By on May 23, 2014

Department of the Treasury

Back in 2004, perfectionist homemaker and well known TV personality Martha Stewart was charged with insider trading. As presented, the facts in the case were simple. Martha owned stock in a medical research company called ImClone and, like a lot of people who invest in tech firms, she was hoping for a big payout when their product, a promising new cancer treatment, went on the market. Unfortunately, the FDA chose not to approve the drug and the value of the stock looked set to take a beating once the decision was announced. According to the charges initially brought against her, Martha and many of the company’s top executives learned of the FDA’s decision though their inside connections the day before it was publicly announced and were able to sell their shares before they crashed. That’s against the law and many of the people caught up in the scandal, including Martha who was convicted on the charge of making false claims to a federal investigator, ended up going to jail.

The above case is a useful example because it offers a clear cause-and-effect pattern and plays out along such a short timeline. Despite Martha’s protestations that she was innocent, the dots here appear to be easily connected. Most insider trading cases, however, require a little more imagination. The connections aren’t always so clear cut and sometimes the cases play out over a period of years. Take, for example, the US Government’s recent divestment of its massive amount of GM stock and the subsequent recall debacle that now threatens to drive that company’s stock prices through the floor. Coincidence? Some people think not.

Last December, the US Government sold its remaining shares in General Motors and ended a controversial bailout program that ultimately cost the American taxpayer something on the order $10 billion. At the time, the move puzzled many investment experts who argued that the government could have lessened its losses by simply holding onto the stock, which was trending upward at the time, and selling when its value was higher. It makes sense, right? The USG bought high and then sold low, even a novice investor like me knows that’s the opposite of what you’re supposed to do, so why not simply wait?

Recalled GM ignition switch

The move that looked so stupid then looks like genius today. In February of this year, just a couple months after the sale, GM announced the recall of 1.4 million cars for faulty ignition switches. In the months since, more GM vehicles have been recalled for other problems and, if you have been following the reports here on TTAC, you know that that the number of vehicles involved now exceeds GM’s total sales for the past 5 years! The question is did the government have inside knowledge that this was on the way? Well, evidence is emerging that GM had data going back to at least 2007 that the ignition switches were failing to function properly and the government’s own safety watchdog, the National Highway Traffic Safety Institute (NHTSA) shows the company was actively investigating the problem during the 2009 bailout. At some level, then, the government did know.

Whether or not the timing of the stock sale rises to the level of insider trading, however, remains to be seen. The US Government is bigger and more complex than most of us will ever know and the individual agencies don’t always communicate with one another with the efficiency we might expect. The NHTSA has an entirely different focus than the Treasury Department and the chances of their reports coming across the desk of the person charged with maintaining that portfolio are extremely small. Still, the appearance of malfeasance is enough to send the tin foil hat wearers into a frenzy and damage the public’s confidence in the markets. The matter needs to be looked into.

GM RenCen

Thomas Kreutzer currently lives in Buffalo, New York with his wife and three children but has spent most of his adult life overseas. He has lived in Japan for 9 years, Jamaica for 2 and spent almost 5 years as a US Merchant Mariner serving primarily in the Pacific. A long time auto and motorcycle enthusiast he has pursued his hobbies whenever possible. He also enjoys writing and public speaking where, according to his wife, his favorite subject is himself.

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85 Comments on “Was The Government’s Divestment of GM Stock Insider Trading?...”


  • avatar
    kvndoom

    Well the gubmint can’t exactly put itself in jail, so nothing will come of it anyway. When you make the law, you are above the law by default.

    GM stock hasn’t taken a hit at all from this so far; it’ll be interesting to watch.

  • avatar

    Congress is a set of the worst insider traders known to man.

    • 0 avatar
      Dr. Kenneth Noisewater

      Well, up until quite recently it was perfectly legal for them to do it. Why wouldn’t they?

      • 0 avatar
        asapuntz

        if you’re referring to the 2012 STOCK Act, I think much of it got rolled back the following year

        http://www.npr.org/blogs/itsallpolitics/2013/04/16/177496734/how-congress-quietly-overhauled-its-insider-trading-law

    • 0 avatar
      Jeff Weimer

      Except this is the Executive branch…who am I kidding? THEY ARE the umpire, and a principal in the situation. Why wouldn’t they find themselves innocent?

