Should the Feds Dump General Motors?

Is it time for the U.S. Treasury to dump its stake in General Motors (NYSE: GM  ) ?

It is -- if you listen to former GM CEO Ed Whitacre. In an opinion article that appeared in Thursday's Wall Street Journal, Whitacre said that the time has come for the Treasury to "sell every last share that it owns of General Motors -- as quickly as possible."

Whitacre argued that the Treasury's ongoing ownership -- specifically, the conditions imposed by TARP, the Troubled Asset Relief Program, which funded the $50 billion bailout that led to the government's stake -- is hindering GM's recovery.

Is he right? And if he is, what are the implications for GM's other shareholders?

GM is done with the whole "Government Motors" thing
Whitacre's opinion piece is the latest salvo in an ongoing GM campaign to pressure the government into selling. The Wall Street Journal reported earlier this week that Whitacre's successor, current GM CEO Dan Akerson, has been pushing a plan in which GM would buy back some of Treasury's shares, while offering the remainder on the open market.

Why the rush? Several reasons. First, Akerson, and most everyone else at GM, is tired of being painted with the "Government Motors" brush. The lingering stigma of the bailout has made it harder for GM to tell the (increasingly good) story of its much-improved products and strong balance sheet. GM's turnaround may be lagging Ford's (NYSE: F  ) , but it's on the right track -- but that story isn't getting told well, which has held back GM's U.S. sales as well as its stock price.

Second, TARP comes with some strict rules, like limits on executive compensation. Akerson has argued that those rules have made it harder for GM to attract top senior-level talent. According to the Journal, GM executives are also privately cranky about TARP-imposed limits on corporate jet use. (That might sound like rich-guy whining, but Akerson and his senior team members spend a lot of time going back and forth between Europe and China and Detroit. To the extent that corporate jets make sense for any company, they definitely make sense for a global behemoth like General Motors.)

That's why Akerson has been pushing the Feds to sell. But, so far, Treasury officials haven't been interested in GM's plan.

The Feds aren't (yet) willing to sell
Treasury has two main objections to selling. First, at current prices, the Feds would take a loss of roughly $15 billion on their $50 billion "investment" in the General. That would look bad. It would look especially bad -- here's the second objection -- coming just weeks before a hotly contested presidential election.

Clearly, nothing is going to happen before the election: GM's bailout is already too much of a political hot potato. But what about after? Republican nominee Mitt Romney has said that he would sell the government's remaining stake in GM shortly after taking office, even if that meant a loss for the Treasury. Assuming the sale was managed well, so as not to disrupt the market, it would be a win for Akerson. And it would probably be a win for GM's other shareholders too, at least in the long run.

But President Obama, who is leading in most polls at the moment, has been less clear about his plans for Treasury's stake. What's likely to happen to GM if he's reelected?

How this story is likely to end
It's in GM's interest to end this relationship as quickly as possible, but it's also in GM's interest to do it in a way that doesn't leave the public with the impression that taxpayers lost money on the deal.

Consider: GM has roughly $33 billion in cash on hand. Setting aside for the moment the possibility of a big pension liability at some point down the road, GM probably needs about $20 billion of that to ensure that it can continue to fund product development programs through a protracted economic downturn.

That leaves $13 billion to play with, give or take, which is close to the loss the Treasury Department would take on its "investment" if it sold all of its remaining GM stock today.

I won't be surprised if, sometime after the election, Akerson packages up an offer to Treasury that combines a stock buyback, an offer of some of Treasury's shares on the open market, and a premium payment that, at least arguably, leaves taxpayers breaking even. That should prove hard for the Feds to resist, and -- again, depending on how the stock offering is handled -- I think such a deal would be good for GM's stock price, and thus for shareholders.

Is it worth $13 billion to GM to get rid of the Feds and the "Government Motors" tag? It's a lot of money. But, it might turn out to be a bargain.

GM's stock has risen a bit recently, but it's still hovering near its post-bankruptcy low. If Akerson can harness GM's potential and get the Feds to exit honorably, GM's stock could have significant upside over the next couple of years as new products hit showrooms and improvements continue around the world. However, investors need to stay attuned to fluctuating demand and the ability of automakers like GM and Ford to respond in unison. For starters, one of our top equity analysts has compiled a premium research report with in-depth analysis on Ford's competitive edge. To find out what could propel Ford down the road, get instant access to this premium report now.

