More Money Badly Spent by Bailout Nation

Includes: GKM, GM, GMA
by: Rick Newman

Just in case anybody's keeping track, the government has now appropriated $9 billion in bailout funds to some of the richest folks in America. This would be Cerberus Capital Management, the private equity fund that owns majority stakes in GMAC (NYSE:GKM) (NYSE:GMA) and Chrysler and whose chairman is John Snow - the last Treasury Secretary before the current one, Henry Paulson.

Cerberus is a worthy supplicant because it's flat out of money - hahaha, just kidding! Cerberus actually has plenty of money, courtesy of a secret list of well-heeled investors. And that's not even counting the personal stash of billionaire Stephen Feinberg, the company's founder and CEO. No, Cerberus is a worthy supplicant because of the 35 or so companies that it owns, its two auto-related properties are really hurting.

Now in a normal caplitalst society, Cerberus's losses on two troubled companies would merely be the cost of doing business, and odds are high that its gains on other investments would offset those losses. Or else Cerberus would go out of business, and be replaced by a more competent group. But here in Bailout Nation, Cerberus gets special treatment.

Chrsyler, with one of the weakest product lineups in the industry, qualifies for $4 billion in bailout money because it employs 55,000 workers and it would be an inconvenient time for an industrial firm centered in the most depressed part of America to go bankrupt. GMAC gets $5 billion because it's losing billions on foolish mortgage-related investments that are going bust, and because General Motors, which owns 49 percent of the lender, can't sell cars if GMAC isn't there to make loans.

[See the cars that drove Detroit's customers away.]

You might think that Cerberus, whose specialty is structuring multibillion-dollar deals, could come up with $9 billion on its own to salvage these two companies - if Feinberg et. al. thought they were worth the investment, that is. But it turns out that big investing clubs like Cerberus have rules preventing money invested in one fund or company to be cross-invested in another. Anyway, it's all too complicated for you to understand. The good news is, Cerberus has no rules against accepting sweetheart loans from taxpayers.

[See why Chrysler will still be running on fumes, even with a bailout.]

More good news: Paulson's Treasury Dept., which is adminstering the loans, won't require Snow or Feinberg to publicly testify or otherwise explain why they need the loans and can't cover their own losses. Cerberus has already sent Chrsyler CEO Bob Nardelli to testify before Congress, so that his corporate bosses don't have to. And GMAC doesn't have to explain its need to taxpayers because none of the other financial firms that have gotten financial aid from Treasury, like Citigroup (NYSE:C) and AIG, have had to formally explain. Thank goodness. Feinberg in particular is a notorious recluse, averse to even having his picture taken. Making a public plea for help would have made him really uncomfortable.

[See a proper way to grill a CEO seeking a bailout.]

Cerberus is getting the $9 billion because Chrysler and GMAC supposedly play an important role in lubricating the broader economy. GMAC is deemed especially vital to you and me. It used to finance about 80 percent of all GM purchases. This fall, on account of its deep losses, GMAC said it would only lend to people with credit scores of 700 or higher, effectively cutting off millions of potential borrowers. GM, in turn, has cited those lending cutbacks as one of the biggest reasons people have stopped buying its cars. And that supposedly is one reason that the entire auto industry is in a tailspin, making a tough recession even worse.

[See how the feds will govern Chrysler and GM.]

So you might think that in exchange for $5 billion, Treasury would require GMAC to relax its lending standards and get some money flowing to consumers. But Treasury doesn't want to tell anybody how to run their business - they just want to fund it. So the terms of the loan don't make any stipulations about what GMAC must do with the money. Instead, we're left to hope that billionaire financial-aid recipients will someday share the governmnet's largesse with the rest of us.

Disclosure: no positions