Uncle Sam's GM Investment Is Still Coming Up Short
byAug 15th 2012 2:21PM
In a new report, the Treasury Department says it expects to lose more than $25 billion on its bailout of the auto industry during the financial crisis.
That's a big number, more than a quarter of the total cost of the bailout. But General Motors (GM) had record profits last year -- and GM's former CEO said that the company had "paid back" the Feds, as did Chrysler.
How can this add up? And what has to happen for taxpayers to get their money back?
Paid in Full ... but Not in Cash
The federal government spent about $85 billion bailing out the auto industry during the economic crisis -- about $25 billion under President George W. Bush during his last days in office, the rest under President Obama.
Not all of that went to GM -- about $12 billion went to save Chrysler, and some went to Ally Financial, formerly GM's financing arm, and some other players -- but GM got the lion's share, just under $50 billion.
Technically, under the terms of the bailout, GM has in fact paid back its obligation to taxpayers. Its payments were a mix of cash and GM stock, which is exactly what was called for in the agreement.
In fact, the automaker did everything it could to pay off its loan early: It made the last cash payment, $5.8 billion worth, in April 2010. That was years ahead of schedule.
So why does the Treasury say that it's still out over $25 billion?
Several reasons, but here's a big one: GM's stock price hasn't played along.
Get the Jumper Cables
GM's "payment" to the Feds included stock. A lot of stock. The government has sold some, but it still owns 500 million shares of General Motors.
GM's stock rose to almost $39 after its return to the public markets in late 2010, but it's been all downhill since. Right now, GM is stuck around $20 to $21 a share, a range it has been in for a while.
Here's the problem: For the Feds to break even on the bailout, the shares of GM still owned by the Treasury have to get up to around $53 a share.
That's not happening -- at least, not any time soon. That's not exactly GM's fault: Believe it or not, CEO Dan Akerson and his team are -- for the most part -- doing a solid job of getting GM's house in order.
Eventually, GM's stock price should reflect the progress they're making. But even though Akerson is doing pretty well, and even though GM's profits in 2011 were at an all-time high, there are several factors holding back GM's stock:
- Europe is a mess. Like rival Ford (F), GM is losing big bucks in Europe: $361 million in the second quarter alone, thanks to ongoing economic troubles that have clobbered car sales. A turnaround is coming, but it could take a few years. Meanwhile, losses could continue, and investors hate that.
- GM's losing ground at home. GM's share of its most important and profitable market -- the USA -- has fallen in recent months, a fact that might have contributed to the recent ouster of its global marketing chief. Upcoming new cars and trucks should help, but they're a year or two off. Meanwhile, discounts are up, sales are down, profits aren't what they could be, and Wall Street remains concerned.
- The Fed might dump its investment. 500 million shares is a lot of stock. If the government decides to bail on its investment after the election, the price will drop further as all of those shares hit the market. That possibility makes investors nervous.
GM has other problems that worry investors, but what they all have in common is that they're likely to be resolved in time -- but it could take a few years. Eventually, GM's share price should rise quite a bit -- in fact, for a long-term investor, GM stock might be a pretty good buy right now.
But taxpayers -- or at least, the Treasury Department -- may decide not to wait for that likely-but-not-certain rise. And the way things look now, that means a big loss is likely.
At the time of publication, Motley Fool contributor John Rosevear owned shares in General Motors and Ford. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford and General Motors, as well as creating a synthetic long position in Ford.