      Kids, this is why it’s a Bad Idea to bail out a company this way.

  • avatar
    OneAlpha

    The government’s GM stock problem isn’t insider trading for the same reason that Social Security isn’t a Ponzi scheme and the income tax isn’t theft – because the government says it isn’t.

  • avatar
    Pch101

    “even a novice investor like me knows that’s the opposite of what you’re supposed to do, so why not simply wait?”

    GM management and political conservatives were all whining about “Government Motors.”

    Well, it ain’t Government Motors anymore.

  • avatar
    rpol35

    Well…..I suggested this theory in a post about a month or six weeks ago and a commenter suggested otherwise saying that it would be unlikely that the Treasury would be aware of something at this detailed a level.

    I stick by my original hypothesis!

  • avatar
    mike978

    I am disappointed in you Thomas. I didn`t think you went in for conspiracy theories. Especially ones that save taxpayers money.

    The stock had been divested over quite a time and the last slice was sold months before this came up.

    As for why the apparent rush – maybe something to do with some people bleating “Government Motors” and the desire to put that issue to bed.

    • 0 avatar
      ellomdian

      ^This. Clearing it off the plate before Mid-terms started in earnest is a far more plausible scenario than suggesting the Feds were smart enough to discover the defect, cunning enough to recognize the potential loss, efficient enough to organize a stock ‘Fire sale’, and vindictive enough to run GM over with a PR-bus after the fact.

      I think you give far too much credit to “The Gub’mint” as an entity.

      • 0 avatar
        APaGttH

        Agreed.

        One doesn’t have to search too hard here on TTAC for story, after, story, after story, after story, going when will the government share their shares already and get out from under GM.

        It wasn’t a big dump, but done over months – and as others noted – election cycles probably had a lot more to do with things than bad ignition switches.

        Doesn’t matter anyway, the black helicopters told me that GM builds thousands of vehicles and stores them on lots, and then sends them to the crusher to build more of them to keep manufacturing propped up. Zero Hedge reported it on the Internets so it must be true.

    • 0 avatar
      KixStart

      mike978,

      +1

      In addition, for the government to own one company in an industry that they sometimes regulate or punish would be awkward. There were a lot of reasons for getting out of the auto business.

  • avatar
    Conslaw

    Yes the government was an insider. Yes, it traded. The question is whether the government had materially adverse information that was not available to the public and what harm came to stockbuyers from it.

  • avatar
    Toad

    The initial GM bankruptcy was premised on a “unique” reading of bankruptcy law in the first place: secured creditors got pennies on the dollar, favored unsecured creditors & UAW workers got paid in full. The government screwing over investors in GM again should not be the least bit surprising.

    Fool me once, shame on you. Fool me twice, shame on me.

    • 0 avatar
      Pch101

      GM secureds were paid at par, i.e. 100%.

      In any case, being a secured creditor does not mean that one is guaranteed full repayment. It surely doesn’t mean what you think that it means.

      • 0 avatar
        Rasputin

        Haven’t time to dig into it now, but I am very sure that the vast majority of GM secured creditors DID NOT receive 100%. If you are speaking of Preferred Stockholders, maybe they were paid at par, but par was far below market price. As to bondholders (who are actually ABOVE preferred shareholders in the bankruptcy hierarchy), they took a huge hit – and bondholders tended to be retirement funds and individual retirees, including my 90-year-old Mother.

        There was only one winner of this illegal “bankruptcy” and they happened to be the ones who contribute to and vote for their sugar daddys. Everyone else lost: taxpayers, shareholders, bondholders, suppliers, many dealers, and employees of closed dealerships who lost their jobs (the story of who lost franchises & who didn’t is verrry interesting).

        A true, normal bankruptcy would probably have allowed GM to not only survive, but would have forced it to restructure so as to maybe be successful. But that would have meant court-ordered dissolution of the union contracts – and we can’t have that now, can we?

        • 0 avatar
          Pch101

          “I am very sure that the vast majority of GM secured creditors DID NOT receive 100%.”

          In that case, I wouldn’t have much confidence when you feel “sure” about matters.

          The GM secureds were paid in full.

