Monday, September 24, 2012

Should the SEC be investigating the Treasury Department?

An op-ed in the Chicago Tribune yesterday called for the Treasury Department to dump its General Motors stock, especially given it's recent jump--albeit a modest one--in price. On Friday, GM stock closed at $24.80 per share, up by more than two dollars per share since mid-August, when I penned this piece calling for the Treasury to sell off it's holdings, though still below the price per share in February of this year when Mitt Romney made the same call.

When the price of GM stock--in August--sat at around $22 per share, a full divestment would have meant a total loss--for the Feds and the taxpayers--of around $15 billion dollars. In February, it would meant a loss of around $13 billion. Today? Somewhere in the middle, let's call it $14 billion. Of course, as long as the Government is holding these shares--500,000,000 of them--all losses or gains are on paper only, they are unrealized as of yet. But at the same time, the investment represents stagnant capital at best, since an earlier divestment could have been used to invest in a superior (higher potential upside) stock or stocks. Like Apple, for instance.

Year to date, GM stock is up around 22%. Not bad, but it still represents a helluva drop off from the $33 per share IPO and the subsequent rise to $40 per share in January of 2011. Apple stock--in contrast--is up over 70% for the year and far more than that, going back to the beginning of 2011. In fact, using the IPO as a start date, GM stock is down around 28% since then, while Apple stock is up a whopping 326%.

Obviously, the Treasury Department is not being run by investment gurus. But then, the Government's stake in GM wasn't about making money, it was about saving the company and saving jobs, right? That's the Administration's narrative on the matter, repeated ad nauseum. So why is it still holding the shares? This piece at Bloomberg argues that the Treasury Department is just being smart:
Treasury is right to be patient. This isn’t bureaucratic resistance -- it’s smart investment management. Dumping the shares would only flood the market with GM stock, depressing the price even more. Taxpayers, moreover, deserve a better return. They are still suffering in the backwash of the financial crisis, with more than 12 million Americans out of work and real wages that have been stagnant for years.
Hello? If GM really is back, if it can actually remain competitive, none of this matters. The stock would represent a bargain, right? And if it's a "better return" that's the issue, Treasury should have dumped to the stock a long time ago. The real reason that Treasury is holding the stock is purely political: the Administration doesn't want to be forced to explain a huge loss of taxpayer funds this close to an election.

So it waits. And hopes. And waits. And hopes.

If only there was some way to get that share price up, to make the loss seem far more palatable so it could be sold to the American people as a win...

Enter QE3.

The latest round of Quantitative Easing is, in fact, the reason behind recent jumps in the market. Nevermind that QE3 is actually a loser, that it's overall effects on the economy will be illusionary and inflationary. In the short term the DOW may see some nice gains and GM stock will benefit from this. It already has.

So, let's imagine that GM stock keeps going up--even though the company's future just isn't that bright, as I previously detailed--to the point that Treasury is able to dump the stock at a price even higher than in February of this year. Then, the Administration can say "see, we knew what we were doing; if we had sold when Romney wanted to sell, we would have lost billions more." This is the game plan, you can take that to the bank.

But if things do go down this way, if the government successfully manipulates the market--via QE3--which creates an artificially high price for GM stock, and that allows the Government to minimize its losses, should we be concerned?

You're damned right we should be concerned. Such a chain of events represents an illegal manipulation of the market, per the Securities Exchange Act of 1934. Simple put, it's illegal to use any tools to make the market look better than it really is, if the one doing so stands to directly gain from such actions. When the government screws around with the money supply or interests rates, it does so--generally speaking--to influence to market as an inactive participant. It's neither a broker, a dealer, or an institutional investor (aside from government securities, which are actually exempt by law).

But things are different now. The Federal Government is a direct participant in the market, by virtue of its 500,000,000 share stake in General Motors. As such, it can't--as a matter of law--manipulate policies to benefit its position, even if such manipulations are no different than previous ones. Seriously, think about it. Suppose I want to go short on GM stock (bet that it will fall in price). People who are long on GM (like the Government) don't want that to happen, but they don't get to manipulate the market to their benefit and my detriment. That's the whole point of the body of laws governing the markets, the raison d'ĂȘtre for the existence of the SEC.

Given what is happening in the market right now, given the behavior of a major stockholder in major U.S. company, shouldn't the SEC be investigating all of this?

Cheers, all.

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