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. 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.