GM, US Treasury Butt Heads On U.S. Ownership of Shares

Who wants to buy a car from Government Motors?  Apparently, not as many people as would prefer to buy one from General Motors.  That’s the argument that GM has attempted to convey to Treasury officials in recent weeks.  It seems that GM is tired of its association with the controversial TARP/auto industry bailout, and feels that any continued ownership by the U.S. government is acting as a drag on its reputation, and therefore its sales.

In contrast, the Treasury Department (which has the responsibility of deciding when to sell its GM holdings, and how much of them to sell) is trying to balance what are right now competing goals of exiting government ownership of GM and maximizing the amount of money returned to taxpayers.  (Since we’re talking about a loss at GM’s current $24.14 price of about $15 billion on the company’s bailout, perhaps ‘minimizing losses absorbed by taxpayers’ should replace ‘maximizing the amount of money returned to taxpayers.’)

Republican presidential candidate Mitt Romney stated a few months ago that he’d immediately sell the government’s stake in GM, losses be damned.  And why wouldn’t he?  Doing so allows him to draw a line under the TARP era (well, at least the TARP in the auto industry era, with the Treasury still holding a stake in about 300 mostly smaller banks and a chunk of AIG) and gives him the ability to lay the blame for the $15 billion loss on his predecessors, both Bush and Obama.  If Romney held onto GM for a while, trying to time the market (always a dangerous game, particularly with GM’s Europe-sized problems) and GM shares fell further, he’d be criticized for not selling when he could have.  If he sells and GM shares rise, he could just say that he didn’t want the government owning a private enterprise and that the government shouldn’t have been in the business of owning car companies in the first place.

GM’s shares would have to more than double their current price in order for the government to break even on its “investment” in GM.  The breakeven price is about $53.00 per share.  According to “people familiar with the situation” cited by The Wall Street Journal, Treasury would be willing to sell with the price in the $30s, but not as low as its current level.

Aside from the perception and possible issue with lost sales, GM is also still shackled by executive pay restrictions that make it challenging for the company to attract and retain top-tier talent.  A $500,000 base salary cap may sound like a ton of money to the 99 percenters (believe me, it does to me), but when a competitor is offering 50% more, or 100% more, plus stock options and large cash bonuses, you’d never work at GM for the money when you can set yourself, children, and grandchildren up nicely with a much more lucrative career somewhere else.

GM’s proposal to Treasury was to repurchase roughly 40 percent of the 500 million shares that the government owns (or about 200 million shares).  Had Treasury said yes, its stake in GM would have fallen below 16 percent (from 26.5 percent currently).

There are a few ways out of this scenario.  GM can wait until after the election, and if Romney wins, they’re set, because he already said he’d sell the stake right away.  I suspect that part of the reason Treasury doesn’t want to set the loss in stone is for political reasons; if Obama wins, they might still sell the shares regardless of price, because Obama won’t have to worry about being re-elected again.

If Obama wins in November and doesn’t sell the shares at any price, GM can fix its European operations (which will cost billions, not to mention taking years) and continue growing sales elsewhere in the world, and hope that the stock price gets into the $30s, and that it can talk Treasury into selling its shares.

The last alternative is for GM to agree to a repurchase price with Treasury that is a premium over the current trading price of the stock.  If the company feels that it’s worth the investment to pay, say, a $6 premium per share to give the Treasury $30 per share just to get the “Government Motors” monkey off its back, Treasury might be willing to talk.  GM’s other shareholders may not like such a move very much, particularly those who bought in at or above the $33 IPO price and would love to get a $6 premium.

If GM went down this “premium repurchase” route, it would have to worry about burning its cash (the company has about $33 billion in cash, and supposedly needs $20 billion in order to keep operating; the 200 million share repurchase originally proposed would cost about $5 billion at the current share price, or about $6 billion with a premium thrown in).  Given its current cash position (and serious cash needs in Europe in the coming years), GM could not afford to repurchase much more than 40% of the government’s remaining stake, so you can forget about GM just buying out Treasury’s entire stake, with or without a premium.

With all of the complexities and competing priorities swirling around this situation, I wonder how much thought went into the exit strategy at the time President Bush and President Obama made the decision to bail out GM and Chrysler.  My guess would be not very much, though to be fair, liquidation of either or both companies (and particularly GM) would have been catastrophic to the economy.  But now it’s time to pick up the pieces and get this company back into the hands of only private shareholders.