Let’s Divest of GM Yesterday
Writing in today’s Washington Post, Charles Lane posits that the time is now for the U.S. Treasury to divest of its remaining 500 million shares of General Motors stock. I agree with that conclusion, but not with Lane’s rationale or his recommendation for a heavy-handed, government-imposed exit strategy.
Just to recap: the Treasury recouped $23 billion of taxpayers’ $50 billion outlay when it sold GM shares to the public in an IPO in November 2010; the outstanding 500 million shares in government coffers must be sold at an average price of $54 to recover the remaining $27 billion; the IPO price was $33; today’s price is $21.69. If all 500 million shares could be sold at today’s price, the Treasury would raise $10.8 billion, leaving taxpayers at a loss of just over $16 billion. (Of course, the sale of such a large number of shares would drive the average selling price way below today’s price, resulting in a much larger taxpayer loss.)
Lane is correct to conclude that GM’s immediate future isn’t looking quite so rosy. Demand is tanking in Europe. Concerns remain about whether GM will continue to be able to fund its $128 billion pension plan. And sales of the “game-changing” Chevy Volt have been lagging since the vehicle’s commercial introduction some 13 months ago—well before its engines demonstrated an annoying propensity to spontaneously combust. (Not to worry, says GM’s public relations team: the engines don’t seem to catch fire while being driven, only an hour or two after they’ve been parked in the garage.) Recognizing that that qualifier hasn’t been reassuring enough, GM is now offering to buy back any Chevy Volt it has ever sold, which doesn’t bode well for the bottom line, but also affirms how few of these Government Motors show pieces have even sold.
That grim analysis is the basis for Lane’s preference for government divestment now. There is more downside risk than upside potential. It is an argument based on market-timing, rather than on the principle that bad things happen when the government has a stake in the outcome of a race that it can influence. Sure, the administration would love to divest of GM at a profit to taxpayers. But the longer it is allowed to wait for that train to arrive, the greater the temptation to grease the skids.
The government should divest now. It should have divested in June, when it was first legally permissible to do so. But the administration (following, by logic, what would have been Lane’s advice at the time) rolled the dice, expecting the stock value to rise. Instead it fell. And then there was this.
But my bigger problem is with Lane’s proposal for a managed divestment. He writes:
It’s time to cut our losses. Treasury should start selling its stake in GM.
And I know just the buyer: GM. The company is sitting on more than $33 billion in cash, about triple the market value of Treasury’s 500 million shares, which is roughly $10.8 billion.
Though GM wants to dedicate much of its cash to shoring up its pension plan, it could still absorb most or all of Treasury’s shares, even if Treasury charges a modest premium over the current market price, as it should.
Lane proposes this under the guise of some perverse fealty to a “free-enterprise economy,” as it would spare shareholders from the stock price-depressing impact of an unnatural 500 million share dump. But those shareholders knew the risks they were taking when they purchased GM stock in the first place. They certainly knew that the largest single shareholder didn’t intend to hold its position for very long. Lane’s argument for protecting those shareholders in the name of free-enterprise in unconvincing, if not misplaced.
Furthermore, Lane’s zeal for sticking it to GM seems to eclipse any real commitment to free markets. Forcing GM to divert resources from where management wants to commit them in order to achieve some favorable political outcome (a smaller taxpayer loss) is just as coercive as some of the administration’s actions on the road to GM’s nationalization in the first place.
GM should not be entitled to any favors or exceptional treatment by virtue of its ownership structure. To be certain of that, it should be 100 privatized yesterday. But likewise, GM should not be subject to compensatory or otherwise countervailing policies designed to punish or remove any perceived advantage. For starters, it is impossible to measure the benefits received or the penalties suffered with any precision. Demanding that GM not be exposed to special treatment goes in both directions.
Monday Links
- It is false to assume that GM’s earnings report means the auto bailout was a success.
- It is false that, among other things, failing to raise the debt limit means defaulting on our obligations.
- It is false that Osama bin Laden’s death means torture is a good idea.
- It is false that international institutions can deliver what they say they can deliver.
- It is false that oil speculators are to blame for fluctuating oil prices:
Obama’s GM Quagmire
Media are reporting this morning that the Treasury has decided to hold off on selling any of its remaining 500 million shares of General Motors stock until at least July. The Obama administration had hoped to divest as soon as possible after May 22, but GM’s stock price hasn’t been cooperating.
