The GM Stock Offering: Why We Can’t All Be Winners
I have a big problem with the whole General Motors Corporation (NYSE:GM) government-assisted bankruptcy and yesterday’s new public offering.
GM originally listed on the NYSE back in 1916. Through its roughly 100-year history, the storied automaker had its ups and downs like every other business. But the buffoon management of the early 2000s ruined the company. Unlike Ford (NYSE:F), which prepared for and weathered the downturn in the economy, GM lost over $80.0 billion between 2006 and 2008.
When GM came calling on Washington, the same administration that let Lehman Brothers fail (and that witnessed the credit market freeze after the Lehman failure) was concerned that GM was “too big to fail.”
I liked GM’s argument at the time: if GM failed, not only would over 200,000 jobs be lost right at GM, but other car-makers like Ford would go under, because GM would put the same part suppliers that feed both GM and Ford out of business. Ford even wanted the government to bail out GM!
So, the government invested about $50.0 billion in GM. When the company went public (again) yesterday, GM sold $20.0 billion of stock in the second largest IPO in American history. The offering valued GM at just under eight times 2010’s earnings.
The U.S. Treasury got back about $14.0 billion of its money. But if my calculations are right, unless GM stock goes up 75% to 80%, the government will lose money on its investment in GM.
So, what’s my beef with how the GM bailout was handled?
It’s quite simple. I don’t see where in the U.S. Constitution it states that the government can use public money to bail out private companies. GM was mismanaged. And, ultimately, the government bailed out GM because of poor decisions made by bad company management.
How many hard-working companies in America go out of business daily, not because of bad management, but simply because they do not have the cash flow to sustain their business…to pay their bills while they wait for their customers to pay them? Sure, they might have 200,000 employees. However, small businesses in America, those with less than 50 employees, account for over two-thirds of all jobs.
Collectively, thousands of small businesses in this country went bankrupt during the Great Recession, causing hundreds of thousands of job losses, and the government did absolutely nothing to help them. Nothing. I guess we can’t all be winners like GM.
Michael’s Personal Notes:
Slowly, interest rates are rising. And I’m very surprised that more is not being written about the new trend in the financial media.
Yesterday, the popular U.S. 30-year fixed mortgage hit a new three-month high of 4.39%. Rates for mortgages are rising in spite of the housing crisis. In fact, according to the Mortgage Bankers Association, the number of applications for mortgages in the U.S. fell 14% last week.
Similarly, the yields on government securities are also rising. The yield on five-year U.S. Treasuries hit 1.54% yesterday, up from 1.44% on Monday. Here, rates are rising despite the Fed’s QE2 program.
I’ve been warning of higher interest rates for months…and we are starting to see them now. However, the rate hikes to date have been very subtle; nothing to shock the stock market.
I’m looking more for the establishment of a clear indication that the new cycle of higher interest rates has begun, and we might just be getting that indication now. Interest rate cycles tend to run in 20-to-25-year trends of either up or down.
Where the Market Stands; Where it’s Headed:
The stock market came back to life yesterday with a rally that the media blamed on a resolution to the crisis in Ireland and a report from the Federal Reserve Bank of Philadelphia that said manufacturing in Philly was at its highest level of 2010.
Forget what the media is saying about why stocks are rallying. The truth of the matter is that demand for stock is outweighing the supply of stock in the marketplace. Depending on which report you read yesterday, and which you believed, the GM offering was highly oversubscribed…the demand for stock is rising.
The economy continues to turn the corner. Corporate America continues to deliver solid profits (while stashing their cash in the bank) and there are few investment alternatives to good, quality stocks at this time in the economic cycle.
The bear market rally in stocks that started in March of 2009 is alive and well.
What He Said:
“I’ve been writing to my readers for the past two years claiming the decline in the U.S. property market would not be the soft landing most analysts were expecting, but rather a hard landing. My view remains unchanged. The U.S. housing bust will be cut deeper and harder than most can realize today.” Michael Lombardi in PROFIT CONFIDENTIAL, June 13, 2007. While the popular media was predicting a bottoming of the real estate market in 2007, Michael was preparing his readers for worse times ahead.
Best Credit Cards
Chase Freedom- Blue Cash
- Chase Sapphire
- American Express Platinum Card
- United Credit Card
- Southwest Credit Card
- Delta Credit Card
- British Airways Card - Get 100,000 Bonus Points
- Blue Cash Preferred
- Capital One Venture
- Discover Card
- Chase Ink Credit Card
- Discover More Card - 18 Month Promotional Balance Transfer
- Chase Sapphire Preferred
- Ritz-Carlton Rewards Credit Card
- Citi Diamond Preferred Card
- American Express Premier Rewards Gold Card
- Starwood Preferred Guest
- American Express Gold Card
- Citi Dividend
- Capital One Cash Rewards
- Discover Student
- Marriott Rewards Credit Card
- Marriott Rewards Premier Credit Card
- Capital One Secured Credit Card
- Hilton Rewards
- Credit Card Rewards
Broker Reviews
The whole GM IPO exercise yesterday was yet another example of sheltering special interests at the expense of taxpayers. It will one day be known as the Great Taxpayer Heist of 2010.
