The U.S. Treasury has begun a sale of its remaining stake in General Motors, with a goal of selling its remaining shares by March 2014. Currently, the government owns more than 300 million shares in the auto maker, equivalent to a 19 percent stake.
Throwing investment advice of eminent experts such as the LA Times editorial board and former GM CEO Ed Whitacre in the wind, the Treasury will not sell its holdings in GM as recommended, but hold on to the stock. Why? For the same reasons that prompt smaller scale investors to hold on: The Treasury “expects the stock to rise in the future due to a roll-out of several new vehicles,” people familiar with Treasury’s thinking told Reuters. (Read More…)
An earlier report, stating that Bob Lutz would be returning to GM as a consultant was true… but so was the news that Treasury opposed GM’s plans to pay its longtime executive, who retired a little over a year ago. Speaking to the press at the New York Auto Show, Maximum Bob confirms that he is on the board of Lotus, and revealed that he is doing “pro-bono” work as a consultant for GM’s new product development boss, Mary Barra. According to Automotive News [sub], the prospect of Lutz returning as a GM consultant (ala Fritz Henderson) caused such a stir at Treasury, that he decided to work informally at GM, without pay. Given that Lutz’s heavily-hyped products have yet to return GM to steady retail market share growth, perhaps GM is finally paying him what he’s worth?
With GM’s share price slipping below $30, the cries are going up again around the internet about the government’s stake in the bailed-out automaker. Thus far the Treasury has remained mum on its exit strategy, only indicating that it would emphasize speed rather than maximum return as it charted the course for its sell-off. But now, Reuters reports that “a big chunk” of the government’s 33% remaining stake in GM could be sold “in the summer or fall.” With the government’s shares “locked up” until May 22, that could mean the government is bailing as quickly as possible at a time when GM’s stock is hitting post-bankruptcy lows, and its CEO offers little in the way of explanations beyond blaming the Japanese tsunami and rising fuel prices. The Wall Street Journal figures taxpayers would lose $11b on its “investment” in GM equity if the government sold at today’s prices (the stock must hit $53 for break-even), but reports that political motivations outweigh fiscal considerations. The White House does not want “Government Motors” to be an issue in the next election.
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
While some have questioned why TARP was used to support the automotive industry, both the Bush and Obama Administrations determined that Treasury’s investments in the auto companies were
consistent with the purpose and specific requirements of EESA. Among other things, Treasury
determined that the auto companies were and are interrelated with entities extending credit to
consumers and dealers because of their financing subsidiaries and other operations, and that a
disruption in the industry or an uncontrolled liquidation would have had serious effects on financial
market stability, employment and the economy as a whole.
Translation: credit dependence killed the car companies. And from the 0% Red Toe Tag Sales to GM Daewoo’s $2b currency gambling loss, the glove fits. It’s a lesson that isn’t brought up often enough, and it’s one of the only passages of note in the Auto Industry Financing Program section of Treasury’s two-year TARP retrospective [PDF here]. Otherwise, the document is swallowed up in accounting for the billions spent on banks, despite the fact that
We now have recovered most of the investments we made in the banks. Taxpayers will likely earn a profit on the investments the government made in banks and AIG, with TARP losses limited to
investments in the automobile industry and housing programs.
So, why not explain why projected auto rescue losses were reduced to $17b with more than just a footnote? [#2 on Figure 2-B shown above]
We want the government out, period. We don’t want to be known as Government Motors.
GM Chairman and CEO Ed Whitacre channels his inner Rick “Bankruptcy is not an option” Wagoner in the New York Times, telling the taxpayers who put him in charge of a bailout-rinsed General Motors to get lost. Sure Ed, we’ll all go NSFW ourselves just as soon as we get our $49.5 billion back. Talk about putting the throat-clearing guttural in chutzpah…
Bloomberg reports that GM has already pulled off one of the ballsiest IPO moves ever, by asking banks bidding to underwrite its IPO to use fees to subsidize the purchase of GM vehicles by its employees. According to the report, a GM document sent to bidding banks solicited
ideas as to how we can use the IPO to reposition GM and its vehicles within the investment community including your firm’s willingness to reinvest any portion of any underwriting fees into the purchase of GM vehicles for your employees and/or company use.