As much as the president doesn’t want the odor of nationalization following him on the campaign trail, the administration is equally concerned about having to explain why it took a $10 billion to $20 billion direct loss by divesting when it did. By deferring sales until July, the administration presumably is hoping for a stock price boost from second quarter earnings. But that is unlikely for several reasons, which I explained in the Daily Caller yesterday. Here’s the gist in a few passages from that op-ed:
The soonest the U.S. Treasury can sell the remaining 500 million shares (according to terms of the initial public offering) is May 22, but the administration would also like to “make the taxpayers whole.” The problem for the president on that score is that the stock price — even in the wake of this week’s earnings report — isn’t cooperating. As of this morning’s opening bell, GM stock was valued at $31.07 per share. If all of the 500 million remaining publicly-owned shares could be sold at that price, the Treasury would net less than $16 billion. Add that to the $23 billion raised from the initial public offering last November, and the “direct” public loss on GM is about $11 billion — calculated as a $50 billion outlay minus a $39 billion return.
To net $50 billion, those 500 million public shares must be sold at an average price of just over $53 — a virtual impossibility anytime soon. Why? The most significant factor suppressing the stock value is the market’s knowledge that the largest single holder of GM stock wants to unload about 500 million shares in the short term. That fact will continue to trump any positive news about GM and its profit potential, not that such news should be expected.
Projections about gasoline prices vary, but as long as prices at the pump remain in the $4 range, GM is going to suffer. Among major automakers, GM is most exposed to the downside of high gasoline prices. Despite all of the subsidies and all of the hoopla over the Chevy Volt (only 1,700 units have been sold through April 2011) and the Chevy Cruse (now subject to a steering column recall that won’t help repair negative quality perceptions), GM does not have much of a competitive presence in the small car market. Though GM held the largest overall U.S. market share in 2010, it had the smallest share (8.4%) of the small car market, which is where the demand will be if high gas prices persist. GM will certainly have to do better in that segment once the federally mandated average fleet fuel efficiency standards rise to 35.5 miles per gallon in 2016.
Deservedly reaping what it sowed, the administration finds itself in an unenviable position. It can entirely divest of GM in the short term at what would likely be a $10-to-$15 billion taxpayer loss (the stock price will drop if 500 million shares are put up for sale in a short period) and face the ire of an increasingly cost- and budget-conscious electorate. Or the administration can hold onto the stock, hoping against hope that GM experiences economic fortunes good enough to more than compensate for the stock price-suppressing effect of the market’s knowledge of an imminent massive sale, while contending with accusations of market meddling and industrial policy.
Or, the administration can do what it is going to do: First, lower expectations that the taxpayer will ever recover $50 billion. Here’s a recent statement by Tim Geithner: “We’re going to lose money in the auto industry… We didn’t do these things to maximize return. We did them to save jobs. The biggest impact of these programs was in the millions of jobs saved.” That’s a safe counterfactual, since it can never be tested or proved. (There are 225,000 fewer jobs in the auto industry as of March 2011 than there were in November 2008, when the bailout process began.)
Second, the administration will argue that the Obama administration is only on the hook for $40 billion (the first $10 billion having come from Bush). In a post-IPO, November 2010 statement revealing of a man less concerned with the nation’s finances than his own political prospects, President Obama asserted: “American taxpayers are now positioned to recover more than my administration invested in GM, and that’s a good thing.” (My emphasis).
The administration should divest as soon as possible, without regard to the stock price. Keeping the government’s tentacles around a large firm in an important industry will keep the door open wider to industrial policy and will deter market-driven decision-making throughout the industry, possibly keeping the brakes on the recovery. Yes, there will be a significant loss to taxpayers. But the right lesson to learn from this chapter in history is that government interventions carry real economic costs.
Friday Links
- What are Republicans doing to stop ObamaCare? Not much.
- Conflating the Taliban with al Qaeda isn’t helping our foreign policy dialogue.
- “Sitting in a Volt that would not start at the 2010 Detroit Auto Show, a GM engineer swore to me that the internal combustion engine in the machine only served as a generator, kicking in when the overnight-charged lithium-ion batteries began to run down.”
- The new issue of Regulation looks at price gouging, soda taxes, the Durbin Amendment, and more.
- Who should decide when we tap into strategic oil reserves: The president? Or market forces?
President’s Statement about GM IPO Reveals a Defensive Politician
I don’t particularly relish picking on a president who, on virtually every policy front, is showing all the markings of a man in way over his head. But the president’s actions and statements are becoming excruciating to watch—like a highly-touted Olympic figure skater who can’t complete a maneuver without falling to the ice.
President Obama’s salutary statement about GM’s IPO yesterday reveals a man so focused on defending his policies that he can no longer conceal the incongruity between his political objectives and the country’s imperatives.
