Congressional Oversight Panel: A Failure At GM

The Congressional Oversight Panel is skeptical that the Treasury Department will ever recoup its investment in GM.

The new report from the panels says:

GM is furthest along in the process of repaying taxpayers.  It conducted an  initial public offering (IPO) on November 18, 2010, and Treasury used the occasion to sell a portion of its GM holdings for $13.5 billion. This sale represents a major recovery of taxpayer funds, but it is important to note that Treasury received a price of $33.00 per share – well below  the $44.59 needed to be on track to recover fully taxpayers‟ money

The COP view of the Treasury decision to support a GM IPO is that “it essentially ‘locked in’ a loss of billions of dollars and thus  greatly reduced the likelihood that taxpayers will ever be repaid in full.”

The panel is even less optimistic about the Treasury investments in GMAC and Chrysler.

The panel’s warning about the future of large bailouts of American companies is that they represent a moral hazard. Major US firms will believe that they are too big to fail. This in turn may encourage them to take risks which make failure more likely. It is the same criticism voiced about the bailout of banks. But, both bankers and the auto industry have learned a harsh lesson and excessive risk is among the things they are most likely to avoid.

The panel is right about one thing. Treasury could have held its GM shares much longer. Taxpayers may have taken a paper loss for a while. The odds, however, that US vehicle sales would recover in the next three or four years is likely given how low they were in 2009. There was also some reason to believe that the stock market would recover more of its 2008 and 2009 losses as time passed. The Treasury did not sell near a top because it was too impatient. There has never been any taxpayer pressure to offer GM shares to the public. A “buy and hold” strategy would almost certainly have worked better than a “buy and sell right away” approach. That strategy has certainly worked well for holders of Ford (NYSE: F) shares.

The federal government has decided to get the paper from banks and car companies off of its books as quickly as possible. The impatience was imprudent, and the imprudence has cost tax payers money.

Douglas A. McIntyre