U.S. Treasury Prepares to Wrap up Auto Bailout: Will It Help GM?

On Monday, the U.S. Treasury announced that it was launching a second "pre-defined written trading plan" in order to sell the government's last 241.7 million shares in General Motors . While the Treasury had previously stated its intention to sell all of its GM shares by early 2014, this announcement confirms that the government is on track to exit its investment in GM according to that timetable. This will mark the end of the auto bailouts, as the Treasury has already sold its full stake in Chrysler.

GM executives hope that the government's sale of its remaining shares will help GM finally escape the "Government Motors" moniker that has clung to it for several years. The stigma of receiving a bailout has driven some potential investors away, and more importantly, it has alienated a large swath of potential customers in the U.S. However, I do not expect the government's sale of its shares to help GM in any way, and in the next few years, it could actually exacerbate GM's PR problems. The main problem for GM is that when the Treasury finally exits the investment, it will confirm that the U.S. has lost money on GM. This is likely to further ingrain the widespread perception that GM has taken advantage of U.S. taxpayers, and it could take many years for Americans to "get over" the company's bailout.

Bailout stigma has deep roots
The TARP bailouts of the auto industry have been incredibly divisive from day one. Supporters argue that, due to the credit crunch, the only alternative for GM and Chrysler would have been liquidation. This would have resulted in the loss of hundreds of thousands, or even millions of jobs. Some opponents of the bailouts have argued that the free market should have been allowed to work, even if that meant the liquidation of one or both automakers. Others supported the concept of the bailouts, but argued that the bailouts were structured in a way that unfairly helped union workers and retirees at the expense of creditors and taxpayers.


Over the last several years, this significant backlash has helped Ford , and even (to a lesser extent) foreign automakers, as some individuals have boycotted GM and Chrysler on principle. Ford took advantage of this sentiment with a controversial ad campaign in late 2011, highlighting its independence and American values. Despite airing nearly three years after the auto bailouts were initiated, the ads struck a responsive chord among many Americans, while irritating others (including the Obama administration). Americans can be slow to forgive what they see as an injustice, and as the largest U.S. automaker, GM has borne the brunt of this backlash.

Hard feelings will remain
While GM executives hope that the end of government ownership will improve the company's public image, GM is likely to take a hit initially, as the government calculates its losses from the GM investment. At the end of March, the Treasury had recovered $30.4 billion of the $49.5 billion it originally invested in GM through the TARP bailouts. In order to break even, Treasury would need to sell its remaining shares for an average of roughly $79. Considering that GM's 52-week high is $32.44, it is safe to say that the losses will be substantial. At the 52-week high of $32.44, the Treasury's proceeds on its remaining shares would be less than $8 billion, leaving it with an 11-figure loss: significant even by U.S. government standards.

It will take almost a year for the Treasury to sell its remaining shares, and it could take several more months to calculate the final cost of the GM bailout. It is reasonable to expect another round of criticism after these numbers are released. After that, GM can hope that potential customers begin to put the bailout in the past, but it would not be surprising if it takes several years of continued success for bailout-mania to fully recede.

Foolish takeaway
None of this analysis is meant to discourage investors from considering buying GM stock. The company has made significant improvements to its product portfolio in the last two years, and there are more on the way. However, if you want to buy GM, you should do so because you believe that it will be able to deliver great products at good margins: not because the end of government ownership will change anything. If GM maintains its position as the top dog in the U.S. auto industry over the next several years, it will do so in spite of a continuing bailout backlash, and not because angry taxpayers have finally forgiven it.

Worried about GM?
Few companies lead to such strong feelings as General Motors. But ignoring emotions to make good investing decisions is hard. The Motley Fool's premium GM research service can help, by telling you the truth about GM's growth potential in coming years. (Hint: It's even bigger than you think. But it's not a sure thing, and we'll help you understand why.) It might help give you the courage to be greedy while others are still fearful, as well as a better understanding of the real risks facing General Motors. Just click here to get started now.

The article U.S. Treasury Prepares to Wrap up Auto Bailout: Will It Help GM? originally appeared on Fool.com.

Motley Fool contributor Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Gumby

GM is healthy again and is out of intensive care already. Start selling bonds and dont ever think about paying out dividiends !!

May 08 2013 at 4:06 PM Report abuse rate up rate down Reply
Gumby

Why should the Govenment be selling shares to investors until early 2014 which will mean a prolonged drag on Ford stock price as it became a distraction too great to ignore. GM is practically debt free and GM can take on debt by selling bonds to investors and pay off much faster . The car market is hot and it may not last long enough to get Ford stock price up by then. Ford shareholders do not deserve to be dragged down by GM and Government dealings. GM is always looking for the easiest way out all along. it is about time to force GM to borrow money now ! Bondholders would be thrilled to buy new GM bonds that pay 3-4% .. Bull for them! Not for GM ! It is more fair that way! With billons of new debt, GM will have to learn how to manage its finances and UAW has to live with that !

May 08 2013 at 4:04 PM Report abuse rate up rate down Reply
Gumby

GM can really borrow money and buy out Uncle Sam within a heartbeat! I mean at a fair price like $80 a share GM is thriving now and I dont see why GM cannot take on debt where it really belongs all along that is GM! Ford is still dragging debt all along. This should level out the playing field for both ! GM should have sold additional shares to avoid bankruptcy long ago, because GM actually have 2 billon shares authoriozed to do so but never did. GM stubbornly kept its float very low so to easily make its earnings look good while UAW kept most of the earnings for themselves. UAW has proven to be hostile to shareholders by "secretly" instruct GM board of directors not to issue additional shares to raise cash to avert impending bankruptcy. Instead , GM chose to sell off assets like Delphi, GM Locomotive, Directv, Frigidaire, etc to raise cash. GM was once $90 a share and GM could have raised billons just by selling a couple hundred millon of shares even if it would irk the GM shareholders about stock dilution. GM still has very low float compared to the authorized share allocation of 2.5 billon shares including 500 millon shares in float... I cannot find any other stock that has so much authorized shares left unused! It is not clear to me who to blame for that mind boggling omission , GM management or UaW or even sharehodlers themselves! At least, I know that everybody knew that GM has oodles of shares lying around to sell to raise cash without really much issue about stock dilution at all! The SEC could have prodded GM to do it because GM had been losing market share for so long and to refuse to make access to those valuable shares really begged the logic.. Everybody was busy splitting stock while GM held out with its minsicule amount of shares out in the float back then.

May 08 2013 at 3:48 PM Report abuse rate up rate down Reply
Ed

Ford will hit #20 by the end of the year.
You saw it here!!!

May 08 2013 at 3:08 PM Report abuse rate up rate down Reply