          The GM bondholders were unsecured, as bondholders typically are. In most corporate bankruptcies, secured creditors are usually just a small part of the pie.

          The Chrysler creditors were in a different position, as many of them were secured. However, there wasn’t enough money to pay them at anywhere close to par. To pay them in full would have required the taxpayer to give them the cash.

          “Secured” does not mean guaranteed repayment. People need to learn what these terms mean before throwing them around.

          You guys have had five years to get your facts straight. How much longer is it going to take?

          • 0 avatar
            APaGttH

            Pch101 has this correct, and on who does and doesn’t get repaid.

            There were no DIP investors for GM or Chrysler (funny how everyone ignores Chrysler, owned at the time by a private equity company, that had the deep pockets to prop the company up itself, it was a far more egregious bailout and then it was sold to the Italians). Heck, as the record shows (and was run by TTAC) the Fed had to step in prop up companies like McDonalds because let alone DIP financing, there wasn’t any money to be had in 4Q08 from anyone. You could have had AAA+ credit and known Jesus personally, had him put a call in for you, and the lenders wouldn’t pony up the cash.

          • 0 avatar
            Rasputin

            My mistake. No excuse, but I rushed a reply – to my embarrassment. So I concede your point about “secureds”.

            But my basic point above about losers & winners stands. In a basic Chap.11 bankruptcy of a publicly-traded company the assets are liquidated and the creditors are repaid in the following order:
            government, secured creditors like financial institutions, unsecured creditors, bondholders, preferred shareholders and common shareholders.

            No one is “guaranteed” anything. The bankruptcy judge determines the division of the proceeds of the asset sale according to the above priorities.

            But GM’s case was NOT a normal bankruptcy procedure. The government stepped in to pick the winners & losers – and “loaned” GM the money to pay off the winners. Bondholders & shareholders, the common Americans who invested in GM, many through retirement funds, lost big time. Many State Retirement Funds took huge hits. The UAW came out smelling like roses.
            I stand by my second paragraph above.

          • 0 avatar
            Pch101

            ” In a basic Chap.11 bankruptcy of a publicly-traded company the assets are liquidated”

            No, that’s Chapter 7. Chapter 11 is reorganization.

            “creditors are repaid in the following order…”

            I would suggest that you type [bankruptcy cramdown statute] into Google.

            “Bondholders & shareholders, the common Americans who invested in GM, many through retirement funds, lost big time.”

            Of course they did. That’s what happens in bankruptcy.

            “The UAW came out smelling like roses.”

            You must have a different idea of what a rose is.

            I would suggest that you avoid acquiring your knowledge of bankruptcy from right-wing blogs, unless you prefer to remain misinformed.

          • 0 avatar
            Landcrusher

            Because all the FACTS are in Mother Jones and on MSNBC where, as is done here, it is assumed everything wrong was from the right wing.

            And, where it really matters what the details are as long as they aren’t the salient bits embarrassing to progressives and democrats.

          • 0 avatar
            Pch101

            This will baffle some people, I know, but agenda-driven political blogs are not the best places to learn about bankruptcy law. That’s especially true given how wrong they usually are.

            If you’ve been harping on this topic for five years and still don’t understand what a “secured creditor” is and isn’t, then you’re either incredibly lazy or else aren’t very good at research.

          • 0 avatar
            Landcrusher

            What’s truly baffling, PCH, is how you keep making assumptions and spewing them out as fact rather than the partisan leaps of logic they are. Correlation v causation is something many people seem to have an issue with, but you could do some research on it and maybe start learning something yourself.

            You don’t know where anyone got their mistaken notions. Trying to blame all ignorance on right wing blogs is just as lazy as making up conspiracies.

          • 0 avatar
            Pch101

            I can see that political ideologues struggle with their inability to separate fact from opinion.

            Chapter 11 is reorganization, not liquidation. That is not a matter of opinion, but a matter of fact.

            The cramdown statute negates the bogus claim that absolute priority is truly absolute. In a bankruptcy case, creditors will argue for absolute priority while debtors will argue for cramdown as appropriate, and the judge will sort it out. Again, a fact, not an opinion.

            The GM secureds were paid in full. A fact, not an opinion.

