As GM’s Stock Price Drops, Auto Bailout Cost Goes Up
December 21, 2011
by: PJ Austin
WasteWatcher, December, 2011
Despite claims to the contrary, U.S. taxpayers are still on the hook for billions of dollars that were given to General Motors (GM). According to a November 14, 2011 article in the Detroit News, the Treasury Department in its November report to Congress now says it expects to lose $23.6 billion, an increase of more than $9 billion from its previous estimate of $14.33 billion. This adjustment is the result of the recent precipitous drop in the value of GM stock, of which the federal government still owns 500 million shares.
The financial repercussions associated with decades of above-market wages and benefits for unionized workers, overproduction, and bloated vehicle lineups were exposed in the fall of 2008, when the chief executives for GM, Ford and Chrysler testified before Congress. Of the total $79.6 billion in taxpayer aid that Congress dished out to “save” GM and Chrysler, GM received about $50 billion. Although the government has clawed back $23.2 billion and shaved its stake in the struggling company from 61 percent to 26.5 percent, it is unlikely that the Treasury Department will be able to profitably unload the remainder of its shares anytime soon.
When the government first trimmed its holdings of GM stock at the company’s initial price offering on November 17, 2010, shares were trading at $33 apiece. However, fears of recession in Europe and a corresponding drop in car sales have sent the company’s share price tumbling. As of November 29, 2011, GM stock was trading for $20.31 per share, and with rising fuel prices and industry production disruptions adding to fears of financial contagion, it is unlikely that the company’s stock price will rebound any time soon. According to an April 19, 2011 article in the Wall Street Journal, “To break even, the U.S. Treasury would need to sell its remaining stake – about 500 million shares – at $53 apiece.” Had the government dumped all of its GM stock at the time that the Journal article was published, when the company’s stock price closed the day at $29.97 a share, taxpayers would have lost around $11 billion, a relative bargain in hindsight.
The Obama administration has continued to claim that any financial losses on the auto bailouts were worth it because of the thousands of jobs that were saved. However, as Luke Gelber of Citizens Against Government Waste wrote about in his June 1, 2011 WasteWatcher, this argument ignores the myriad ways in which that money could have otherwise been invested. “To argue that President Obama’s decision to bail out GM and Chrysler ‘saved thousands of jobs’ is to focus on what the nineteenth-century French economist Frédéric Bastiat called the ‘seen,’ rather than the ‘unseen.’ In the case of the auto companies, what is seen are two large, famous firms that avoided collapse, and a large group of workers that kept their jobs. What is unseen are the purchases, loans, and investments diffused throughout the economy that could not take place because the money was transferred to Detroit, and the ugly precedent the bailouts set for future administrations with regard to politically favorable businesses.”
GM’s Chief Executive Officer (CEO) Dan Akerson also seems to be completely out of touch with the sentiments of American taxpayers regarding the bailout. In a November 30, 2011 article in Human Events, Ackerson was quoted as saying “We are in the midst of transforming an iconic American company so 20 and 30 years from now (taxpayers) will look at this company and they’ll say, ‘absolutely it was the right thing to do’…And it shouldn’t be measured on did it sell for $43 or $53 (a share) or did they lose a couple billion dollars?” Akerson’s hubris was even more evident when he added that taxpayers have “kind of gotten over” their anger about the bailout, which former GM CEO Ed Whitacre stated during the summer of 2009 was hurting the company’s sales. Comments like these demonstrate that Ackerson not only cares very little about the pocketbooks of U.S. taxpayers, but that he also doesn’t think very highly of their intellect.
As Leslie Paige of Citizens Against Government Waste argued in a November 21, 2008 WasteWatcher at the time the bailouts were being discussed in Congress, lawmakers should have let GM enter into Chapter 11 bankruptcy. This would have allowed the troubled automaker to embark on much-needed restructuring while continuing to operate. In a February 20, 2009 article, the Los Angeles Times argued that “One of the strengths of our economic system is the fact that the market, not the government, decides who wins and who loses…Rather than trying to direct the companies’ restructuring, the administration should leave the job to bankruptcy courts, which were created for that purpose.” Hopefully this experience will once and for all teach future generations of lawmakers that taxpayer-funded bailouts are a terrible idea.
