Dwight Cass at BreakingViews makes some astute and troubling observations about the GMAC rescue, which spurred a market rally in the face of truly awful economic releases (one might take the cynical view that, given how thin trading is this week and the tape-painted appearance of the end-of-day recovery in stocks yesterday, that a rally was in the cards absent anything short of the onset of nuclear war).
There were essentially two observations in the piece, the first, that the “rescue” is more likely to be a down payeant:
More worrying is the possibility that this $6bn is the first of many trips to the well. After all, GMAC is still losing money – it has haemorrhaged almost $7.5bn since the start of 2007 – and isn’t overflowing with capital. It had $9bn at the end of September, is raising $2bn from shareholders – including the rights offering – and now has the $5bn in Tarp money.
It just concluded a debt for debt-and-preferred exchange offer, the deadline for which it had to extend several times. It says enough bondholders swapped their debt for it to meet the Fed’s capital requirement, but that doesn’t leave it with a huge amount of excess cash to leverage into new loans, or act as a buffer against future losses.
Admittedly, GMAC is expected to trim its dealer network considerably, but that does not do anything for the assets now on its balance sheet. And given the considerable investment that dealers have usually made in their enterprises, many observers doubt the ability of the automakers to make meaningful reductions of their dealer networks absent Chapter 11. Look how recalcitrant GMAC bondholders proved to be when asked to take a pretty minor haircut in order to become a bank holding company.
But Cass raises a more interesting point, that Treasury and the Fed are working at cross purposes here. Since Paulson has less than a month to go, the consequences of his playing badly with Ben will (presumably) not have any impact on market psychology. However, in the discussion below, note how the Treasury action was in conflict with the Fed’s requirements to bringing the finance operation to a reasonable level of capital adequacy were it to become a bank holding company . Will we see more pressure in the Obama Administration to pursue expedient fictions (in this case, that the band-aid for GMAC is a lasting solution)?
The Fed imposed tough conditions on GMAC last week when it approved its application to become a bank holding company, giving it access to oodles of government lending facilities. It required the company to scrape together about $30bn of equity in order to be “well capitalised” and to cut Cerberus’s and GM’s ownership stakes sharply over time.
But the Treasury seems to be pushing in the opposite direction – $1bn of the funds it has siphoned from the Troubled Asset Relief Programme has been lent to GM so that the carmaker can participate in an upcoming rights offering by GMAC. That will actually increase GM’s stake.