Can GMAC Save GM?

GM and Chrysler aren’t just two troubled auto companies. They are also linked by GMAC, a financial company which used to be wholly-owned by GM and which is now 51% owned by Cerberus, which also owns Chrysler. GMAC has now applied to become a bank holding company (it owns a small bank) — with the obvious intention of asking Treasury for TARP funds. And just to complicate matters, GMAC owns ResCap, a troubled subprime mortgage lender.

As John Carney said this morning, this is clearly an attempt to procure a GM bailout by the back door. Will it work? I decided to ask Carney, via IM.

Felix Salmon:

So what on earth is going on with GMAC?

If GMAC owns a bank, and GM owns a minority stake in GMAC, is that all that’s needed to get TARP funds all the way up to GM?

And is there any way that those TARP funds can make their way up to GMAC’s majority owner, Cerberus, and thence back down to Chrysler?

John Carney:

Every operating company should buy a small bank if it’s allowed to do that.

Felix Salmon:

GM owns 49% of GMAC, is that right?

John Carney:

Yes

I suspect that the Treasury might very well tell GMAC to take a hike.

Felix Salmon:

Because it would suspect that the money would leave GMAC as soon as it arrived, and be dividended up to GM and Cerberus?

Also what’s the relationship between ResCap and GMAC? Can GMAC simply let ResCap collapse? Or is GMAC now guaranteeing ResCap’s liabilities?

John Carney:

Ordinarily, if you can use that word for this bailout, the government demands preferred equity, warrants and dividends from the companies it recapitalizes. But they are now making special accomodations for private banks. I think GMAC try to argue that they should be treated like a private bank. I’m not sure how that works though.

ResCap is a subsidiary of GMAC. I’m not sure if all the obligations are guaranteed by the parent company, though.

GMAC recently paid $607 million to cancel $1.2 billion worth of ResCap debt, and sank $2.7 billion into the firm last year in a bid to shore up its finance

Felix Salmon:

And 49% of that $2.7 billion came from GM? Talk about throwing money down the drain.

John Carney:

Yeah. Funnily enough, Josh Weintraub, formerly of Bear Stearns, was appointed to Rescap’s board earlier this year.

He is best known as Bear Stearns best boxer

Felix Salmon:

My feeling is that if GMAC gets TARP funds, that might help GM sell more cars if it can start extending financing to more potential buyers. But that the money shouldn’t go directly up to GM, and that GM still needs some serious working out, ideally within a pre-packed Chapter 11.

What happens to ResCap though I have no idea, is it worth throwing good TARP money after bad GMAC recapitalizations?

And why does ResCap need a board if it’s a wholly-owned subsidiary of GMAC?

John Carney:

They’d have to put serious restrictions on dividending up the money to the parents. I’m sure they’d say something like, "No upward flows of TARP money until the shares are bought back." But, as you said, they can send the money upward by normal operations, funding auto purchases.

Felix Salmon:

In this sense though the fact that GM is a minority owner helps, ‘cos Cerberus won’t allow GMAC to write bad loans just to prop up GM. Unless it thinks that it needs GM to stay alive in order for Chrysler to have any hope of survival.

John Carney:

That’s true. And apparently, RESCAP is already restricted from making dividends to GM.

They did this, and put in place a separate board, so they could continue to borrow money.

Felix Salmon:

Ha. As if ResCap is going to be paying any dividends in the foreseeable future.

John Carney:

From a corporate doc: "As part of this transfer of ownership, certain agreements were put in place between ResCap and us that restrict ResCap’s ability to declare dividends or prepay subordinated indebtedness owed to us. While we believe the restructuring of these operations and the agreements between ResCap and us allow ResCap to access more attractive sources of capital, the agreements inhibit our ability to return funds for dividends and debt payments."

Felix Salmon:

Seems to me that this is all mind-bendingly complex, and should really be worked out strategically, within the context of a restructuring of both GM and Chrysler.

Absent such a context, I have a feeling it’s not going to help, and could end up just limiting degrees of freedom in any future restructuring.

John Carney:

All along the Treasury department, from Paulson to Kashkari, has told us that the TARP is an investment not a prop to failed companies. If they mean it, this would be a great chance to prove it by closing the TARP window to GMAC.

Felix Salmon:

But do you really believe this fiction that TARP funds aren’t bailout funds?

John Carney:

I’m suspending my disbelief. Let’s see if they are willing to let at least one firm with no plausible systemic risk claims fail.

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