Feds cut losses, to sell GM stock

No surprise, now that the election is over.  This piece on the US News website (link courtesy of Real Clear Markets) lays out the math.  GM initially received $50b and paid back $23b when in "went public" in 2010.  Shares are now trading at $25 and they would have to reach $52 for taxpayers to be made whole.  Most likely, taxpayers will not see the last $10-12b.

The article reminded me about GM's global operations.  Even though GM now makes money on the cars it manufactures in the US, its European operations are still running in the red.  So US taxpayers ended up subsidizing jobs overseas as well as here; not sure we will hear much about this from the pols who supported the bailout. 

On Government Motors

I am not following all of this 47 percent dependency society stuff.  I bet most voters did not know that each and everyone of us is a shareholder -- in General Motors!  The US government owns 26.5% of the one-time automotive titan.  Even though Chevy Volts are not exactly flying out the door, both the GM top brass and the feds are starting to look forward to the day when the government cashes in its stake.

But when is this deal going to go down?   WSJ reports that the government is in no hurry because if it sold its GM stock now it would end up losing $15 billion.  GM stock would have to go up to $53 for the government to break even; right now the stock is trading at $25.  

So what do we have to show for our $15 billion "investment" in GM?  GM currently employs 202,000 worldwide and about 68,500 in the US.  Of course, GM is part of a global supply chain, so there are parts and materials providers and auto dealers who also depend on their continued existence.  Let's propose that the bailout saved 200,000 US jobs (this is probably much too big a number; someone -- Toyota, Volkswagen, Honda? -- would have purchased GM's assets in bankrupcy and redeployed them).  Then it ended up costing US taxpayers $75k per GM job saved.  Each person can judge on his or her own the wisdom of that investment. 

High-powered incentives for the UAW?

WSJ reports that General Motors wants its unionized workers to have part of their pay tied to the company's financial performance.  From a financial standpoint, this appears to make a lot of sense on the surface, as worker pay would go down when the company has bad years thus reducing the variance of profits. 

I see at least two reasons why this may not end well.  First, GM stockholders and bondholders have multiple ways of hedging any risk associated with the assets they own, as anyone who has taken an MBA level finance course should easily understand.  Are profit-sharing or bonus plans desirable for UAW members?  These are individuals who for the most part have limited financial resources beyond their wages, benefits and home equity.  By putting more pay at risk, it is not clear what they can do to offset that risk.  Perhaps UAW members would have more stable jobs if the price of labor fell during downturns, but if I were a UAW member familiar with the long run trend of employment in the domestic auto industry I would be skeptical.  On the surface this looks like a classic case of inefficient shifting of risk from stockholders to workers. 

Second, how much would a pay-for-performance plan affect employee behavior?  This looks like a classic case of what I call the 1/n problem where individual workers see that the impact of their own behavior on the bottom line is virtually zero in any organization where the number of employees (n) is 100 or more.  Given the decades of mistrust between GM and the UAW, it is hard for me to see any new pay scheme changing productivity, especially in an industry where workers have little control over the pace of work and the connection between individual contributions and company outcomes is tenuous. 

The truth about GM repaying its TARP loan

Last week General Motors conducted a public relations blitz celebrating the repayment of its TARP loans. Treasury secretary Geithner also issued a press release saying GM has repaid its debt ahead of schedule.

Those with memories recall that GM received about $60 billion in government funds, but the TARP repayment amounted to a mere $6 billion. Also, GM is still not profitable. So where is the money coming from? GM CEO Ed Whitacre failed to note in his press release that GM drew upon another line of credit at the Treasury to pay off its TARP debt. Taxpayers continue to hold a sizable equity position in GM, but the odds that an IPO would make them whole are quite low. Today's NYT reports that the Congressional Budget Office expects taxpayers to take a $30 billion hit on GM.

My take: credibility is a precious asset, one that neither GM or the White House has in great supply right now. This phony message needlessly depreciates that asset further.