CNS news
written by Matt Cover
Thursday, May 12, 2011
As the Treasury Department seeks to extricate itself from the 2009 auto industry bailouts, it will struggle to balance being both an investor and a government agency, in the view of the Government Accountability Office (GAO).
A GAO report also notes that the Treasury will not likely recoup all of the $62 billion it spent to prevent General Motors and Chrysler from going through the normal bankruptcy process.
“Treasury’s divestment strategy for its GM and Chrysler investments – including the timing of Treasury’s exits and the extent to which it will recoup its investments – will depend on how Treasury balances its goals of maximizing taxpayers’ return and exiting as soon as practicable,” the May 10 report stated.
The government watchdog said the price of GM shares still owned by the Treasury would have to rise dramatically for the government to break even on the bailout – a development the GAO thinks is highly unlikely to happen in the near future.
“GM’s share price will have to grow significantly for Treasury to approach fully recouping its investment in the near term,” it reported. “GM’s share price will have to increase over 60 percent from the IPO [Initial Public Offering] share price to an average of over $54 for Treasury to fully recoup its investment in GM.”
The Treasury will therefore have to sacrifice one of its two main goals in managing the auto bailouts – protecting taxpayers and limiting involvement. GAO said that if the department hopes to at least break even on the deal, it will have to own GM stock for the foreseeable future.
“Treasury will have to temper any desire to exit as quickly as possible with the need to maintain its ownership interest long enough for the company to demonstrate sufficient financial progress.”
In other words, the Treasury will either have to sell its remaining GM shares in the near term and lose taxpayer money, or remain a shareholder for longer in hopes that the share price rises enough to make back the original bailout.
The Treasury spent $62 billion on the bailout. Had the two auto giants gone through the normal bankruptcy process, one or both may have been liquidated. Recently, GM became a publicly-traded company again, using the proceeds from the stock sale to raise $13.5 billion.
The Treasury also sold some of its GM stock during that sale, or IPO, bringing in $2.1 billion. In April 2010, GM repaid a $6.7 billion loan, bringing the total to $22.5 billion in repaid bailout funds.
Chrysler, whose bailout consisted mostly of loans, has been less successful in repaying taxpayers, returning only $1.9 billion of the $12.5 billion.
Because its bailouts to Chrysler were different than the ones it offered GM, the Treasury will have an even more difficult time extricating itself, the GAO report said.
Chrysler, unlike GM, is not a public company and so cannot rely on stock sales. Also, because the Treasury does not hold a large amount of Chrysler stock – as it did in the case of GM – it cannot merely sell off its investments when the time is right.
“Treasury’s options for divesting its stake in Chrysler differs from those it had for GM, given the type and amount of Treasury’s investment in Chrysler.”
GAO said that Chrysler, like GM, will need to become much more valuable than it is now if the Treasury is to recoup the full cost of the bailouts. Further complicating matters is that fact that Chrysler has a much steeper hill to climb, needing to become more valuable than it has ever been in order for the government to break even.
“We estimated that Chrysler would need a market capitalization of about $41 billion for Treasury to earn enough on the sale of its equity to fully recoup its investment in Chrysler,” the report stated.
“As a point of reference for these values, in 1997, the last year Chrysler was a publicly traded company, its market capitalization value ranged between $23.1 billion and $31.7 billion, and in 1998, when it merged with Daimler, its estimated value was $37 billion.”
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