DealZone

GM’s debt designs

Announcing a third-quarter operating loss, the government-owned automaker said it would begin paying down its $6.7 billion debt to the U.S. government ahead of schedule. Most financial experts would agree that paying off debt is a good thing.

The government extended almost $50 billion in financing to GM but agreed to convert most of that into a 61 percent equity stake in the automaker. A congressional oversight panel said the government was unlikely to recover all of the financing it provided GM.

Banks that paid off their government bailouts early were able to shrug the pay czar off their backs and return to the time-honored practice of paying their executives whatever they pleased. It’s unclear whether GM will be able to do the same once it pays off the government. After all, taxpayers will still be majority shareholders after all debts are paid. Ken Feinberg may well wind up with a desk at GM’s HR office.

So why pay this money back before it is due? It’s not as if the prepayment is being funded from genuine earnings. In effect, GM is using money borrowed from taxpayers to pay them back. With expectations so low, and markets gradually accepting that the worst may be behind it, is this trip really necessary?

Uncle Sam, a shareholder forever?

ShareholderHow long will it take the U.S. government to disentangle itself from the financial services sector?

More than 16 years, according to a new Piper Jaffray paper.

“The more likely answer may be that the U.S. government may never be fully repaid,” reads the paper, “Opportunities for Private Equity in Financial Services,” released last week.

The estimate is based on assumptions, including that $3 trillion of U.S. government funding has to be fully repaid and no addition funds are drawn from $23.7 trillion in commitments. 

Lending CIT a hand

An almost heart-warming effort is being mustered by CIT bondholders to keep the troubled lender from getting put under the TARP or stumbling into a much-anticipated bankruptcy. Some $3 billion in survival cash is seen in the pipeline — money that could strengthen CIT’s finances and allow it more time for a debt restructuring. An announcement is expected before the markets open this morning.

What kind of terms might bondholders extract from CIT? Before TARP was modified to target executive pay for those who sought its shelter, banks such as Citigroup and then-independent investment house Merrill Lynch paid what were seen as shockingly high terms on mandatory convertible debt. They were the kind of rates Citi customers paid on credit cards; nothing like traditional bank funding rates.

So, a CIT deal could, and perhaps should, come with a variety of stringent terms. If these are effectively passed on to desperate small and medium-sized businesses that CIT serves, the cost of this rescue could be blamed for stifling the recovery.

CIT’s strong hand

CIT, the small-business financing company that provides funding for airlines, railways, retailers and manufacturers, should have little trouble securing some kind of government aid, whether in the form of a short-term loan, as seems to be the most likely scenario, or even a TARP or FDIC bailout.

Public antipathy toward bailing out financial companies was pretty much exhausted months ago. Plus, with banks still skittish about lending, CIT serves a clientele that has both ready demand and strong support in conservative corners of Washington that have long touted small business as their base.

The more hearty free marketers say CIT clients will be able to find funds elsewhere if the company does go under. But in the current environment, might a government agency be just as likely to fill that role as the banking sector?

Repaying TARP on a high

As several large banks rush to the market to raise capital, one question remains: What’s the correlation between their ability to raise equity now and their strength in the face of a deeper recession if the early signs of a possible recovery prove false?

This morning Morgan Stanley joined the bandwagon of banks raising capital to pay back TARP. The Wall Street bank said it intends to raise $2.2 billion in common equity to satisfy a supervisory condition to enable it to redeem TARP preferred capital. It follows JPMorgan Chase and American Express, which announced their plans Monday.

The offerings come after the Fed said Monday the government will announce next week which of the 19 stress tested banks will be allowed to repay the funds. One condition for repayment is that they are able to raise money in the public equity markets.

Will UnTARPed Banks Boost M&A?

News that top investment banks want to pay back their TARP funds is welcome news for the M&A market. Though the tens of billions of dollars in capital that will slosh out of the banks and into government coffers may sap the banks of the funds to make big buys, the fact that most post-stress-test capital-raisings have gone smoothly must be encouraging for dealmakers.

Plus, banks that are unable to pull themselves from the government teat will have a whole lot less pricing power. It was interesting to see HSBC commenting on Tuesday that it expects industry consolidation in the second half of this year and in 2010. Though they may be looking more closely at non-U.S. assets, given the burns on their fingers from their foray into the U.S. mortgage market, that big global may sit out the next round of mergers. Will they be missing the boat, particularly given the conviction of many analysts that the U.S. economy will be the earliest to recover?

A key question that could rain on any M&A party is asset quality, and the radiation emitting from the toxic assets still poisoning the financial system. While most of it has been moved to the bomb shelter balance sheet of the U.S. taxpayer, there is little conviction that valuations will have the golden glow of yesteryear, and plenty of lingering fear that the glow is the toxicity of the lost decade.

Goldman steps up to save America

USA/Not much rides on Goldman Sachs‘ success at shedding TARP – just the future of Wall Street, the recovery of the U.S. and global economies, and saving whatever shreds remain of the American Dream. Though it may take some financial finagling to extricate itself from the government’s grip, Goldman’s storied stable of financial savants is as capable as any of casting off the yoke of socialism.

For Wall Street, Goldman fights for the right to pay people whatever the market will bear, enshrining the guiding principal of the marketplace that it is not how much money one earns, but how much more than the other guy. For the economy, everyone knows we need a healthy banking sector to run our particularly high-octane form of capitalism. As for the American Dream, what this country needs most in this time of financial peril is a hero, someone who can stand up to the regulatory Frankenstein shambling from the wreckage of such spectacularly failed government efforts as AIG and Lehman Brothers.

The only question really for Goldman shareholders is how big a bonus Lloyd Blankfein should get if he manages to achieve these lofty goals.

Lewis Common Denominator

DEALS/Given his bank gobbled up the biggest broker on Wall Street and the biggest mortgage lender in the country, one can be forgiven for thinking Bank of America‘s Ken Lewis is talking his book. After all, going on CNBC and sounding confident is his primary role right now, with the days ticking down to the release of first-quarter results on April 20 and the bank’s annual meeting nine days later.

In the network’s lengthy interview, there wasn’t much said about shareholder pressure to unseat him after eight years at the helm of the bank. And, having taken $45 billion of federal bailout money and absorbed Merrill Lynch and Countrywide, he had little incentive to talk about bold measures at this point.

The Wall Street Journal says Lewis is set to sell the bank’s Columbia Management unit and may be looking to unload First Republic Bank, though it is not considering a sale of its stake in hedge fund BlackRock. While he spoke earnestly about repaying taxpayers, repeating his regret at having tapped TARP as heavily as he did, Lewis said it would be several quarters before the bank could do so.

ILFC bidders may get TARP relief

AIGPotential buyers of a large AIG business could be the latest to get some “relief” under the $700 billion Troubled Asset Relief Program (TARP).

In approving a revised AIG rescue package, the government has also agreed to give potential bidders of the insurer’s assets at least a bit of what some of them have been clamouring for – access to capital.

AIG has received significant interest from buyers for its aircraft leasing unit, International Lease Finance Corp, Chief Restructuring Officer Paula Reynolds said.

Taxpayer dollars losing appeal?

CashWhen the U.S. government started handing out taxpayer dollars to banks under TARP last fall, hundreds of banks lined up. To many, government money was cheaper than the terms they were getting in private and public markets.

“That really, in effect for several months, put a lot of our discussions with issuers really on hold,” said John Duffy, CEO of investment bank KBW, which specializes in the financial services sector.

Now, the pendulum may be swinging away from the government.

The Obama administration has made it clear that the recipients of more capital will have to live under dictates on what they can and cannot do with the money — dividend restrictions, executive compensation caps and such.