In which: General Motors does a share buyback in order to buy jets, I list the highlights of the UBS Libor report [too much awesome!], and Kodak prepares to not be bankrupt.
- GM to buyback shares from the US government.
Link: sunk losses.
General Motors was at the heart of the Romney-Obama conflict: who would have, and who would not have, let that beast go into bankruptcy. As though bankruptcy is a bad thing in the US.
Note: I’m about to do some rounding to the nearest billion. All the decimal points aren’t really that important to the underlying story, and are actually just confusing…
But Obama bailed it out, in his wisdom. And GM received about $50 billion under TARP* in 2009. In return, the government received shares. It’s now selling 200 million of them back to GM for $27.50 per share (a total of $5.5 billion).
The controversy: once this sale goes through, the only asset that the government will still hold in respect of General Motors will be 300 million shares. But the government will only have recovered $29 billion of the $50 billion that it gave, leaving $21 billion still to be repaid.
The implied share price required on the remaining shares in order for the government to break even will therefore be about $70 per share**. And given that today’s share price is floating around the $27 mark, GM would have to generate a 300% return in order to cover the bailout money. Which seems a bit of a tall order, and the journalists are talking about “virtually guaranteed multi-billion dollar losses”.
I would like to point out that there is a public loss aversion bias here. It’s actually irrelevant how much the government “paid” for the shares. What is relevant is whether the government expects the share price to improve much beyond where it stands today. The bailout money is a sunk cost***. Selling today could minimise losses – which is exactly the same thing as maximising gains, only less palatable.
On the other hand, when part of the buyback includes the Treasury agreeing to relinquish some governance rights – and lifting the ban on buying corporate jets – then I am less convinced of Treasury’s motives, and more convinced that GM’s executives are keen to get the bonus incentives schemes back into less-supervised space.
Oh – the bonus caps of TARP are still in place. But a buyback here, a buyback there, and before you know it…
*And you thought that TARP (the troubled asset relief program) was only bailing out banks…
**$21 billion / 300 million = $70
***I know – it’s easier to say when it’s not your money. Although it is slightly my money. After all, I have US dollar savings. And if the Fed is weakening the currency to pay off its debts – then this is not “taxpayer money”. This is “anyone-holding-US-dollars reserves” money. Which is not the Americans, because they’re generally in debt.
- Speaking of bankrupt corporates.
Kodak is planning on exiting its Chapter 11 bankruptcy early next year*. There was a grand patent sale which collected $525 million, in which lots of unexpected companies teamed up to take part: Apple, Google, Amazon, Facebook, Microsoft, RIM, Samsung… The list reads like the Who’s Who of patent war litigation.
Kodak still has some “businesses” to sell off – and when it re-emerges, don’t expect to see Kodak cameras on the shelves. The shift is away from the general consumer and toward providing product for the commercial imaging market.
It makes so much sense. The public consumer market is fickle. When you can’t be cutting edge, you fall back on big business – because the management teams of big business like to organise long-term contracts at negotiated prices, which gets the task out of their hair.
*I repeat: “as though bankruptcy is a bad thing in the US”.
- UBS officially fined.
So UBS has agreed to pay a $1.5 billion fine for the rigging of Libor. But there’s also a fun report from the Financial Services Authority.
“UBS’s traders routinely made requests to the individuals at UBS responsible for determining its LIBOR and EURIBOR submissions to adjust their submissions to benefit their trading positions (“Internal Requests”).”
“At times, a single Internal Request was made that covered a sustained period of time. For example, on 24 January 2007 in response to a Trader’s request about three month and six month JPY LIBOR submissions, Manager A, who was overseeing the Trader Submitter responsible for determining the submissions, replied: ‘standing order, sir.‘”
“UBS, through four of its Traders, colluded with interdealer brokers to attempt to influence the JPY LIBOR submissions of other banks (“Broker Requests”).”
“For example, on 18 September 2008, a Trader explained to a Broker: “if you keep 6s [i.e. the 6 month JPY LIBOR rate] unchanged today… I will fucking do one humongous deal with you… Like a 50,000 buck deal, whatever… I need you to keep it as low as possible… if you do that… I’ll pay you, you know, 50,000 dollars, 100,000 dollars… whatever you want… I’m a man of my word“.”
“particular individuals referred to each other in congratulatory and exhortatory terms such as ‘the three muscateers [sic.]’, ‘SUPERMAN‘, ‘BE A HERO TODAY‘ and ‘captain caos [sic.]’.”
And that was just to the end of page 4!
I mean – it’s awesome.
That’s all for now.
Have a good day.