12.19.12

Bailout’s Success Lets Treasury Take Loss on General Motors Stock

The Treasury has kicked off a drive to rid itself of the taxpayers’ 500 million shares of General Motors—a sign that the success of the financial bailouts is leading to a rapid windup of the industrial bailouts.

If you run a mutual fund, and a lot of your stocks have done well over the past few years, you can afford to exit a giant, unwanted stock position at a loss. That mentality, apparently, holds in the Treasury Department’s Financial Stability office, which presides over the dwindling pile of crisis-era TARP investments in banks, insurance, and auto companies.

On Wednesday, Treasury announced it would sell 200 million shares of General Motors back to the company at $27.50 per share.  The $5.5 billion sale, hailed by the stock market as a sign of progress, would reduce the government’s stake in the company to below 20 percent. Treasury also announced a process through which it would sell of the remaining shares over the coming months.

The announced exit is both an admission of failure, and a sign of success.

Let’s start with the failure. The investments in—OK, bailouts of—two of America’s car companies, General Motors and Chrysler, were projected to be massive losers. Here were two giant manufacturers, crippled by high legacy costs, beset by foreign and domestic competitors, and contending against tarnished images. Combined, the taxpayers made available nearly $64 billion to the two companies. The loans were essentially converted into stock.

A surprising amount of the cash has come back. As we’ve documented, Chrysler has been revived by Fiat. The Italian automaker brought new management, design ideas, cash, and marketing elan to the company. The company’s revival allowed it to generate sufficient cash to repay $11.13 billion out of $12.37 billion it received. Essentially, the government accepted that it wouldn’t break even on the deal, and was pleased to exit with a loss of 10 percent, or about $1.2 billion.

General Motors, which is much larger than Chrysler and required much more capital to stay afloat, has been a different story. There was no foreign white knight willing to ride to the rescue. So GM went through a painful restructuring, shucked a lot of obligations, and worked hard to introduce new products. The strategy worked, to a degree. As Vice President Joe Biden routinely said during the campaign: “General Motors is alive, and Osama bin Laden is dead.”

Over the years, GM, desperate to rid itself of government oversight, has paid back some of the funds the taxpayers advanced—about $28.7 billion of the $49.5 billion total. But by last year the situation had hardened. GM is a publicly held company. The government had converted its loans into a fixed number of shares of the company. Until today, that total stood at 500 million. In order for the taxpayers to be made whole, GM’s stock would have to rise to the 40s and hold that price for quite a while. That’s not going to happen any time soon.

So with the company’s stock mired in the 20s, the government essentially decided it would take a loss on the company. After this sale, the government will still be out $15.3 billion on its investment in GM, but its remaining shares are worth $8.4 billion at current market prices. So if GM holds its value over the coming months while the government sells its shares, the taxpayers will lose about $7 billion.

The government is willing to own and recognize its losses on GM because of the profits it has turned on “investments” in banks and AIG.

So where does the success come in? The losses on GM are sure to raise political hackles. But with the 2012 presidential campaign over, there’s not much damage these losses can do. And profits on the government’s other “investments” make it willing to own and recognize its losses on GM.

Earlier this month, the life insurer AIG, which sucked in far more federal aid than Chrysler and GM combined, repaid the last of its assistance by buying back shares from Treasury. In a result that defied even the most optimistic projections, the taxpayers wound up receiving $205 billion in proceeds on the $182.3 billion in aid they had extended. That’s a “profit” of $22.7 billion.

Meanwhile, the Capital Purchase Program, the central component of TARP, in which the government purchased interest-bearing preferred shares in banks, is winding down at a profit. As this chart shows, taxpayers sent $245 billion out the door in the CPP and in related programs to provide extra aid and insurance to Citigroup and Bank of America. Of that total, $234 billion of capital has been returned. The government has profited by pocketing insurance premiums it sold to Bank of America and Citigroup, and by selling shares of Citigroup it received in exchange for extra aid. That’s another $9.37 billion. In addition, the government has collected $15.31 billion in dividends and reaped $9.28 billion for selling warrants in the banks. In all, that’s $267.90—or a “gain” of nearly $23 billion. Considered as a mutual fund of bank shares, the CPP has had quite a good run.

The fact that so much money has come back means the government can afford to be a little more generous and less concerned about the bottom line for the sake of winding up its remaining unwanted investments. Treasury is sitting on about $8 billion in shares of banks in 218 banks, mostly smaller ones that have had difficulty scraping up the case to repurchase the shares. (Synovus, which owes $967 million, is the remaining big fish.) With so little left, Treasury has signaled that is going to dispose of its remaining shares soon, even if it has to take a loss doing so. If it reaps only $6 billion instead of the $8 billion it owed, then so what? The CPP will still close without a net cost to taxpayers.

It’s with the same sense of generosity that Treasury is approaching GM and the company’s non-government shareholders. Instead of hanging around for years in the hopes of getting paid, Treasury is cutting its losses and moving on. By the middle of 2014, nobody will be able to accuse GM of being “Government Motors.” The bailouts will be history. And the company’s executives will be free to pay themselves what they please and resume flying private planes.  This may be the rare occasion when an $8 billion loss for taxpayers is good news.