Taking the Taxpayers out of General Motors


Ruggles – 12/26/2012



What many stockholders
and taxpayers had feared, had Mitt Romney won the recent Presidential election,
is coming true anyway. The taxpayers (U.
S. Treasury) are quickly being taken out of their remaining General Motors
ownership BEFORE the positive impact of the many new and exciting redesigned GM
products to be introduced in the next few months can have the chance to boost
retained earnings and share price. Waiting
another 18 to 24 months could reduce or eliminate the loss that will be taken
on the original taxpayer investment.



Having
recently arranged for an $11 billion line of credit, and with about $41 billion
in available cash and credit, GM is buying the stock back directly from the
U.S. Treasury. At least buying back
stock directly from Treasury is probably much better than dumping the stock on
the open market, thereby diluting the share value and causing the stock price
to drop even further. At least that is
this stockholder’s point of view.


“Car Czar” Steve
Rattner describes the buy back as “welcome news.” I’m not so sure. He goes on to write in the New York Times:


“For General Motors, the
separation will conclusively remove the appellation of “Government Motors,” a
stigma that the Company had argued affected the buying decisions of a
meaningful segment of consumers.”


The divorce will ultimately also
liberate G.M. from a number of government-imposed restrictions, importantly
including those relating to executive compensation. These restrictions
adversely affected G.M.’s ability to recruit and retain talent. Now, compensation decisions will be made by
the company’s board of directors, just as they are in every other public
company in America.”



As an observation, once GM rids
itself of taxpayer ownership, GM execs can also resume the use of corporate
jets. And we know how car business execs
hate to fly commercial.


Others might say, GM has traded
the appellation of “Government Motors” for another appellation, “The Car
Company on which the taxpayers lost billions.” Rattner himself estimates the loss will come in at about $14
billion. Other estimates are
higher.


The taxpayers should pay $14 - $20
billion so GM execs can go back to their spendthrift ways, when waiting 18
months or so would have given the stock the opportunity to rebound based on the
recovering economy and an almost complete makeover of their product line? Not in my world. While this writer is NOT a professional stock
picker, many folks look to Forbes for financial advice. A December 10 article in Forbes recommended
“Roll with GM for 2013,” and gave compelling reasons why.


Others investment experts have
weighed in on the subject and most have recommended buying GM stock for 2013,
despite the attempt from some naysayers to float a rumor predicting a near term
bankruptcy from GM. Of course, these
columns appeared before the stock buyback announcement. And
the naysayers ignored facts, while misinterpreting others, to create their
false assertions.



Ex GM CEO Ed Whitacre was shown
the door after he claimed in a national television commercial that GM had
repaid its government loans. This was
word parsing at its worst, as GM had only returned unused loans it didn’t
need. The commercial implied, even
though it did not specifically state, that GM was no longer in hock to the
government and U.S. taxpayers, which was certainly not true. Some might argue that GM is using tax payer
money to buy back taxpayer stock, a move similar to the claim that sank
Whitacre.



What would another 18 to 24
months hurt? The President won his
second term. What can the political
pressure be? Why not give the stock the
chance to improve? Is GM actually
claiming that the cap on compensation is why they have had high velocity
executive churn since the restructuring?



Has the government been “heavy
handed” in its ownerships of GM, except for the jets and executive
compensation? Recalling the previous
bailout of Chrysler in the 1980s, Lee
Iacocca chafed under the government supervision he had to live with during that
era, ESPECIALLY the one that kept his jet grounded. In addition, the Feds were pushing Chrysler
to divest itself of its truck division. All it took was for Ronald Reagan to make a crack to Iacocca at a Statue
of Liberty restoration event about how Iacocca should be grateful that Carter
was in the White House, and not Reagan, when the bailout was approved and
signed, and the Chrysler CEO was more than incensed. He took a huge risk and paid the Feds off
early, forgoing over $300 million in interest savings to do so. Iacocca put Chrysler at risk from a cash
position perspective, even though the gamble ultimately paid off, but he saved
the truck division, which has been the largest source of profits for Chrysler
since. And he got his jet back and stuck
it to Reagan. So is it ego or legitimate
business considerations driving this current GM stock buyback move?


More Rattner:



“In a perfect world, I would not be a seller of
G.M. stock at this moment. For one thing, the company is still completing the
reworking of its sluggish management processes in order to achieve faster and
better decisions and lower costs.”


For another, G.M.’s financial problems slowed its
development of new products during 2008 and 2009. Now, a passel of shiny new
models offering great promise is about to hit showrooms.”


And in my view, G.M. stock remains undervalued,
trading at about 7 times its projected 2013 earnings, compared with nearly 13
for the stock market as whole.”


I think the move is driven by GM ego and arrogance,
a really bad sign, and is NOT in the best interests of the U.S. taxpayer. This does not change the fact that while the
auto sector restructuring was not conceived and executed perfectly, on balance
what was accomplished will be considered a feat by economic historians. The cost to have NOT done the restructuring
is incalculable, and most certainly many times more costly than a measly $20
billion. Depression or “moral hazard?” That was the choice. And the “perfect can’t be the enemy of the
good.” In my mind, this premature stock
buyback adds unnecessary tarnish to an otherwise laudatory endeavor.



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