Can The Treasury Make Money On GM Shares?

The US Treasury may want to wait a few years to sell its portion of GM.

The federal government put $50 billion of taxpayer money into the largest US car company (NYSE: GM) as part of a plan to rescue the American auto industry. The Wall Street Journal says the Treasury may unload the shares it got in exchange for part of its investment, perhaps as early as this summer. Taxpayers have already been reimbursed for the debt portion of the transaction.

GM’s shares fell below their IPO price recently and that news headlined a large number of news sites. Calculations made when GM went public showed that taxpayers would have to get over $50 a share to be paid back entirely. For some reason the government appears to be ready to sell those shares at under $30.

The Treasury has made a great deal out of the fact that it made money on the TARP “investments” in banks. The value of the stock in these firms and warrants made taxpayers a bit of money. It is hardly worth guessing what the Treasury would have made if it had held its stock in banks. But, the general improvement in bank balance sheets might help build an argument that the government sold too soon.

Outsiders can only speculate about why the Treasury would sell its GM position this year. Perhaps the government believes it did not save the US car industry at all. GM’s shares may be on a relentless move downward. High gas prices, high component prices brought on by commodity inflation, and competition from Japanese and European manufacturers may badly wound GM again. That prediction seems unlikely now. GM’s market share in the US for the first quarter was 19.4% up from 18.7% in the same period last year. Japanese manufacturers will have trouble with exporting to the US and production levels at American plants because of the earthquake. That would argue that GM’s market share will actually rise, at least for a large part of the rest of the year.

Treasury showed no patience as it dumped its stock in bank companies. It might want to give GM some time. Events showthat GM’s stock value will rise this year. Taxpayers should get the chance to make some money on GM or at least cut their losses.

Douglas A. McIntyre