Care needed with General Motors stake sale
Tarp bailout of big carmakers was a key to poll win, but now share disposal looms
The bailout of General Motors played an important role in the re-election of President Barack Obama, but now comes the hard part, which is unloading the government's stake, probably at a big loss.
GM received US$51 billion from the US Treasury in 2009. Taxpayers have recouped US$24 billion and still own 32 per cent of the company. The problem is that GM shares are trading at less than half the price the government said it needed to break even.
Selling the shares was politically precarious before the election because that would have locked in a loss of US$14 billion at yesterday's closing price. Now, cutting the stake could be good for GM's image and stock.
The question is how and when.
"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. "They will wait a reasonable time after the election, as people focus on the fiscal cliff and tax reform. Then they will start to sell off the shares."
Obama was 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, a car industry analyst with Guggenheim Securities in Boston. "Investors see that and think, 'Look out below!'"
Rather, Treasury probably will make a measured selldown over time, much like it has in exiting ownership in banks and insurer.
GM's US$51 billion was part of the government's US$79.7 billion rescue in 2009 of GM, Chrysler and lender Ally Financial.
"Treasury has done a very good job of disposing of shares of Troubled Asset Relief Programme [Tarp] banks and that provides a pretty good road map," said Swagel, now a professor of economics at the University of Maryland.
"Treasury has taken some losses on the Tarp shares on individual banks. But they said the best thing to do was to sell these off and get the banks back into fully private hands."
Jim Cain, a GM spokesman, 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: "Going forward, as with all our investments, we'll continue to balance exiting as soon practicable and maximising value for taxpayers."
GM had the liquidity it needed to buy back government shares after securing a US$11 billion revolving credit line, Brian Johnson, a Chicago-based analyst with Barclays, wrote. If Obama were to announce an AIG-style wind-down in GM, it could help both sides.
"Announcement of a selldown plan, combined with a co-ordinated share repurchase plan by GM, could actually boost the stock," he wrote. "Announcement of such a plan would help the Treasury's cause, as the stock could see a boost."
If GM were to buy back 40 per cent of Treasury's holdings for as much as US$5.6 billion, that would add 12 per cent to the value of the remaining shares, according to Johnson.