With a 180-day lockup prohibiting it from selling any of the General Motors Co. shares it still owns expiring in mid-May, the Treasury Department has to decide whether to hold or sell all or some of those shares.
But it faces more challenges than any conventional institutional investment manager does in dealing with such an underperforming investment.
With the expiration of the lockup, the Treasury has to decide whether to sell now at a loss, or wait for an uncertain upturn in prices, trying to sell to for a profit.
As a large shareholder now with 33.3% of GM stock, the Treasury Department has to take care that any selling doesn't have an adverse impact on the market. To recover its investment, it should commit to selling shares gradually to minimize market impact.
Treasury might have a long wait to recoup its $49.5 billion investment in General Motors Co. — as well as the $12.5 billion committed to Chrysler Group LLC. Those government interventions had two tough goals: saving the companies and at least breaking even on the investment.
The GM stock price would have to rise to $54 per share for Treasury to recoup its investment by divesting its remaining shares, according to a Government Accountability Office report, released May 11.
In the GM IPO, priced at $33 last Nov. 18, Treasury sold 45.2% of the GM shares it owned. Prior to selling any shares in the IPO, GM stock would have had to sell all at $45 a share for the Treasury to break even on its GM investment.
The market valuation of Chrysler, which is not publicly traded, might have to rise to $58 billion — a historic high — for the government to break even, according to the report.
A money manager might cut its losses now by selling its remaining shares and investing the proceeds in stocks with better long-term prospects.
The Treasury, considered by the administration a “reluctant shareholder,” isn't a long-term investor and seeks to end its financial involvement as soon as practical. Still, it has put no timeframe on the optimal time to sell, and has not estimated its opportunity costs.
In addition, it doesn't manage an ongoing portfolio to guide a choice to sell and invest the proceeds elsewhere to maximize its return, or to use hedging techniques.
As someone said, there is a saving grace to a dilemma: You can't get tossed about by more than two horns. Would that the Treasury faced only such a dilemma.