Friday, December 21, 2012

GM Still Isn't "Saved" ... Neither Are the Taxpayers

GM has been put in the "saved" camp by President Obama and like minded politicians.

Of course, that "saved" status is just silly political talk unless taxpayers are deemed to be the ultimate source of salvation and permanent financing for private sector companies like GM.

In other words, unless GM becomes just another government like taxpayer supported U.S. Postal Service "type investment," the company has in no way been saved permanently. The taxpayers' money has just kept GM on life support for now. Customers will decide about GM's future by buying or not buying what GM is selling at a price which generates sufficient profitability for its investors to stick around.

Without a permanent taxpayer backstop, GM's long term future staying power as a worthwhile investment proposition is by no means assured. And free markets don't provide taxpayer backstops and guarantees supported by taxpayers.

Taxpayers through the government bailed out GM in 2010 by "investing" billions of dollars in the company. Now the taxpayers through the government are "selling" our ownership position to independent investors, including individuals, at a loss of billions of dollars to those taxpayers who financed the bailout. How many billions of losses will be determined after all the shares have been sold.

So I guess technically the government, aka taxpayers, did save GM from bankruptcy -- for now at least. But the "saving" gesture will end up costing taxpayers billions of dollars in the end. We just don't have a final tally of the ultimate taxpayer "subsidy" yet.

But the signs aren't good. In fact they're indicating that GM's stock price will have to triple from its current level of ~$27 to ~$70 for taxpayers to break even on our "investment." That tripling to $70 is, in my opinion, a fairy tale price.

While we don't yet know how much taxpayers will end up paying, the bill will be substantial. Treasury to Sell G.M. Stake Within 15 Months says this:

"For months, General Motors executives have been pressing Washington to sell its stake in the company, desperate to rid itself of the yoke of being called Government Motors.

Nearly four years after what became a $49.5 billion bailout, the Treasury Department announced on Wednesday that it would sell 200 million shares back to the company for $5.5 billion, then sell an additional 300 million shares by early 2014.

Currently, the exit would produce a loss of more than $12 billion for taxpayers — one of the few major bailouts that did not produce a return. . . .


The Treasury’s presence in G.M. disturbed investors and prompted some consumers to avoid its products in an increasingly competitive United States auto market. Independence, however, will leave the company with no excuse as it battles domestic and foreign rivals, many of whom did not turn to the government for a lifeline.

When G.M. was given its first loans by the Bush administration, the company was still the industry leader, with a 22 percent share of the market in the United States. After bankruptcy and its re-emergence as a public company, that dominance has eroded.

As of the end of November, G.M.’s market share had slipped below 18 percent this year, and it was struggling with hefty inventories of some major models like the Silverado pickup and the Malibu midsize sedan.

And while General Motors has benefited from shedding debt and four brands in bankruptcy, it has considerable work ahead to rebuild a product lineup that withered during its financial crisis. For one, its hometown rival, Ford Motor, earns more money in North America despite selling fewer vehicles....

Executives were eager to shed the government’s 32 percent ownership stake, but the election in November delayed any talk of a share buyback. But soon after President Obama’s victory, G.M.’s chief financial officer, Daniel Ammann, called Timothy G. Massad, the Treasury Department’s assistant secretary for financial stability, to begin negotiations, according to people with direct knowledge of the matter.

An offer to buy back a substantial number of G.M. shares at the market price — no premium for the Treasury — was rejected. Several weeks of start-and-stop negotiation followed, during which the company demanded a firm timetable for the government’s exit.
By about 5 p.m. Tuesday, G.M.’s board had voted to offer $27.50 for the Treasury stake, an approximately 8 percent premium to the stock price at that day’s close. By about 7:30 p.m., the sides signed off on the deal.

Despite the relief of reaching an accord, G.M. executives planned no celebration or new marketing campaign, feeling that might look unseemly or even arrogant.

Wednesday’s deal all but guarantees a loss for taxpayers. The remaining shares need to be sold at close to $70 each to break even. But a Treasury official argued that the company’s stock hadn’t surpassed $27.50 since the government was legally cleared to sell additional shares after G.M.’s initial public offering.

The Obama administration has long argued that the rescue was always about saving the American auto industry, not making money. On Wednesday, Treasury claimed to have saved more than one million jobs through the bailout. . . .

“The government should not be in the business of owning stakes in private companies for an indefinite period of time,” Mr. Massad, of the Treasury Department, said in a statement. “Moving to exit our investment in G.M. within the next 12 to 15 months is consistent with our dual goals of winding down TARP as soon as practicable and protecting taxpayer interests.”. . .

G.M. has improved in several respects. Its annual profit has risen over the last two years, and as of the end of the year will have about $38 billion in cash and credit lines to draw upon.

But much hard work remains. Ford has had a head start on G.M. in globalizing its products and spreading out development costs. And during its bankruptcy, G.M. had to delay some new models, costing it valuable time in reacting to market trends. . . .

They have to keep their head down and keep plugging away and executing their strategy,” Mr. Wall of IHS Automotive said. “It is the beginning of the end of government ownership, but way too soon to celebrate anything.”"

Summing Up

GM will pay the government $27.50 to buy back these two million shares. That's not a good omen for taxpayers being made whole in the end.

In fact, in order for the taxpayers not to lose money on our "investment," the remaining government's ownership shares will have to be sold for $70. There's almost no chance of that happening.

So GM isn't "saved." Nor will it be for many years to come, assuming the intention was that taxpayers would not suffer billions in losses.

But President Obama says that making taxpayers whole never was government's objective.

So what was the government's objective -- maintaining UAW jobs at the expense of taxpayers? And for how long?

Assuming taxpayers won't provide funds to keep the company afloat forever, customers will ultimately decide GM's longevity and viability by which company's cars they decide to purchase, how many they purchase, at what prices they purchase them and how much it costs the company to provide those desired vehicles. It's all about market based competition.

And GM's future shareholders will also play a big part in the final outcome as they buy or sell their ownership positions in the company from time to time.

In free markets it always comes down to what customers choose to do with MOM.

And no matter what the politicians may say, governments and unions can't control what MOM does.

Thanks. Bob.

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