Obama: GM Will Repay Bailout Money?
By Randall Holcombe • Thursday August 5, 2010 2:11 PM PST •
President Obama says “We expect taxpayers will get back all the money my administration has invested in GM.” As I write, GM is planning an initial public offering of stock (IPO) to raise money to pay back “...the money [President Obama's] administration invested...” As an aside, I do like the way the president takes personal credit here for “investing” your tax dollars.
Doing a back of the envelope calculation, the federal government (whoops, I meant to say “the Obama administration’) owns 60.8% of GM, for which it paid $49.5 billion. If GM can cover the $49.5 billion with a stock offering, that would indicate that 60.8% of the company is worth $49.5 billion, so 100% of the company would be worth $81.4 billion. Maybe. The market capitalization of the Ford Motor Company is about $44 billion as I write. Would investors really value GM at twice the value of Ford?
(I’ve actually overestimated the value of the Obama administration’s stock here, because an IPO would dilute the ownership shares of the current owners, which are mainly the Obama administration and the United Auto Workers. So the company would have to be worth more than $81.4 billion for the Obama administration’s shares to be worth $49.5 billion. That’s one reason I called this a “back of the envelope” calculation.)
The plan is for GM to issue stock to the public, which would then allow the Obama administration to sell their shares on the market, at the market price. My judgment is that investors would have to place an unrealistically high value on GM stock for the Obama administration to be repaid.
I haven’t even considered the time frame over which the Obama administration will sell its stock. Obviously, it couldn’t just offer its whole 60.8% share immediately, because the supply of shares for sale would substantially outstrip the demand, pushing the share price down. That means that after the IPO, the market price would be an upper bound for the value of the Obama administration’s shares, and if it continues to trickle its shares onto the market, that will continue to exert downward pressure on the price.
President Obama’s view that his administration will get all that money back just doesn’t seem realistic to me. Even if they stretch out their share sales to the end of his administration, that just gives him six years to divest and get the money back. (It still could turn out that the Obama administration’s investment in GM will do better than your “investment” in Social Security, though.)
The current plan is for the IPO to take place prior to the November election, so we should see very soon the market value of the Obama administration’s share of GM.