Fool contributor John Rosevear owns shares of General Motors and Ford. Follow him on Twitter at @jrosevear. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of General Motors and Ford. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (8) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 21, 2012, at 8:12 PM, daedalian wrote:

    Ackerson is correct. There are a few to whom the lingering stigma of government bailout make it harder to even listen to the story of product and balance sheet improvement. I realize it may not be rational but as one who has in the past driven GM products, when I recently purchased a new auto, I didn't even consider GM. Further, I will replace another family vehicle in the near future and they won't be a consideration there either. There are too many other good options. While many may forgive and forget rapidly, some of us hold on to attitudes a little longer. For that reason, in spite of the numbers, I won't be restoring my holdings of GM common either. I think the stigma will be a drag for some of us for quite a while.

  • Report this Comment On September 21, 2012, at 8:15 PM, SUPERMANSTOCKS wrote:

    I am the government and I say not until we make a profit

  • Report this Comment On September 21, 2012, at 8:29 PM, jasio2553 wrote:

    Please do not forget the billions of dollars that GM Credit div, got from us, tax payers.

  • Report this Comment On September 21, 2012, at 8:32 PM, jasio2553 wrote:

    We need to get the whole inv. back first with interest

  • Report this Comment On September 22, 2012, at 2:07 PM, ObsidianMTness wrote:

    I agree that we, the tax payers, are all part of the government because this IS a democracy isn't it? Government by the people for the people, as Lincoln said. Unlike Ford and Chrysler, typical GM style, they refuse to evolve with the changing times. Remember NUMMI, the joint venture with Toyota? GM could have changed the way they ran their factories, but they just could not learn because of their hubris.

    Talk about a sense of entitlement. Cried for help then now blaming the very people who helped the company. Whitacre, unlike his name has no wit whatsoever, needs to look around at the sinking ship and make some worthy cars. Ones that are reliable, functional, and efficient. Ones with some style. Then, they'd sell some cars and make a profit so the us the tax payer can get our money back.

  • Report this Comment On September 23, 2012, at 10:49 AM, wolfman225 wrote:

    ^The lack of quality cars and models that people actually ask for and want to buy is largely a function of governmental interference in how the company is run.

    Absent a Romney win, I don't see the government getting out of GM & Chrysler anytime soon. They forced banks to accept bailout agreements (even though some didn't need or want the "help") and gained a great measure of control over the financial system. Ford was able to rebuff their offers of help and managed to both stay out of bankruptcy and return to profitability a lot quicker as a result of their not being handcuffed by governmental interference and micro-managing. Not so GM & Chrysler.

    Now that government has it's fingers deeply into the auto sector of the economic pie, the central planners imbedded in the administration will be loathe to give up the opportunity to "prove" their theories' effectiveness in the marketplace, even when it's obvious that the buying public has little or no interest in what they're selling. I can only hope that the oft-used slogan: "As GM goes, so goes the nation." No longer applies.

  • Report this Comment On September 24, 2012, at 6:36 AM, rtichy wrote:

    I think the whole argument rings false, coming from GM that the U.S. government is holding them back from succeeding.

    1st- GM does make quality cars, now, and som of them are even pretty good looking. There are of course people who don't consider GM when/if they go car shopping, but that's game you have to win over decades, not years, and GM knew that when they were losing the customers in the 80's and 90's.

    2nd- The inability to attract "top level talent" because of pay restrictions seems to apply only to a possible inability to attract talent that is already working for other auto manufacturers. Certainly there's no unemployed or recent graduates who'd turn down a job with GM. And if the problems with GM are build quality and stylishness, as argued by some, then those people qualified to change those facts and perceptions aren't at the top of the corporate pyramid anyway.

    3rd- wolfman225 is clearly unaware that Chrysler did pay back all their debt to the U.S. government, and got back to their own business of making stylish cars with mediocre powertrains. He can comfortably shop for a Dodge without fearing to support President Obama and his nightstand drawings of "cool cars" he can force the automakers to make.

  • Report this Comment On September 24, 2012, at 10:40 AM, TMFMarlowe wrote:

    To be clear, I don't think the government is really holding GM's business back in any significant way. The Feds haven't, despite wolfman225's comment, interfered in GM's product development or product strategy efforts, from all accounts. It's just a bunch of limits on pay and perks that drive the senior team nuts.

    I do think, however, that the Feds' ongoing ownership stake is one of the big things weighing on GM's stock price, and having them gone will be a good thing for shareholders.

    Thanks to all for reading.

    John Rosevear

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2027016, ~/Articles/ArticleHandler.aspx, 9/19/2014 6:15:03 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement