By Edward Harrison of Credit Writedowns
Yves is going to be in a light posting mode, so I will be posting some links and a few posts for your reading pleasure. The first one is an update to some thoughts that Yves had on GMAC on the 27th.
By the way, where is Jesse? I want to see him posting here too. (hint, hint)
And you thought the bailouts were over and market discipline might be restored. Not a chance – the bailouts will continue, come hell or high water. The latest demonstration of this is GMAC, where the government will now be majority owner. GMAC has officially been nationalized. Now the government is running auto financing in addition to running the companies making the cars.
Below is a quote from the Financial Times. Notice the parts I have bolded.
GMAC, the car financing company, is set to receive up to $5.6bn in a new capital injection from the Treasury, filling a hole identified in the “stress tests” earlier this year and paving the way for the government to become the majority shareholder.
The company, formerly the financing arm of General Motors, was one of 19 institutions to submit to a capital adequacy programme led by the Federal Reserve and completed in May. That determined that GMAC had a shortfall, which will now be provided by the government in the form of preferred equity, according to two people familiar with the situation.
As widely expected, GMAC has been unable to raise the necessary capital in the market and the company – which will take on fresh lending responsibilities when it merges with Chrysler Financial – was seen as vital to the government-led restructuring of the US automotive industry and deserving of more funds from the $700bn troubled asset relief programme.
“When we laid out the stress tests, we expressly said that some additional Tarp capital may be needed given the severity of the downturn – this capital need is not new information,” said an administration official.
“But the transparency brought about by the stress tests allowed all other institutions to raise the capital required by the stress tests to ensure these firms could withstand a more severe economic scenario than anticipated,” the official said.
What you should be reading from this statement is the following:
- All the firms identified as lacking capital under the stress tests were given time to raise funds in the capital market to meet the shortfall.
- Some firms did meet the shortfall and they are now free to do as they please.
- Others have not and we the government are now going to take a more muscular approach in dealing with them.
- GMAC is the first public example of our flexing our muscles.
- But there surely are/will be other examples; some may already be happening in secret.
If the US government is going to throw its weight around to deal with financial firms short of capital, I would personally prefer they try a process which allows these firms to fail whereby equity and debt holders suffer consequences that are consistent with taking market risk. Bailing out GMAC is a moral hazard plain and simple.
But, what’s done is done. The GMAC case does, however, give a lot more credence to my view that Citigroup’s actions are being dictated by government. As I indicated when the stress tests were done in April, firms were going to get some time to raise capital and if they didn’t, the government was going to move on to Plan B (debt-for-equity swaps, nationalization, and FDIC seizure). Expect to see more indications that other financial companies with capital shortfalls are falling under the government umbrella.