GM’s Stock Offering Goes Well, But Some See Nothing to Cheer

Published November 18, 2010

Many investors and financial industry commentators have been heaping praise on General Motors Co., including The Wall Street Journal, which said GM’s initial stock offering this week represents “a remarkable two-year turnaround in which the car maker went from begging for a government bailout to posting its first steady profits in more than six years.”

Others say it is no such thing, including Robert Wenzel, editor and publisher of

“I wonder what the initial GM bondholders, before the re-organization, think. They were forced into settlements instead of getting their day in bankruptcy court,” he said. “If you want to go with the fiction that this was a true turnaround that could be completed so quickly, then a severe injustice was done to those bondholders who did not receive 100 cents on the dollar.”

‘Matches Amount Pumped Into System’

Wenzel says inflation is a real fear because of the government’s bailouts of GM and other firms and the ongoing printing of new money by the Federal Reserve, led by Chairman Ben Bernanke.

“Without Bernanke’s money printing, this deal would have never gotten done,” he said. “We now have a very manipulated economy. I note, for example, that the money expected to be raised in the GM IPO, $23.1 billion, matches up almost exactly with the amount of money Ben Bernanke has pumped into the system so far with his QE2 monetary expansion. The only thing it will really mean for taxpayers is another form of tax, the inflation tax.”

‘What’s So Remarkable?’

Competitive Enterprise Institute Director John Berlau was also unimpressed by the GM stock sale, asking “what exactly is so remarkable about a company coming back to life” after a taxpayer bailout and  “additional billions in tax breaks not available to other companies, and even an amazing ‘sovereign immunity’ exemption for this IPO from anti-fraud securities laws and lawsuits? With this massive infusion of government aid and favors, even a company selling ketchup Popsicles to women wearing white gloves would likely show a profitable quarter!”

GM sold 478 million shares of common stock and 87 million shares of convertible preferred stock in its initial public offering (IPO), bringing in about $20.1 billion. The underwriters have an option to purchase up to 71.7 million additional shares of common stock, for a total of $2.37 billion, and an additional 13 million shares of mandatory convertible junior preferred stock from the company, for a total of $650 million, to cover over-allotments, if any. The potential total tops $23 billion.

Small investors had virtually no chance to buy the initial shares, as the deal was structured to give big investors such as mutual funds, pension funds, and Wall Street’s wealthiest individual investors first shot.

Chris Liddell, GM’s vice chairman and chief financial officer, said in a statement: “With a new business model, centered around designing, building and selling the world’s best vehicles, we’re ready to compete and are confident about the company’s future.”

More Than Expected

The $33 price for the common shares was higher than most analysts thought the company could get just a few days before the stock offering. The Wall Street Journal reported cheers greeted GM executives when they walked into the Manhattan headquarters of one of the lead underwriters, Morgan Stanley – itself a government bailed-out firm – after the stock sale.

The sale took the federal government’s ownership stake in GM below 50 percent. The government had been a 61 percent shareholder going into the sale, the result of nearly $50 billion of bailout money the government poured into the company to keep it in business. GM has received billions more in tax breaks.

The government has also sent billions of dollars to Chrysler to save that company.

Ford Motor Co., the nation’s other domestic automaker, took no federal bailout money and stayed out of bankruptcy.

‘Should Remain Incensed’

“Taxpayers who will be responsible for making good on the increased tax burden represented by the GM bailout, in the form of new Treasury debt offerings as well as future interest payments on that debt, should remain incensed about the whole thing,” said Taylor Conant, a financial analyst for a private investment management firm in Dallas.

He added he doubts the government will ever get rid of the debt it took on to save GM, even if the government recovers everything it spent in constant dollar terms, not in cheaper inflation-weakened dollars years from now.

“That debt isn’t going away, just like all the other debt that’s ever been raised by the US government isn’t going away. They’re going to keep rolling it over until they can’t anymore” because of bond buyers who will decide the government’s debt has become too risky.

He also said supporters of Ford or foreign automakers with operations in the US have reason to be upset, because “they all shouldered some of the burden of the bailout. It might have been cleaner and easier if the government had just forced these companies to raise their prices relative to GM to allow GM to be ‘competitive,’ or, even better, just instructed them to wire a few million dollars each to GM each month to help GM subsidize its operations. Either way, this bailout is the opposite of a competitive, free market outcome, and it is truly perverse that GM’s competitors should be forced to help pay to keep it propped up.”

Steve Stanek ([email protected]) is a research fellow at The Heartland Institute and managing editor of Finance, Insurance & Real Estate News.