The Government Accountability Office (GAO) concluded that the government was unlikely to recover its investment in General Motors based on the history of GM's stock prices. This is a bad metric, reporters should have looked to other analysts instead of just repeating the GAO figures. GM's past stock prices were depressed by pension and health care liabilities that will not apply to the new GM. The better metric is a projection of stock prices based on estimates of future profitability. Toyota's quarterly profits peaked at just under $4 billion in the 3rd quarter of 2007. Suppose that a reborn GM is able to achieve half of Toyota's profits or $8 billion a year. If GM's stock price is equal to 15 times earnings (roughly the historic average), then the market capitalization would be $120 billion. The government's 60 percent stake would then be worth $72 billion, enough to give it a decent profit on its investment. Of course there is no guarantee that GM will reach this level of profitability, but this is the question that GAO should have assessed in trying to determine whether the taxpayers will recover their investment.
--Dean Baker