            I could go on, but again, these points are not debatable. You don’t have a substantive counterargument, but then again, you rarely do.

          • 0 avatar
            Landcrusher

            PCH, you just don’t get it. This is your argument style:

            2+2=4

            Austin is the capital of Texas.

            You are a lazy idiot. (There has to be an attack, it seems a mandatory ingredient)

            Canada is north of Mexico.

            [insert unrelated unsubstantiated nonsense here].

            I post that you cannot know where the source of someone’s misinformation and you argue with me by spewing back that he was wrong. And you say I can’t read!?

        • 0 avatar
          ect

          A secured creditor is not guaranteed to receive 100% repayment. He can realize on his security, but if the security fetches less than 100% of his claim, he’s at best an unsecured creditor for the balance, and maybe just plain SOL (not sure how the US Bankruptcy Code treats this).

          And by the way, GM was complete toast by 2008. A “normal” bankruptcy in 2009 would have led inexorably to Chapter 7. There was simply no DIP financing available, and no new investors willing to come in.

          • 0 avatar
            Landcrusher

            And after chapter 7, the universe implodes and everyone dies while the regular victim demographics somehow suffer even more than everyone else and the rich somehow buy their way into dying a little better and it’s all unfair?

            Not to pick on you, but this common bit of wisdom constantly gets thrown out as absolute truth. The reality is that there is supposedly an unquestionable bit of righteous reality built into the current bankruptcy system when it happens to you, but not to when it happens to the UAW. Also, predictions on the effects this would have on the rest of the country are not nearly as accurate as weather forecasts for next year, but we are expected to believe them because the guys who couldn’t see this coming know exactly how it will turn out if we don’t follow their consensus built on fear.

  • avatar
    Lorenzo

    Martha Stewart was NOT convicted of insider trading. She knew the CEO socially but never got any inside information, and didn’t sell the day before, but while the stock was spiraling down, on the advice of her broker who had tried to get her to dump the stock long before.

    She was convicted of lying to investigators, who had no insider trading evidence against her, but saw her as the kind of high profile person (uppity rich Byatch) they wanted to nail. Federal investigators arrive unannounced with no recording devices and no notebooks, so anything said becomes a he said-she said situation. Who does the jury believe, the UBB or the fine, upstanding federal investigator? Ask any lawyer: he/she will tell you to refuse to talk to investigators outside of an office/court, where the conversation is recorded by a third party.

    Her conviction was based on an “expert” analysis of the records of the broker, with the government expert testifying that the records had been written after the fact, proving Stewart had lied to investigators about her dealings with the broker. That expert was later charged and convicted in another case of lying under oath, but the courts refused Stewart’s lawyers’ request for an appeal.

    One legal scholar strongly suggested the case was one of malicious prosecution, but Stewart had to accept the conviction since the feds could have frozen her accounts and destroyed her businesses. But she wasn’t convicted of insider trading.

    • 0 avatar
      CliffG

      Thanks, I was going to correct the story if someone else hadn’t jumped in. It is sort of like the Milken affair over 20 years ago. The government basically came in and said “Give us a billion dollars or we put your brother in jail”. What else was he going to do? Meanwhile the SEC was so busy downloading porn they missed the Madoff Ponzi scheme for 15 years. But Madoff was a good buddy…..

      • 0 avatar
        Xeranar

        Milken was running a junk bond scheme using cons to sell it as a rightful investment when he knew there was no money to back them, he was running complex pump and dumps on top of that. Madoff was in the same position and frankly Milken’s was started and caught before the SEC was gutted by pro-business ideologues (who, to start a fight, were by and large conservatives). The situation always gets more complicated in stock cons because the system isn’t really well designed to identify when somebody is intentionally lying or not. Our laws are designed to give the benefit of the doubt and both used it to their full advantage to escape charges for as long as possible.

      • 0 avatar
        John

        Word.

    • 0 avatar

      Clearly, my understanding of the case was not correct. I have altered the article above to match the case as I understand it now. I apologize for not doing deeper research into the case at the beginning. Thanks for the heads-up.

