by Will Ashworth | December 11, 2013 8:49 am
The Treasury department just sold the last of its shares in General Motors (GM), making the federal government’s $49.5 billion bailout of America’s largest car company by revenue a footnote in automotive history.
For now, let’s forget the 1.2 million jobs and $34.9 billion in tax revenue the Center for Automotive Research says was saved by GM’s rescue. Today, I’d like to quickly focus on what kind of job the Treasury did divesting its 912 million shares since 2010.
Ditching the political rhetoric for a minute, let’s analyze the Treasury’s track record over the past three years and see whether the Treasury could have done better than “investing” in GM stock:
According to the Treasury timeline, the government lent General Motors $49.5 billion. Further, it indicates that once GM emerged from bankruptcy protection in July 2009, its investment was restructured from loans to a combination of common and preferred stock as well as some debt, which ultimately was repaid in April 2010.
By the time GM went public in November 2010, the Treasury held 912.4 million shares of its common stock. GM also issued the Treasury 83.9 million Series A preferred stock in July 2009, which it bought at a discount of $1.4 billion. Excluding the preferred stock, its breakeven on its common stock prior to the IPO works out to $40 billion, or $43.84 per share. Bloomberg is routinely quoted in the press as having crunched the numbers and ascertained that the breakeven on the government’s investment in GM prior to the IPO was $43.67 per share.
Not knowing how Bloomberg parsed the numbers, I think we can safely assume the 17-cent spread is due to a slight difference in how this was calculated.
The Treasury sold 412.3 million shares in General Motors’ $33 IPO in November 2010 for a total of $13.5 billion. In the three years since, GM stock has gained 24%. For comparison’s sake, the SPDR S&P 500 ETF (SPY) has achieved a 63% total return. However, Ford (F), who bailout detractors consider the poster child of responsibility, has seen its stock appreciate by just 8%.
If the government hypothetically were to have kept the IPO shares through today, it would have generated an additional $3.2 billion on top of the $13.5 billion it received in the IPO.
On the flip side, had the Treasury instead took the $13.5 billion and bought F stock, it would have generated an additional $500 million — $2.7 billion less than GM.
Following this sale, the Treasury had a remaining 500 million shares of GM stock.
(As a note, GM also bought back its preferred shares from the Treasury for $25 per share, or $2.1 billion.)
As the election approached, GM stock was doing awful. At their lowest point, hit in July 2012, GM shares briefly dipped below the $20 level — almost 40% under GM’s IPO price. Naturally, the government was in no hurry to sell its stock given the optics.
The Treasury instead waited for a better point after the election, and announced on Dec. 19, 2012, that it would sell back 200 million shares of GM stock for $5.5 billion, or $27.50 per share — still about 17% worse than what it received at GM’s IPO.
If the Treasury held onto those shares, today they would be worth $8.2 billion, or 49% more.
If the Treasury had put the $5.5 billion into Ford stock, it would have achieved a 45% total return. Once again GM would have been the better investment.
Unfortunately, the government sold out for too little.
As GM entered 2013, the Treasury Department was in the homestretch. It had just 300 million shares to unload, one-third of its original stash. As part of its share repurchase agreement in December, it commenced a share trading plan that would see it sell its remaining interest in five blocks of shares between 30 million and 110 million.
In the span of 12 months, the Treasury sold all of its GM stock for gross proceeds of $10.2 billion, or an average price of $34.10.
If you or I had invested $10.2 billion in GM stock at the end of 2013, today those funds would be worth $14.5 billion. The same amount invested in Ford is worth $13.4 billion, $1.1 billion less.
Once more, the Treasury sold too early.
The Treasury recouped $31.3 billion of its bailout money from its three-year sale of GM common and preferred stock. If the government hadn’t sold any of its shares and converted the preferred at the time of the IPO into common stock ($2.1 billion divided by $33 = 63.6 million), today it would have 976 million shares worth $39.9 billion, 27.5% more than it ultimately received.
Politically, it would have been impossible for Treasury to treat its GM investment as a portfolio manager would but it demonstrates why buy-and-hold sometimes makes sense. The U.S. government is estimated to have lost $10 billion from its bailout of General Motors — the additional $8.6 billion it could have made (albeit in hindsight) from continuously holding GM stock would have brought it within inches of breaking-even and that’s completely ignoring the jobs and tax revenue angle.
Unfortunately, patience lost out to political optics. Treasury could and should have done better.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
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