Sorry, GM, It’s ’Government Motors’ Awhile Longer
GM, bailed out with $50 billion from the Troubled Asset Relief Program, wants the U.S. Treasury to sell its remaining 26.5 percent stake quickly, even if that means taking a huge loss. The unnecessary oversight and intervention that comes with its “Government Motors” status, GM argues, is holding the company back.
Bailouts aren’t free -- for either side -- a point worth highlighting as critics continue to beat up on the Treasury for not extracting more pain from the banks and companies it rescued. GM’s fitful relationship with its government overseers should help deter the poor decision-making that landed companies at Washington’s doorstep.
More important, the facts don’t support GM’s complaint. Let’s review: At the height of the financial crisis, President George W. Bush, a Republican, and Barack Obama, his Democratic successor, threw GM a financial lifeline despite doubts that it deserved the money or could repay it.
The Obama administration then managed a whirlwind 40-day bankruptcy proceeding, from which the company emerged with its crushing debt lifted and health-care obligations slashed. GM went public in 2010 at $33 a share and, in 2011, became the world’s No. 1 automaker. It has reported profits for 10 straight quarters.
The company is now strong enough that, as Bloomberg News reported, it is preparing to bid for Ally Financial Inc. (ALLY)’s auto- lending arms in Europe and Latin America. Its biggest challenges have little to do with the government’s financial stake. Rather, it is suffering, as most U.S. manufacturers are, from losses in Europe and a slowdown in China.
For a reality check, look at Ford Motor Co. (F), GM’s closest peer and the only one of the Big Three automakers not to get a government bailout. GM’s price-to-earnings ratio, or the price the market puts on a dollar of its earnings, is $8.35. Ford’s is barely higher, at $8.47.
Although GM’s stock is doing as well as Ford’s, it’s not doing well enough; this is the primary reason Treasury is hanging on to the shares. Treasury already lost more than $4 billion in the initial offering, when it sold common shares for $33, below the $43.53 it needed to break even.
So far, Treasury has recouped about $24 billion of its $50 billion GM bailout. (The special inspector general for TARP has said Treasury would need to sell its remaining 500 million shares for about $53 apiece to recover all of its GM investment, including what it lost in the IPO.)
Treasury doesn’t expect to make money on the auto bailouts -- ever. As of May, it assumed it would lose $25 billion on the entire Detroit rescue, including funds provided to Chrysler and Ally Financial. The ultimate loss will depend on how the stocks perform.
Treasury is right to be patient. This isn’t bureaucratic resistance -- it’s smart investment management. Dumping the shares would only flood the market with GM stock, depressing the price even more. Taxpayers, moreover, deserve a better return. They are still suffering in the backwash of the financial crisis, with more than 12 million Americans out of work and real wages that have been stagnant for years.
As for managerial interference, the U.S. has exercised the authority Congress gave it to set pay for top-salaried GM executives. That condition of TARP has been applied to all companies that received “extraordinary assistance.” During the restructuring, the U.S. also played a big role in the company’s operations. It chose the chief executive officers, including current CEO Dan Akerson and his predecessor, Ed Whitacre, who is now among those urging the U.S. to sell its shares pronto.
But the administration has long made it clear it would be a hands-off manager once the Treasury was simply a common shareholder -- a promise it has kept. It hasn’t told the company what cars to make, where to build them or which companies to acquire.
Still, the U.S. Treasury isn’t a hedge fund and should look for opportunities to sell the shares. The stock may never hit $53, so Treasury need not wait for that price. It also doesn’t have to give money away, especially now that the market is rising and GM is in a strong position.
GM should focus on expanding its global market share by improving productivity, adopting the latest technologies and building world-class cars that consumers want -- in other words, do all it can do on its own to hasten an amicable end to this relationship.
Today’s highlights: the editors on making air conditioners more green and on why Europe must get its banking union back on track; Betsey Stevenson and Justin Wolfers on Mitt Romney and taxes; William D. Cohan on JPMorgan’s missing $6 billion; Albert R. Hunt on the best way to handle Iran; Jeff Rubin on the end of growth; Luigi Zingales on why Romney would have done better than Obama.
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