Today the American, Canadian, and Ontario governments released a big piece of General Motors (GM), trading in both Toronto and New York, to the public. At $33 per share, institutions and individual investors scooped up the shares quickly driving the price up 3.6% in regular hours trading.
Initial investors now have a small profit on their shares after the first day, but the taxpayers have locked in a loss of about $4.5 billion so far because to save the company taxpayers had to pay closer to $50 per share. The U.S. Treasury, however, still owns about 25 percent of the company, so it could make back some more money if the shares rise in price and they sell at a later date.
Having unloaded a large share of its stake, the Obama administration is now hoping to distance itself from the highly unpopular auto bailout. The big winners in this deal, however, are clearly the investment banks, like Morgan Stanley and J.P. Morgan, that put this share issue together. They will reap massive fees for bringing this issue to the market, and their retail brokerage houses will make a fortune by selling the shares to investors.
Essentially, the taxpayer paid over $50 per share for a company that was issued largely to the banks and institutional investors for $33. Those banks and institutions will now hype the stock for sale to smaller investors at a higher price and reap a healthy little profit on the backs of John and Jane taxpayer. Is General Motors a good investment? At $33 and with little to no debt left on its balance sheet, it is a much better company than it was before. But undoubtedly, this stock is going to be a short-term success, long-term disaster. Eventually legacy costs (such as pensions) and the reality of operating a North American auto manufacturer will creep back into its existence.
A couple quarters of consecutive profits does not make a good company. They have to make money in good times and bad. General Motors has proven time and again that it is incapable of contending with competition from leaner and fitter foreign competition. To be sure, the company has gotten smaller, and it has improved its business model a little bit, but it has been under the smoke and mirrors of receiving massive financial assistance from Joe public. The public has now basically turned over a huge share of his hard-earned dollars to Wall Street's investment banking houses.....which, remember, started the whole financial mess in the first place. Oh how well the banking industry took advantage of the public on this one, and on the bailout that they received.
The fees being charged by the investment banks to the taxpayer for bringing GM public is going to be $248 million. So if you are looking for the profits from this trade, J.P. Morgan might be your answer. Under the symbol JPM in New York and trading at a 9 percent earnings yield, it is nice and cheap, especially considering all of the government support they seem to have : )