      • 0 avatar
        alexndr333

        Thomas,
        While you seem interested in getting the Martha Stewart story correct, after being called out, you happily feed the tin-foil hatted minions about GM. That’s just lazy journalism these days. “Still, the appearance of malfeasance is enough to send the tin foil hat wearers into a frenzy and damage the public’s confidence in the markets. The matter needs to be looked into.” Are we reduced as a country to pandering to every conspiracy-monger? Your article spends many words explaining why the size and complexity of the federal government mitigates against ‘insider trading’ on the GM stock sale – a reasonable analysis. Why do you then throw that out to stoke the goofballs?

        • 0 avatar

          For the markets to work, the average investor must have confidence in the idea that there is a level playing field. The impression of wrongdoing damages the public confidence and so, when the possibility of wrongdoing arises, looking into what happened helps to reassure people.

          As you can see from the articles I linked to, some people in the investment community are beginning to think about the timing of the government’s stock sale. The reason I talked about Martha, although I was wrong on some of the exact facts which is why that part of the article was corrected, is that the example has a clear parallel to what people are now beginning to allege happened.

          Saying that someone should look into the situation isn’t lazy journalism, it’s an opinion. The conspiracy people will talk about it – they are already starting – and this makes enough sense that it might gain real traction and cause real trouble. Having someone look into that might help damp that reaction down before it gets started.

          • 0 avatar
            KixStart

            Kreutzer: “As you can see from the articles I linked to, some people in the investment community are beginning to think about the timing of the government’s stock sale.”

            What I see that that some right-wingers in or tangentially involved with the investment community have found a politically useful opportunity to accuse the Obama administration of malfeasance on no hard evidence whatever.

          • 0 avatar
            Pch101

            Conspiracies are what dumb people use to fill in their knowledge gaps. There isn’t much reason to indulge them or even worry about them.

            Occam’s Razor makes very simple work of this. Lance Cooper, lawyer for the Brooke Melton estate, culled a bunch of paperwork in connection with his case. In February, he went to USA Today and NHTSA with his findings. That story went viral.

            Conveniently enough, GM had just recently appointed a new CEO with a lot to prove. So she has been engaging in some rather high-profile attempts at damage control.

            Had it not been for Lance Cooper, this probably would have been a routine recall accompanied by the usual settlements. But he ratcheted up the stakes and gave the story a public profile, and he succeeded.

          • 0 avatar
            John

            Amen

          • 0 avatar
            ClutchCarGo

            “Conspiracy theories are an irresistible labor-saving device in the face of complexity.”
            -Henry Louis Gates

          • 0 avatar
            shaker

            Put Issa on it… he’s a sneaky little $h!t.

          • 0 avatar
            alexndr333

            “…some people in the investment community are beginning to think about the timing of the government’s stock sale…” “The conspiracy people will talk about it…and this makes enough sense…” So, all we need is for enough people to speculate based on no real facts, just their own personal opinion and agenda (whatever it might be). What you’ve just described is the social media’s equivalent of the Big Lie: If there are enough posts, even if they all refer to one or two original ‘conspiracy speculations’ then we have the basis for official inquiry. Lemmings over the cliff.

          • 0 avatar
            KixStart

            Kreutzer: “For the markets to work, the average investor must have confidence in the idea that there is a level playing field.”

            The Average Joe investor has no fresh reason to lose confidence over this. The government needed to get out of the auto business, there are always going to be *some* investigations on-going, recalls do not seem to materially affect stock price, there was some insulation between the officials at Treasury and the NHTSA/DOT.

            Nothing to see here, move along.

            However… if the Average Joe investor is interested in losing confidence in the market, he should consider the roles that the major private financial players have. These guys have the leverage to do almost anything. One of the big banks’ defense against allegations that they were betting against their own slimy mortgage packages was, “we didn’t need to do that, we were positioned to make money NO MATTER WHAT.”

            Sweet deal, that. With my portfolio, I actually have to guess correctly and pick long-term winners.

            Hedge fund managers rake in $billions, no matter what. Junk bond dealers did quite well for themselves, pushing worthless paper. There’s even small ridiculous violations of good practice and common sense… GM had no business paying a dividend in its last few years prior to BK… but they did. They’d shorted their pension systems for years in favor of paying shareholders (which only served to give the less savvy shareholders false confidence).

            Big buck investors have access to information that the little guys can’t afford.

