Ontario Finance Minister Dwight Duncan says it’s time for the government to get out of the auto business, calling on Ottawa to unload shares of General Motors even as the stock trades at less than half the price taxpayers would need to get their bailout money back.
More than three years after the two governments contributed $13.7-billion toward an unprecedented bailout of the North American auto sector, one of the main players in that decision is showing little interest in playing the long game with the remaining government-owned shares of GM.
For two governments focused on deficit fighting, selling the stocks – which account for 9 per cent of GM common shares – would give an immediate boost to their bottom line. For federal Finance Minister Jim Flaherty, each tick up or down in GM’s share price could ultimately affect whether the federal Conservatives deliver on a promise to erase the federal deficit before the next election.
“There are certain restrictions on how many we can move at once and so on, but the sooner we’re out of the stock the better,” Mr. Duncan told The Globe. “I just don’t think governments should be buying and holding stocks in private-sector companies.”
A report released Thursday shows the combined value of Ottawa and Ontario’s preferred and common shares in GM stood at $3.5-billion as of Sept. 30, up from $3.2-billion at the end of June. The value would be higher now, given the recent increase in the GM share price, which closed Thursday at $26.09.
For accounting purposes, Ottawa booked its shares at a value of $15 each in 2009, meaning that if they are sold above that price, the difference would be added to Ottawa’s bottom line after giving Ontario its one-third stake. Ontario booked the stock at $13.
But the potential political gain of a smaller deficit would have to be weighed against the possible reaction from voters in conceding that billions in auto bailouts would never be recovered.
Nearly half of the $13.7-billion in bailout funds have already been recouped, but it would take a sale of GM shares at more than twice their current value for taxpayers to get all of their money back.
Leslie Shiell, a University of Ottawa economics professor who co-authored a report on the auto bailout earlier this year, said governments should take the long view if there’s a chance of bigger returns.
“If we [sell] simply to meet some short-term target on financing, we’re actually shooting ourselves in the foot in the long term,” he said. “If the long term only means three or four years down the road and we can significantly increase our capital gain on that, it would not make a lot of sense to sell them now.”
Mr. Flaherty has been more tight-lipped with his thoughts on a sale, but briefing notes obtained by The Globe under access to information show he is frequently briefed on the latest developments with GM and the potential impact on the government’s holdings.
In a fiscal update released this month, Mr. Flaherty pushed back his target for erasing the federal deficit to 2016-17 and forecast a deficit of $1.8-billion in 2015-16. A few days later both he and Prime Minister Stephen Harper said that in spite of those numbers, the government plans to balance the books before the fall 2015 federal election. The government’s forecasts suggest new revenue from a GM share sale could be enough to tip federal finances into the black. Meanwhile the Parliamentary Budget Officer released a report Thursday that claims the government is overestimating the size of future deficits by about $4.7-billion a year, which hints the government could be setting the stage for announcing positive budget news before the next election.
The unprecedented $13.7-billion move to protect Canada’s auto sector in 2009 included a $10.8-billion contribution to a bailout of General Motors and $2.9-billion contribution toward a bailout of Chrysler. About $2.1-billion of the contribution to Chrysler had been returned by July, 2011, when all remaining government shares of that company were sold. The decision to approve the bailout of GM and Chrysler is widely viewed as a success for avoiding major job losses and the potential wholesale departure of Canada’s auto sector. Finance Canada claims the intervention saved 52,000 jobs.
The auto company has made no secret of the fact that it would like to sever ties with its emergency financiers and shed its unwelcome “Government Motors” moniker. The current arrangement allows the U.S. Treasury to impose limits on spending in areas such as executive compensation.
The Wall Street Journal reported in September that the U.S. Treasury Department was resisting a GM proposal that would see the government’s remaining shares sold off, partly to GM and partly through a public stock offering.
Since that report, which surfaced prior to the Nov. 6 vote that saw Barack Obama re-elected president, there has been little public debate in the U.S. over what to do with the government’s shares in GM.
The Canadian shares are managed by a federal Crown corporation called Canada Development Investment Corporation. The CDIC holds regular board meetings, transfers dividends from the GM shares to Ottawa and contracts outside advice on the best strategy for eventually selling the government’s stake in the auto maker.
Canada has not sold any GM shares since a Nov. 18, 2010 initial public offering, in which Ottawa sold approximately 35 million shares at $33, which led to a net federal gain of $424-million.