Canada Follows US Lead on Refusal to Sell GM Stake
It would appear that there is a bit of a Mexican standoff regarding the sale of General Motors stock by the three major holders. The US government (aka taxpayers), the UAW and the Canadian government have a combined ownership stake in GM of about 50%. If any of these three were to dump their shares on the market, the remaining holders will see a drop in the value of their shares due to the dilutive effect of the new shares hitting the market. Recent stories regarding the mindset of the Canadian government reveal that they will mirror the market-timing philosophy of the US government by hanging on to their stake. The decision may be driven by closed door meetings with US Treasury Secretary, Tim Geithner.
According to thetruthaboutcars.com, "(Canadian) Finance Minister Flaherty said he has had 'continuing discussions' on the subject of the GM stake with U.S. Treasury Secretary Timothy Geithner," a move that might be viewed more cynically if we were talking about major private holders of a publicly traded corporation. The Canadian Auto Workers' union is also encouraging Canada's leadership to hold on to their stake and those leaders seem to have come to the same conclusion of US leaders that GM share price has no where to go but up.
Not all agree with the Canadian decision to continue to market time the exit from GM. Ontario Finance Minister Dwight Duncan says it is not the job of government to be shareholders according to a Reuters' report. He is quoted as saying "I just don't think governments should be buying and holding stocks in private-sector companies." Imagine that!
Of course it is not the job of governments to be holding stock of companies in the private sector. But that is exactly what continues to happen with GM. It is a very odd philosophy to believe that an investment in a publicly traded company has no risk involved and if you hold on long enough you are sure to increase the value of your holdings. This philosophy didn't work too well for the original holders of Old GM, who saw their investments disappear when the Obama Administration guided the company through bankruptcy at the expense of taxpayers as well as to those existing shareholders that were wiped out.
The gamble on GM stock by US and Canadian governments is at odds with President Obama's previous stance on gambling in the stock market. When Republicans suggested partial privatization of Social Security, Obama argued in a White House weekly address that assets should not be subjected "to the whims of Wall Street traders and the ups and downs of the stock market" and he would "fight with everything I've got to stop those who would gamble your Social Security on Wall Street. Because you shouldn't be worried that a sudden downturn in the stock market will put all you've worked so hard for - all you've earned - at risk."
The conflicting philosophies regarding gambling public funds in the stock market raise a major question. Just why does the Obama Administration feel that there is no risk involved with holding GM shares when the President seems to understand the obvious risks involved with the markets? Is our government helping in some continuing way to assure the success of a publicly traded company? There are also the ethical issues of having a government ownership stake in a major corporation that played a part in reelecting Obama as he campaigned on the perceived success at GM.
Finance Minister Duncan is correct in saying that it is not the place of governments to have this kind of continued involvement in the private sector. Whether you think the auto bailouts were conducted in the most ethical matter or not, it is hard to argue for the continued involvement of governments in the sector. Leaders in both the US and Canada should be asked why they are so certain that GM share price has no downside and is without risk if they continue to display the reluctance to exit their stakes and a close eye should be kept on the financial figures coming out of GM for possible fudging (like stuffing truck inventory channels or getting help from government-owned Ally Financial) as the company continues to have powerful political motivations.
Mark Modica is an NLPC Associate Fellow.