Government Motors: Why Won't D.C. Sell Its GM Stock?

GM Camaro 2013
GM Camaro 2013

Why hasn't Uncle Sam sold its shares of General Motors (GM)?

When GM went public again in late 2010, the federal government did sell some of the shares of GM it acquired as part of the 2009 auto industry bailout package. But the Treasury still owns 500 million shares -- a 32% stake in the world's largest automaker. Why not cash out?

Some have suggested that Washington is holding on to its remaining shares so that it can influence future car design. The theory goes that President Obama wants more hybrid and electric cars on the market, and what better way to get them than by holding a big stake in GM -- big enough to give him big leverage?

Here's the problem with that theory: It's not really happening.

It's true that GM -- like Ford (F) and just about every other automaker -- is working hard to create more fuel-efficient models. However, GM's leaders insist that the government hasn't used its ownership stake to push GM to change its product strategy.

Notwithstanding high-profile "green" models like the controversial Chevy Volt, GM still produces plenty of not-so-green trucks and SUVs -- brawny (and thirsty) sports cars like the V8-powered Chevy Camaro and Corvette. And it will continue to do so, because GM engineers are confident that they'll find ways to keep delivering products like these within the tough new U.S. fuel economy guidelines.

So, no, the Feds aren't holding on to their (our) GM stock for policy reasons. There's a much simpler explanation for why the government hasn't sold its shares yet. It's not a prudent investment move.

The Real Reason the Feds are Hanging On to GM

Remember that the government's big stake in GM is a result of the auto industry bailouts. Under President Bush, and later President Obama, the Troubled Asset Relief Program made a series of loans to GM amounting to $49.5 billion.

GM and the Feds agreed, as part of the automaker's bankruptcy and restructuring in 2009, that those loans would be paid back with a mix of cash and stock. So far, according to GM, about $23.1 billion of the total has been "repaid or returned to the U.S. Treasury." That leaves GM's IOU to the Treasury at roughly $26.4 billion.

But -- and this is important -- technically speaking, GM has already settled its cash loan with the government. As of April 2010, GM had paid back all the cash it was required to pay under the conditions of the TARP deal. GM also bought back some special preferred stock that it had issued to the government, and made payments of interest and dividends.

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That's it. That's all the cash GM owed, and GM paid it back well ahead of schedule. The rest of the loan was paid in stock -- the 500 million shares we're talking about here.

The sale of some stock in 2010 is part of the $23.1 billion that has been returned to the Feds. The remaining shares are right now valued at $13 billion: 500 million shares at $26 each. But the government's breakeven point is around $53 a share.

Selling now would leave the Treasury with a $13.4 billion loss on its bailout of GM, and there's no way that the Obama administration is going to willingly take a loss like that -- especially not during an election year. So unless the stock goes way up, past the government's breakeven point, a sale isn't happening -- not before the election, and maybe not for a while after.

There you have it: The 32% stake in GM has nothing to do with pressuring GM to make more "green" cars. It's simple math, plus a smidgen of election-year politics.

Motley Fool contributor John Rosevear owns shares of General Motors and Ford. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford and General Motors, as well as creating a synthetic long position in Ford.

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