American taxpayers are now positioned to recover more than my administration invested in GM, and that’s a good thing. (My emphasis)
Besides revealing the president’s preference for LIFO accounting procedures, the statement strikes me as sub-presidential. Shouldn’t the POTUS be concerned about American taxpayers getting back all of the money invested in GM? Even though former President Bush is complicit, shouldn’t the sitting president of a country that owes its wealth, freedom, and future to the endurance of the rule of law and the other long-standing, bedrock institutions that were defiled and abused to bail out two automakers issue a statement of regret and reassurance that such extreme measures will never be undertaken again?
I think President Obama missed an opportunity to make amends, build a bridge, and reassure businesses and investors that the White House will do its part to reduce the economy-stifling problem of regime uncertainty going forward. But, then again, that might have been too presidential for a politician who appears motivated more by avoiding blame than by advancing the country’s best interests.
GM IPO ASAP, SVP
GM announced yesterday its intention to go sell shares on the New York Stock Exchange, thus officially beginning the process of re-privatizing the company.
A GM initial public offering is the right move, and cannot happen soon enough. Let’s get the government out of the car business now.
But successfully reprivatizing GM should not be seen as a sign that the intervention itself was successful. The intervention was akin to theft — from Ford, Honda, Toyota, the other automakers and taxpayers — and was highly damaging to crucial longstanding institutions in the United States, like property rights and the rule of law.
The costs of GM’s ”turnaround,” if it is to happen, will never be fully appreciated. The other auto companies were denied the spoils of competition. Had they been able to pick up the market share that the nationalized GM has maintained, then more resources would have flowed to the companies that are best at making the products that people want to buy. These are huge implicit costs–the costs that are not seen–that are happily swept under the rug by Obama administration officials.
It is also highly likely that the timing of the IPO talk is politically motivated. Democrats want to have a business success to tout for their campaigns this fall. But there is the real prospect that that the IPO won’t raise anywhere near the amount of cash to make taxpayers whole, which could generate a lot of bad press before the election. With economic growth and auto sales prospects apparently in doubt and the $41,000 Chevy Volt about to be unveiled when gas prices are relatively low, investors may not be ready to own GM stock.
The FTC and Those GM Ads
I’m usually in enthusiastic accord with our friends over at the Competitive Enterprise Institute, but it seems to me they’ve made a mistake by petitioning the Federal Trade Commission (FTC) to crack down on GM’s ridiculous “we repaid our federal loan” ad. Some zealous enforcers would love for the FTC to do more to regulate speech by American business on matters of public concern, and it seems to me the last thing we should do is encourage such a trend.
For those who came in late, General Motors and its CEO Ed Whitmire were widely and rightly assailed here and elsewhere for asserting (in a column whose message was repeated in much-played TV ads) that the company had repaid its bailout loan “in full, with interest, years ahead of schedule.” Actually, as the inspector general of the government’s TARP program readily acknowledged, the firm had merely used one pot of federal money to repay another. Iowa Sen. Charles Grassley helped expose the dodge, and publications ranging from FoxNews.com to the New York Times joined in with scathing coverage.
Yesterday CEI announced that it had filed a formal complaint [PDF] with the FTC urging the commission to investigate the automaker’s ad campaign as misleading. It alleges that the ad campaign “could unfairly dupe consumers into a false, renewed confidence in the company” and that “consumer purchasing decisions can easily be affected by such considerations.” Nick Gillespie at Reason, CEI general counsel Hans Bader, and Todd Zywicki at Volokh have more.
There’s a long history of businesses’ responding to public criticism of their operations or products — and getting in further legal or regulatory trouble because of that very response. In one early case, the FTC went after egg producers for asserting, in the midst of a cholesterol scare that in hindsight appears overblown, that their ovoid wares were not in fact a menace to cardiac health. Sen. Charles Schumer (D-N.Y.) and the Center to Prevent Handgun Violence have asked the FTC to prohibit ads that imply that keeping a loaded weapon on hand will make a family safer. In Nike v. Kasky, a famous case that reached the Supreme Court [Thomas Goldstein, Cato Supreme Court Review 2003, PDF], shoemaker Nike was sued under a California law over the public defense it had put forward of its labor practices in overseas factories. Environmentalists have sought to suppress ads claiming that nuclear power is nonpolluting, and so forth.
