The company announced the move after an activist investor threatened to run for a seat on the board and push for a larger $8 billion buyback. The initiative may be great for GM investors in the near term, but University of Massachusetts economics professor William Lazonick argues that the investment threatens GM’s stability if the industry encounters another downturn.
“GM did $20.4 billion worth of buyback from 1986 through 2002,” Lazonick wrote in a story for the Harvard Business Review. “If it had saved that money and earned a modest 2.5% on it, the company would have had $35 billion on hand when the financial crisis and Great Recession hit and probably would not have had to file for bankruptcy protection.”
The bailout ultimately cost US taxpayers more than $9 billion in absorbed losses, combining a $11.2 billion loss attributed to GM and a $2.4 billion profit from its loan arm, Ally Financial.
Major automakers are currently enjoying global sales gains as demand continues to grow, but some analysts view changes in lending trends as the first small signs of potential trouble in the coming years. The average car loan term has grown steadily from 60 months in 2002 to 78 months in the current market, according to Edmunds.
Ally Financial recently began offering 84-month loans in many states, according to Automotive News. The extra-long term allows buyers to purchase more expensive vehicles, but potentially delays their next trip to the dealer.
“Going forward, GM will need all the financial resources it can muster to produce automobiles that buyers in diverse global markets want at prices that they are willing to pay,” Lazonick added.
Former GM chief Bob Lutz appears to agree, recently telling The Wall Street Journal that buybacks are a “harbinger of the next downturn” and nearly always a regretted decision.
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