            The latest can’t lose scheme is high-speed trading. If you have the money and access, you can engineer anything to go your way.

            The capital markets are not at all a level playing field and it has little to do with the government (and what action government does take is usually to punish the most – and only the most – egregious violations of the market).

            The tinfoil hat brigades are going to have a field day with this – and that is going to cost confidence in the markets and undermine confidence in government. The One PerCenters are going to find a way to twist this into less regulation and oversight and that’s what’s really going to stick to old Average Joe in the long run.

  • avatar
    geeber

    For the charges of insider trading to be true, we have to assume that the federal government’s right hand knew what the left hand was doing. That’s quite a stretch.

    • 0 avatar
      Pch101

      On February 12, the day before the Cobalt recall, GM’s stock closed at $35.56 per share.

      As I type this, the shares are trading at $33.54. Not much of a difference.

      Recalls don’t usually lead to dramatically falling stock prices, and this has been no exception. Even if there had been insider knowledge, the timing of the events would have almost certainly been the same.

      • 0 avatar
        John

        Ever heard of leverage? If you have millions, or billions to invest, and have leverage, you can make a small fortune knowing a stock is going to fall from $35.56 to $33.54. If I KNEW that was going to happen to a stock, I would mortgage my house and borrow every penny I could to short the stock.

        • 0 avatar
          Pch101

          If you made a 6% gain on $100,000, then you’d make only $6,000.

          • 0 avatar
            TomHend

            Socialism doesn’t reward achievement, it rewards need-and GM is very needy.

          • 0 avatar
            shaker

            I guess that’s the point of that new-fangled “robotic trading”, making $6,000 a couple of hundred times a day, every day, for a fortunate few. Meanwhile, plebes and 401(k) holders take it on the chin (after “fees”).

          • 0 avatar
            Kenmore

            Shaker,
            You probably don’t need to read it but “Flash Boys” by Michael Lewis was a real mindfark for ignorati like me.

          • 0 avatar
            Pch101

            There’s nothing wrong with making $6,000 on a (legal) trade. But nobody with brains is going to mortgage his house to the hilt just to make $6,000.

            There is simply nothing about this story that even remotely resembles insider trading. Only people who don’t understand insider trading would believe such a thing.

          • 0 avatar
            shaker

            Kenmore: Thanks for the recommendation – I’ve seen a couple of interviews with Mike Lewis, those (along with your suggestion) convinced me to DL it to my tablet.
            I hope to get it read soon; thanks!

          • 0 avatar
            Dr. Claw

            L O L @ “socialism”… looks like the tinfoil crowd is already here

  • avatar
    wsn

    Even though I am strongly against the bailout or “investing in GM” whatever it is. I don’t see this as insider trading.

    If the government wants to avoid looking bad due to the falling stocks which is caused by recall, all they need to do is to instruct NHTSA (or who is in charge) to dismiss the case against GM. Just call the ignition issue working as intended.

    It’s actually the opposite. The people who decides GM’s fate (as in recall), decided to actually slap on GM, because it’s out of the government’s book already.

  • avatar
    bunkie

    Right after the January market dip, I bought into an S&P 500 fund. I set myself a target sell price and when I hit it, I sold out. That was at 1845. Had I stayed in I would have made even more money. Why didn’t I? Because I can’t read the future. Post-event analyses always seem to discount this important fact.

  • avatar
    wmba

    Well, son-of-a-gun, the nasty US Treasury, they didn’t tell the government of Ontario to sell its shares last September.

    There are dozens of conspiracy theory websites out there where topics like “did we actually get to the moon?” are earnestly debated by gaunt-cheeked nutters tapping out urgent messages to each other. No need to turn this place into one of those.

    If there’s one thing the Internet has done, it has allowed the tinfoil hats to reinforce each other, where before families could pat them on the head and make them a nice cup of hot chocolate to calm themselves down.

  • avatar
    bomberpete

    Ralph Nader made some good points about the GM IPO back in late 2010. Naturally no one listened because it was coming from Ralph Nader.

    http://www.thetruthaboutcars.com/2010/11/nader-government-motors-forever/

    • 0 avatar
      KixStart

      Nader, et al, made some bad points, too.

      The best part of that article is Niedermeyer’s comment (which is the second comment).

