Taxpayers Will Lose Money on GM Investment

... calculate what it would have cost to NOT rescue the auto industry...

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GM Share Price Needs to Triple for Taxpayers to Beak Even by Paul Eisenstein

The good news for shareholders is that General Motors shares are on a rise, gaining more than 25% in value so far this year – and reaching a $37.45 high during Wednesday trading before settling back a bit.

Good news, perhaps, but not good enough for U.S. taxpayers who received 61% of GM’s equity in exchange for a $50 billion bailout linked to the maker’s 2009 bankruptcy. While the increase is likely to benefit the U.S. Treasury as it continues selling down its stake in the Detroit maker, the latest report by a special federal watchdog cautions that GM shares would have to nearly triple – to $95.51 a share – for the government to break even. “There’s no question that Treasury, the taxpayers, are going to lose money on the GM investment,” Special Inspector General Christy Romero told the Associated Press.

GM received $49.5 billion to complete its restructuring, a bailout initiated by former President George W. Bush in 2008 and completed by his successor, Barack Obama, in 2009 as the maker exited a managed bankruptcy. The White House also approved a bailout for GM’s crosstown rival, Chrysler, but only after Italian automaker Fiat stepped in and effectively assumed control.

The White House has said repeatedly that it has no interest in being in the car business. And it began selling down its stake in November 2010 when GM staged its initial public offering. Priced at $33 a share, it reduced the Treasury’s stake to 33%.

Late last year, the government announced plans to sell off the remaining stock by April of 2014. That followed heavy pressure on the Obama Administration during the 2012 presidential campaign during which Republican candidate Mitt Romney said he would sell off the remaining stock immediately. Ironically, that would have been at a low point when GM was trading at barely $18 a share and such a move might have pushed losses on the sale to nearly $20 billion. In recent months, as GM stock has rebounded, pushing part the November 2010 IPO price, the Treasury has accelerated its sell-off.

While some observers had worried that could actually hurt the stock price GM has been benefiting from other positive factors, such as the rebounding U.S. automotive market – which is now approaching sales levels not seen since 2007. GM also got a psychological boost with its recent return to the closely followed S&P 500 stock index. Because many funds are required to buy shares covered by the index, analysts believe that has boosted demand for the automaker’s stock, driving up its price.

As of June 6, the latest date covered by the Special Inspector General’s report, Washington still held 189 million shares of GM, or 14% of the outstanding stock. To cover the outstanding balance as of that date – a total of $18.1 billion, the government would need a $95.51 share price, the report noted. Were the stock to be sold at the stock price at that point of $36.61 a share, it would still lose about $11.2 billion on the bailout.  The escalating price of GM stock could further reduce the loss but there are no indications that GM stock could come close to the point of a break-even, industry analysts warn.

The other maker to receive a bailout, Chrysler, has repeatedly said that it paid off the government in full for its rescue. That is partially true. The “new” Chrysler that emerged from Chapter 11 has paid off the loan it received after bankruptcy. But about $2.9 billion that was loaned to Chrysler before its bankruptcy filing was assigned to the “old” Chrysler and written off as a loss.

Ruggles writes: In terms of the actual funds advanced, there is no way taxpayers break even on the GM investment.... at least on the surface. Now if we could calculate what it would have cost to NOT rescue the auto industry we could compare that number with what will be lost when taxpayers sell their last share of GM stock. A paragraph from WIKI follows:

"In microeconomic theory, the opportunity cost of a choice is the value of the best alternative forgone, in a situation in which a choice needs to be made between several mutually exclusive alternatives given limited resources. Assuming the best choice is made, it is the "cost" incurred by not enjoying the benefit that would be had by taking the second best choice available. "The New Oxford American Dictionary defines it as "the loss of potential gain from other alternatives when one alternative is chosen". Opportunity cost is a key concept in economics, and has been described as expressing "the basic relationship between scarcity and choice."

Another way to look at it? The choice between "moral hazard" and Depression. Which do you choose? GM CEO Dan Ackerson has been pushing the government to sell its stock more quickly.  Why?  While the government still owns stock GM has a cap on executive compensation.  Danny wants a raise.