Neither the U.S. Treasury nor the taxpayers got back one thin dime from GM’s IPO. Zero. Zilch. Bubkis, not a shekel. What the taxpayers did receive was stock in the company, which was valued at $33.00 per share on the offering. In order for taxpayers to be repaid, the shares would have to be sold. and the likelihood that those shares would be sold below $33.00 is rather low.
The stock would have to nearly double, and the shares be sold, for taxpayers to be whole, so the net gain to taxpayers is zero.
Not so much for the other participants (underwriters and syndicate) group though. The United Auto Workers (UAW) union received a gift of $4 Billion from the proceeds.
The churning witnessed on the stock’s first day indicates that those involved in bringing it to market all sold their shares, making certain only the unaware would remain as shareholders.
The People’s Republic of China received 15 million shares gratis. 30 million shares went to Middle Eastern countries such as Dubai and Saudi Arabia.
You are correct that the Constitution doesn’t specifically allow this activity, but why would that matter with this bunch? When Obama et al bailed out GM and Chrysler, they illegally voided the contracts the automakers had with their bond holders. Tens of thousands of families had their entire investment wiped out.
Best guesses are that GM stock will decline as the economy continues on the next leg down, causing the taxpayer to become a long term holder.
I’ll go out on a short limb and suggest when the political will demands the taxpayer be out of GM, the stock price will be much much lower that $33.00, and when those shares are sold, you can be be sure it won’t be during good times at GM.
In the end, the UAW is likely to benefit the most (they’ve already realized a non-taxable profit of $4 Billion).
Hosed again…
“The bear market rally in stocks that started in March of 2009 is alive and well.”
Did you mean to say bull market???
You math IS correct.
How about the simple bullet point that the original GM shareholders (most who are taxpayers) were shafted.
As a result of the cash infusion given to the “old GM”, from taxpayers (many who were former shareholders not receiving any interest in the new company) the government acting as a receiver for itself and former shareholders, should have been granted the licensing rights & revenues to all and any names, patents, service marks, royalties, marketing licenses -including any apparel and merchandise, etc licensing going forward.
The “old GM” should have to relinquish and look and feel of the former company. As a former shareholder (and owner, right? isn’t that what they tell you when you buy stock…lol), I never received a proxy to see if the new GM wanted to buy the rights to the old company.
If this is truly a “new GM” it should have to certainly look like a brand new company.
You hit the nail on the head my friend. I find it disgusting that certain companies can claim the “ripple effect” and get federal funding while individuals are out their risking their own assets to take a risk and start up a new company.
All the hype behind this IPO was just that – hype. Take away all my bills and debts and let my income post to my bottom line, ill look pretty good on paper too. I don’t think the media spent as much time focusing on the fact that they are still loosing money overseas.
They are still the same lame duck company they were for most of the 00′s with the expectation that during the bottom of the business cycle they used fed financing to help them over the hump…..we might as well have extended them the full discount window like a bank…..
the feds did absolutely nothing for small businesses? i suppose that stimulus package that you were no doubt vehemently opposed to did nothing to help small businesses. those road construction jobs, weatherization and research dollars that went to small private businesses did nothing to help them stay solvent. how about the fact that 40% of stimulus funds were in the form of tax cuts – a large portion of which went to small businesses!!
i honestly don’t get why people refuse to recognize the critical role the government played in savings all of us in the midst of the financial crisis. you should check out warren buffet’s recent op-ed. or is he now a communist too?
Many insist on making a correlation between the individual shop owners and GM. Certainly I am sympathetic to the small business owner that has a failed venture and to the job losses that ensue from them. However, the impact of those failures on our economic society is marginal compared to one that involves as huge an enterprise as GM. How so? GM’s failure would have been immediately devastating. Small business losses get filtered through the system discreetly. Simply put, the U.S. government bailed out GM in order to avoid a greater panic that had already been developing. When a company is as visible as GM, understand that the losses of hundreds of thousands of jobs, in an instant, would have sufficed to bring about exactly that. Wrong or right, they did what they thought was necessary. It is ironic how we criticize them for bailing out GM and at the same time criticize them for not having bailed out Lehman Bros. Whatever suits us, right?
Thats what cracks me up about all of this. Bush did the bail out NOT obama. people love to blame him but its just not true. Even Bush recalls this in his own book. Secondly GM is the largest seller of cars in china. If we would have went it under GM assets would have been bought by china and this country would have seen the largest future growth of wealth thrown away. Why the GOP looks at this world as US only i saw we need to start understanding we are not Top dog anymore and a GM gone down would have meant china buying it and owning one of our crown companies. So what is the UAW pays there employees decent wages. This is good for American to have people who do not need to go on welfare no? or should everyone just stay on unemployment and let China take over all of our old jobs. I am no Union guy but i think GM did it right and going forward this will only be good for the country as a whole and we need to start thinking out side of the box or the only people with money in the future will be China and we will be broke.
well put and agree completely.
well played!
Where in the constitution does it say the gov’t can bail or private companies? Check Necessary and Proper Clause, Commerce Clause or Article II spending clauses.