Monday, the U.S. Treasury Department sold off its remaining shares in General Motors (NYSE: GM), closing a chapter of the auto industry bailout with a cringe-worthy $10.5 billion loss of taxpayer dollars.
The federal government spent $49.5 billion to save the doomed auto-making giant in 2008. It took on about 912 million GM shares (a 60% stake) in exchange for cash.
In 2009, GM went through bankruptcy, and stockholders’ investments disintegrated.
Over the course of the last five years, the government recovered $39 billion on the GM bailout – culminating in a loss to the tune of $10.5 billion.
The numbers are being reported as a success by the administration and media outlets. Michigan-based think tank The Center for Automotive Research issued a report on Monday indicating that if GM had been allowed to go under, almost 1.9 million jobs would have been lost in 2009 and 2010, along with billions in tax revenue going toward unemployment benefits and food stamps.
That’s all well and good. But what’s not being addressed is that taxpayers will never be made whole, and no matter how you spin it, $10.5 billion is a massive loss.
“The government should never have bailed out GM in the first place. Any other investor would consider that a 21.21% loss,” Money Morning’s Chief Investment Strategist Keith Fitz-Gerald said.
The sad state of the matter is, taxpayers are given no option to “opt out” of giving their hard-earned money to a policy – or a company – they might not believe in.
Remember in 2008 when the “Big 3” chief executive officers of GM, Chrysler, and Ford Motor Co. (NYSE: F) went to Washington to ask for billions in bailout money, each flying in on big corporate jets? That didn’t exactly inspire sympathy or confidence from U.S. taxpayers.
Nonetheless, taxpayers had no choice. Five years later, the government has spent $80 billion on bailing out the automotive industry.
It wants people to believe the bailout was a success, but this is a political success – and an economic failure.
“Any company can be kept on life support with enough taxpayer backing,” Fitz-Gerald pointed out. “Ultimately, it hurts taxpayers and our economy.”
The Bailout Era
Historically, private industry has meant private gains and private losses.
The United States has seen failed institutions that made shoddy products, or overextended themselves, or had incompetent management, in abundance through its history. And the government was not in the business of creating jobs; instead, it created a healthy private sector environment which, in turn, created jobs.
Not so anymore…
“Critics can debate the merits of the bailout all day long, but I think this speaks to a much bigger issue,” Fitz-Gerald said. “The game has shifted to private gains and public losses, with the taxpayers being involuntarily forced to bail out decades of bad decision making.”
Handouts have fundamentally changed the psychology surrounding roles played by the private and public sectors.
If the public must bail out the GMs of the world, maybe savvy investors can offset the losses along the way.
So, where should investors go from here?
Investing in Post-Bailout General Motors (GM) Stock
General Motors (NYSE: GM) stock rose 1.8% (73 cents on the dollar) in after-hours trading following Monday’s announcement. It rose another 1.8% in regular trading, and hit $41.17 – the highest level since GM’s 2010 IPO.
GM hit $33.00 in May 2013, finally eking its way to even with its November 2010 IPO price. Since May, the stock price has steadily climbed 25%.
Another product of federal bailout, global insurance company AIG (NYSE: AIG), completed repayment of its full $182.3 billion loan last December. It was trading at around $35.00 per share in the beginning of January 2013 and has enjoyed a steady rise, now sitting around $49.70.
Despite GM’s recent signs of life, and AIG’s post-bailout success, Fitz-Gerald does not recommend investors get on board.
“If anything, I think short GM. Too many people like it right now and that’s dangerous for any stock, even with government backing.”
Did you hear the one about the Wall Street firm that made $15 million by manipulating a credit default swap? (Yes, the one “The Daily Show” highlighted.) Totally legal, too… Read all about it here: How the Masters of the Financial Universe Use Derivatives for Fun and Profit
- Money Morning:
The Volcker Rule Surprises Wall Street Thanks to JPMorgan
- Money Morning:
How the Masters of the Financial Universe Use Derivatives for Fun and Profit
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