Europe’s economy is tanking, which portends more losses at GM’s troubled Opel division.
Add lingering concerns about the funding of GM’s $128 billion pension plan, and it’s little wonder the company’s stock had fallen to $21.59 a share Monday. That’s down from $33 at its initial public offering in November 2010.
Tough luck for GM’s stockholders. Oh, wait — we are all GM stockholders. The U.S. Treasury still owns about a quarter of the company’s stock. And because of the sagging stock price, last month Treasury raised the bailout’s net cost to taxpayers from $14.33 billion to $23.6 billion.
It’s time to cut our losses. Treasury should start selling its stake in GM.
And I know just the buyer: GM.
The company is sitting on more than $33 billion in cash, about triple the market value of Treasury’s 500 million shares, which is roughly $10.8 billion.
Though GM wants to dedicate much of its cash to shoring up its pension plan, it could still absorb most or all of Treasury’s shares, even if Treasury charges a modest premium over the current market price, as it should.
GM chief executive Dan Akerson reportedly floated a buyback earlier this year, but Treasury wasn’t interested; it is betting the stock can come back. This strategy is part economic — Credit Suisse says GM shares should rise to $32 by the November 2012 election — and part political: The Obama administration is loath to spoil its GM success story by turning bigger-than-promised paper losses into bigger-than-promised real losses.
This is dicey for taxpayers and, possibly, for the president. As recent events show, GM poses plenty of downside risk. In fact, that $32-per-share Credit Suisse forecast was marked down Nov. 10 from $42.
Dumping the government’s stock on the public — all at once or in stages — would compound the administration’s market-timing dilemma and that of every other investor. In a free-enterprise economy, this is not a game Washington should be playing.
Selling to GM, by contrast, mitigates those problems: It gives would-be investors, the company and the government much-needed clarity. It might enhance the company’s future profitability, too, in that the GM brand could finally shed the “government motors” stigma. Also, the firm could hire talent without the constraint of government limits on executive compensation.
Those considerations, plus the prospect of firming up the stock price by reducing the supply of shares outstanding, explain why GM might think the benefits of a buyback outweigh the risks.
For the government, the main argument against selling to GM below the IPO price of $33 — to say nothing of the actual break-even price of $53 — is that it would look like yet another bailout.
But there was never any chance that the government would break even on the GM rescue. The choice has always been between a big loss and a bigger loss. Selling to GM at a negotiated premium now would mitigate the paper losses already incurred, while protecting the taxpayer against the risks looming for 2012.
Treasury can defensibly make that case to the public. Of course, Republicans would complain, but then they would be in the position of opposing privatization. Anyone who insists Treasury should hold out needs to be reminded how much better off taxpayers would have been if Treasury had sold at its first lawful opportunity, back in June. The stock was trading at about $30 then.
There would even be some rough justice in selling out to GM. The firm’s pension liability is the biggest drag on its stock price. And the pension plan’s funding remains iffy — despite some recent GM success in replenishing it — because the Obama Auto Task Force declined to push the United Auto Workers for radical reforms during bankruptcy talks.
So, to the extent Treasury’s investment has suffered from GM’s declining stock price, the Obama administration has itself partly to blame.
Obama has repeatedly declared victory at GM. David Axelrod even said his 2012 slogan could be “GM is alive and bin Laden is dead.” Now the president should declare victory and get out.