Pulling The TARP Off GM

It’s been a big few weeks for TARP. In the wake of selling its final shares in American International Group (AIG), the government announced last week that it would bow out as the major shareholder in General Motors Co. (GM) within the next 15 months.

The government’s plan to exit GM comes in two steps. First, the government will sell 200 million of its shares, or about 13 percent of the company, directly to GM before the end of the year at a negotiated rate. It will then sell the rest of its shares, presumably on the open market, by early 2014.

What sets the GM transaction apart from AIG, and from virtually all the banks that received funds from the Troubled Asset Relief Program, is that the transaction will be an overall money loser. The New York Times reported that the planned exit would currently mean a loss of about $12 billion for taxpayers, though the exact figure will depend on GM’s stock price when the government sells the open market portion of its shares. Given that the government would have to sell its shares for about $70 each in order to break even, it’s not really a question of whether taxpayers will lose money, only how much. The stock has recently been trading at around $27.

The administration’s bailout plan put GM through a bankruptcy process it would have undergone anyway. The difference was that the government, rather than a bankruptcy court, ultimately dictated the terms. The terms of the restructuring left the United Auto Workers as the clearest winners, giving them a substantial stake in the company and keeping many unionized plants open through periods of low activity and the bankruptcy process. The losers were the company’s creditors and taxpayers, who stood at the back of the line to recover their money.

Still, in the short term, it is not fair to call the GM bailout a failure. The goal was to keep the company operating, and so far, it still is. But it is indisputably a weakened company, with a declining U.S. market share – below 18 percent last month, compared to 22 percent in 2008 and about 50 percent in its heyday. The company’s priorities have also been skewed by the political whims of its government owners, leading it to focus on initiatives such as the heavily promoted but slow-selling Chevy Volt.

The government is clearly more interested in getting out of GM than sticking around to see if the company can make a profit for taxpayers. Steven Rattner, who led the restructuring of the auto industry in 2009 as counselor to the secretary of the Treasury, wrote in a commentary published by The New York Times, “…this intervention needed to be the opposite of Vietnam: We wanted to have as small a footprint as possible while the government was a shareholder and to get out as quickly as practicable.”

GM itself is anxious to escape the weight of its “Government Motors” label, which is not helpful in some segments of the market, and to compete on its own against its fully privatized peers. Soon it will get its chance.

Time will tell whether the TARP bailout of this non-financial company, whose failure would not have been a systemic risk, was a success or merely delayed the inevitable death of a dinosaur.

About Larry M. Elkin 551 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

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