During the financial crisis, the federal government took a massive stake in General Motors (NYSE:GM) in exchange for providing $49.5 billion in bailout funds. Ever since, the U.S. Treasury has regularly sold off portions of its GM stock holdings, reducing its current stake to just 101 million shares, or about a 7.3% position in General Motors. Yet even though the Treasury currently plans to continue those sales and completely eliminate its position in General Motors by early next year, the stock's recent gains raise an obvious question: Why's the Treasury in such a hurry to sell?
General Motors: stronger than ever
In light of General Motors' earnings report Wednesday, you can't blame taxpayers for wondering why the Treasury didn't hold onto its stake longer. The auto giant beat earnings expectations by a substantial margin, with North American profits rising by about half a billion dollars to $2.2 billion. A big reduction in losses in Europe painted an even better picture of GM's future prospects, and shares soared to their highest levels since shortly after General Motors stock went public almost three years ago.
Yet the Treasury has stuck with the plan it announced back in December 2012, in which it said it intended to sell off its investment in General Motors within 12 to 15 months. That announcement included GM's repurchase of 200 million shares of stock at $27.50 per share, representing about 40% of the Treasury's remaining position after the late-2010 IPO. Since then, the Treasury has continued to sell shares on the open market, with its first pre-arranged trading plan running through April resulting in sales of 58.4 million shares for $1.6 billion. It sold 30 million shares at $34.41 in a public offering in June; since then, the government said it has reduced its stake from 13.8% as of mid-June to 7.3% by mid-September.
In hindsight, the Treasury's sales have had mixed results. The $13.5 billion it received from the General Motors IPO gave the government solid value for its shares, which subsequently fell from their $33 IPO price to lose more than 40% of their value over the following year. Yet even after a solid recovery, GM's repurchase seems prescient, as the 200 million shares it repurchased would be worth $2 billion more at today's prices. The first trading plan earned the Treasury an average of between $26.50 and $28.25 per share, missing out on subsequent gains. Although more recent sales have occurred closer to the stock's current share price, the fact that General Motors appears to be turning the corner makes the Treasury's sales look ill-timed.
Yet the U.S. Treasury isn't the only government entity getting rid of its shares as quickly as possible. Last month, the Canadian national government and the provincial government of Ontario sold about a quarter of their remaining holdings in General Motors, with Canada's finance minister reiterating the government's commitment to "exiting from ownership of GM as quickly as feasible, while maximizing the return for Canadian taxpayers."
Admittedly, from the company's perspective, General Motors continues to suffer from its "Government Motors" perception of having needed financial assistance in order to survive the financial crisis. By contrast, Ford (NYSE:F) has gotten a huge reputation lift from its decision not to accept a government bailout. Having the Treasury no longer own shares of GM would go a long way toward the automaker putting the painful episode behind it. It will also give General Motors more flexibility to restore corporate perks to executives and avoid other restrictions under the provisions of the bailout, which could help it better compete against Ford as well as its foreign automaker rivals.
Still, the huge gains in General Motors stock raise the issue of whether the U.S. Treasury has an implicit fiduciary duty to taxpayers to maximize the amount it earns from its investment in GM. In the long run, if General Motors keeps running on all cylinders, taxpayers might well regret the Treasury's decision to get out as quickly as it did.