By on October 3, 2011

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.

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39 Comments on “Should The Treasury Dump Its GM Stock?...”


  • avatar
    APaGttH

    The under-performing nature of GM stock is a bit of a red herring…

    http://www.google.com//finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=0&chfdeh=0&chdet=1317673224218&chddm=74290&chls=IntervalBasedLine&cmpto=NYSE:F;NASDAQ:TSLA;NYSE:TM&cmptdms=0;0;0&q=NYSE:GM&ntsp=0

    Considering GM and F are going merrily hand-in-hand to the straight to Hell should have put your money somewhere else land.

    Tesla and Toyota (US) is doing a bit better, down about 10% to 20% YTD (roughly) but if you look at all four trend lines, they largely are following the same trajectory.

    GM’s performance has less to do with…GM’s performance and more to do with the overall equities market. If GM wasn’t trending with others in the sector, the argument would be quite valid.

    To answer the headline’s question, well it depends. If the treasury believes that the equity markets will improve and 2012 will be a better year, then no, they are better off holding on. Given that the S&P 500 broke under 1100 today, a point that it has been showing tenacious resistance, indicates that the big bad bear (we’re in a correction market right now, a bear market would be DOW 10150) is likely to start stalking Wall Street. Honestly I see the treasury as stuck. If they dump GM stock they’ll need to spin doctor it in a huge way as a good thing – because otherwise I see it as a no confidence vote not in GM, but in the equity markets in general.

  • avatar
    NN

    Obama will never hear the end of it if they dump the stock now…the entire market is down, it will come back. Unlike most people selling stocks now the govt will not be trying to buy back later at a lower price to ride the market up.
    GM’s sales are up 20%, they supposedly have more cash on hand than their market cap, they are very profitable and continue to do well in China. They are nowhere near failing, on the other hand, it’s probably a very good time to buy unless you really think we’re heading for hyperinflation, total collapse, WWIII

  • avatar
    dvp cars

    ……”further depressing stock prices” could be the automotive understatement of the year. Given Wall Sreet’s recent precipitous return to “bear” territory, any “market order” of this size could set off a dumping avalanche. On the other hand, it could represent the opportunity of a lifetime for the vulture investors willing to take the risk.

  • avatar
    wsn

    “GM’s performance has less to do with…GM’s performance and more to do with the overall equities”.

    Can’t be more wrong. Just used Google Finance and frame the period between GM IPO day and today:

    GM down 42%
    Ford down 41%
    Honda down 24%
    Toyota down 13%
    Dow 30 down 4.7%

    Even a three year old can see that it’s not the market, it’s GM.

    • 0 avatar
      APaGttH

      GM down 42%
      Ford down 41%

      So you post a list of automotive stock sector YTD performance numbers, every single one of them is down, the entire sector is underperforming the broader market, and then you write, a three-year old can see that its not the market.

      And again – Ford and GM are hand-in-hand (just as I said).

      I suggest a return to two-year old math for you.

      • 0 avatar
        wsn

        Yep, a two year old can see that every single auto maker is down. But would it take a three year old to understand that 13% is more preferrable to 42%?

        Honestly and no offence intended, one who thinks Toyota’s 13% decline is about the same as GM’s 42% decline must be an id*ot, and deserves to lose his hard earned money in the stock market.

    • 0 avatar
      APaGttH

      Lets go back to what I wrote…

      Tesla and Toyota (US) is doing a bit better, down about 10% to 20% YTD (roughly) but if you look at all four trend lines, they largely are following the same trajectory.

      Apparently reading comp isn’t one of your strong points either. Oh, and I linked to a chart on GOOG that shows the information on F, GM, T, and TSLA.

      So what part did I get wrong, exactly?

      Oh that’s right – the part that doesn’t completely throw GM under the bus for under performing in an under performing sector. F is the darling, sorry for bringing out that F and GM are on hand-in-hand the same pace, unless you REALLY want to split the difference on 1% on a 42% decline. If being right is that important to you – have at it.

      • 0 avatar
        wsn

        In your own link, GM is down 46.46%, Toyota is down 14.83%. Dow 30 is down 7.96%.

