Monday, April 26, 2010

“Pump and Dump” by Government on GM Stock?

For those not familiar with the stock market, “pump and dump” is the illegal activity of overstating the value of a stock to encourage unsuspecting buyers to buy the stock and thereby drive up the price. Those giving out the misinformation on the stock (pumping) then suddenly sell (dump) all of their stock which they had previously acquired at much lower prices and make a large albeit illegal profit.

You must not own a TV set if you haven’t seen the recent new commercial by General Motors starring Ed Whitacre, the CEO and Chairman of the Board. He is strutting through a GM plant and bragging about how GM just repaid a $5 billion government loan 5 years early. This advertisement began the very day the “repayment” was made and the press release was issued. This was no coincidence and it was very well coordinated.

All of the media, TV cable and network, and print jumped on this and spread the word that General Motors was doing a lot better than expected and the taxpayers’ $50B investment in GM would not only be repaid soon but with a big profit.

The fact is that we taxpayers got back none of the money we gave GM. The $5 Billion that Ed Whitacre said GM paid back early was already in the U.S. Treasury’s possession in an escrow account. It was simply moved from one column on the Treasury’s books to another. At best, one could say that GM used one source of TARP funds to repay another. This was reported to Congress last week in a TARP audit by its inspector general, Neil Barofsky. Strangely enough, the conventional media has ignored this. The way I found out about it was from an article in my trade journal, Automotive News. This article cited a letter written to Treasury Secretary Tim Geithner, from Senator Charles Grassley of the finance committee.

Also, remember that our government loaned GM $50B, not $5B. When GM went bankrupt and could not repay anything, the government took majority ownership (61%) and converted the loan into worthless stock. You probably know that debt holders (bond holders) are in a much safer position than equity owners (stockholders). For Ed Whitacre to brag about repaying a $5B loan 5 years early that was really a $50B loan is patently absurd. But wait, there’s even more.

Now here’s the “smoking gun” for “pump and dump”. General Motors will be coming out very shortly with a stock offering to the public, an IPO. The only way that the taxpayers can really be paid back is if our government sells their stock in GM for a lot more than they paid for it. The only way they can sell stock is if the stock buyers believe GM can recover and begin to make a profit. Now do you get it? Using “smoke and mirrors”, Ed Whitacre and our politicians whose reelection depends on the survival of GM are trying to raise public opinion about the viability of GM so that they can drive up the price of the stock offered.

I hope the government doesn’t sic the SEC on me like they did Goldman Sachs because I’m going to short GM stock if the government sells it for, or above, the IPO price. In my opinion GM has little chance of being profitable in its present form anytime soon. Almost all of their improvements have come from laying off workers, closing plants, and other radical cost cuts, not from car profits. They have shown sales increases but most of those are to large rental and leasing fleets like Hertz and Avis that buy cars dirt cheap. GM does this even though they don’t make a profit so that they don’t have to close more plants and to make their numbers look better. The fleets then dump the cars back on the used car market which drives down the resale value of GM cars and trucks. This has the net effect of raising the cost of GM cars and trucks to GM owners because their trade-ins are worth much less.

It’s bad enough that Ford, Honda, Toyota and other manufacturers have to compete with the US government, but now the government isn’t even playing fair. The bottom line is that it’s the marketplace that decides which manufacturers will succeed, not the government. The American buyer will buy those products that have the best value, the ratio of price to quality. If GM, Chrysler, and our politicians don’t like those rules, they should get out of the car business.

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