Why Is GM Bailing Out Cerberus?

GM is bailing out private equity firm Cerberus Capital Management while waiting for its own bailout from the rest of us. The details are in a barely-noticed filing with the SEC (which is not, of course, responsible for the accuracy or content of such filings).

On December 9, 2008, General Motors Corporation ("GM") and GMAC LLC ("GMAC") agreed on a temporary basis to adjust GMAC's terms for making advance payments to GM for wholesale financing of vehicles sold to GM dealers. GM typically has an increase in its inventory levels in advance of the year-end shut down and this adjustment will help finance purchases of this inventory. Ordinarily, GMAC pays GM the invoice amount for a vehicle shipped by GM to a GMAC financed dealer on the first business day after the shipping date. Beginning on December 9, 2008, GMAC will be obligated to pay GM the invoice amount when such amounts are due from dealers. As a result of this change in payment terms, GMAC will be able to defer payment until December 30, 2008 of up to $1.5 billion in cash due to GM. During the shipping period GM will have a security interest in the financed vehicles.

No mention of Cerberus in here so you have to remember that "a group led by Cerberus Capital Management LP" owns 51% of GMAC which is in tense negotiations with its creditors to get them to take a haircut so GMAC can become a bank and be eligible for bank-type bailouts. GM owns the other 49% of GMAC.

Now let's look at the reality of the transaction. One of GMAC's normal functions has been to provide credit for dealers to buy cars from GM so the dealers can put those cars on their lots and so GM can get cash for the cars before the dealer actually sells them to people; this is been the way the auto industry has worked almost forever. GMAC, collects interest from the dealers for this financing activity, of course. But now GMAC DOESN'T have to pay the cash to GM – which tells us it is starving for cash – until "such amounts are due from dealers"; presumably GMAC still gets the interest from the dealers, though (I've quoted the full text of the SEC filing above which does not mention GMAC waiving interest to dealers). So GMAC is performing no useful function here; GM isn't going to get cash until the dealers would have paid it anyway. And, if GMAC should go bankrupt, GM may not get the money at all.

Huh?

I understand GM's need to ship the cars and get them on dealers' lots if it's going to have any hope of selling them. And maybe GMAC has no cash left to lend. But GM would have been in the same position if it simply financed the purchases to the dealer itself; and it wouldn't have had any extra exposure to the prospect of a GMAC bankruptcy nor would GMAC been in line for any fees or interest on loans it didn't really make. GM could have collected the interest from the dealers or waived it to help the dealers.

If GMAC were the sole owner of GMAC as it used to be, this bailout of its subsidiary wouldn't have made much difference. But GM is a minority owner of GMAC; seems like the Cerberus-led group majority owner which is not putting more money in or making new loans to GMAC is the beneficiary.

So why is GM bailing out Cerberus? Truth is I don't know. Could it be some way to make clear to the administration that the survival of GM and GMAC are intertwined to gain leverage in the negotiation of the bailouts of GM and Chrysler (mostly owned by the Cerberus and friends)? If GMAC goes under GM will be out another $1.5 billion. Could it be part of a side deal between GM and Cerberus who are now reported to be back in discussions about merging GM and Chrysler?

Either this is a very one-sided deal or the other side of it somehow got omitted from the SEC filing. Think anybody reads those things?

Full disclosure: In by far the worst business decision of my life (which I thought was right at the time, of course), I recommended the sale (actually a reverse merger) of ITXC, the company Mary and I founded, to a Cerberus-owned entity. I stayed on for a while as non-executive Chairman and left under unpleasant circumstances.

Comments

[casey00001:]

Tom:
This could be related to them trying to become big enough to be considered a bank. I know nada about this but perhaps the combined entity would be closer to the requirements to get TARP money directly?

2008 Dec 19 09:49 AM

[sumosama:]

could it be that they need GMAC to finance the cars GM hopes to sell? Stop seeing conspiracies everywhere ... think horses not zebras.

2008 Dec 19 10:25 AM

[BobMichigan...:]

Duh, they need someone to loan the money to buy the cars.

Another "We Todd did" expert on the auto industry!

always want to ask, if you guys are so clever, why are you writing about it instead of doing it?

2008 Dec 19 01:25 PM

[Ames Tiedeman:]

When it is all said and done GM will own Chrysler, Dodge and Jeep.

2008 Dec 20 11:53 AM

[robertc39:]

Just curious, first the politicians allowed the foreign car companies to sell their products here without a large tax. This meant that because of their low wages and government subsidies they could sell theirs cheaper than those made by American companies and made here. Now the foreign car companies gained a foot hold here and seized part of the market. I can understand that, they were cheaper, smaller but I refuse to say a better product. The media has said that but I will not put down the American worker. Now back to my original question, if the politician allowed this to happen why it is they blame the car companies and unions. Why not look at the politicians and foreign lobbyist? Just a thought.

2008 Dec 23 12:04 AM