In one of the most controversial moves during the financial crisis, the U.S. government stepped in and bailed out a number of businesses, one of which was automaker General Motors (GM).
While the decision to do so was met with a great deal of criticism, it appears as though it may have been the right decision, as the company appears to be back on solid footing. General Motors has increased annual sales during each of the past two years, but despite its growing strength it still lives under the shadow of the government bailout, something it desperately wants to lift.
The company announced today that its strong balance sheet has put in a position to spend $5.5 billion to buy back 200 million shares of stock from the U.S. Treasury by the end of this year. At the same time the Treasury Department announced plans to sell its remaining 300 million shares on the open market over the next 12 to 15 months.
While the government is destined to lose billions on the bailout, it says that it never believed that the bailout of GM would be profitable. In all, the government spent $49.5 billion on the bailout, but it will come nowhere close to recouping that total expense.
After the upcoming $5.5 billion buyback, the Treasury Department will have recouped $28.7 billion, so in order for the deal to break even it will have to sell its remaining shares at an average of about $70 a share. GM stock is currently trading at $27.71, so the chances of the stock climbing to $70 in the next 15 months is remote to say the least.
For GM, getting out from under the government’s shadow will be a good thing, and remove a major obstacle in restoring customer faith in the company. The bailout saved the company from being broken up in 2008, so in that regard it was a good decision by the government, but free market critics argue that no company is too big to fail… GM included.
Personally I believe it was a good move, despite the apparent loss the government is going to take on the deal. The Treasury Department contends that the bailout saved around 1 million jobs at a time when the nation's economy was in freefall.
Michael Fowlkes is a financial writer who has been with the Fresh Brewed Media family since 2004. Over the course of his tenure with Fresh Brewed Media, he has worn many hats, including portfolio manager, options analyst, and writer. Michael received his undergraduate degree from Virginia Tech in Accounting and got his start in finance working as a stock trader for six years at Chase Investment Counsel in Charlottesville, Va. His articles typically cover big-picture events and forecasting what impact they will have on the stock market. In addition to writing for Fresh Brewed Media, Michael also wrote for AOL's BloggingStocks for three years, focusing most of his attention on the energy and technology sectors.