Steve Rattner's Fuzzy Math: GM Worth $90b, Taxpayers Will Make Money
In a conversation with The WSJ [sub]’s Paul Ingrassia, former Car Czar Steve “Chooch” Rattner did some “back-of-the-envelope calculation” to show why he believes the US taxpayers will see their $50b “investment” in GM recouped when The General goes public sometime in the next year.
Here’s how Rattner gets to his latest calculation: Bonds of GM’s bankruptcy estate – known as Motors Liquidation – are currently trading around 30 cents on the dollar, according to Thomson Reuters. Those bondholders were owed $27 billion.
As part of GM’s restructuring, those bondholders were promised a 10% stake in GM when it goes public. In very rough calculations, those bonds are currently valued at about $9 billion (because they currently trade at around 30 cents and were originally worth $27 billion).
Assuming that $9 billion represented 10% of GM if it went public now that would imply GM had a value of around $90 billion. The taxpayer’s stake: 60% of that $90 billion, or $54 billion — Rattner’s magic number.
For an alleged Wall Street hot-shot, Rattner’s calculations leave a lot to be desired. For one thing, they don’t take into account the crucial $17.2b bailout of GMAC, without which neither GM nor Chrysler would have likely survived. And as the WSJ [ sub] notes, the GMAC bailout will probably cost taxpayers at least $6.3b. Meanwhile, we still have yet to see GAAP-compliant financial results from GM, a fact that puts Rattner’s speculative calculations into proper context.
Furthermore, using the speculative market for Motors Liquidation bonds as a gauge of GM’s strength is hardly satisfactory. After all, Motors Liquidation stock, which shouldn’t be worth anything, is still valued at nearly 60 cents per share, giving the wind-down remnants of “Old GM” a market cap of about $350m. When it should be worth precisely nothing. This illogical state of affairs speaks to the deeply non-rational influences at play in speculative investment, and casts doubt on Rattner’s “back-of-the-napkin” calculation. Would Rattner conclude that Motors Liquidation is actually worth $350m just because enough investors are making moon-shot penny bets on the remains of Old GM?
Besides, the US Government isn’t the only stakeholder in GM. When GM does hold an IPO, the UAW’s VEBA 17.5 percent stake in the firm will have to be monetized as soon as possible, because the fund is in desperate need of cash, and it will be years before it can cash out its 55 percent Chrysler stake. If the UAW cashes out its GM stake at the same time as Treasury, the IPO size would be considerably larger than it would be otherwise, potentially diluting investor enthusiasm (depending on actual financial results). Presidential Task Force boss Ron Bloom has hinted at this, saying
Private markets would like to see us exit this investment, and I think they will be more comfortable if we’re on a sustained path out the door than if they think we’re going to try to market time it to maximize return.
Even Barrons [via MSN], which hypes GM as the “hot IPO of 2010,” agrees that taxpayers will play second fiddle to, writing
Even if the debt rallies, bondholders will fare the worst, reflecting the restructuring of GM by the Obama administration that favored the union over bondholders despite their similar legal claims. The union is also apt to do better than taxpayers, based on its sweet deal. [emphasis added]
The same Barrons report cites a JP Morgan analyst’s “aggressive” valuation of GM at $63b, with $50b given as a more conservative valuation. Considering GM was functionally worth nothing prior to the bailout, and was revived to the tune of about $50b (not counting GMAC, retooling loans, et. al.) that $50b valuation sounds about right to us.
Meanwhile, Rattner’s motivations for overselling the possibility of taxpayer payback shouldn’t be nearly as hard to calculate.
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"back of the napkin", or was it "bar napkin" cause it sounds like someone was inebriated with this kind of math......