GM Buyback of Treasury Shares – Why Now?
General Motors moved quickly to complete its buyback of 200 million shares from the US Treasury Department before year end. It is a welcome sign that the Obama Administration is finally beginning to exit taxpayers' GM stake, a move that could have been made a year and a half ago when share price was closer to $30. While some felt it was never the place of Government to gamble taxpayer money on Wall Street by market timing the exit of Treasury's GM stake, others argued that taxpayers would be better served by waiting until GM share price rose to at least over the $33 IPO price of two years ago.
Of course, the presidential election affected the politically-sensitive decision as well, as no one in the Obama Administration would suggest locking in losses for American taxpayers prior to Election Day. Now the question must be asked, what drove the decision of Treasury to sell at this point in time, just one month prior to GM's fourth quarter earnings announcement and right in the midst of fiscal cliff negotiations?
When speculating on what drives actions out of GM, it is important to understand that the management team there is headed by appointees of the Obama Administration. It is highly likely that Treasury keeps a close eye on the goings-on at GM as it lends a guiding hand from time to time. This was evidenced in the past as former GM CEO Ed Whitacre coordinated with Treasury on the ads proclaiming that GM had paid taxpayers back in full, even though this claim was blatantly false. Also, the insane and costly focus on plug-in electric vehicles (like the Chevy Volt) can not possibly be motivated by purely economic motivations, particularly as GM continues to lose market share on more important areas like mid-size cars and the profitable truck segment.
The Obama Administration has been adamant, up to this point, that GM share price has no where to go but up. The assumption has always been that Treasury would sell its stake WHEN GM share price rose, not IF it rose. The possibility that shares publicly trading on Wall Street could actually go down as well as up never entered into the thinking; nor was the strategy questioned by many in the media. The change of heart by those in the know may bode ill for what the future holds for GM shareholders. Speculating even further, the move may have ties to a negative outlook for the economy in general as fiscal cliff "negotiations" seem to be going nowhere.
GM CEO Dan Akerson recently warned that he was "quite concerned" with the negative impact that going over the fiscal cliff would have on his company. Wouldn't it make sense for GM to wait until a resolution was at hand before spending $5.5 billion of shareholders money on a buyback? What about Treasury, why spend time addressing the GM sale when the more pressing issue of the fiscal cliff warrants all of their attention? And if things are going so great at GM, why not wait until one more earnings report drives share price higher and minimizes taxpayer losses to only single digit billions of dollars?
I fear that GM's moves are, once again, politically motivated instead of motivated by what is best for shareholders. The company raised $11 billion in debt recently, just so that it could afford to buy back shares from Treasury that would be harder to sell on the open market. To make matters worse, they paid a premium over where those shares were trading and completed the deal without waiting for resolution on the all-important fiscal talks.
So, what's it all mean? Maybe nothing, maybe the alarm raised by Akerson over the fiscal talks was just posturing to help further motivate politicians to cut a deal and he was not really all that concerned with going over the cliff. But it's also possible that the concern expressed was a warning that GM shares will take a hit when and if we go over that cliff. The manner in which the Obama Administration has "negotiated" with Congressional Republicans on the fiscal cliff further points to a likelihood that a deal will not be made.
It certainly does not appear that the budget offer made by Team Obama and presented by Treasury Secretary Tim Geithner to Republicans was crafted with the intent of being agreed to. As a former GM bondholder, I have seen this form of "negotiation" before. Prior to GM filing for bankruptcy in 2009, an offer was crafted by the same folks bringing us the fiscal offer which was then presented to GM bondholders. It was well known by those following the story that the offer to the bondholders was designed to fail and was nothing more than a political move that presented creditors as the scapegoat for the impending bankruptcy. I spoke to this at the time on a CNBC interview with commentators who seemed to be well aware of what was happening.
I don't think it is a stretch to correlate what happened with the GM bankruptcy process to the budget negotiations. It exposes a modus operandi for the "negotiating" tactics of this administration. A recent WSJ.com piece explains the fiscal cliff talks' breakdown and quotes an exchange between House Speaker John Boehner and President Obama. Speaker Boehner asks what he gets in exchange for agreeing to $800 billion in increased tax revenue to which President Obama replies, "You get nothing, I get that for free." That certainly does not seem like a good-faith negotiation.
If the President is truly not putting a budget offer on the table that has a chance of passing, the motivation would be to hurt Republicans in any upcoming elections. Polls imply that the majority of Americans will blame Congressional Republicans for a failure to reach an agreement. Of course, we all hope that those in power have the nation's best interest at heart and would not risk the good of the country for political gain.
If there is to be a downturn in GM share price due to the fiscal cliff or disappointing earnings, it would be best for Treasury to unload some of its shares before the occurrence. The timing of the GM share buyback may not be just coincidental and is open to question since it occurred in the middle of all-important budget negotiations that may have a major impact on future share price and one month prior to an earnings announcement that should bring just a little more clarity to the financial health of GM.
The highly charged GM bankruptcy process has given us (at least those of us who care) a show that will intrigue us and lead us to speculate on any actions at the company that could be motivated by politics. The presidential election which saw President Obama campaign upon the perceived success of GM proved just how important GM is politically to those in power; particularly those who strive to retain that power. The timing of GM's share buyback is just one more story open to debate. Until such time that the government has sold all of its stake in GM (as well as their prime lender, Ally Financial) and the Obama-appointed management leaves GM, the company will be questioned whenever it gives the appearance of having possible political motivations. There are many who will continue to have a negative opinion of GM as the moniker "Government Motors" will not be removed until that time comes.
Mark Modica is an NLPC Associate Fellow.