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What did the Treasury Dept. Know About GM’s Problems and When did they Know it?



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Here’s a timeline from NPR of the ignition-switch issue at GM. Check out the fortuitous timing of the Treasury Department’s sale of its remaining stake in the company in December 2013:

June 1, 2009: GM files for Chapter 11 bankruptcy.

July 10, 2009: The U.S. Treasury purchases GM assets, giving the government primary ownership of the company.

February 2010: NHTSA again recommends a probe looking into problems with air bags in Cobalts; ODI again decides that there is no correlation and drops the matter.

Oct. 26, 2010: Consumer Reports says GM is considered “reliable” based on scores from road tests and performance on crash tests.

2012: GM identifies four crashes and four corresponding fatalities (all involving 2004 Saturn Ions) along with six other injuries from four other crashes attributable to the defect.

Sept. 4, 2012: GM reports August 2012 sales were up 10 percent from the previous year, with Chevrolet passenger car sales up 25 percent.

June 2013: A deposition by a Cobalt program engineer says the company made a “business decision not to fix this problem,” raising questions of whether GM consciously decided to launch the Cobalt despite knowing of a defect.

Dec. 9, 2013: Treasury Secretary Jacob Lew announces the government had sold the last of what was previously a 60 percent stake in GM, ending the bailout. The bailout had cost taxpayers $10 billion on a $49.5 billion investment.

End of 2013: GM determines that the faulty ignition switch is to blame for at least 31 crashes and 13 deaths.

And it’s not just the sale of the final piece of equity that looks suspicious. Here’s a timeline from the Treasury Department. Note the activity by the Treasury Department occurring after the NHSTA’s second warning to GM in February 2010, including GM’s IPO:

On April 20, 2010, GM made its final loan repayment, leaving the remaining investment 
in the form of common and preferred stock. 
 
On November 18, 2010, Treasury recovered approximately $13.5 billion in conjunction 
with the new company’s IPO. The IPO reduced Treasury’s stake from approximately 61 
percent to 33 percent, or 500 million shares of GM common stock. 

GM going public was necessary for taxpayers to get paid back. Here’s the prospectus. I did a quick search for ”ignition” and received two hits, neither in regard to the switch defect. Cobalt, the model at the center of the problem, is not mentioned at all. And here’s the “Risk Factor” dealing with recalls:

The costs and effect on our reputation of product recalls could materially adversely affect our business.

From time to time, we recall our products to address performance, compliance, or safety-related issues. The costs we incur in connection with these recalls typically include the cost of the part being replaced and labor to remove and replace the defective part. In addition, product recalls can harm our reputation and cause us to lose customers, particularly if those recalls cause consumers to question the safety or reliability of our products. Any costs incurred or lost sales caused by future product recalls could materially adversely affect our business. Conversely, not issuing a recall or not issuing a recall on a timely basis can harm our reputation and cause us to lose customers for the same reasons as expressed above.

Is this statement sufficient to cover GM for the size of the problem that was reportedly known since 2005 and has resulted in the recall of 2.6 million cars? Would GM ever have gone public if this switch issue and the corresponding deaths were public? I highly doubt it.

Continuing with the timeline from Treasury:

On December 15, 2010, GM repurchased all of the preferred stock Treasury held for 
approximately $2.1 billion. Treasury’s remaining investment consisted solely of GM 
common stock. 
 
On December 21, 2012, GM repurchased 200 million shares of common stock for 
approximately $5.5 billion in net proceeds to taxpayers. At that time, Treasury announced 
its intent to exit the GM investment in 12-15 months through a series of pre-defined 
trading plans that began in January 2013 and sold shares into the market daily. 
 
On June 6, 2013, Treasury sold 30 million shares of GM common stock when GM was 
included on the S&P 500 index for approximately $1.0 billion. 
 
In total, Treasury launched four pre-defined written trading plans, completing the sale of 
its shares of GM common stock on December 9, 2013. The proceeds from the four 
trading plans totaled $9.2 billion. 

Taxpayers have recovered $39 billion on the investment in General Motors, but had we 
not acted to support the automotive industry, the cost to the country would have been 
substantial — in terms of lost jobs, lost tax revenue, reduced economic production, and 
other consequences. 

Here’s the chart of GM’s stock for the last six months. Did the Treasury Department get lucky with it sales or is the government guilty of insider trading? Is GM guilty of securities fraud for not mentioning the switch defect in their IPO prospectus? Did the Treasury Department know about the switch defect and still let GM go public without the proper disclosures?

At the very least, the SEC should start asking questions, treating the Treasury Department as if it were any other investor — there’s more than enough here to merit an investigation.



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