Should the Government Have Held Onto its Stake in GM?

Today, the Congressional Oversight Panel (COP) overseeing the government's bailout activities released a report (.pdf) on the auto industry rescue. In it, the COP said that it's unlikely the government will recoup all of its $40 billion bailout of General Motors and Chrysler, though the loss appears to have been reduced to $19 billion. If further criticizes the handling of the GM initial public offering of stock, saying that taxpayers might have been better off if the government had waited. That might be true, but putting it off would have resulted in other intangible costs.

Over at 24/7 Wall St., Douglas A. McIntyre analyzes the COP's complaint:

The panel is right about one thing. Treasury could have held its GM shares much longer. Taxpayers may have taken a paper loss for a while. The odds, however, that US vehicle sales would recover in the next three or four years is likely given how low they were in 2009. There was also some reason to believe that the stock market would recover more of its 2008 and 2009 losses as time passed. The Treasury did not sell near a top because it was too impatient. There has never been any taxpayer pressure to offer GM shares to the public. A "buy and hold" strategy would almost certainly have worked better than a "buy and sell right away" approach. That strategy has certainly worked well for holders of Ford shares.

McIntyre may very well be correct about the loss. Although it is easy for us to criticize the Treasury for being impatient, it really isn't that simple. Minimizing the loss for taxpayers is supposed to be at the front of Treasury's mind, but that's far from their only concern.

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From the moment the bailout was first proposed, the government had been criticized for its heavy involvement in the private sector. The quicker that it can remove itself from these companies, the less meddlesome the public will feel it is being in the market. Moreover, with GM in particular, it looks bad to other nations that the U.S. would continue to hold such a major stake in the nation's biggest auto company. We've all heard the joke that GM's acronym changed to "Government Motors" after the bailout. The government shouldn't own private sector firms, so its desire to shed its stake in GM as quickly as the market can bear it isn't at all surprising.

Another issue is the constraints that GM faces as long as the government owns the firm. If the U.S. really wants the company to be able to recover, then it must allow it to function with sufficient autonomy. That means lifting restrictions that other firms don't have to deal with, like those on executive compensation. You can complain that since the company is bailed out, it doesn't deserve to be able to operate like typical private sector firms, but that disregards the entire purpose of the bailout, since this attitude could doom the company to failure if it cannot compete on a level playing field.

Finally, there's the uncertainty factor. It's easy to assume that GM's stock will be worth more in a few years. But that's an assumption. What if it begins to lose market share as companies like Ford, Nissan, and Hyundai grow in popularity? What if its new vehicles like its Volt and Cruze, despite all their fanfare in the media, end up not really capturing consumers' interest? What if it has to endure a massive vehicle recall due to a dangerous electrical problem? A number of negative factors could impact GM over the next couple of years, so the government can't really be certain waiting would have produced a much smaller loss anyway.

Ultimately, we have to ask whether we really would have liked the government to continue to own the nation's biggest auto company for several more years in order to ensure a smaller loss for taxpayers. The answer might depend on who you ask. While some taxpayers would prefer not to lose as much on the bailout, others may prefer the government not to own GM for another three or four years. In this case the Treasury had to choose, and its choice may very well have cost taxpayers billions of dollars, but the benefit is removing itself from the auto industry more quickly.