      “What’s I find fascinating about this this letter is that it basically summarizes the popular right-wing perception of Obama’s agenda re: the auto industry, and yet its authors are totally at odds with what the White House is actually doing. Could rumors of Obama’s ideological extremism be somewhat exaggerated?”

  • avatar
    jkross22

    Short answer is maybe, but it’s hard to believe. Government ineptitude, lack of accountability and decision making and in fact, lack of common sense all suggest that even if the government knew about this, it’s not organized enough to act on this type of information.

    It would seem the sale of GM stock had much more to do with political expediency for Obama and the Dems with mid-terms just around the corner than with anything else.

  • avatar
    msmitka

    One piece of basic investment empirics is that “prices were trending up” contains information about the past, not what will happen tomorrow. While the “efficient market hypothesis” has its limitations, lots of investors (eg pension funds, those with serious money) follow (and hold) GM, and if tomorrow was going to be highly profitable, investors would buy today driving up price today… Those same investors knew that at some point in 2014 the government would be selling very large blocks of shares, likely all, so would have factored that into their decisions, too.

    Do recalls affect share prices? That’s unclear, there’s lots of other news – slower growth in China, and in the face of fiscal stringency little growth in Europe and slow growth in the US – that might lessen expectations of future profits.

    BTW I just took my 2014 Chevy Cruze in for a recall check today. A potential problem with the right front half-shaft, it sounded to me like a few bad forgings but (according to the service person) to date no failures on the road. Many of the other recalls, if you bother with the fine print, are for small numbers of very old vehicles [though lots have to be screened to find the handful with issues] for problems less than catastrophic. GM is being very cautious.

    But I expect every new volume vehicle to face 2-3 recalls over its lifespan, vehicles are simply too complicated and the threshold for recalls too low. My worry is that there will be so many recalls that consumers will cease to take them seriously. Since on occasion there are things found that can go catastrophically wrong in very low numbers, the cure of being tough on recalls will I suspect prove worse than the disease.

    Note too that if the GM ignition had been on a vehicle sold only for a few years, or in low volumes (eg only on a luxury vehicle) there would have been too few on the road to have ever suspected something systematic. Volume manufacturers will face more recalls than niche makers such as BMW or Mercedes. When I read the rants on Porsches, there are numerous reports of the same drivetrain bearing failiing, things of that sort that at a GM would correlated with accidents (sheer numbers would guarantee that) and a massive recall. Now self-selected consumer rants need to be discounted (ditto Consumer Reports quality ratings) so perhaps there is no Boxster bearing issue, but the statistical logic should be clear: a part in which only 1 in 100,000 go bad may show up on a Chevy sold in large volume year after year, but will never be spotted on a Porsche.

    I and David Ruggles blog at http://autosandeconomics.blogspot.com and my Spring 2014 auto course at http://econ244.academic.wlu.edu with 150+ students posts plus journals from a week in Detroit plus notes on auto books by Volti, Vlasic, Heitmann-Rosales and Tom Wolfe.

    • 0 avatar
      wsn

      This is one of the more rational post. My reply would be:

      Is the new GM stock investor demography warrant an efficient market? Personally, I believe it’s less efficient than other stocks, simply because there is more patriotism sentiment in it. We have seen it will the old GM. The stock should have been collapsed long before the actually event. But it held on and on to the last moment.

      • 0 avatar

        ALG doesn’t project any significant loss in residual value over the recall. It will all blow over even though I’m not saying it should. GM is highly embarrassed. Mary Barra addressed a group of us in NYC in April, and it was clear she was quite distressed about it. She took every question and didn’t flinch. The stock has taken a hit. Its a good time to buy. I suspect the uncertainty of the upcoming UAW talks will cause more stock value disruption than this recall.

        People expect for there to be recalls. They really dislike cover ups. There will be many who will give GM the benefit of the doubt. Some won’t. Same with Ford, Toyota, and the others.

    • 0 avatar

      Great post.

  • avatar
    Hillman

    So if the government lost money people would complain. If they made money they timed the market, exploited something/someone. If they let the companies fail then people complain that the government should have done more or if they bailed out then people complain they should have failed. So my question is how can the government win?

