The Exchange

As GM stock falls, timing of the government's exit looks shrewd

The Exchange

DOJ investigates General Motors

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DOJ investigates General Motors

DOJ investigates General Motors
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If the government could investigate itself for insider trading, the timing of a recent stock sale might have triggered a few alerts.

In December, the Treasury Dept. sold the last of its shares in General Motors (GM), wrapping up the controversial bailout that began when GM declared bankruptcy in 2009. Taxpayers ultimately lost about $10 billion on GM, and some critics argued the Treasury could have recouped more of its investment if it held on to its GM shares longer and waited for the price to rise. But now the timing of the sale looks superb, especially since a mushrooming safety controversy — which the government knew about for years but the public didn’t — has been pushing down the value of GM shares.

In February, GM announced the recall of about 1.4 million Chevrolet Cobalts, Pontiac G5s and other vehicles for a faulty ignition switch that’s been linked with 13 deaths in 31 crashes. As more information about the safety problem has surfaced, it's become apparent GM knew about it for nearly 10 years and did nothing to fix it, which has now prompted Congress to investigate and the Justice Dept. to consider pressing criminal charges. Had the Treasury held on longer to its GM shares, that could have led to a bizarre situation in which the government ended up investigating and perhaps even prosecuting a large business entity it held a controlling interest in.

A strange situation

The whole situation is weird enough as it is. A chronology of events GM provided to the government’s auto-safety regulator, the National Highway Traffic Safety Administration (NHTSA), shows GM was internally investigating the ignition-switch problem even in the midst of the company’s 2009 bankruptcy filing and government bailout, which gave the Treasury Dept. a 61% ownership stake in GM. There appears to have been a lull in GM’s internal inquiry from 2009 to 2011, but the probe intensified from 2012 to early 2014, leading to GM’s decision to mount a recall in February.

General Motors returned to public markets in November 2010. On Dec. 21, 2012, the Treasury Dept. announced it planned to unload its GM shares over the course of the next 12 to 15 months, and it completed that process by Dec. 9, 2013. During that time, the price of GM shares mostly rose, ranging from about $27 to $41. The peak price in GM's post-bankruptcy era occurred about two weeks after Treasury sold its final GM shares, at the end of 2013. So the Treasury sold as the stock price was rising, finally exiting its position with the share price near its peak — and about to fall.

In a normal investing situation, that would constitute excellent timing, perhaps even raising questions about whether the sellers knew more than they were letting on. Treasury, for its part, said all along it was not involved in operational issues at GM. And by selling GM shares at a $10 billion loss, when it could have waited longer, the Obama administration signaled its eagerness to disentangle itself from the automaker and from awkward questions involving executive pay, regulatory issues, political posturing and other matters. A Treasury spokesperson reiterates the department was not involved in the day-to-day management of the company, and had no prior knowledge of the ignition-switch issue.

The NHTSA did know about the problem, however, and raised it with GM no later than 2007. The NHTSA is part of the Transportation Dept., not the Treasury Dept., and even though most Americans may think of “the government” as one organization, it’s actually hundreds of agencies that don’t necessarily communicate with each other and don’t even have the same computer systems. So it’s quite plausible information held at NHTSA never reached Treasury and had no bearing at all on its sale of GM stock. Still, it’s a connection Congressional investigators — representing the arm of the government charged with oversight of the executive branch — will undoubtedly explore.

The timing of Treasury’s GM stock sales, meanwhile, could end up being a better deal for taxpayers than it initially seemed. The median price of GM stock in 2013, when Treasury sold most of its shares, was about $34. GM shares are now down around 14% for 2014 and are trading around $35. So if they fall much more, 2013, in retrospect, will look like a good year to have sold. And if the shares recover, at least the government won’t have to investigate itself as the GM saga develops.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.

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