It's not very often that a presidential candidate promises to promptly write off $15 billion in taxpayer money if he's elected. But that's what Mitt Romney has done.
Romney told the Detroit News recently that as president, he'd quickly sell the U.S. government's stake in General Motors, which is valued at about $10.6 billion, based on GM's current stock price. But GM still owes the government about $26.4 billion, so selling at the current price would leave taxpayers out roughly $15.8 billion.
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The Obama administration would dearly love to end its involvement with GM as well, and reduce a glaring liability among voters opposed to the 2009 auto bailouts. That would suit GM just fine. But taxpayers taking a loss on the deal would be an ugly ending. Besides, the government can hold onto its shares as long as it likes, waiting to sell until it can get its money back in full. It can also do that as a passive investor with no involvement in the company's day-to-day operations.
The problem is GM's stock price. When GM emerged from bankruptcy and went public again in 2010, its stock entered the market at about $35. It went as high as $39 but has since drifted down to about $21. For Washington to get its entire investment back, the stock price would have to rise to about $52.
The depressed stock price doesn't mean GM is reeling again. The company is actually healthy, with a much leaner operation than a few years ago, a lineup of cars critics and customers generally like, and strong cash flow. At the current share price of about $21, stock analysts on average give GM an "outperform" rating, according to S&P Capital IQ, which means they expect GM's stock price to rise faster than the overall market. And GM has already mustered the cash to pay back $23.1 billion of the $49.5 billion it got from the U.S. government.
The factors holding GM back include several the automaker can't control. Car sales remain far below the peak levels of 2006. Japanese manufacturers have recovered strongly from the 2011 earthquake, eliminating a sales boost GM and other competitors enjoyed as Japanese inventories thinned out. And the financial crisis in Europe is holding back the whole global economy, and making it harder for GM to fix Opel, its money-losing European division.
The stock could still get as high as $52 some day, allowing the government to break even. But that would probably require a robust economic recovery, which isn't on the near horizon.
Romney obviously wouldn't wait that long. As a very successful investor, Romney surely knows that there are times in business when it makes sense to end a failed project and cut your losses. But that usually happens when continuing the project would incur additional costs, so killing it saves money that would have been lost otherwise.
That's not really the case with GM. While there's a stigma associated with the government's ownership stake, there would be no apparent financial gain for the government or for GM if Washington sold its shares at a steep loss. It might even damage GM's image more, while flooding the market with shares at the wrong moment could further weaken the stock price and harm GM's finances.
It might also be hard to simply write off $15 billion in taxpayer funds at a time when the government is desperate for revenue. That amount of money, for example, is twice the annual budget for Head Start, the program for disadvantaged kids that's already under budget pressure. It's more than the government spends every year on basic science research, and almost equal to NASA's entire budget. Any president would find it difficult to turn his back on that amount of money, just for the sake of principle.
So if Romney is elected president, his promise to divest the government's stake in GM could come late in his first term--around the same time President Obama might end up selling if he remains president. Nobody likes to lose money, not even the commander in chief.
Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.
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