    • 0 avatar
      Xeranar

      By win you mean be popular? It’s unlikely in a democracy. Most policies have dichotomous relationship so by doing anything you’re bound to upset somebody. In this case the right is in a completely stymied and frustrated position so the loudest pots being banged are coming from their camp right now. Before it was coming from the left over Bush. Regardless of the value of the pot banging it will inevitably happen because nobody will ever be satisfied completely.

      It’s the same reason why today I hear people complain about Obama after he won in an effective landslide by modern presidential standards and yet the other side immediately clamored to the idea of that 47% had a voice in the new government. This is why these fights usually fall along ideological lines, people pick a point of view and stick with it regardless of facts.

      • 0 avatar
        Hillman

        Agreed. I was hoping some people would notice the hypocrisy of their complaining. I have seen way to many bad policies come about after the professional complainers get their way.

    • 0 avatar
      Rasputin

      It can win by growing smaller and intruding into our lives much less than it currently does.

      • 0 avatar
        Xeranar

        Interesting, except the majority of voters have voted against that ideoogy as has the western world. So perhaps you need to keep banging those pots. :)

        • 0 avatar
          Big Al from Oz

          @Xeranar
          What you state is true pre-GFC.

          Look at the Europeans, they are moving away from the socialist models.

          Even here in Australia our government will not bail out a company, even Ford, Toyota or GM.

          The government states to companies and unions you are responsible for the deals you cut and you will wear the consequence of poor decision making, not the taxpayer.

          I think this is a fair to operate. This might be too new a concept for unions to manage. It’s called becoming accountable for decsions.

          Unions, industry and government must take into account poor decisions on their part.

          If the workers suffer then they should speak to their unions for poor advice.

          What happens when a person who owns a restaurant has a poor menu and no-one buys their meals. What does the government do. Subsidise them to continue on with the incorrect menu.

          Sort of like making pi$$ poor management decisions in the auto industry. If your menu is wrong or you sell vehicles to cheaply so there is no profit, go broke. Tough, sell your business.

  • avatar
    Xeranar

    Much of the awkward defense of the government is the claimed ineptitude and such which really ignores the practical reality of how this divestiture was setup. The stock was held in a trust and there was a management team put in place over it, they were charged with divesting the stock at the appropriate time and acted in accordance with their overview. In fact I remember clearly that a separate team was setup so the government (or more realistically individual officials) couldn’t get a benefit from it, so when they say the ‘government’ they mean a small team of financial analysts passed a report to the treasury that then unloaded it. Since they couldn’t have been privy to any findings outside of the public domain this is pretty much an open and shut case of ‘no’ and even if so the government can’t necessarily commit insider trading because they’re a national government and the law itself applies but there is no aggrieved party to charge them. Also, PCH noted it dropped $2 or around 6%. The short-term loss on the loan is minuscule in terms of the payroll taxes and corporate taxes they’ll receive by continued existence.

    • 0 avatar
      DC Bruce

      Nicely put. Consider the opposite possibility: that the “government” not wanting to jeopardize the amount of money it realized from the sale of GM stock deliberately avoided mandating recalls, coming down on GM for its defects, etc.

      Now there’s a black helicopters theory for you! ;-)

  • avatar
    PWarren4

    “Was The Government’s Divestment of GM Stock Insider Trading?” Well DUH.

    • 0 avatar
      highdesertcat

      Of course it was! The public will never know the ins and outs of what information passed between GM management and the US government prior to the sale of the GM stock, but the US government didn’t want to be even remotely associated with an innuendo of owning any part of GM.

      GM stock may not have been affected as of this date, but confidence in GM is not exactly at an all-time high either.

      To the US government’s divestment? “Smooth move, Exlax!”

  • avatar

    Recently at Brookings –

    http://www.brookings.edu/blogs/brookings-now/posts/2014/05/summers-marchionne-2009-auto-bailout

    • 0 avatar
      Landcrusher

      Summers is wrong on several counts.

      1. His time line is insufficient. There should be some standard agreed upon on what success looks like, and not just still in business a couple years later.
      2. There are plenty of leaders of big companies that have learned precisely the wrong lessons on what risks to take and not take.
      3. No matter how much he attempts to suck up by trying to appear reasonable, the leftist elites will never let him back into their inner circle.


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