Search Penny Hill Press

Thursday, September 8, 2011

The Role of TARP Assistance in the Restructuring of General Motors

Bill Canis
Specialist in Industrial Organization and Business

Baird Webel
Specialist in Financial Economics

General Motors Corporation (Old GM) was a publicly traded company from 1916 until its bankruptcy in 2009. As part of restructuring, Old GM and its successor General Motors Company (New GM) together received over $50 billion in federal assistance through the U.S. government’s Troubled Asset Relief Program (TARP). In exchange for this financial support, the U.S. Treasury received 60.8% of the new company, with the rest of New GM held by the United Auto Workers (UAW) retiree health care trust fund, the governments of Canada and Ontario, and holders of Old GM’s bonds. In its restructuring, GM closed plants, cut its hourly and salaried workforce, shed three brands, reduced debt, introduced popular new vehicles, and implemented changes in retiree legacy costs that had been a major financial drain.

In November 2010, New GM conducted an initial public offering (IPO) of stock to investors, once again becoming a publicly traded company, although the post-bankruptcy owners, including the U.S. government, continue to hold significant stakes in the company. In the IPO, 550 million common shares were sold by GM shareholders at a market price of $33 a share, raising over $18 billion. The U.S. Treasury sold over 412 million shares in the IPO and received approximately $13.5 billion from its sale of shares. In addition, it continues to own 32% of New GM’s common stock. The only capital New GM raised through the IPO was $4.9 billion from the simultaneous sale of preferred stock.

GM is not the only company that received TARP funds as a result of the 2008-2009 financial crisis. More than 700 institutions received support, with the U.S. government taking ownership stakes in five large companies: GM, Chrysler, GMAC (now called Ally Financial), AIG, and Citigroup. In general, ownership of private companies was not a goal of TARP and the U.S. government has sought to reduce its ownership stakes when possible while maximizing the taxpayers’ return from the assistance.

The strength of New GM’s stock price, and the related recoupment of government assistance to the company, have hinged on two major factors: the success of GM’s restructuring and the performance of the U.S. economy, including U.S. retail auto sales. While New GM’s internal finances have steadily improved—in the second quarter, it reported its biggest operating profit since exiting bankruptcy—the overall economy’s prospects have become clouded. The prospects of consumer retrenchment or even a new recession have prompted many investors to avoid some major automakers, including New GM, Ford, and Daimler (parent of Mercedes-Benz). The shares of these three automakers have all dropped by more than 40% since last winter, while the Dow Jones Industrial Average has dropped by less than 6% during the same period.

The IPO sale of some of its New GM shares in November 2011 returned $13.5 billion to the U.S. government, but this was a $4.4 billion realized loss compared to the amount of assistance given. Other recoupment by the government has included repayment of $7.4 billion in loans and repurchase by GM of $2.1 billion in preferred shares. Future sale of the remaining U.S. stake in GM could result in gains that would offset the previous loss. In order for the U.S. government to fully recoup the nominal value of its $50.2 billion assistance, however, the government shares would need to sell in the future for over $52 per share, compared to the recent trading range of $22-28 per share. It is unclear when the U.S. Treasury will sell additional shares in GM, given recent volatility in the stock market and the unsettled economic outlook.

Date of Report: August 30, 2011
Number of Pages: 18
Order Number: R41978
Price: $29.95

Follow us on TWITTER at or #CRSreports

Document available via e-mail as a pdf file or in paper form.
To order, e-mail Penny Hill Press or call us at 301-253-0881. Provide a Visa, MasterCard, American Express, or Discover card number, expiration date, and name on the card. Indicate whether you want e-mail or postal delivery. Phone orders are preferred and receive priority processing.