The U.S. Treasury’s plan to sell its remaining 32 percent stake in General Motors Co. (GM:US) is a leap forward for the Obama administration’s effort to end a $418 billion bailout program that in four years was transformed from a political albatross to a winning campaign issue.
The decision to exit GM within the next 15 months, and the Treasury’s sale last week of its remaining shares of insurer American International Group Inc. (AIG:US), will erase two corporate symbols of the 2008 financial crisis from the government’s Troubled Asset Relief Program. Taxpayers spent $182.3 billion on AIG and $49.5 billion to rescue GM.
“This shows that the Obama administration, as it enters its second term, wants to close the book on TARP as quickly as practicable,” said Stephen Myrow, who worked on the program in 2008 as a Treasury official in the administration of George W. Bush and is now managing director at ACG Analytics Inc., an investment research and consulting firm in Washington.
The stock sales, announced as Treasury Secretary Timothy F. Geithner prepares to leave office, mark a turnaround for the Obama administration. Public anger over the bailouts, initially intended to prevent a financial meltdown by rescuing banks, helped the Republican Party retake the House of Representatives in 2010. Two years later, President Barack Obama turned the issue against Republican opponent Mitt Romney to help win Ohio and Michigan, key states in the presidential contest.
GM plans to buy 200 million, or 13 percent, of its shares for $5.5 billion by the end of the year. That would leave the Treasury with about 300 million shares, or 19 percent on a fully diluted basis, after the transaction.
“The question most often asked is whether TARP was successful,” said Kevin Petrasic, a partner with law firm Paul Hastings LLP in Washington and former special counsel at the Office of Thrift Supervision. “The more important question is did TARP fail, and we do know the answer. It didn’t fail. Where we are now, compared to where we were three years ago, demonstrates that it didn’t fail.”
Congress approved $700 billion for the financial rescue in October 2008, and the bill was signed into law by Bush in the midst of a presidential election campaign that Obama won. The economy was shrinking at an 8.9 percent annual rate in that quarter, and 1.95 million jobs were lost.
Growth resumed in the third quarter of 2009, and unemployment last month fell to 7.7 percent, the lowest rate since 2008. The Standard & Poor’s 500 Index has more than doubled since reaching a 12-year low on March 9, 2009.
“My concern is that Treasury might put GM on autopilot and forget about how taxpayers ended up owning the company in the first place,” Christy Romero, the special inspector general overseeing TARP, said in an interview yesterday. “Treasury just can’t focus on its exit from these investments. It has to focus on ensuring that TARP was worth it and there’s continued financial stability for our economy.”
GM surged 6.6 percent to $27.18 yesterday as the automaker said it would pay $27.50 a share, a 7.9 percent premium over the previous day’s closing price. The Standard & Poor’s 500 Index lost 0.8 percent to 1,435.81 as deteriorating federal budget talks fueled concern automatic tax increases and spending cuts will be triggered.
The shares gained 26 percent this year through Dec. 18, when they remained 23 percent below the company’s initial public offering price of $33 a share.
The deal puts break-even further away for Treasury, which has garnered about $23 billion through GM’s 2010 IPO, debt repayment, repurchasing of preferred stock, and interest and dividends. That means the U.S. would need almost $70 for each of the remaining 300 million shares to recoup its investment, up from about $53 before yesterday.
The Congressional Budget Office estimated in October that TARP, which stabilized banks including Citigroup Inc. and Morgan Stanley, would ultimately cost taxpayers $24 billion, down from a projection of $109 billion in March 2010.
The rescues of GM, Chrysler Group LLC and auto lender Ally Financial Inc. cost taxpayers $79.7 billion, and $40.9 billion has been returned. Taxpayers have invested $49.5 billion in GM and received $23 billion back, not including the $5.5 billion GM plans to buy from the Treasury.
Several pieces of the bailout remain. The Treasury said the timing of its exit from GM depends on market conditions, and it retains a 74 percent stake in Ally. The government is also running housing programs that have helped fewer homeowners than it initially hoped and is trying to sell shares of 218 banks that still owe taxpayer money.
“With the year-end upon us, everyone wants to clean up their balance sheets,” said Kip Weissman, a partner representing banks for Luse Gorman Pomerenk & Schick PC in Washington. The GM sale allows the Treasury to “show a higher profit and lower outstanding balance on TARP, and investors can take some GM profits.”
Outside of TARP, taxpayers have invested $187.5 billion in mortgage finance companies Fannie Mae and Freddie Mac and received dividends of $50.4 billion. The Obama administration wants to overhaul the housing-finance system and wind down Fannie and Freddie, which pool home loans for sale to investors and guarantee interest and principal payments. The firms have operated under U.S. conservatorship since 2008.
The auto bailouts by the U.S. and Canadian governments propped up a light-vehicle industry that has since reported three straight years of at least 10 percent growth. Cars and light trucks sold at a 15.5 million annual rate in November, the most since February 2008, according to data from Ward’s Automotive Group.
The auto bailouts were “not a bust but not a success,” said Phillip Swagel, who was an assistant Treasury secretary under Bush and is now a professor at the University of Maryland in College Park. “The economy would have been worse without the auto rescue, but the administration’s method was more costly than it needed to be.”
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