Bailing out zombies with taxpayers’ money. But you can trust the government with your money.
“An open, competitive, and liberalized financial market can effectively allocate scarce resources in a manner that promotes stability and prosperity far better than governmental intervention,” Paulson said 21 months ago.
Treasury Secretary Henry Paulson declared that the current turmoil in markets and financial institutions ultimately will “make things better.” (September 15, 2008)
As you see Henry Paulson is a real ‘expert’ you can believe in.
A GMAC Real Estate sign, attached to a sign advertising 0% down financing, is posted in the front yard of a home in Norcross, Georgia, on Sept. 12, 2007. Photographer: Chris Rank/ Bloomberg News
Dec. 29 (Bloomberg) — The U.S. Treasury committed $6 billion to support GMAC LLC, the financing arm of General Motors Corp., the latest step in the government’s widening effort to keep the largest U.S. automaker out of bankruptcy.
Treasury said it will purchase a $5 billion stake in GMAC, and lend $1 billion to GM so the automaker can participate in a rights offering at GMAC to support the lender’s reorganization as a bank holding company. The loan is in addition to $13.4 billion the Treasury agreed earlier this month to lend to GM and Chrysler LLC.
The fresh capital from the Treasury’s $700 billion Troubled Asset Relief Program will enable GMAC to expand lending to car buyers, which in turn may help save GM. The company’s U.S. sales plunged 22 percent this year through November after GMAC — which financed about 35 percent of GM’s retail customers last year — ran short on cash and limited loans to people with only the best credit. The Treasury stepped in after Congress failed to pass an auto industry bailout earlier this month.
“This is a good start by the federal government,” said Thomas Atteberry, who helps manage $3.5 billion in fixed-income assets at First Pacific Advisors in Los Angeles. Still unknown, he said, is whether the government cash will “make it palatable for new investors to come in.”
Resume Lending
In a statement, GMAC said it “intends to act quickly to resume automotive lending to a broader spectrum of customers to support the availability of credit to consumers and businesses for the purchase of automobiles.”
The Bush administration has already agreed to loan GM $4 billion this month and $5.4 billion next month, although the funds have not yet been loaned. If Congress agrees to approve funding of a second $350 billion for TARP, GM would get another $4 billion in February. Chrysler is supposed to get $4 billion under the same agreement this month.
A Treasury official said there is no cap or deadline for aid to automakers under the TARP. Congress “will need to release” the second half of the $700 billion TARP under Treasury’s rescue plan, the official said on condition of anonymity during a conference call with reporters.
Debt Swap
Separately, GMAC said it has accepted all bonds tendered in a debt swap designed to reduce its debt load.
“Once the offers are settled, which we expect to do promptly, results will be disclosed,” said spokeswoman Gina Proia in an e-mail.
The Federal Reserve last week approved GMAC’s application to become a bank holding company.
“This is part of our strategy to position GMAC for long term stability,” said Toni Simonetti, a spokeswoman for GMAC. “The reason we’re doing this is so we can provide credit to consumers; we’ll put these funds to use right away.”
GMAC will “continue to pursue” other ways to boost liquidity, including applying for an Federal Deposit Insurance Corp. guaranty program and attracting retail deposits from consumers, Simonetti said.
Becoming a bank makes it easier for GMAC to get federal aid and eases the threat of a collapse, which threatened to dry up credit for purchases of GM cars. Dealers depend on GMAC to finance about three-quarters of their inventory. Analysts have said the lender’s survival is a crucial step toward saving GM, which has said it may run out of cash.
GMAC joins more than 190 regional banks, commercial lenders, insurers and credit-card issuers seeking funds from the Treasury’s bailout program for financial firms. American Express Co., the biggest U.S. card company by sales, and CIT Group Inc., the biggest independent commercial lender last year, won capital infusions last week after converting into banks.
Credit Freeze
With GM selling cars at the slowest pace in 26 years and the country in its worst housing crisis since the Great Depression, GMAC and its Residential Capital LLC unit have no way to revive their own revenue and have been shut out of credit markets. GMAC has $540 million of bonds due this month and another $11.6 billion that mature in 2009 and previously said it would cancel plans to become a bank if the debt swap failed.
The Fed has since granted approval before the swap was finished.
GMAC, which had 26,700 employees as of Dec. 31, 2007, had about $161 billion of unsecured and secured debt as of Sept. 30, according to a filing last month. The proposal asked holders of $38 billion of debt to swap for as little as 55 cents on the dollar in cash or a combination of new notes and preferred stock. Individual owners of about $15 billion of debt were excluded from the exchange.
GMAC’s $2.5 billion third-quarter deficit brought losses over the past five periods to $7.9 billion. GM, which sold 51 percent of GMAC in 2006 to a group led by private equity firm Cerberus Capital Management LP, is also seeking a permanent federal bailout in order to avert bankruptcy. The automaker has been promised more than $9 billion in U.S. loans to keep it in business until the administration of President-elect Barack Obama takes office.
To contact the reporters on this story: Rebecca Christie in Washington at [email protected].
Last Updated: December 29, 2008 21:55 EST
By Rebecca Christie and Hugh Son
Source: Bloomberg