GMAC plays its too-big-to-fail card… again
The Treasury, as major shareholder of such credit boom casualties as Citigroup and General Motors, showed with its $3.8 billion infusion into GMAC that it can still be counted on to safeguard the financial system from systemic collapse. The auto-loan company, which had dutifully spread its wings into mortgages in the housing boom, wound up becoming a bank to qualify for TARP bailout funds a year ago – the day after Christmas 2008, to be precise. How could Treasury say no?
Now taxpayers are plonking another $3.8 billion into GMAC to help cover mortgage losses. That gives us another majority shareholding in a company that could not have survived to pay its bills, workers and its executives without aid. No, it’s not much in terms of the government’s balance sheet. But it should rankle in Congress when lawmakers come back from holiday.
Not far behind the brouhaha over universal health care lays the still smoldering debate over “too big to fail”. Is it naïve to note that the timing of GMAC’s new lifeline came when legislators were safely tucked away at home? Arguing that AIG was too big to fail, with its myriad confusing and distracting derivative contracts, and that GM was too big to fail, with its strategic position just behind the aorta of the American manufacturing heartland, or even that Citigroup, with its corner office (sans fireplace) in the U.S. superbanking community can somehow be extended to GMAC might seem farfetched to fiscal hawks.
A report in the New York Post last week certainly would have helped GMAC’s cause. The paper said that Warren Buffett was looking at taking on at least part of ResCap, GMAC’s real estate lending operation. That would probably have gone some way to convincing Treasury folk that GMAC was moving in the right direction. Many analysts see GMAC’s mortgage assets, which make up about a third of the company’s $178.2 billion balance sheet, as the main obstacle to the lender reaching profitability. GMAC said after the capital infusion it does not expect to record more major losses from its mortgage lending unit, which should help stabilize results. Well, if majority government ownership doesn’t stabilize the situation, too big to fail would not be an issue.
Santa for automakers, Grinch for taxpayers?
A company in the U.S. auto industry fails — and the government steps in as savior. Yet again. That’s right. Santa visits the automakers this year while the Grinch steals taxpayers’ Christmas.
The Bush administration is buying $5 billion in equity in GMAC – the finance arm owned by GM and Cerberus Capital Management. The Treasury has also offered a new $1 billion loan to GM so the automaker could participate in a rights offering at GMAC.
Yes, this in addition to the recent $17.4 billion emergency loan to save GM and Chrysler from bankruptcy. In fact, the government already helped GMAC last week, when the Federal Reserve approved the finance company’s application to become a bank-holding company.
But the Fed’s approval was conditional on GMAC raising new capital.
GMAC said it had raised enough capital to satisfy the Fed’s conditions just as the Treasury announcement on Monday.
The Treasury’s generous moves help Cerberus just as much as they help the auto industry. Cerberus bought 51 percent of GMAC in 2006 and 80 percent of Chrylser last year. The private equity firm has been stung by both those investments as U.S. auto sales have plunged to record lows amid a sinking economy following its purchases.
A happy coincidence: Cerberus Chairman John Snow was the Bush administration’s treasury secretary before Henry Paulson.
so does this mean that it will be easier for us taxpayers to get cars manufactured by gm, financed by gmac at better rates no matter what our credit rating is? after all they ought to give taxpayers a huge discount considering that we have to back them financially after sqandering profits made from selling us a sub-par product in the first place
GMAC’s Christmas present
The Fed donned the red suit on Christmas eve for GMAC, giving the troubled auto finance company the nod to become a bank holding company.
The speedy approval should not come as a surprise, given that GMAC lends to consumers and GM depends on the finance company to sell cars — factors that could make its survival seen as key to fixing the economy.
The new status gives the company access to government lending programs and should allow it to continue financing loans for GM cars.
“In light of the unusual and exigent circumstances affecting the financial markets … the board has determined that emergency conditions exist that justify expeditious action on this proposal,” the Fed said in a statement.
The bank holidng status will come at a cost to GMAC’s majority owner Cerberus and minority owner GM: Both must cut their stakes in the company to comply with regulations that prevent many kinds of companies from owning too big a share of a bank.
DEALS OF THE DAY
** Nissin Foods Holdings, Japan’s top instant noodle maker, said it would buy a one-third stake in Russia’s largest instant noodle group Angleside Ltd for about $296 million, making a foray into the fast-growing market.
Does anyone else think that it’s a cruel karmic-realignment that GM execs are in part responsible for dragging their company into such a mess while finding a means to be forced to cash out on their stake in the company and are walking away with pennies on their stashed away dollars?
20 percent = zero
At the end of December 2007, Daimler’s 20-percent stake in Chrysler was valued at about $1.18 billion.
At the end of June, Daimler valued that investment at about $219.6 million.
Today, Daimler said the book value of that 20-percent stake is zero.
That’s right, zero.
To put that zero in perspective:
A year ago, after Daimler sold 80 percent of Chrysler to U.S. private equity firm Cerberus Capital Management, the German automaker listed the value of its minority interest at $1.8 billion.
Ten years ago, Daimler paid $36 billion for all of Chrysler.
What does Daimler expect? They got their reward up front when they robbed Chrysler after merging (TOOK OVER) Chrysler.
Then by not following on Chrysler’s successful FWD car lines effectively Chrysler has lost many customers, including me a long term one.
Perhaps Daimler should buy the Chrysler 300 car line they loved.