The Detroit News reports that the Treasury Department has hired Lazard Frères & Co. as an advisor to GM’s forthcoming IPO sale. And with news of the hiring comes confirmation that GM’s IPO really is coming soon: the investment bank will receive half a million dollars, according to the DetN, but that amount will drop to $250,000 if the IPO isn’t completed within one year. If you’re one of the GM boosters who believes that an IPO will repay all or most of the government’s investment in GM, it’s time to start saving those pennies. You have less than a year now to put your money where your mouth has been.
In response to Senator Chuck Grassley’s concern that GM’s claim to have paid back taxpayer loans was misleading, the US Treasury is now saying that it has no problem with The General’s statements. According to the Freep, a Treasury letter to Grassley explains that:
GM’s decision to pay off the loan signaled the automaker did not face “extraordinary expenses,” and that Treasury approved the loan payoff.
“The fact that GM made the determination and repaid the remaining $4.7 billion to the U.S. government now is good news for the company, our investment and the American people,” said Herbert Allison, assistant Treasury secretary for financial stability.
Strictly speaking, GM’s claim to have paid back all US Government loans is correct. The only issue is that GM’s ad touting the payback makes no reference to the fact that it still owes the Treasury upwards of $40b. If that misleads folks, well, apparently the Treasury Department isn’t going to do anything about it.
My first day back at the helm of TTAC has been accompanied by an embarrassment of riches, in the form of both a GAO report on GM and Chrysler’s pension obligations, and the release of GM’s first post-bankruptcy, GAAP-approved financial results. We will continue to mine these documents for the most revealing quotes and statistics, but for now let’s take a moment to consider the political tensions caused by the auto industry bailout. TTAC has long held that political conflicts over the government’s stewardship of GM and Chrysler is a pressing concern, nearly on par with the financial ramifications of the auto bailout, and today’s GAO report confirms our concerns. As the following quote reveals, Treasury is under constant pressure to accommodate political concerns over the management of its stakes in GM and Chrysler, and has received no fewer than 300 official letters from congressional representatives, eager to subordinate the long-term health of the bailed-out automakers to their local concerns.
According to GM’s 3rd Quarter financial results announcement:
GM plans to repay the United States, Canadian and Ontario government loans in quarterly installments from escrowed funds, beginning next month with an initial $1.2 billion payment to be made in December ($1.0 billion to the UST and $192 million to the EDC), followed by quarterly payments. Any escrowed funds available as of June 30, 2010 would be used to repay the UST and EDC loans unless the escrowed funds were extended one year by the UST. Any balance of funds would be released to GM after the repayment of the UST and EDC loans.
Though this sounds like positive news, don’t let it fool you. GM’s financials only acknowledge $6.7b in government debt, a sum that barely scratches the surface of the taxpayer “investment” in The General (let’s use $52b as a baseline). The escrow fund in question contains $13.6b of the final $30b GM was given as it exited bankruptcy. Having burned through nearly half of that princely sum, GM now plans on using at least part of the rest to pay off the “outstanding $6.7b.” The escrow account expires in June 2010, at which point whatever is left unpaid of the $6.7b will be returned to the government, and GM will keep the rest. GM will then declare victory and pretend like it has squared up with the tax paying public, when in fact the public will have merely paid itself back a paltry fraction of what GM actually owes. This “repayment” will then be dutifully reported without question by the mainstream media, and the stain of bailout will be symbolically lifted. Except, of course, it won’t. GM and the government are playing a classic shell game, taking advantage of the public’s inability to keep the billions straight. Shameful.