        The facts is there. Only opinions differ:

        To you, 14.83% decline is “a bit better” than 46.46% decline. May I ask if you are living in Detroit? I heard people there use a different set of adjctives.

        To me,
        7.96% = recession
        14.83% = recession + earthquake
        46.46% = OMG this junk is going back to zero again faster than I thought and RF better start another death watch

      • 0 avatar
        doctor olds

        @WSN- One who can’t see that F is tracking GM, almost perfectly since the IPO is the one ignoring reality. U.S. auto sector stock is down, period. GM’s P/E of 4.2 is real, regardless of you emotional desire for it to be false. GM Co. is a very different company than dead GM Corp.

        The truth is that GM is much larger than Ford with over 60% higher global sales last year and gaining share compared to Ford in NA while commanding higher prices. GM is #1 and Ford #5.

        GM will continue to grow away from Ford and be very profitable while doing so. It is not too surprising that so many undervalue GM stock given the profound lack of understanding of the real drivers of the company’s abrupt slide into bankruptcy and the basis for great profitability established with the new company, particularly with the breakthrough UAW contract of 2007.

      • 0 avatar
        wsn

        doctor olds, put your money where your mouth is at. Back up your Silverado and buy as much GM stock as you can please.

      • 0 avatar
        doctor olds

        @WSN- Speaking of Silverado, I noticed that GM outsold Ford in pickups last month for the first time in a while
        .
        General Motors made $5.7B in the first half of 2011.
        To bring perspective, the most profitable car company ever, VW in 2010, made only about twice that amount for the full year.

        GM may not hit Akerson’s goal of $10B net this year, particularly if the U.S. is in a double dip recession, but it doesn’t look too far off. American pent up demand appears to be driving auto sales, despite the generally weakening of the economy. GM Europe has recovered from a $1.6B loss to breakeven, and GM continues to grow market share here and globally. The new labor contract keeps labor costs almost flat for 4 years.

        If I were a betting man, I would bet GM stock will rebound in the coming years.

  • avatar
    KixStart

    Why take $19 if you don’t need to? GM is trading at a P/E of 4.2. That’s pretty low. The whole market is being crushed. I’d say wait, unless there’s some concern that GM is going to run into severe problems the rest of the industry won’t have (don’t know of any).

    Maybe Treasury’s concern here isn’t political as much as it is financial and getting a decent return or as little loss as possible and acting prudently with taxpayer money. Sometims, the government tries to do the right thing and worries about the politics later.

    We’ve already gotten some significant return on the bailout, anyway. Consider the unemployment checks not cut and the massive load that the PBG didn’t have to take on. Michigan would be in even worse shape than it is. It’s tough to get a Tea Partier to figure this out (’cause Gummint’s BAD) but we’ve already done pretty well by the auto bailout. Even better by TARP, generally.

    And look at GM now. The new product is not at all bad. The Cruze is selling very well. The Sonic looks promising. The jury is out on the profitability of these lines, of course.

    People get all cranked up about the UAW’s connections, the Gummint partial ownership and fringe things like the Volt but, overall, the new GM is looking lively for the first time in 30 years.

    • 0 avatar
      wsn

      “Why take $19 if you don’t need to? GM is trading at a P/E of 4.2. That’s pretty low. The whole market is being crushed.”

      1) Do you honestly believe in that P/E 4.2 crap? GM never put the UAW obligation into its operating cost structure. Being legal accounting doesn’t mean it won’t haunt them back. There will be a constanct “one time write down” along with the “low” P/E. The suckers who didn’t notice this got wiped out once already (and the additional suckers will be wiped out soon, again!)

      2) The market, as in Dow 30 terms, dropped 4.7%. GM dropped about 10x as fast, just like a piece of sh*t that simply won’t stick to the wall.

  • avatar
    jmo

    For the government there is limited downside to keeping the stock and a huge potential upside. To sell now you run the risk of ending up like Gordon Brown and looking like a fool for selling Britain’s gold for a fraction of what it would fetch today.

  • avatar
    Robert Schwartz

    In most IPOs, the controlling shareholders sign contracts with the underwriters that restrict subsequent sales of stock by them for a period of time, usually a year or two, but sometimes longer.

