By Kevin Meyer
A couple of news items lately prompted me to take a look at my undesired investment, as a taxpayer, in General Motors. With a couple of very specific exceptions I've gone to "all cash" over the last few months in response to several looming problems on the horizon that I think add significant near-term risk to the overall market. So any investment, even undesired and for which I can do nothing about, should be scrutinized.
First let's take a look at Ford, which decided not to take any government bailout and weather the storm on its own:
Ford Motor continued its successful turnaround as better-than-expected sales and profits easily outdistanced expectations and reversed the operating loss of a year ago.
The automaker earned $2.7 billion, or 68 cents a share, excluding special items. The consensus forecast of analysts surveyed by Thomson Reuters was for earnings of 40 cents a share, and Ford easily topped even the most bullish forecast of a 48 cent a share profit.
The results were the best quarterly results for Ford in six years and marked the fourth straight quarterly operating profit for the company, which had suffered more than than four years of steady losses before it returned to profitability in the second half of last year.
Ford was the only major U.S. automaker not to go through bankruptcy in 2009. The company has been steadily gaining market share over the last year, with the introduction of critically-acclaimed new vehicles.
Even better results ahead. "We are ahead of where we thought we would be despite the still-challenging business conditions," said Ford President and CEO Alan Mulally in a statement. "We remain on track to deliver solid profits and positive automotive operating-related cash flow for 2010, and we expect even better financial results in 2011."
Not too shabby. Amazing how a crisis and forced frugality can create excellence.
And now for General Motors, predominantly owned by us taxpayers. Not a report on financial results, but on strategies the company is taking now that it has access to so much cash. Eerily similar to how the government operates with its perceived unlimited access to taxpayer cash – or Chinese credit – depending on your perspective.
Extra cash is not always a good thing for a corporation. This may be the case with General Motors.
The theory is that managers should act in a disciplined manner in spending and operations. By limiting the amount of cash that a company has on hand, managers remain more focused and are less likely to take undue risks with their excess cash. This theory has been documented in a number of academic studies. Managers with too much cash to burn will burn too much cash.
G.M.’s announcement on Thursday that it was acquiring the subprime lender AmeriCredit for $3.5 billion may show that the automaker has stepped into this trap. G.M. is also paying a 24 percent premium to AmeriCredit’s closing stock price on the day before the deal was announced.
Once you take into account the government ownership element, even more issues and problems emerge.
First, when G.M. owns a captive lender, it subsidizes the plants, labor unions and dealers. Captured finance means nonmarket financing for buyers when they receive a loan. Think zero percent financing. Lease financing for automobiles usually results in artificial residual pricing for the buyout price at the end of the lease. All of this helps empty dealer lots and keeps plants running. But it oversupplies cars. The problem of artificially oversupplying new cars (like new houses) is put off for another day.
Second, the subsidy ensures that people who may not otherwise qualify to buy new cars do so. They overconsume and overspend as they shift their buying from used cars to new cars.
Silly me – I continue to delude myself that we can learn lessons from the past. Even very recent lessons such as the dangers of subprime lending – not to mention over production and venturing outside of your core competencies. Of course what can we expect of an owner that has just tried to regulate financial markets by purposely ignoring the two largest contributors to the financial collapse, Fannie Mae and Freddie Mac.