The Obama economic team crowed when they finally shoved a big chunk of their General Motors stock into the hands of the public some six months ago in the much anticipated GM IPO. More crowing followed last week when GM announced record profits.
Yet the markets were not so easily fooled. GM stock actually fell 3.3 percent on the news. It remains stuck at around $32 a share, below its November 2010 IPO price of $33. The reason? Those record profits were largely made up from one time asset sales by the company to boost cash which it desperately needs to bolster its underfunded pension plans!
As even the liberal Atlantic magazine admitted:
Okay, let’s not get too excited here. GM sold off big stakes in Delphi (formerly its captive parts supplier) and Ally Financial (formerly its capital arm) to generate the bulk of that profit; the company’s not making record money because it sold three times as many cars. GM is still excessively dependent on big incentives and fleet sales to move cars off of its lot, which means that despite quality enhancements made possible by the bankruptcy (which lowered fixed costs, and allowed them to put more money into making cars), their brand still hasn’t recovered from decades of neglect.
The Financial Times called the quarterly results “sobering” – indeed, as if people should put down the champagne bottles and smell the coffee. To the extent actual sales of cars instead of financial engineering helped the bottom line it was from GM operations in other parts of the world (particularly Asia and Europe) not the US.
As I wrote at the time of the IPO as long as GM’s market capitalization refuses to budge, taxpayers face significant losses. In fact, the value of GM must top 90 billion dollars – nearly double its current value – or else the US government will not reach break even point on its original investment in the company.
Sure enough, while publicly Obama crows, privately his team is preparing to cut their losses and run. The Wall Street Journal reported that the government is going to throw in the towel on their GM stake soon after the current six month lock up agreement expires at the end of May.
Meanwhile GM continues to send jobs off shore not to former UAW members in the midwest – GM recently put $100 million into its South Korean subsidiary and another $52 million into a Chinese joint venture. As the GM 10-Q stated:
In the three months ended March 31, 2011 73.3% of our vehicle sales volume was generated outside the United States, including 44.5% from emerging markets, such as Brazil, Russia, India and China (collectively BRIC), which have experienced the industry’s highest volume growth….We view the Chinese market, the fastest growing global market by volume of vehicles sold, as important to our global growth strategy and are employing a multi-brand strategy, led by our Buick division, which we believe is a strong brand in China.
This leads to a very odd state of affairs in the blogosphere: the right criticizes Obama for propping up failed auto companies to save working class votes while the left celebrates Obama for propping up failed auto companies that profit at the expense of American workers.
Yet in the case of GM neither position makes sense. The working class is not better off than it was and GM is far from being a successful company. We just have one very large troubled business in the middle of a global transportation industry that is itself deeply troubled and a political system that is incapable of responding to the problem in a sensible fashion.