    I doubt that the Federal Government signed such a contract, but, it should be honorable and obey what ever the underwrites requested at that time.

    I was opposed to the bailout, and the subsequent proceedings, but I don’t think the government should dump its shares in a weak market. The crimes have been committed, there is no reason to rush the clean-up at the expense of the innocent.

  • avatar
    MrWhopee

    If the government truly believe in the future of GM, since they did believe in it enough to bail them out in the first place, they should hold on to the stock. They don’t need the money right away anyway, right? It’ll be foolish to sell them now at low price, then the whole bailout thing will be forever looked at as a failure, the government lost money on it, etc., etc. It would be bad politically. As long as GM did not go into another bankrupcy, they’re OK anyway, right? THere’s always the chance that the stock will get better in the future.

  • avatar
    Pch101

    From an investment standpoint, there isn’t much reason to dump the stock. It’s not as if there is an opportunity cost to the government for holding it, as the government doesn’t typically buy or trade equities.

    As for the few loudmouths on the right who wish to make this a political issue, they would be whining, regardless, so orienting a policy decision around them is pointless. They would have blamed Obama, no matter what the policy had been; the best thing to do is to ignore them.

  • avatar
    doctor olds

    GM’s low stock price is difficult to explain given their current market success and strong profitability. Apparently the stock market is not always rational.

    • 0 avatar
      Scoutdude

      It has been many years since the stock market was rational.

    • 0 avatar
      PaulVincent

      Is it possible that GM’s low stock price (despite their current market success) is because few investors thought that it was worth $33.00 to begin with? I know that I was very skeptical at the time.

      • 0 avatar
        APaGttH

        With a P/E of 4.2, the current valuation by the market is very low.

      • 0 avatar
        doctor olds

        @PaulVincent- Notice that Ford stock has fallen in lock step with GM. The U.S. auto industry stock is down, probably in part because investors do not yet realize that both can make money on cars now and in a still depressed market with the new cost structure that emerged from the 2007 UAW contract. GM did made $5.7B in just the first 6 months and, like it or not, they have almost no debt.

  • avatar

    get what you can while there is a chance. these fools have no clue what they are doing, nothing has changed except the balance sheet…albeit temporarily. they refuse to listen to people who could save their worthless butts. shame really, so many good people there and so many retirees and communities dependent on a company doomed to fail.

    I could save them but they won’t even try any part of Return to Greatness. they deserve to go down. no tears here.

    • 0 avatar
      Zackman

      @Buickman:

      It puzzles me that you say the things you do about your employer. Why do you continue to work for GM if you hate them so much? Perhaps you should sell Toyotas or Hondas or Kias? Or Fords!

      Regardless of my opinion of the company I work for, I have to keep these thing in mind: They sign my paycheck and keep me gainfully employed, so I’m going to do the very best job I can do for them. Everything else is pretty much out of my control and I sleep very well at night.

  • avatar
    dvp cars

    ……..GM’s up 4 per cent Tuesday in an otherwise down market……..is it too late to load up that truck, or is this just another case of javelin-catching?

    • 0 avatar
      doctor olds

      Fitch raises GM’s IDR to BB; Outlook now positive
      http://www.reuters.com/article/2011/10/04/idUSWNA001520111004

      S&P also upgraded GM’s credit rating.

      This may be part of the reason why the stock is up. I expect on-going upgrades as the strength of the new company becomes evident in the coming months and years. I want to say it is because GM, up 20%, more than doubled Ford’s 9% growth last month, but the data doesn’t support that! Ford stock is up in lockstep with GM today.

      • 0 avatar
        dvp cars

        …..unfortunately analysts, growth projections, and hard data are virtually useless in picking winners these days. Which side of the bed some Greek banking official got out on is at least as good as any fundamental. I wish GM and it’s shareholders well, but as my old stockbroker used to say, “when the cops raid this place, they take ALL the girls!”.

      • 0 avatar
        doctor olds

        @dvp- You are right! There are some powerful influences on stock prices beyond simple business success and fudamentals.

      • 0 avatar
        doctor olds

        I meant to type “fundamentals”!


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