The US government is exiting the auto business. The US Treasury announced that it would sell its remaining 2.2% stake in General Motors Company (NYSE:GM) by the end of the year, ahead of consensus expectation that it would sell the stocks in 2014. Treasury officials said that the exact timetable will depend on market conditions, report Jeff Bennett and Eric Morath for The Wall Street Journal.
US Treasury’s stake in GM remains controversial
When the US first bailed out the auto industry in 2009, Treasury took a 61% stake in General Motors Company (NYSE:GM), a move that remains extremely controversial. While low interest loans to the financial sector were unprecedented in their scale and structure, for the government to partially own a private company drew especially heavy criticism. Economists disagree about whether a normal bailout would have been preferable in the long run, and unlike the TARP loans, taxpayers won’t be getting all of their money back. The initial investment cost $49.5 billion, and unless GM has a sudden rally the US will lose about $10 billion on the deal.
“Had we not acted to support the automotive industry, the cost to the country would have been substantial—in terms of lost jobs, lost tax revenue, reduced economic production, and other consequences,” said Treasury Deputy Assistant Secretary Tim Bowler. Whether the economic impact of the bailout was worth $10 billion and increased moral hazard doesn’t have a straightforward answer.
GM will be free to initiate dividends
Once the government is completely out of the picture, GM will be free to initiate dividends and buybacks as well as raise executive pay. “We believe that General Motors Company (NYSE:GM)’s board of directors could initiate a common equity dividend of 80 cents annually and approve a $5 billion share repurchase program,” said Buckingham Research analyst Joe Amaturo.
General Motors Company (NYSE:GM)’s stock price is up 55% for the year, climbing from $25 per share to about $38 now. Revenue fell 53% year-on-year during the third quarter, but that is almost completely due to the loss of $800 million “related to the repurchase of 120 million shares of Preferred Series A Stock” and “incremental tax expense,” neither of which was a shock to investors and had likely been figured into the company’s stock price.