Are we bailing out GMAC’s bondholders?

May 20, 2009

Amid all the noise about the government doing unspeakable things to Detroit bondholders, it looks very much to me as though in fact we’re shamelessly bailing them out:

The Treasury Department is preparing to announce as early as today that it will invest an additional $7.5 billion in GMAC LLC…

The Treasury and Federal Reserve Board this month announced GMAC needs $11.5 billion in additional capital reserves as the result of government stress tests. The additional assistance to be announced this week is likely not the end of government support for GMAC.

Credit default swaps on GMAC are trading at 900bp these days, and its bonds are trading at yields in the 50% range*. GMAC’s bond investors mark to market: they’ve already taken their losses. So let’s take advantage of that fact, and convert their debt to equity, before pouring billions of fresh dollars into this particular black hole.

Update: There is one possible reason for this: GMAC needs cash — and a debt-for-equity swap doesn’t provide cash.

*As for the bond yields, my commenters are right, I made a mistake reading my Reuters screen. The most near-dated bonds come up first, and the annualized yields on bonds maturing in June and July are over 50%, but that doesn’t mean very much. Still, if you look at say the 8.4% bond maturing in April 2010, it’s trading at 79.5 cents on the dollar, which is a yield of 36.1%.


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