Free-market advocates have generally argued that whatever the merits of laws or regulations banning misleading advertising in garden-variety commercial contexts, there are special dangers to the First Amendment and to robust debate generally in letting agencies and courts second-guess the content of “issue ads” and speech on topics of public controversy. To begin with, it encourages advocates to turn to the law to silence disagreeable speech rather than muster their best arguments to rebut it. In one grotesque example, MoveOn.org and Common Cause actually petitioned the FTC to institute a complaint against Fox News over its use of the slogan “Fair and Balanced”, since (they said) the network was neither.
Despite its current dependence on government, GM is in every relevant legal sense a private company, so any precedents forged against it will wind up applying to every other private enterprise that might wish to advertise on matters of public controversy. Which makes it a concern that CEI’s complaint cites with seeming enthusiasm broad FTC interpretations of authority — for example, its authority to suppress speech that might not be in itself false but could leave a potentially misleading impression.
If there is a continuum extending from more or less purely commercial speech (“Our tires last 40,000 miles”) to more or less purely political speech (“Our business is badly overtaxed”), GM’s ad campaign surely falls way over toward the “political” side. CEI’s response to this is to argue that the campaign might influence consumers’ purely economic calculations (as opposed to the political reasons they have to feel angry at GM) by making them more likely to see the company as solvent and thus as capable of making good its warranty promises. The words “strained” and “makeweight” come to mind to describe this argument. Does CEI really want to establish the future principle that a company’s over-sunny talk about its financial prospects will henceforth get it in trouble with two federal agencies, the FTC and SEC, rather than the SEC alone?
It all seems a rather high price to pay in principle for keeping the GM-TARP story in the papers for another day or two.
Don’t Be Fooled — GM Is Still Government Motors
General Motors chairman Ed Whitacre is appearing in ads on all the Sunday morning shows repeating the message of his Wall Street Journal op-ed, titled “The GM Bailout: Paid Back in Full,” and the company’s full-page newspaper ads:
We’re proud to announce: We’ve repaid our government loan. In full. With interest. Five years ahead of the original schedule.
But wait: In the Wall Street Journal, Whitacre says the company has made a $5.8 billion payment to the governments of the United States and Canada. But don’t I recall that the GM bailout was $50 billion? Shikha Dalmia of the Reason Foundation explains the whole story in Forbes: First, part of the bailout went into an “escrow fund,” and that government money is being used to pay back the small part of the bailout that was officially a loan. Second, GM is asking for another $10 billion loan to retool its plants to meet the stiffer Corporate Average Fuel Economy standards, and paying back one government loan — with other government money — will make it easier to get another government loan.
And finally, of course, most of the bailout money was transferred to GM in return for a 60 percent stake in the company. And the taxpayers will get that money back if and when GM becomes a publicly traded company again, provided that the company’s market capitalization is eventually higher than it’s ever been in history. Don’t hold your breath.
These are called GM ads, but they could just as well be called BS ads.
Global Markets Keep U.S. Economy Afloat
Three items in the news this week remind us why we should be glad we live in a more global economy. While American consumers remain cautious, American companies and workers are finding increasing opportunities in markets abroad:
- Sales of General Motors vehicles continue to slump in the United States, but they are surging in China. The company announced this week that sales in China of GM-branded cars and trucks were up 67 percent in 2009, to 1.8 million vehicles. If current trends continue, within a year or two GM will be selling more vehicles in China than in the United States.
- James Cameron’s 3-D movie spectacular “Avatar” just surpassed $1 billion in global box-office sales. Two-thirds of its revenue has come from abroad, with France, Germany, and Russia the leading markets. This has been a growing pattern for U.S. films. Hollywood—which loves to skewer business and capitalism—is thriving in a global market.
- Since 2003, the middle class in Brazil has grown by 32 million. As the Washington Post reports, “Once hobbled with high inflation and perennially susceptible to worldwide crises, Brazil now has a vibrant consumer market …” Brazil’s overall economy is bigger than either India or Russia, and its per-capita GDP is nearly double that of China.
As I note in my Cato book Mad about Trade, American companies and workers will find their best opportunities in the future by selling to the emerging global middle class in Brazil, China, India and elsewhere. Without access to more robust markets abroad, the Great Recession of 2008-09 would have been more like the Great Depression.
Mainstream Media’s Trade Gap
In a post at the Enterprise Blog two days ago, economist Mark Perry deftly parodies a typical mainstream media account of trade protectionism by editing the story in redline to contrast its original presentation with its true significance. I recommend reading the whole thing, but here’s the first paragraph:
WASHINGTON POST (Reuters) – A U.S. trade panel gave final approval on Wednesday to duties taxes ranging from 10 to 16 percent on cost-conscious firms in the U.S. who purchase low-priced Chinese-made steel pipe rather than high-price domestic pipe, in the biggest U.S. trade case to date against China American companies (and their shareholders, employees, and customers) who shop globally for their inputs and find the best value in China.
