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The Feds as Stock Speculators

Sunday, May 15, 2011

What the government should do with its large stock portfolio.

Much of the American public has soured on the large government bailouts of the recent financial crisis, a verdict that bailout proponents consider unfair. It is hard to render a final accounting of damage done or disaster averted while the U.S. government continues to hold large ownership stakes in major firms. The Obama administration is gambling that, with time, the firms will flourish, the stocks will rise, and the interventions will be vindicated. But it is placing these high-stakes bets with taxpayer funds.

The Atlantic's Megan McArdle runs the numbers on the federal government’s investment in General Motors, concluding that it has been a money-losing endeavor, but that the government should not extract itself too soon.

She’s reacting to pieces like one from Jonathan Cohn at The New Republic, who asked, “Will the voters ever give President Obama credit for rescuing the American auto industry? I have no idea. But it looks more and more like they should.”

Cohn was crowing about GM’s announcement this month that it had turned a profit for a fifth consecutive quarter. McArdle asks how much it cost the government, on balance, to stand up the revived automaker. She concludes that the net bill will run between $10 and $20 billion. She writes:

What lesson, exactly, are we supposed to learn from this success? What question did it answer? “Can the government keep companies operating if it is willing to give them a virtually interest-free loan of $50 billion, and a tax-free gift of $20 billion or so?” I don't think that this was really in dispute. When all is said and done, we will probably have given them a sum equal to (GM’s) 2007 market cap and roughly four times GM's 2008 market capitalization.

The question of how much U.S. taxpayers will ultimately lose requires some guesswork, in part because the federal government still holds a large stake, even after GM’s initial public offering last November. Here’s where McArdle’s piece takes an odd turn, though. She criticizes the government for its rush to divest:

The Obama administration's rush to dispose of its GM stake before the 2012 election is probably costing us billions. No one I interviewed for my piece on GM was exactly enthusiastic about an early IPO; doing it so quickly meant that the company had very little to show in the way of earnings and stability. Now the government may rush to sell all its remaining shares this summer even though this means locking in a substantial loss.

McArdle estimates it cost the government, on balance, between $10 and $20 billion to stand up the revived automaker.

The presumption here is that the government is wiser, more patient, and more clairvoyant than the private investors out there. It suggests the government should have been more optimistic than the skeptics who might have shunned GM’s IPO because of its short record.

But the numbers seem to say just the opposite. GM went public at $33 per share and rose to $35 almost immediately. After more time has passed and GM has extended its streak of profitable quarters, the stock was trading around $31.40. Of course, the stock could still rise from there. Or it could keep falling. The global auto market is very competitive and there is plenty of capacity out there. My concern is just the opposite of McArdle’s: that the government will hold onto its shares as a means of gambling for redemption. That would provide them with a ready rejoinder to criticisms of the big loss: “No, it’s too soon to tell.” This political gamble, however, puts taxpayer funds at risk and perpetuates all the troubling aspects of having the government as a part owner of major American firms.

The presumption here is that the government is wiser, more patient, and more clairvoyant than the private investors out there.

Other parts of the government’s large stock portfolio (wince) have similar risks. Reuters reported recently that the Treasury may pull out of the sale of American International Group (AIG) stock if the sale would occur at a loss: “Sources, speaking on condition of anonymity, said the Treasury was committed to making a profit on this and future offerings and would pull the deal off the table if it could not do so.”

The story reports that the source of concern is a one-third fall in AIG’s share price this year. Presumably, a delay would be based on the confidence that this trend will be reversed. After all, what could go wrong with a business like AIG?

The government’s reluctance to sell may be comforting to those who worry that it is too eager to recede from being a major stockholder in large (erstwhile) private corporations, or who believe that stocks have nowhere to go but up. For me, the government cannot be eager enough.

Philip I. Levy is a resident scholar at the American Enterprise Institute.

FURTHER READING: Levy also wrote, “Who’s Stalling Whom on Trade?” “Protection Rolls On,” “An 18-Wheel Bellwether” on trucking trade with Mexico, and “Will the President Confront His Base on Trade?” Claude Barfield adds “The Doha Round: No More Delays” and asks “From ‘Government’ Motors to ‘Shanghai’ Motors?


Image by Rob Green/Bergman Group.

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