Think Twice About Buying GM Stock as a Private Citizen! (Or as a Taxpayer!)
We've been down this road before:
Hey, didn't you hear that the GM bailout is working out just swell! Why, we're likely to make us a profit on the bailout, so let's not dawdle over details, such as whether the whole goddamn thing was even legal in the first place (because it wasn't!).
The first time we heard this happy-happy line was when then CEO Ed Whitacre took to the airwaves to lie about GM's payback of its TARP loans "in full and ahead of schedule." (See below for why that argument had about as much credibility as a Chevy Citation's cooling system).
Now GM has done its first stock IPO and everything is on track for a happy ending. Right? Right! Right?
GM sold about 478 million shares Wednesday at $33 each, a price higher than the company and its bankers thought was possible just days ago. An additional 71.7 million shares are expected to be sold by GM's bankers as part of an "overallotment" allowed when sales are stronger than expected. And it sold $4.35 billion in preferred shares.
So come on, tell us, how'd we (and by we, I mean the taxpayer/owners) do? The good news is that the sale will reduce the government's ownership stake from about 61 percent to 26 percent. The bad news?:
With Wednesday's sale, including the overallotment, the Treasury lost roughly $4.5 billion on GM shares it acquired at an effective cost of $43.84 apiece. The Treasury would need to reap $26.4 billion, or an average of $52.79 a share, on its remaining stake to break even.
The rest of the government's shares will be pushed out into the market if and when the company and stock perform well over time.
As we wait for that to happen, keep in mind that the financial press in general and the automotive press in specific is a tool for the industries it covers. As recently as late September, for instance, you could find jackasses claiming that GM stock would be worth $134 a share, enough to wipe out the $50 billion bailout in a single bound:
Morningstar analyst David Whiston issued a preliminary estimate setting the shares' fair value at $134.
"GM's cost structure is drastically improved," Whiston wrote in a Sept. 13 note to investors. "We think GM's earning potential is excellent because it finally has a healthy North American unit and can focus its marketing efforts on just four brands instead of eight…. We think it is critical for investors to know that GM now makes excellent car models as well as light trucks."
$134 was the magic number estimated by Neil Barofsky, the special inspector general for TARP, for taxpayers to recoup their/our money in a single bound. Barofsky gave the figure in a letter to Sen. Charles Grassley (R-Iowa).
But that was then, and this is the imaginary future, where the government will cash out your/mine/ours remaining 500 million shares at around $53 a pop to kinda-sorta break even. Which is a kinda-really a stretch given that Ford, the one U.S.-owned company that weathered the past few years without government help and hence is probably better run, is trading at around $16 a share. (For the record, GM's historical high for stock before it went into bankruptcy was $93.63, in 2000. That came to a total market cap of $57 billion.)
Oh yeah, and the guy who oversaw GM's fabulous restructuring, Steven Rattner, told Bloomberg News that the U.S. is likely to lose between $5 billion and $7 billion on the full auto-sector bailout of about $82 billion (and which included parts manufacturers, too).
But the important thing to remember is: The IPO proves the GM bailout wasn't just good politics, but good business. Got it?
All those questions about the rule of law, whether it's a good idea for the government to bail out a company that lost records amount of dough the very year it sold the most cars ever, whether the domestic-owned auto industry is locking in amber workers and resources that could be productively used elsewhere, or even whether the feds coulda made more money parking that $50 billion in a Bank of Iceland Christmas Club account -well, just forget 'em.
There's nothing to see here, just poor-performing tales that will continue to roll off the media assembly line like so many 2010 Chevy Cobalts destined for scrap heaps ("cramped backseat, mediocre fit and finish, missing common safety features, lack of interior storage, dull handling [except for the SS], poor braking on XFE models").
UPDATE: I appreciate various commenters exposing my glib and mistaken apples-to-oranges (apples-to-lemons?) comparison regarding the relative stock prices of Ford and GM. Note that the $134 share price noted above is mentioned to illustrate the ways in which the media is always ready to tell a happy story about bailouts paying for themselves.
Also in the comments, Ken Schultz flags another related story from the Wall Street Journal, one that discusses a different type of preferential treatment for GM. The post-bankruptcy "new" GM won't have to pay $45.4 billion taxes on future profits:
The tax benefit stems from so-called tax-loss carry-forwards and other provisions, which allow companies to use losses in prior years and costs related to pensions and other expenses to shield profits from U.S. taxes for up to 20 years. In GM's case, the losses stem from years prior to when GM entered bankruptcy.
So there's no misundertanding, this is unusual given the type of restructuring that GM went through:
Usually, companies that undergo a significant change in ownership risk having major restrictions put on their tax benefits. The U.S. bailout of GM, in which the Treasury took a 61% stake in the company, ordinarily would have resulted in GM having such limits put on its tax benefits, according to tax experts.
But the federal government, in a little-noticed ruling last year, decided that companies that received U.S. bailout money under the Troubled Asset Relief Program won't fall under that rule.
"The Internal Revenue Service has decided that the government's involvement with these companies, both its acquisitions plus its disposals of their stock, means they should be exempt" from the rule, said Robert Willens, a New York tax consultant who advises investment banks and hedge funds.
There's little doubt that the ruling makes GM stock more attractive to potential investors. And it's not surprising that the government didn't do anything to make last year's "little-known ruling" any better-known. Or that nobody in Treasury was talking it up today as they did their victory laps about the GM triumph. [End of update]
Related: "How the Hell Did GM Pay Back Its Loans 'In Full and Ahead of Schedule?' Well, It Didn't":