Perry’s point—and I share his frustration—is that the mainstream media typically fail to convey even a sense of the costs of U.S. protectionism to U.S. interests even though Americans (and non-Americans living in the U.S.) bear the greatest burden of that protectionism. When the U.S. government imposes duties on Chinese steel, it is imposing taxes on U.S. consuming industries, their employees, their shareholders, and their customers.
How to Kill a Company: A Beginner’s Guide (Chapter 1, P. 1.)
As described in the current Cato Policy Report, one of the “Hard Lessons from the Auto Bailout” is that management at GM is likely to be “highly erratic, as the president and Congress wrestle for decisionmaking primacy at this majority taxpayer-owned entity.” The “dealerships” issue is Exhibit A.
One of GM’s first decisions upon emerging from bankruptcy was to announce closures of a number of dealerships to help reduce costs. Then-nominal-CEO Fritz Henderson explained that the planned closings would save GM about $100 in distribution costs per vehicle–a few hundred million dollars per year when factoring in the millions of units GM expects to produce.
But many of GM’s congressional CEOs cried foul, demanding reconsideration from a company that had taken public funds. The House of Representatives even passed a bill requiring companies that received federal funds to reestablish terminated dealership agreements, though no action was taken in the Senate.
However, as reported in The Hill today, Congress is fast-tracking legislation to restrict GM’s (and Chrysler’s) closings, by subjecting each decision to an arbitrator, who will “balance the economic interests of the terminated dealership, the car companies and the general public.” A Senate aide is cited as saying legislators intend to pass this measure before Christmas.
Well, look, EVERY decision GM makes will produce winners and losers in terms of real and opportunity costs. Hence, EVERY decision is just as worthy of legislative or executive scrutiny, if the dealership issue is the litmus test.
With 537 CEOs, all but one of whom have bigger priorities than GM’s bottom line, GM’s future will be dictated by splitting differences, political logrolling, and managing by consensus–tactics that will assure GM’s demise.
Spending Our Way Into More Debt
Huge deficit spending, a supposed stimulus bill, and financial bailouts by the Bush administration failed to stave off a deep recession. President Obama continued his predecessor’s policies with an even bigger stimulus, which helped push the deficit over the unimaginable trillion dollar mark. Prosperity hasn’t returned, but the president is persistent in his interventionist beliefs. In his speech yesterday, he told the country that we must “spend our way out of this recession.”
While a dedicated segment of the intelligentsia continues to believe in simplistic Kindergarten Keynesianism, average Americans are increasingly leery. Businesses and entrepreneurs are hesitant to invest and hire because of the uncertainty surrounding the President’s agenda for higher taxes, higher energy costs, health care mandates, and greater regulation. The economy will eventually recover despite the government’s intervention, but as the debt mounts, today’s profligacy will more likely do long-term damage to the nation’s prosperity.
Some leaders in Congress want a new round of stimulus spending of $150 billion or more. The following are some of the ways that money might be spent from the president’s speech:
- Extend unemployment insurance. When you subsidize something you get more it, so increasing unemployment benefits will push up the unemployment rate, as Alan Reynolds notes.”
- More infrastructure spending. This will lead to misallocation of resources since only markets can allocate resources efficiently. Governments allocate capital on the basis of politics instead of economics.
- “Cash for Caulkers.” This would be like Cash for Clunkers except people would get tax credits to make their homes more energy efficient. Any program modeled off “the dumbest government program ever” should be put back on the shelf.
- More Small Business Administration lending. A little noticed SBA program created by the stimulus bill offered banks an “unprecedented” 100 percent guarantee on loans to small businesses. The program has an anticipated default rate of 60 percent. Small businesses need lower taxes and fewer regulations, not a government program that perpetuates more moral hazard.
- More aid to state and local governments. State and local government should be using the recession to implement reforms that will prevent them from going on another unsustainable spending spree when the economy recovers. Also, we need fewer state and local government employees – not more – as they’re becoming an increasing burden on taxpayers.
The president said his administration was “forced to take those steps largely without the help of an opposition party which, unfortunately, after having presided over the decision-making that led to the crisis, decided to hand it to others to solve.” Mr. President, nobody has forced you to do anything. You’ve chosen to embrace – and expand upon – the big spending policies that were a hallmark of your predecessor’s administration.
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