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Wednesday, August 18, 2010

Potentially the Biggest Stock Scam of the Century: The General Motors IPO.

Potentially the Biggest Stock Scam of the Century: The General Motors IPO.

Edited 8.20.10

Abstract: The GM IPO filing is out and it contains exactly nothing of substance. There are so many pitfalls and pungi stakes in this swamp that there is no way to suggest that anybody should buy these stocks. The current history of Tesla Motors shows us that their IPO surged and then crashed catching investors on the upswing to lose money [$30.42 down to 15 for a quickie 50% shellacking] My prediction is that the preferred stocks in this scam will be offered privately to insiders [like Warren Buffett] and they will convert to common before the bad news is released and the other stockholders take the loss. This is your government in action.

We are always interested in the growth of business and the purchase of equities of various flavor and, a few years back, the new and exciting IPOs that were offered in the Dot Com Era such as Arriba, Red Hat and more were popular and profitable and those are some that I participated in. I missed Google.[1] The IPO activity has been particularly quiet for the last few years [except recently in China] and many corporations merely hung on with their financial fingernails as the economy tanked and is still crashing under the massive weight of 14 trillion dollars in national debt, rising at 10% per year or more for the next several years.

GM was a sorry and particularly disgusting crash with liberal Democrats bawling over the wreckage and greedy unions hoping to get their jobs secured by federal laws.

From a previous blog on this subject Apr 23, 2010:

“This attracted political attention and the Obama organization decided to fix the problem by nationalizing the company. This conforms to my theory of ‘spreading around the wealth.’[2] GM was swamped by $80 billion in debt and was going bankrupt. Our current Neo-Marxist liberal/radical government now blends fascism[3][4][5] with socialism in an attempt to redistribute the wealth and they applied this in fact as we saw in the GM and Chrysler bailouts where bond holders and stock holders were wiped out [a 70% haircut in the parlance for the bond holders] and the shrunken remains given to the unions while the management was replaced by orders from the White House.[6] The unions retained some 17% of the company [for what?? Political reciprocity??] and the US and Canada lent them 6.1 billion to get restarted. From money lying around in sprawling government project accounts, they ‘repaid’ the ‘loan’ 5 years ahead of schedule and now celebrate. They intend to hire soon but at lower wages according to Mark Reuss who heads up GM of North America. Thus, their debt was wiped out by our government. The taxpayers are stuck with 45 billion in stock and now GM wants to offer an IPO, which will most likely dilute the shares and secure a loss for the taxpayers. This is all an illusion as their labor costs remain uncompetitive against other car manufactures that make profits in this country. We have substantially subsidized a failing company for a political return and we will have to perpetually rescue this monster from time to time. Wages and benefits must come way down before GM can be successful in a free market. “[7]

This was the picture in April 2010 and the number crunching that must proceed any new stock purchase on this second socialist exercise in the US are masked by the fact that they do not appear in the IPO filing. According to the New York Times, suspect in all matters, but this time publishing the raw truth, a surprise, are these:

“[1] In the filing, G.M. did not disclose the number of shares that it planned to sell or a price range,…

[2] …the total offering was expected to raise more than $10 billion and could approach $15 billion or more….

[3] G.M. said the offering will include preferred shares as well as common stock, though the company will not sell any additional common shares directly. The preferred shares would be converted to common stock in 2013 at a rate that was not disclosed.

[4] The registration also did not disclose how much of a stake that the government would sell immediately, but it said taxpayers would “continue to own a substantial interest in us following this offering.” People briefed on the matter said last week that the Treasury was expected to sell about a fifth of its shares, bringing the taxpayers’ stake in G.M. below 50 percent.

[5] In the four years before its bankruptcy, G.M. lost $88 billion. [higher than my estimate above. Ed.]

[6] Mr. Whitacre said he wanted the Treasury to sell off its full stake as quickly as possible.

“We want the government out, period,” he told reporters earlier this month after speaking at an automotive conference in Michigan. “We don’t want to be known as Government Motors.”[8]-- General Motors Files for an Initial Public Offering By Nick Bunkley Published: August 18, 2010 .[Emphasis is mine in all quotes.]

Edited 8.20.10

Some comments from the GM IPO filing:

“GM said that as of June 30, "we concluded that our disclosure controls and procedures were not effective at a reasonable assurance level because of the material weakness in our internal control over financial reporting..." Thus, you might not be surprised to learn, GM can't promise to "report accurately our financial condition and results of operations in the future in a timely and reliable manner..."”[9]-- Quick read: What you need to know in GM's IPO filing Aug 19, 2010 .[Emphasis is mine in all quotes.]

“"In some cases, the technologies that we plan to employ, such as hydrogen fuel cells and advanced battery technology, are not yet commercially practical," and a for-instance, GM says, is the "Chevrolet Volt, an electric car, which requires battery technology that has not yet proven to be commercially viable. There can be no assurance that these advances will occur in a timely or feasible way...” -- Quick read: What you need to know in GM's IPO filing Aug 19, 2010

“"We cannot assure you that any of our contemplated restructurings will be completed or achieve the desired results, and if we cannot successfully complete such restructurings, we may choose to, or the directors of the relevant entity may be compelled to, or creditors may force us to, seek relief for our various European operations under applicable local bankruptcy, reorganization, insolvency" laws.” -- Quick read: What you need to know in GM's IPO filing Aug 19, 2010

Now, if that is not sorry work.

