GM Share Sale Shows U.S. Auto Revival as Economic Pillar

The Obama administration’s decision to sell more of its stake in General Motors Co. (GM) underscores the resurgence of a domestic auto industry that emerged from near-collapse to become a pillar of economic growth.

The U.S. Treasury Department said today that it agreed to sell 30 million GM shares for $34.41 apiece, leaving it with less than a 14 percent stake four years after rescuing the company along with Chrysler Group LLC. The sale coincides with Detroit-based GM’s return to the Standard & Poor’s 500 Index (SPX) for the first time since its 2009 bankruptcy.

“The auto industry is alive and well,” said George Magliano, senior economist at IHS Automotive in New York. “And today one of the leading industries in the recovery, though it’s a rather lackluster recovery, is the auto industry.”

Automakers in the U.S. contributed 14 percent of the 2.1 percent average rate of growth for gross domestic product in the recovery that began in the third quarter of 2009, according to data from the Commerce Department. U.S. auto sales are on pace for the best year since 2007 as GM, Ford Motor Co. (F) and Auburn Hills, Michigan-based Chrysler all gained market share in the January-May period, the first time that has happened in at least 18 years.

Photographer: Jeff Kowalsky/Bloomberg

General Motors Co. Chairman and Chief Executive Officer Dan Akerson addresses reporters after GM's annual meeting at company headquarters in Detroit on June 6, 2013. Close

General Motors Co. Chairman and Chief Executive Officer Dan Akerson addresses reporters... Read More

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Photographer: Jeff Kowalsky/Bloomberg

General Motors Co. Chairman and Chief Executive Officer Dan Akerson addresses reporters after GM's annual meeting at company headquarters in Detroit on June 6, 2013.

The federal government spent $80 billion to bail out the industry, including more than $63 billion on GM and Chrysler. The effort will cost taxpayers $20.3 billion, according to a March 31 Treasury estimate.

CEO’s Defense

GM has been profitable every quarter since its 2010 initial public offering and posted $6.19 billion in net income last year.

Chief Executive Officer Dan Akerson defended the U.S. bailout during GM’s annual shareholder meeting today in Detroit after a speaker suggested it was hindering sales.

“Four years afterward, it’s pretty hard to argue that it wasn’t successful,” Akerson said. “Twenty-five billion dollars in profits later, growing employment and a strong manufacturing basis and the first time in more than a generation that all three manufacturers were profitable, speaks to whether it was a wise decision.”

‘More Expensive’

Some still question the cost of the bailouts. That cost tarnishes the bailouts, which were “more expensive than they needed to be” and structured to favor labor unions, said Phillip Swagel, who was an assistant Treasury secretary under President George W. Bush and is now a professor at the University of Maryland in College Park.

The industry’s revival has drained much of the controversy from the Obama administration’s decision, which was opposed by some congressional Republicans at the time and later became a flash point in last year’s debates between President Barack Obama and Republican challenger Mitt Romney.

“The industry was extremely vulnerable, and had GM gone down, it likely would have precipitated a depression in the overall economy,” David Cole, chairman emeritus of the Center for Automotive Research in Ann Arbor, Michigan, said in an interview. “It was like an investment that avoided a catastrophe.”

The concern was that an uncontrolled GM liquidation would have a domino effect throughout the U.S. auto industry, causing suppliers, already struggling to stay in business, to collapse as well.

Edge of Cliff

“If GM had gone down, that would’ve taken the whole industry down because it would’ve shut down critical suppliers who were at the edge of the cliff,” Cole said.

A healthy GM is helping other parts of the industry, including suppliers and dealers, David Whiston, an equity analyst with Morningstar Inc. (MORN) in Chicago, said in a telephone interview. “A stronger GM is great for GM stakeholders,” he said. “It is certainly good for the auto industry.”

The rescue saved 1.14 million jobs in 2009 at automakers and companies that depend on the industry, according to the center. A collapse would have cut $96.5 billion in personal income in 2009 and 2010, and it also would have cost the federal government $28.6 billion in extra jobless benefits and reduced Social Security contributions and income taxes in those years, the center said.

“There are parts of the country where the unemployment rate would have been a couple of points higher and taken much longer to come down than was actually the case,” said Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities who previously was Vice President Joe Biden’s chief economic adviser.

‘Much Tougher’

“It would have been a much tougher job market,” said Bernstein, who was a member of a presidential task force on the auto industry.

The U.S. unemployment rate fell to 7.5 percent in April from a peak of 10 percent in October 2009. In Michigan, home to GM, Ford and Chrysler, the rate has fallen to 8.4 percent from 14.2 percent in August 2009.

The Troubled Asset Relief Program, initially aimed at financial firms, was broadened to housing and autos as the 2008 crisis unfolded, though less than two-thirds of the $700 billion authorized by Congress was used. The Treasury has recovered $398.2 billion of the $420 billion disbursed through TARP, the department said yesterday in a statement.

Treasury’s Stake

The U.S. owned 219.2 million shares in GM, or 15.9 percent, as of yesterday, GM said in a filing today. After Treasury completes selling 30 million shares, its stake will decrease to 13.8 percent, according to the filing. The UAW retiree health care trust’s stake will decrease to 13.1 percent from 14.5 percent after it sells 20 million shares.

In 2008, Bush gave GM and Chrysler federal money, and the companies received additional help through managed bankruptcies under Obama’s administration.

GM rose 1.2 percent to $34.44 at the close in New York while the S&P 500 increased 0.8 percent. The shares have gained 19 percent this year, eclipsing its $33 initial public offering price, compared with a 14 percent increase for the S&P 500.

Investor confidence in GM has increased since the automaker said in December it would spend $5.5 billion to buy 200 million shares back from the Treasury, and the government said it would sell the rest of its holding within 15 months.

Shares reached a 10-month-high the day of the announcement in December and have continued to climb after topping their IPO price on May 17 for the first time in two years.

Dividend Possibility

The sale is part of the Treasury’s strategy to end its GM ownership stake. By spreading out its share sales over many months, the Treasury can minimize pressure on the stock price.

Chief Financial Officer Dan Ammann has said the Treasury’s sale of shares is good for GM because it removes the perception of government involvement in the company.

Akerson today left open the possibility that the automaker may repurchase additional shares from the U.S.

“It depends upon what happens,” Akerson told reporters following the automaker’s annual meeting. Once Treasury’s stake falls below 10 percent, it’s no longer restricted by how many shares it can sell in a quarter, he said.

“There are many variables in the equation and depending on where we are at that particular point in time -- end of this year, early next year -- we might be a factor in that,” Akerson said. “We’ll have to wait and see.”

While GM isn’t prohibited from issuing dividends, it’s choosing to spend money on new products and facilities, Akerson said.

“First and foremost we must continue to invest in this company so we don’t lose the competitive edge we have today,” the CEO said.

To contact the reporters on this story: Ian Katz in Washington at ikatz2@bloomberg.net; Tim Higgins in Detroit at thiggins21@bloomberg.net

To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net; Jamie Butters at jbutters@bloomberg.net

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