GMAC: A Mini-AIG in the Making?

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.

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  1. miguel_swanstein

    The difference between the Fed’s and Treasury’s “solutions” is probably explained by yesterday’s apparent failure of the debt swap tender, no? I’m assuming that the failure wold have triggered immediate downgrades to GMAC, leading to another round of CDS revaluations, leading to the same collateral calls/forced asset sales that brought the system to the brink in Sept/Oct.

    It appears to me that any of the popular reference names in CDS-land are to be protected against failure for the foreseeable future in the name of “saving the system”. Why we are burning up the national treasure in such a futile objective isn’t as clear.

  2. Anonymous

    Of course they are they are insolvent are they not and letting them fail would blow a big frigging hole in the derivatives market which is why they were bailed out in the first place just like AIG because it may cause an explosion at places like JPM and CITI and …………

  3. Anonymous

    GMAC chairman is Ezra Merkin, one of Madoff’s prime “feeders.” This guy apparently knows how to bring the money in. What a great capitalist.

  4. ruetheday

    A day after GMAC gets its bailout, GM announces 0% financing deals for select models for 60 month loans. Now granted, the whole intent of this exercise was to subsidize GM through GMAC, but still. Loaning money out at 0% is not an effective way for a financing company to make money. At least GM will make money on the cars they sell with this attractive financing. Oh wait, they also extended their cash back and employee pricing for all programs.

  5. Kevin

    This is the epitome of what you will get with “fiscal stimulus”. Dump a bunch of money into a program designed to “create or protect” jobs, but really does neither. Only difference between this and “fiscal stimulus” through infrastructure projects, is that by the time the infrastructure projects actually start moving dirt it will be 4 years after the jobs are actually needed.

    The Financial Times article from the IMF was a complete waste of space. We have some unknown lead economist waving his Sceptor of Approval for those stimuli he deems appropriate. That is supposed to make me feel all warm and fuzzy??? I think not.

    GM’s problem is simple. Excess capacity has been driven by union work rules which make it prohibitively expensive to reduce capacity. So how does GM deal with the issue?

    They continue to produce vehicles that people don’t want, because it costs them less to produce them than not to produce them. To not produce would mean even more workers in job banks, and onerous costs to permanently eliminate unnecessary and unneeded jobs.

    The only place to sell these “excess” vehicles is to sell them to fleets (Hertz, Avis etc.) In 2 years these fleet sales come back on the market as used cars, which destroys resale value of new cars, which means the cars have less value to consumers, so they pay less for them.

    So all together now lets fiscally stimulate the unneeded, unwanted, non-demanded, so we can kick the can down the road to our children.

  6. satan

    AIG bailouts only benefit financial parasites, GMAC could at least lend to people who buy cars that in turn would keep workers in their jobs and help everyone consume more.

    I hate to say this- no job is truly “essential” . Even those who think their jobs are essential are dependent on the wages of the majority in useless jobs.

  7. Steve Higgins

    If the mortgage portion of the bank started making real estate loans GMAC might get back in the swing. But with their focus on cars, when nodoby needs a new car, red is the most likely color…
    Steve Higgins
    Boulder Loan Ranger
    Real Estate and Mortgages Boulder CO

  8. Anonymous

    don't always agree with denninger, but in this post, he's dead on IMHO:

    "The Federal Reserve and Treasury approved an application that contained as it's essence an intentional money-losing business strategy, enabling the literal looting of the public treasury under the false pretense of an "investment".",-Example-9463.html

    the article and the facts contained therein speak for itself.

    …and they wonder why they are bears & swans…

  9. Anonymous

    This is idle speculation so please feel free to shoot it down.

    Why is it that I believe GMAC lost considerable amounts of money in the Madoff Scheme?

    On top of known big name losses like Woolworths, failing car dealers, etc.

    The silence on the Madoff losses can be explained by GMAC money being indirectly lost through placement in an offshore entity which in turn, leveraged it and invested in Madoff.

    With the relaxation of global accounting standards, it is entirely possible to conceal such a loss for now.

    I believe GMAC is far close to actual bankruptcy than they let on.

