The latest reports from Reuters state that the US Treasury Department will wait until after September to sell its GM stake. Just why is Treasury gambling taxpayer money by trying to market time its exit of General Motors’ shares? The lock-up period for GM expired at the end of May. This was the earliest time that insiders (such as Treasury) involved in the GM IPO would be allowed to file to sell shares. At that time, GM shares were hovering around $31. Today’s price is closer to $28. Calculating the loss from late May to now on the taxpayers’ approximate 500 million shares, we come up with a loss of about $1.5 billion. What is leading the executive branch of our government to believe it has the right to play investment adviser and market timer for taxpayers on the GM gamble?
The idea of investing taxpayer money in equity markets has come up before when suggestions were made by some to invest social security assets in equity markets. The same people who are now making the decision to market time taxpayers’ GM stake have been consistently adamant that government should not gamble social security funds by investing in the markets. Considering that social security investments could be considered a longer term investment then an ill-advised taxpayer funded stake in GM, the hypocrisy of the decision becomes very apparent. I am not arguing for an investment of social security in equity markets, I’m just curious as to what is driving the hypocrisy.
Treasury is displaying continued arrogance in its insistence that GM shares will be higher in the near future than they are now. Past attempts to pump up GM share price by analysts’ rosy projections have not been able to pull the shares out of the doldrums. Morgan Stanley, one of the GM IPO’s lead underwriters and a TARP recipient, has even upgraded GM to one of its highest recommendations, ahead of Ford. That was about three weeks ago when shares were about 10% higher than they are now. Nice call!
Other attempts to shine a positive light on GM earnings include truck inventory channel stuffing, which will give a short term boost to earnings. First quarter earnings for GM looked decent on the surface, but a closer examination uncovers that much of the profits came from non-operating income, such as a sale of Delphi and Ally Financial holdings. In fact, Ford’s (currently trading at a similar market value) first quarter operating income was approximately double that of GM’s. Add to that fact that Ford has an established finance arm and proven management and you have to question why any analyst on Wall St. with any credibility would choose an investment choice of GM over Ford.
Some arguments will be made that GM has a strong balance sheet. This argument seems to ignore the fact that GM still has overhanging UAW pension obligations and an unusual amount of intangible assets on its balance sheet. The questionable $30 billion of goodwill listed as an asset on GM’s balance sheet (as compared to none for Ford) has gone mostly unnoticed. I have to wonder just how much of the “strength” of GM is actually just smoke and mirrors and accounting tricks.
The bottom line is, GM share price may increase or it may decrease. Nobody can accurately predict where the shares will trade two months or two years from now, or if they will even have any value at all in the future. One of the biggest mistakes equity investors can make is basing sell decisions on what was paid for an investment, rather than on whether or not the investment is appropriate for the individual at the present time. In the case of taxpayer investment in GM, it is not presently an appropriate investment, regardless of the high price paid. It is not the job of Treasury to try to guess when is the best time to return taxpayer money that has been used to gamble on GM. Especially when the nation has such debt problems. The continued intrusion of government may result in temptations for the Obama Administration which may choose to spend more taxpayer money on purchases of the Chevy Volt instead of on vehicles that offer much better value, as well as making other unnecessary government fleet purchases from GM. Questionable tax benefits to GM may result, such as the $45 billion tax credit granted that lets GM operate virtually tax-free for years. The continued risks to taxpayers should end now; our government should get out of GM immediately.
Mark Modica is an NLPC Associate Fellow.