When the federal government announced General Motors would be buying back a big portion of its stock, it caused a lot of phone calls to local financial planners. GM is perhaps the areas most widely held stock. How would the sale impact the average investor?
Local financial planner Rick Barnett from Barnett Financial says it remains to be seen how the automaker will spend all that newfound cash. If it decides to invest in new local plants or upgrading existing ones, it could create new local jobs. Key word there is "could".
The Treasury Department says that it will sell its remaining stake in General Motors in the next year or so, winding down a $50 billion bailout that saved the iconic American car giant. It also set off a heated debate about government intervention in private business that even influenced this year's presidential election.
Taxpayers will lose money on the deal, but it gets the government out of the car business. GM has done well over the past three years, piling up $16 billion in profits as car sales bounced back. Now it looks forward to losing the stigma of government ownership - including the derisive moniker "Government Motors" - that it claims cost it sales since it left bankruptcy protection in 2009.
As part of a deal announced, GM will spend $5.5 billion to buy back 200 million shares from the Treasury from now through the end of the year. That will leave the government with 300 million shares, or a 19 percent stake, which it plans to sell during the next 12 to 15 months.
The government bailed out GM with $49.5 billion during the financial crisis in 2008 and 2009. Otherwise the struggling automaker would likely have been auctioned off in pieces. The Treasury Department says it will have recouped about $28.7 billion after GM completes its buyback. So, breaking even would require selling the remaining 300 million shares for an average of about $70 each.
That's more than double the current trading price. GM will buy the 200 million shares at $27.50 each, about an 8 percent premium over Tuesday's closing price of $25.49. At a more realistic price of $30 apiece, the government gets back $9 billion for its remaining shares. That means taxpayers would recoup around $38 billion, or about 77 percent, of the initial investment, resulting in a loss of about $12 billion.