  10. artichoke

    The same could be said for just about all of TARP, all that I’m aware of at any rate.

    I’m much more sympathetic to saving a car company, which is a national security asset and did not cause our economy to collapse (even if some of their workers don’t have to sweat too hard to earn a middle class income), than to save an international bank with many multi-millionaires that participated in the $50 Trn overhang of CDS that is currently strangling the world economy.

  11. Edwardo

    Well, if you thought Mr. Denninger’s post on GMAC was illuminating, your sure to find some merit in he just posted on M1.

  12. masaccio

    GM hasn’t announced the results of the exchange. My guess is that Pimco would only do the exchange if GM and Cerebus put in more equity. GM got the money it needed from Treasury and Cerebus came out of pocket. There is now enough equity to satisfy Pimco, which made some kind of conditional tender.

  13. GloomBoom

    GM is toast. Has been toast for years. The problem is that now they have enough money to survive until Obama is in. Then, with his ties to the unions, GM won’t have to worry. Obama will open the floodgates. Sad really.

  14. Anonymous

    The big three in Detroit are not national security assets at all. That’s some politicians’ inaccurate arguments. In times of necessity (war), other, so-called foreign automobile manufacturers can be nationalized with the same effort as the big 3’s factories. There is absolutely no reason why billions have to be wasted and borrowed from the future of this nation in order to continue to sustain failing industries.

  15. macndub

    Could a mini-AIG be a unit of currency, defined as all the money in the world prior to September 2008, but only a few bucks after that date?

  16. fresno dan

    Agree with “Ruetheday”
    I have been reading about all the acreage being leased at Long Beach ports by Toyota because they can’t ship cars to dealers. Now, if Toyota can’t sell cars, what chance does GM have! Who is going to buy all those Pontiac G-6’s?
    Hmmmm…. I have an idea. GM will get backing to buy land to store all the cars it can’t sell (even with 0% and cash back…lots and lots of cash back. We will actually give more cash back, distributed by helicopters, that will equal the price of the car).
    Supports real estate and automakers. Man, I should be predident.

  17. fresno dan

    BTW, a more serious comment. When I read the article and the other background articles (Thanks!!!) another important point missed is that it puts the government in the position of not enforcing the rules and regulations consistently, impartially, and objectively. Capital requirements except if we (the treasury) are helping you out (wink, wink). Kind of reminds me of 4 legs good, two legs bad.

  18. Anonymous

    I cannot help thinking that this might be a nice little bailout for Ireland. GMAC and its brethren subsidiaries run through Ireland did a nice little business in car loans across Europe, using rates and techniques which squeezed out a lot of the more traditional lenders. Subsequently much of this risky lending has started to make significant losses. How fortunate then for us in Europe that GMAC has decided to restart making risky loans. It means our banks will not have to and we can all go on a big spending spree at the US tax payers expense. Now if only we could cut out the middle people and you Americans could just send half your wages to a European directly things would be a lot better for us. Joking aside it seems to me that most consumers are trying to work out how best to game these bailouts so that they can get as much as they can out of the system before everything crashes.

  19. netzer

    It is only appropriate that GMAC turns out to be another AIG. In fact it should not surprise anyone that much of the economic might of US is a mirage and much of it would need to be eventually shut down or bailed out at tax payers’ expense although I suspect before long, the US government would itself need to be bailed out via a default of US treasuries. Albert Edwards of Dresdner (and now of Socgen) pointed out earlier this year, that much of US economic profits had been nothing but lies and accounting tricks, aided by shameless devaluation of the USD in recent years. Eventually this whole crisis would end with a massive default of US treasuries. I am watching in great anticipation of that day when the US becomes formally a banana republic.

  20. Anonymous

    I have been reading about all the acreage being leased at Long Beach ports by Toyota because they can’t ship cars to dealers.

    Toyota should be leasing space on lawns of underwater homeowners.

    Problem solved.

  21. Kid Dynamite

    GMAC pays the government 8% on the preferred, loans the money out at zero, and to top it all off, GM loses money on every car sale…

    doesn’t sound like a viable formula to me.

    i wrote a blog post about this too… and i agree with Denninger on this 100%

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