General Motors and the unwitting investor

By Jonathan Citrin

It happens every few years—sometimes gradually, ofttimes more pronounced. Typically, it is only noticed in hindsight, years later, and rarely learned from.  In the last decade alone, it has occurred at least four times: 2001, ‘03, ‘08, and as recently as November 18, 2010.

March 10, 2001. Nasdaq index at 5,048-signifying the peak of the tech bubble and the beginning of a new era in American financial markets...  After years of boom and record setting growth in both technology and initial public offerings (IPOs), the market commences a decade of immense volatility that will put into question presidents, Federal Reserve chairmen, Wall Street, and the viability of the entire American economy. The Nasdaq, a symbol for the prosperity of the ‘90s, will drop well below 1,500 and finish the decade (2000-2010) at only 2,269.

June 15, 2002.  President George W. Bush radio address on, “broadening homeownership”-signifying an unofficial institutionalizing of “The American Dream” and thus the mortgage bubble...  During his radio address, President Bush discusses his Administration’s desire to make home ownership more accessible by providing funds for purchase and creating a single-family housing credit.  Not seeing that his efforts will spawn the final boom of a cataclysmic housing bubble, he states, “The single greatest hurdle to first-time homeownership is a high down payment requirement that can put a home out of reach, so my administration is proposing the American Dream Down Payment Fund. When a low-income family is qualified to buy a home but comes up short on the down payment, the American Dream Down Payment Fund will help provide the needed funds.”

March 16, 2008.  JP Morgan Chase, with involvement from the U.S. Government, offers to purchase Bear Stearns for $2 per share-signifying the first major financial institution to fall, with many more to come... Unaware of what is to come, investors continue to overindulge and banks do not heed the warning. Bad mortgages persist to quietly build on the books of major American corporations. The fall of Bear Stearns is categorized as poor management rather than a sign of the storm to come. At the peak of the soon to develop financial crisis, the government will become imminently involved in the private sector, and Wall Street will see the crumbling of its most prized institutions.

A tipping point in market history is considerably difficult to see as it unfolds. These dates will someday be seen for their magnitude, albeit in hindsight. Our inability to understand these turning points while they occur is not what destabilizes an economy or a portfolio. Rather, it is our failure to ever learn from them.

November 18, 2010.  General Motors’ Initial Public Offering-signifying the first major IPO since the Great Recession and a return to “greed” for active investors...  In addition to its size and oversubscription, the GM IPO will long serve, for better or worse, as a symbol of the success of government in the private sector. Importantly, this IPO also marks a subtle but poignant change from the ultimate fears of the late 2000s, to a new era of gluttony and self-fulfilling forgetfulness.  Investors who very recently chastised GM for its bankruptcy are the first in-line to receive new shares. This shift denotes the return of greed as the motivating force behind investor portfolios.  But, even as one of the largest in history, the implications of the GM IPO will not be understood for years to come.

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Jonathan Citrin is founder and CEO of CitrinGroup, an investment advisory firm located in Birmingham. He is an adjunct professor of finance in the School of Business at Wayne State University.