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From Banking and Finance Law Daily, May14, 2013

TARP Restructuring of GM Scrutinized

By John M. Pachkowski, J.D.

The Congressional Research Service has released a report analyzing events that led to the bankruptcy of the General Motors Corporation (Old GM), the U.S. government’s assistance to, and role in, the new company, the progress that General Motors Company (New GM) has made since it was created, and the recoupment of the U.S. government’s assistance for GM. The report was written by Bill Canis, Specialist in Industrial Organization and Business, and Baird Webel, Specialist in Financial Economics.

TARP assistance. The government’s assistance to Old GM and the company’s entrance into bankruptcy was a result of tight credit markets following the bursting of the housing bubble, reduced auto sales, and retiree legacy costs. Prior to its bankruptcy, Old GM received capital in late 2008 and early 2009 from the Bush and Obama Administrations. The government funds, which totaled $14.3 billion, came from the Troubled Asset Relief Program. Overall, the auto industry received $80 billion and the CRS report noted the assistance for the auto industry “was not without controversy, and questions were raised about the legal basis for the assistance and the manner in which it was carried out.” For example, the Congressional Oversight Panel, in September 2009, issued a report recommending, among other things, that the Treasury Department explain more clearly what it sought to achieve with the capital it injected into the U.S. auto sector.

IPO and stock sales. Following its emergence from bankruptcy, the federal government owned 60.8 percent of the New GM, with the remaining share of ownership being held by the United Auto Workers retiree health care trust fund. In the latter part of 2010, the Treasury Department began divesting itself ownership of the New GM. There was an initial public offering of 500 million shares in November 2010 which was considered a “success” since the shares sold at $33.00 a share, well above New GM’s initial target price of $25-$26 per share. As of the first quarter of 2013, the Treasury Department owns approximately 17.7 percent of New GM. The Treasury Department reduced its ownership by directly selling shares back to the New GM and ongoing sales of stock in the public market. At the end of 2012, the Treasury Department announced its intentions to sell its remaining share by March 2014.

Offsetting loss. The report concluded that the U.S. government has realized an $8.4 billion loss on its investment in General Motors, but that “future sale of the remaining GM shares could result in gains that would offset this loss.” However, the report added for the U.S. government to fully recoup the nominal value of its $50.2 billion assistance, the price of the government’s remaining shares would need to approach the $80 per share mark, between two and three times the price that has been received by the U.S. government in past sales.

Companies: General Motors Corporation; General Motors Company

MainStory: TopStory IndustryNews FinancialStability

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