Obama finding what's good for GM not so good for taxpayers
Photo credit: Reuters
DETROIT (Bloomberg) -- The General Motors bailout played an important role in the re-election of President Barack Obama, who stumped on the issue in Midwestern swing states.
Now comes the hard part: unloading the government's stake, probably at a big loss.
GM received $51 billion from the U.S. Treasury in 2009. Taxpayers have recouped $24 billion and still own 32 percent of the company. The problem is that GM shares are trading at less than half the price the government said it needs to break even.
Selling the shares was politically precarious before the election because that would have locked in a loss -- $14 billion at yesterday's closing price. Now that the election is over, cutting the stake could be good for GM's image and its stock.
The question is how and when. With GM suffering as much as $1.8 billion in losses in Europe this year and Chinese economic growth slowing while the U.S. accelerates gradually, prospects are dim for a doubled stock price.
"They can't wait for the shares to turn a profit because they know it's not going to happen," Phillip Swagel, assistant Treasury secretary for economic policy under President George W. Bush, said in an interview. "They will wait a reasonable time period after the election, as people focus on the fiscal cliff and tax reform. Then they'll start to sell off the shares."
Obama is unlikely to sell all 500 million shares at one time, as Republican candidate Mitt Romney had suggested he might, Swagel said. That will reassure investors concerned that GM's largest shareholder would batter the stock with a share dump.
"You have one shareholder who is a likely seller and owns a third of the stock," said Matthew Stover, an auto analyst with Guggenheim Securities in Boston. "Investors see that and think, 'Look out below!"'
Rather, Treasury will probably engage in a measured sell-down over time, much like it has in exiting ownership in banks and insurer American International Group Inc., which received taxpayer rescues from the Troubled Asset Relief Program that also funded GM's bailout.
GM's $51 billion was part of the government's $79.7 billion 2009 rescue of GM, Chrysler Group LLC and lender Ally Financial Inc.
"Treasury has done a very good job of disposing of shares of TARP banks and that provides a pretty good road map," said Swagel, now a professor of economics at the University of Maryland School of Public Policy. "Treasury has taken some losses on the TARP shares on individual banks. But they said the best thing for us to do is to sell these off and get the banks back into fully private hands."
GM spokesman Jim Cain declined to speculate on the government's plans.
"Nothing has changed from our perspective," Cain said. "Treasury will act on its own timetable."
Timothy Massad, the Treasury Department's assistant secretary for financial stability, said in an e-mailed statement: "Going forward, as with all our investments, we'll continue to balance exiting as soon practicable and maximizing value for taxpayers."
GM has the liquidity it needs to buy back government shares after securing an $11 billion revolving credit line on Nov. 5, Brian Johnson, a Chicago-based analyst with Barclays Plc, wrote in a note that day. If Obama were to announce an AIG-style wind-down of the government stake in GM, it could help both sides, Johnson said.
"Announcement of a sell-down plan, combined with a coordinated share-repurchase plan by GM could actually boost the stock," Johnson wrote. "Announcement of such a plan would help the Treasury's cause, as the stock could see a boost from investors appreciating the signal that the Treasury overhang is coming to an end."
If GM were to buy back 40 percent of Treasury's holdings for as much as $5.6 billion, that would add 12 percent to the value of the remaining shares, according to Johnson.
The "Government Motors" tag that dogged GM throughout the presidential campaign is depressing its share price and has hamstrung the company, said Jim Kee, president of South Texas Money Management in San Antonio, which bought 500,000 GM shares in February, expecting a 30 percent to 50 percent gain as the economy recovers.
"GM has still got the dead weight of government involvement limiting their flexibility," Kee said.
Even chopping the government's ownership stake in half might move the share price up, Stover said.
"If they get it to 15 percent or below, I think people will stop talking about it as much," Stover said. "One of the reasons the stock price has come up recently is people are looking at it and saying, 'Europe is bottoming and it looks like the U.S. Treasury is going to do something."'
Obama may want to wait to start selling until the Detroit auto show in January, when GM plans to display a redesigned version of the Chevrolet Silverado pickup, its top-selling model. That news could move shares in the direction of GM's November 2010 initial public offering price of $33.
GM shares closed at $25.03 on Wednesday.
"Housing data points continue to improve and pickup demand is increasing," said Peter Nesvold, an analyst with Jefferies & Co. "GM has brand new product in that category for the first time in five years and the appetite for shares is actually pretty strong."
Other than its European losses, the news on GM is mostly good. The new revolving line gives the automaker $43 billion in gross liquidity, strengthening what CEO Dan Akerson calls "our fortress balance sheet."
GM's third-quarter earnings last week beat estimates by 55 percent and automotive profit excluding Europe rose 4.3 percent to $2.63 billion, before interest and taxes, as it commanded higher prices for its models and expanded in emerging markets in Asia and South America.
"As we've said before, we believe the company's made real progress, but we don't think that the market has given the company as much credit as it might," said the Treasury Department's Massad.
Frank Brosens, a founder of Taconic Capital Advisors, agrees.
"This stock still trades like the old GM," Brosens said Wednesday at the "Invest for Kids" conference in Chicago to benefit youth charities. "The stock can triple from here."
Brosens said the government "would like nothing better" than to get out of GM stock. Taconic owns 9.03 million shares, according to data compiled by Bloomberg. Brosens said he expects the government will sell its stake in the next six months to a year. GM may buy 200 million to 300 million shares from the government, he said.
To Obama, the most important outcome of the bailout is that GM and Chrysler are healthy and hiring. Without government assistance, "we would have lost a million jobs," the president said in the Oct. 16 presidential debate at Hofstra University in Hempstead, N.Y.
The controversy of using taxpayer dollars to save individual companies is unlikely to ever go away, said Swagel, who helped start the auto bailout as part of the Bush administration. Eliminating government ownership of GM, though, will go a long way toward closing the book on that intervention, he said.
"The administration has spun the bailout into a success story, so they're not going to suddenly admit, 'oh, no, now we've lost money,"' said Swagel, who contends labor unions received preferential treatment in GM's bankruptcy. "Everyone understands they've lost money, but, in their mind, they've saved all these jobs."Contact Automotive News