Taxpayers Get Hosed in GM Buyback of Treasury Shares

Government MotorsLet’s all rejoice! The Treasury Department is finally beginning to unload the taxpayers’ stake in General Motors after a three and a half year stint of government involvement in the company. While the decision to get taxpayers out of the private sector is the correct one, the move is hardly a cure-all for what ails GM. And despite reports to the contrary, this does not bring closure to all groups that were involved in the unprecedented intrusion of government into the private sector that saw politically-powerful groups like the UAW receive favorable treatment over other classes.

Let’s start by reviewing the GM buyback deal that was just announced. Of the $50 billion or so of taxpayer money that went to GM, about $40 billion went towards the purchase of approximately 800 million shares of stock in “New” GM. That comes out to roughly $50 a share paid by taxpayers. GM is now raising debt (a situation that got them in trouble in the first place) so that they can repurchase 200 million of these shares at $27 and change. Even though this amount is practically half of what GM sold the shares to us for, it still represented a premium to where the shares were trading at the time of the announcement.

Taxpayers are losing about $4.5 billion on just this GM share buyback. Total losses will probably end up being closer to $20 billion. You would not think this was the case judging from the media’s trumpeting of the deal and proclamations that we now have closure to the GM bailout debacle. Don’t get me wrong, the decision for Treasury to sell was the right one. This should have happened long ago as the government has no business gambling taxpayer money on a market timing strategy in a publicly traded stock. But please don’t urinate on my leg and tell me it’s raining.

In addition to the losses on GM shares, taxpayers are losing billions of dollars in tax revenue thanks to a sweetheart deal that the company received from the Obama Administration regarding tax loss carryover credits. Tax law was changed so that GM will not have to pay taxes for years, saving the company billions of dollars. So much for corporations “paying their fair share.” Even Warren Buffett’s secretary pays more tax than GM!

While the deal may be costing taxpayers money, Wall Street liked the announcement and GM shares rose to about $27 a share on the news. That’s still almost 20% less than the IPO price of $33 over two years ago. But the news may not all be good for GM shareholders as a share buyback does not solve the underlying problems at the company.

GM continues to lose market share in the US. A focus on non-profitable electric vehicles (like the Chevy Volt) that lack demand has hurt the company as more profitable sales of trucks and good old gas-powered vehicles are languishing. GM continued to stuff truck inventory channels, a move that falsely inflates revenue while eventually hurting the bottom line, and now has a glut of trucks that it must steeply discount to sell. European operations are a mess. UAW obligations and overhangs remain as they were not properly addressed in the Obama-orchestrated bankruptcy process. And there are still almost 40% of GM outstanding shares in the hands of the US government, Canadian government and the UAW that eventually need to hit the market. It is doubtful that GM will buy the rest of these, even if someone was foolish enough to lend the company billions more after unsecured, non-union creditors were stiffed the first time around.

There is no closure for those that were adversely affected by the GM bankruptcy process as long as the auto bailouts continue to be presented as a great success. GM bondholders and non-unionized stakeholders saw their positions subordinated to UAW claims. The UAW then came out to help President Obama win reelection. Taxpayers lost billions of dollars, yet Obama campaigned on the perceived success of GM and the bailouts. The media has not given a contrarian view to the politicized proclamations of success for the auto bailouts. Closure, for many, is still a long way off.

Mark Modica is an NLPC Associate Fellow.