Apart and beyond telling us exactly nothing in this deal [except that GM is a losing game with idiots in control] we have no clue on what is happening. Note that if Treasury is selling stock and the public is buying stock and there are some convertible preferred shares involved [let me guess they go to ‘preferred’ buyers like Warren Buffett at a fat 10% guarantee[10][11][12]] there is no way for even GM to determine how much operating cash they can get from this sale. We don’t have a clue what the book value is as the current wreckage is not public. We, as taxpayers, only know that we own some 60% of this trash.

So, what does the Wall Street Journal know about this:

The IPO, expected later this year, will potentially raise $10 billion to $15 billion. An expected price range for the shares will be determined closer to the sale.

The 734-page registration filing outlines GM's business plan and potential risks facing the company, along with detailed financial statements.”[13]-- GM Files for Long-Awaited IPO By Sharon Terlep And Dan Fitzpatrick Aug 18, 2010

Here is a hint:

For the government to recoup its full investment GM must achieve a stock-market value of $70 billion—10 times GM's market capitalization before the company headed into bankruptcy-court protection in June 2009, and at least $30 billion more than the market value of Ford Motor Co.”-- GM Files

This is like an algebra problem where there is only one equation that has three unknowns and you get to plunk in a few numbers here and there and guess at what the result will be. If GM only picks up $10 bln then that is way short of the $70 necessary for the government to break even. It might be that if the government sells shares too soon then they might never recoup their ‘investment’ in this mess and if they wait too long and GM fails then we can go back to the Treasury and fix up this mess with more taxpayer monies and go for a retry. Selling and buying shares in the same company simultaneously usually leads to uncertainties and suspicion. There are scenarios for speculators to make sell numerous naked puts and calls in this mess.

More bad news:

To ready a return to the public markets, GM last week announced that Daniel Akerson, a former telecommunications executive appointed to the GM board by the Obama administration, will become the company's CEO on Sept. 1”-- GM Files

One thing is very clear in all this: our ‘government’ cares not a whoop or a holler how much tax money is wasted in this wreckage as they only care about retaining the votes and generous cash donations to liberal Democrats from the unions. That much ought to be clear.

This preferred stock gig here is disturbing me the most. There is a good chance that the conversion to common might be very generous [1.2 to 1.5 per share] and so generous that if the company crashes, as it should because it is not competitive in US markets, ignoring China with Buick sales, and that leaves the possibility that some wonderful person could buy those preferred shares with a 10% guarantee and take the interest and switch over to common as the company crashes and the government shares would plummet down toward zero value.

That is the kind of plan I expect from Washington. I bet we cannot know who buys the preferred shares. Since we do not know how many shares are in his pig in a poke we cannot know what the dilution factors might be.

This is a potential scam in the making with profits backstopped by your tax monies.

Detroit knows nothing of value.[14]

Intelligent questions:

How can anyone know whether they’d want to buy this or any other IPO without knowing what percentage of the company you would be owning and the asking price in relation to some reference point of valuation?”[15]-- Investor Insanity Regarding the Coming General Motors IPO .[Emphasis is mine in all quotes.]

Already established shares have clearly defined P/Es, price book value, price/cash flow relationships yet the rumored GM IPO has not addressed any of these factors. The question most heard has been… “Should the public be allowed to participate or will all the shares go to the privileged?”

If the public is allowed to buy it’s almost certain that they’ll be grossly overpaying for dicey future prospects after a couple of quarters with profits that were ‘manufactured’ along with the Chevy Volt.

If the public is excluded from the IPO, either through complicated bidding rules or other means, it’s likely that the newly issued shares will be ready to “jump and be dumped” onto them at highly inflated prices.”[16]-- Investor Insanity By Paul Price Aug 16, 2010. [Emphasis is mine in all quotes.]

All these fears are justified in the panic and gloom of the US auto industry. Obama has his own pet stooge in the head chair and we can be certain that the unions will get the best deal if and only if they can sell their shares. Or, the early baiting might be the opportunity to dump union ownership and get out before the IPO flips on the first day and then investors find out they bought a dead horse.

And the government and leftist media howl about Goldman Sachs!

The Tesla scam is outlined in this article by and the chart[17] is very interesting:

Priced at $19 it jumped quickly to $30.42 just in time to suck in those who couldn’t get shares on the offering. Within a few days TSLA was down to under $15 to give them a chance at capital losses or tax loss carry forwards for their trouble.

Caveat emptor on the GM offering.”-- Investor Insanity

As voters, we cannot subsidize this mess as it will only encourage more government takeovers of failing companies if they are union backed.

Do not buy GM or Tesla as that is only laying the foundation for more of your tax monies to be wasted. These products are not competitive in a free market.


Comments to:

[1] Asleep

[2] The Phony Quest for More Jobs--A Prediction: Obama will Just Create and Transfer Debt for Jobs Funding.

[8] General Motors Files for an Initial Public Offering By Nick Bunkley Published: August 18, 2010

[11] He paid “$5 billion for Goldman Sachs (GS) preferred shares that pay a 10% dividend.” Isn’t that sweet! Another TARPIE Sweetie! [Emphasis is mine in all quotes.]

[12] [3] His company “agreed to buy $3 billion of preferred General Electric (GE) stock. This stock pays a generous dividend of 10%. On top of that, Berkshire gets the option to buy $3 billion of GE common stock at $22.25 per share, well under the current trading price of around $25 a share.”

[13] GM Files for Long-Awaited IPO By Sharon Terlep And Dan Fitzpatrick Aug 18, 2010 .[Emphasis is mine in all quotes.]

[15] Investor Insanity Regarding the Coming General Motors IPO .[Emphasis is mine in all quotes.]

[16] Investor Insanity By Paul Price Aug 16, 2010. [Emphasis is mine in all quotes.]

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