Today’s drop in GM’s share price to a new low represents a one-day, half-billion dollar loss for taxpayers. From the time that Treasury could first file to sell the taxpayers’ stake in GM, the losses have reached about 2.5 billion dollars. Of course the total cost of the bailout was well above this, but the Obama Administration does not seem to want to cut its losses.
GM announced earnings this morning and the numbers appeared to be good on the surface. Media friends of GM trumpeted the good news but the celebration did not last long. The festive mood was replaced with GM apologists trying to explain the negative share price reaction.The obvious overhang of UAW obligations seemed to be ignored, as did the lack of management credibility. One TV commentator known for his defense of GM attributed the sell-off to “bankruptcy fatigue”, claiming that investors are still punishing GM for its trip through bankruptcy. Nonsense.
The people who control the big money on Wall Street are not concerned with the past actions of a corporation as much as they are with actions that give an indicator of what the future holds. The problem with GM is not that it suffers from “bankruptcy fatigue”, but rather “credibility fatigue.”
Current management has claimed that future growth would be driven by China and the Chevy Volt. China is a small portion of GM’s profitability and the Volt loses money for GM. Recent statements out of GM that dismal sales of the Volt were due to the fact that dealerships had “virtually” no inventory have been exposed as dishonest. Another comment by CEO, Dan Akerson, about cash on the balance sheet of 35 to 40 billion dollars is also inaccurate. Cash and cash equivalents are about 20 billion dollars. Of course GM might claim that it all depends upon your definition of “cash.”
GM has been closely watched by analysts recently for the possibility that truck inventory channels were being stuffed in order to pump up second quarter earnings. The company does not get a great deal of trust from the investment community, despite rosy projections from investment banks that are making money from GM’s IPO. Television commentators that work for networks that receive millions of dollars in ad revenue from GM seemed to overlook many of the warning signs that GM was not as great an investment as it was made out to be. Individual investors who bought on the hype should be steaming mad at the misleading assertions that GM would “be printing money” or that shares would “hover around where they are or take off after a few earnings reports”, statements actually made by one commentator on a major financial network.
Of course, the market in general was slammed today. I am sure apologists will point to this fact, even though GM has underperformed the market by about 25% since shares began trading. What amazes me is that there are so few media sources questioning GM’s management and the government decision to stay involved in what should be the private sector.
If GM’s earnings are credible and likely to grow at the pace it has, the share price should climb. It is just hard to believe in the credibility of GM or their financial reporting. If a company is dishonest in certain areas, what would prevent them from fudging earnings numbers? Particularly if the SEC is likely to give them a free pass due to the government stake in the company. Is it possible that ex-CFO, Chris Liddell, stepped down so that he could be replaced with someone who might be a little more “aggressive” with accounting? Will future earnings suffer from restatements or from the fact that truck inventory needs to be drawn down? I’m not saying any of this is the case, but these are questions that arise when management loses credibility.
Whatever the future holds for GM and investors, one thing is certain. The government should not be involved. That means an exit of taxpayers’ stake, no favorable tax credits and no bogus purchases of “green” vehicles by our government that the public doesn’t want and the nation can’t afford. The temptation for the Obama Administration to continue to help GM should be removed. Treasury should cut its losses and sell now. And the American media should give a more balanced and unbiased picture of what transpires at GM.
Mark Modica is an NLPC Associate Fellow