General Motors - Fallout

Today, General Motors saw its shares battered by continued concern for the company's long-term health. Shares closed at $3.36 (a 23% plunge) as analysts weighed the risks to equity holders in government bailout scenarios.

Barclay's analyst Brian Johnson speculated that government assistance would "significantly dilute" GM's equity. This dilution would occur because of taxpayer protections which would be attached to a Congressional bailout package. These provisions would likely give the government (and by proxy, taxpayers) an ownership stake in the company. This would dilute the proportion of ownership held by current shareholders.

Analysts responded by slashing GM share price targets. Deutsche Bank went so far as to reduce its target price to $0. These moves come as Congress feels pressure from observers and politicians to intercede and help GM. Michigan's entire congressional delegation urged Treasury Secretary Henry Paulson to exercise his authority and help GM, echoing the CEO Rick Wagoner's pleas for support.

The debate over GM's role in the overall economy continues. Some believe that GM's failure would cripple 401(k) plans and prolong the equity downturn. Others fear that GM's problems are too systemic to be cured by a bailout, no matter what the size. It will be interesting to observe how Congress reacts to these challenges after the public responded with such vitriol to the bailout of the financial system.


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