married to either the “quick dump” or “market timing” approaches. But as the congressional TARP oversight committee found, those goals are fundamentally at odds with one another. And I’d even argue that, a year after the IPO, the time to dump and run has come. After all, it’s fairly clear that the specifics of the loss or gain on bailouts have little bearing on public opinion: witness falling approval for the banking industry even though the bailouts of the biggest banks were revenue-neutral. Besides, Rasmussen’s poll numbers make it pretty clear that GM, more than any one politician, is going to bear the brunt of anti-bailout opinion. And because that backlash doesn’t seem to be tied to a specific amount of taxpayer loss, the Obama Administration would probably be well advised to cut ties with the automaker post-haste. Finally, holding on to GM stock doesn’t just make it a political issue. The real lesson of the For “Bailout Ad” drama is that, for better or worse, any attempt by the administration to boost the value of GM will be seen as worse politically than an extra $10b in government losses. And the longer Treasury holds onto GM’s sinking stock, the greater the temptation to meddle will be.

Besides, dropping GM stock fits best with the Obama Administration’s rhetorical defense of the auto bailouts, which is predicated on the notion that things would have been worse without the government intervention. If that’s true, and few make the effort to argue with the assertion any more, then who cares how much taxpayers lose on the deal? If the alternative scenario is as bad as the Administration has been arguing, wouldn’t avoiding it be worth $20b in losses? Even $30b? After all, the effect of a GM/Chrysler default on pensions alone would have swamped the PBGC by at least that much.

Are there downsides to cutting GM loose now? Sure. For one thing, GM will struggle to offset the larger taxpayer loss that will be pinned on it, rather than the Obama Administration. And at a time when GM’s stock already looks vulnerable, the market could interpret a government pullout as a vote of no-confidence, further depressing stock prices. And if GM can’t make traction in the equity market, there’s an added risk that GM could end up back in the government’s arms. But if GM is on a downward spiral, the government has little to gain by holding onto the stock now… and it will have a tough time defending its auto policy anyway. All in all, the government should probably stop waffling and just sell off its remaining shares in GM.