The U.S. Treasury Department is getting out of General Motors (NYSE:GM). The federal government announced December 19 that it plans to sell 500 million shares of GM, ending the over $50 billion bailout which began four years ago. GM is repurchasing 200 million of its shares by the end of this year at $27.50 per share. The Treasury Department will then unload the remaining 300 million over the next 12 to 15 months. By the middle of 2014, the federal government will have completely washed its hands of GM. Despite losing money on its investment, I'll look at why America wins in the long-run.
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The Ultimate Loss
GM is paying $5.5 billion for this current bunch of shares, leaving the government $21.6 billion in the red with 300 million shares left to sell. If the government gets the same price for these final shares, it reduces the amount outstanding by $8.3 billion leaving taxpayers short to the tune of $13.4 billion. However, I don't see the final number being quite that high unless GM lays an egg in the next couple of quarters or the S&P 500, which the Bank of Nova Scotia (NYSE:BNS) projects will gain 10% in 2013, doesn't. If neither of these comes to fruition, I could see GM delivering a similar performance to 2012, which is up approximately 33% through December 19. Based on an estimated 2012 closing price of $27.50 and a 33% appreciation in 2013, taxpayers could see a deficit of just $10.6 billion on its $51 billion bailout. However, if the economy even remotely recovers in Europe, it's possible that GM's stock could double next year. If so, the shortfall dwindles to $5.1 billion, a pittance for a government with an annual defense budget of $700 billion.
SEE: Top 6 U.S. Government Financial Bailouts
Mitt Was Wrong
The Center for Automotive Research estimates 1.4 million jobs were saved at GM, Chrysler and the rest of the auto industry as a result of the bailout. Some in the media portray the government's exit at a loss as some sort of major shame; it's entirely the wrong way of looking at the events of the past four years. The government invested $80 billion or $57,000 for every job saved. If the two firms were allowed to go bankrupt, I'll assume that the ultimate number of jobs lost would have been approximately 700,000 or half of those saved as a result of the bailout. However, those 700,000 jobs would likely be permanent. At an average annual salary of $40,000 (conservatively low), the economy would have lost approximately $28 billion in annual spending. It's not an insignificant number. Ford (NYSE:F) CEO Alan Mulally appeared on Fox News in September reminding investors that although it didn't take official bailout money (it did borrow $5.9 billion in 2009 for upgrading four facilities) the funds directed to the other two Detroit car companies were absolutely necessary to keep the auto industry, which contributes 12 to 15% of America's GDP, from imploding and taking out its supply chain. Again, I find it absolutely amazing that anyone can criticize the auto bailout when America has been bailing out defense contractors (grossly overpaying for weapons, etc.) for decades. Even if the ultimate loss on GM is $13.4 billion, it was money well spent. America makes cars and trucks. It's that simple.
GM's Road Ahead
GM CEO Dan Akerson recently sent an email to employees outlining the future of the company without the federal government tethered to its bumper. The biggest question mark Akerson wanted to put to rest was an American public that is suspicious of GMs ability to learn from its past mistakes. In the email, Akerson said, "Some of the lessons were financial, including how important it is to have a fortress balance sheet and a low break-even point . More than anything else, we are learning to be humble and to genuinely appreciate every customer." You can be critical of the bailout but I think it's fair to say that Akerson has proven his mettle since taking the helm Sept. 1, 2010. If nothing else, his open market purchase in May 2011 of 30,000 shares of GM stock at $31.33 per share (far more than Alan Mulally) indicates a commitment to the company that few of the other automotive CEOs can muster. This time next year I see Akerson's investment nicely in the black - just like GM itself.
SEE: How To Evaluate A Company's Balance Sheet
The Bottom Line
There are those that argue GM is on the precipice of another financial meltdown. I don't buy it for minute. However, isn't it nice that we're even having that debate. Four years ago it looked like the Ford-GM-Chrysler who's-better argument was ready to go up in smoke permanently. It still might but it won't be because the bailout failed. America won regardless of the ultimate financial loss.
At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.