April 6, 2014

Was US Sale of GM Stock The Biggest, Baddest, Insider Trade In History?

by Hal Gershowitz

Comments Below

Sure seems that way.

Let’s begin by acknowledging that it’s extremely difficult to prosecute the federal government, so we won’t go there. If, however, the United States Government had knowledge (or even a reasonable inkling) of the impending GM scandal when it sold its shares of GM stock, the moral hazard (not to mention the financial losses) the government inflicted upon a huge number of private citizens, institutions and pension plans is mind boggling.  It really staggers the imagination to rationalize that the government’s sale of the last of its GM stock on December 9th (as well as its prior sales) last year was anything other than a transaction that would have private individuals wearing orange jumpsuits as fast as you could say insider trading.  The government’s insider stock sale makes Raj-Rajaratnam and Ivan Boesky look like penny-ante pikers.

Let’s reduce our discussion to a few essentials:

(1). The government “invests” $49.5 billion and assumes ownership of 61% of General Motors as part of the 2009 federal bailout of the auto giant.

(2). July 2009 — Daniel Akerson is named to the GM Board as the government’s representative and later becomes CEO on September 1, 2010.

(3). GM, emerging from bankruptcy, has an IPO on November 17, 2010 in which the government recovers $13.5 billion of its investment in GM by reducing its stake from approximately 61 
percent to 33 percent. The boilerplate in the IPO prospectus, while referencing the general risk to shareholders of routine recalls the company may experience, makes no reference to the growing ignition-switch liability of which GM had been aware for nearly 10 years.

(4). The government announces plans early in 2013 to liquidate the last of its position in GM within 15 mounts.

(5). The government begins liquidating its position and completes its sale of GM stock (ahead of schedule) on December 9th, 2013, three months before the April 2014 date the government had previously announced as its target date to exit GM.

(6). On December 10, 2013, (one day after completing its final stock sale) GM announces that Akerson is to be replaced as CEO by Mary Barra, effective January 15, 2014

(7).  Barely a month later, GM is embroiled in the greatest auto recall scandal since the 1965 “Unsafe at any Speed” Chevy Corvair fiasco.

(8). It is determined that GM knew of the deadly ignition problems since 2001 but did nothing about it.

(9). In 2007, the federal National Highway Traffic Safety Administration (NHTSA) is urged by one of its investigators to open a formal investigation of GM’s ignition switches. Shortly thereafter, a NHTSA (government) report determines a direct link between those switches and air bag failures (and deaths).

(10). The government asks the public to believe it had no negative insider information prior to the sale of the last of its GM stock barely a month before the scandal broke.

Really!?

 While Raj-Rajaratnam and Ivan Boesky made millions in profit from their insider trades, the government mitigated, by billions, its certain losses by selling all of its stock just before the scandal broke.  Legally, there is no difference between an illegal insider trade that produces huge profits and one that mitigates huge losses.

We are asked to believe that when the government invested $50 billion in GM in order to bailout the company no one at the Department of Transportation which knew of the ignition switch problem thought to send a note or make a call over to the White House and suggest, there’s something you ought to know — 0r that no one at the White House thought to call the Department of transportation and ask, anything we ought to know?

Or worse yet, (much worse) when the government decided to fast track the unloading of its position by selling its shares to the public, no one asked, is there anything we should know (or anything those who buy our shares should know)?

Does it seem plausible to anyone that when the government’s representative on the Board of Directors showed up for his first day of work he didn’t ask (or he wasn’t told) whether we’ve got a real problem brewing?

When CEO Ackerson’s retirement was announced (remember, he had been the government’s representative on the GM Board) one day after the government completed its sale of stock, is it really plausible that no one in a position of responsibility knew that a gargantuan recall was about to be announced?

By now all America understands that for years defective ignition switches in millions of GM cars were suddenly turning off, causing engines to shut down, power systems to turn off and safety air bags to cease functioning. This was happening on highways, in heavy city traffic, in the middle of intersections, railroad crossings and just about anywhere else these GM cars might have been driven.  While the government had taken no action, it had been fully aware of the problem for years.

We are not (at least in this essay) taking the government to task for incompetency for failing to see the danger these automobiles represented to public safety.  We’ll do that when the extent of the damage is better understood. Our sole focus at this time is the government’s public stock sale(s) under circumstances that would have the SEC all over any individual or company that executed such a sale under the same circumstances.  In fact, we would venture that there has probably never been a more questionable securities transaction in the entire history of the SEC.

Our government sold the last of its GM stock near $41.00 a share or, essentially, the highest price per share since GM exited bankruptcy. The stock has been in a steady slide ever since, closing as we complete this essay at $34.81. Given that the stock routinely trades between 20 and 40 million shares a day the losses represented by this steady slide in the price of the stock is enormous.

The GM imbroglio, it seems, involves two massive bailouts.  First, the taxpayers bailed out GM, and then the unaware public bailed out the government by purchasing the government’s GM stock while totally in the dark about the scandal that was about to erupt.  People have every right to be upset with GM.  It also seems they have every right to be just as upset with their government, which knew (or most certainly should have known) that it was about to pawn off to the public a sows ear as a silk purse.

The Treasury Department stressed, upon announcing it’s ahead-of-schedule public sale of GM stock, that “this important chapter in our nation’s history is now closed.”  We wouldn’t be too sure about that.

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7 responses to “Was US Sale of GM Stock The Biggest, Baddest, Insider Trade In History?”

  1. abraham sofaer says:

    Very good job. Send to reporters in DC to dig up the facts!

  2. Stuart Goldfine says:

    Whoever was President of GM about 10 years ago should be indicted for taking no action and not fixing the cars; it allowed more people to be killed needlessly. It would make more CEO’s responsible.

  3. susan duman says:

    The complexity of this terrible story is brilliantly analyzed.
    Wow!

  4. mark j levick says:

    Interesting that the responses are focused on the CEO of GM on whose watch the problem arose when our Government knew about the problem and did nothing and then proceeded unnecessarily to bailout GM as a sop to the UAW, install their own CEO, continue the cover up and unload the stock on unsuspecting investors. I suspect that the Bank regulators and the SEC will come down hard on the Wall Street financial institutions who facilitated the Government’s sale of its remaining GM stock for not discovering and revealing the ignition problem to their customers. The new CEO is a woman which should save her from being tarred and feathered but we can be sure that no Government employee will be held accountable for this fiasco.

  5. Tim Favero says:

    While I agree with the commentary, the government actually benefitted the UAW more than it did GM. If you follow the money and how it was spent, what happened to “loans” that were forgiven, and money given to the UAW directly from the government, the UAW was actually the big winner here.

  6. Janice Marcu says:

    Twice you say the government new about the problem and then at the end you say if they didn’t know about it they should have. Which is it?! They should have known about the Sub prime debacle too! And what about Madoff?? And high speed trading?

    • “Twice you say the government knew about the problem and then at the end you say if they didn’t they should have…which is it?”
      Both statements are self evident. This narrative does not call for an “either, or” selection.
      As for Madoff and high-speed trading, we concur with the commenter that both are examples of sorrowful government oversight, but neither are examples of government benefiting at the expense of unsuspecting investors.

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