Henry Ford, A Documentary

Public Broadcasting Service Premiere of 

American Experience Presents Henry Ford 

Tuesday, January 29th, 2013 9:00 – 11:00 PM on PBS

 – A Review by David Ruggles –

additional comments by Mike Smitka

Henry Ford changed the world with his assembly line method of auto assembly, patterned after processes he observed in the meat packing industry. One might think there is nothing new to be learned about the man, his life, and his legacy. And perhaps there isn’t. But I have never found such a wealth of information and insight in one place as in this wonderful documentary directed by Sarah Coit and to be presented by PBS in conjunction with the 150th anniversary of Ford’s birth.
A study in contrasts and contradictions, Henry Ford was a genius who did a lot of good for mankind, while at the same time his behavior presented a case study for the psychiatry profession. Henry Ford began his career at a time in our history when a few plutocrats had combined net worth equal to a major portion of the entire GDP of the country. Before the turn of the century, John David Rockefeller’s net worth alone exceeded 10% of the GDP of the United States. In today’s dollars, that would be the equivalent of about $1.5 Trillion. Together with Andrew Carnegie, J. P Morgan, John Jacob Astor, Andrew Mellon, and others, monopolies controlled the U. S. economy and government policy was bought and sold at will, at least until Teddy Roosevelt signed the Sherman Anti-Trust Act in 1890 and the graduated income tax was passed in 1913.
When Henry Ford historically doubled the wage of his workers from about $2.50 per day to $5.00 per day, it was a giant step forward for the country’s middle class. He also pioneered both 8 hour work day and the 5 day work week. Ford didn’t make these moves for altruistic reasons alone. His assembly line production method burned out employees. In the face of overwhelming employee turnover he was interested in employee recruitment and retention. He also attached conditions to the wage which were onerous for many employees. Ford’s “Sociological Department” monitored employees through a network of thugs and spies. Heavy drinking, gambling, and other adverse behavior was strongly “discouraged.”

But Ford was visionary in that he understood that by paying a high enough wage, so his own employees could afford to purchase the product they built, he could become more successful himself. It was a radical theory at the time and enraged his competitors, who were forced to match wages or risk losing their best skilled employees to Ford.
At the time, automobiles were toys for the wealthy. Ford’s Model T soon became a necessity for the masses and spawned a mobile culture that led to the country’s highway system, a burgeoning oil industry, motels, fast food, and hosts of related businesses that fueled economic expansion. And Henry Ford showed that the wealthier could do even better if they had a thriving and consuming middle class to sell to. In that respect he did not regard economics as a zero sum game.
Ford later turned on his employees, unleashing the infamous Harry Bennett to intimidate workers.
Ford resisted offering any color other than black to consumers until it became clear his company would fail if he didn’t. [ms: in the days of lacquer-based paints, Ford offered an array of colors; the first successful oven-drying enamel was only available in black, and to offer a mass-produced vehicle required that he move away from the earlier paint technology that required hours to dry between multiple coats. but by 1920 DuPont had developed an array of colors that were used by GM, to Ford's detriment. the DuPont family became GM's largest shareholder]
It was the same with financing. Ford thought debt was evil, and a person did not deserve one of his vehicles if it couldn’t be paid for in cash. He ceded huge market share to General Motors, who pioneered auto financing through General Motors Acceptance Corporation, until Ford was forced to enter the business of auto finance.
He hated the wealthy, even though he was one of the richest men in the world. He regarded investors and stock holders as parasites. He created his own idyllic country retreat, now called Greenfield Village, so he could return at will to the more rural simple life from which he came, despite being the singular impetus himself for modernization and industrialization.
He abused his only son Edsel to the point that Edsel died prematurely of stomach ulcers. It took Edsel standing up to his father to finally get approval to replace the Model T with the Model A. That was the son’s high point in dealing with his father. But Henry resented being proven wrong, and went out of his way to punish Edsel for being right.
Adamantly anti-Semitic, he regularly published inflammatory articles from the local Dearborn newspaper he bought for the purpose. [ms: yet his factories were designed by Alfred Kahn, a leader in the Jewish community in Detroit]
The documentary is full of movie clips from the period, bringing the history of our country’s industrialization and its dependence on the automobile to life. Students of history, economics, the auto industry, AND psychiatry shouldn’t miss the premiere of this most entertaining and enlightening presentation.