GMAC Bailout Flaws: No Appreciation of History

Perhaps it is understandable to forget if something happened many years ago. Read the headline here: “GM, GMAC ease lending rules to entice car buyers”. As I stated in my first article, the key driver of this financial crisis is the lack of understanding or appreciation of the unintended consequences of lowering credit standards. Lending to people to buy things they don’t need or can’t afford in the long run does not work out. Look what happened just this year!

There is so much wrong with the GMAC (GKM) deal it goes beyond just the basic elementary concept of the above discussion.

For one, read this piece by Felix Salmon, with which I agree. Salmon basically summarizes that those who did not tender their offer for debt to equity will be rewarded for their “intransigence and unhelpfulness”. They will be holding debt which is more senior than preferred equity and also will have a better coupon payment. Oops to all those that tendered.

Here's another piece worth reading. This issue is really a fundamental flaw. The Treasury has already committed the initial $350 billion approved from the TARP – yet they will use the TARP to pay the GMAC bailout. The article uses a great analogy:

This sounds equivalent to writing $1,100 of checks on a checking account with $1,000 in it because only $900 of the checks have already been cashed. In the real world, this is called "check kiting," and it's illegal.

The Treasury, in my opinion, is acting beyond the constitutional framework. They are the executive branch. They should not be legislating. Look at their ever changing tax laws. Of course, we seem to be so engrossed with our current problems we will do anything for a pain-free solution.

Comments

[Steven Hansen:]

"The Treasury, in my opinion, is acting beyond the constitutional framework. They are the executive branch. They should not be legislating. Look their ever changing tax laws. "

congress is not legislating either. we are faced with the incompetent congress. and a lame duck administration so beaten it doesn't give a $hit.

2008 Dec 31 05:50 AM

[lucky lenny:]

Talk about "unintended consequences," wait until GM & Chrysler get accused of dumping their product below cost. Then Ford & the other car companies are going to scale back R&D; cut back production; & possibly go out of business themselves. Just like FDR & the Great Depression - when the Democrats & FDR wouldn't let shoe manufacturers & others go out of business.

2008 Dec 31 06:43 AM

[sieraromero:]

What is all the hoopla about anyway? All the talking heads in the Government, and the financial press say things are going to get much better. The market is way undervalued and is forward looking.[LOL] The market manipulaters want you to believe all is well so, that they will suck the rest of your hard earned savings-investments away! Good Luck in the coming New Year to you all! I think we are all going to need as much as we can get.

2008 Dec 31 08:39 AM

[epeon:]

First, what is Ford going to do? With the government funding GM, Ford will be at a huge competitive disadvantage. This will probably force them into bankruptcy which is a shame since they are a better run company.

Secondly, in the long run, none of this will really make much difference. All of the American companies are still stuck with the UAW. Without the spectre of bankruptcy, the UAW has no incentive to negotiate away any of their excessive benefits, so I think the big3 will be back asking for more money in about 18 months. Except, of course,
Ford because they will need money to compete against GM now.

2008 Dec 31 08:40 AM

[James G:]

Why does Bernie Madoff and the security regulators show no remorse? It is because the corrupt will always lead the corruptable. Morality is relative. When the immoral lead the lawful, the lawful becomes the criminals. These criminals have been the leaders of financial corporations and government agencies for many years. This greed will continue until these criminals have all the usable assets of the citizens, then it will cease and the criminal legislators will claim they are coming to the aid of american citizens. Of course they will come to our aid, for unless we begin producing again they will not find anything worth stealing. Relax, "good times are acoming"

2008 Dec 31 09:34 AM

[axelrod608:]

>> "beyond the constitutional framework" >> The Constitution has only one authorized method of dealing with overindebtedness - bankruptcy. This entire administration and congress are refusing to honor the oath they took to support and defend the Constitution. They couldn't care less about the Constution.

I would feel better about the future if the incoming administration and congress appeared to be more in line with the Constitution. But the people selected to run the next administration are about as similar to the outgoing ones as fraternal twins. I fear the only "change" we're going to get is the change of names on the doors.

2008 Dec 31 09:46 AM

[sr9web:]

Ok, so what would you recommend? Let GMAC fail?

Get real, you have no f'n idea how bad things will be if GM fails and GM needs GMAC.

2008 Dec 31 09:29 PM

[a. palmer jr.:]

It's possible there is no answer to our financial problems. Try as we might for easy answers to GM and everybody elses problems, it just might be that we now have to pay the piper. The piper being, businesses going bankrupt, high unemployment, etc. You can only do so much with fuzzy math. The numbers haven't added up for several years now, and the more we try to manipulate them the worse off we are.

Jan 01 12:53 AM

[TruthSayer:]

GM failure is relative just like many other things. There are many alternatives and this is not a black and white issue.

I do not think a collapse of our auto manufacturing would occur. This is just like any other manufactured item. If you have too much supply you will have some pain as you transition back to equilibrium. Orderly bankruptcy with government backing is one gray alternative. This is used by almost any other manufacturer when they hit tough times. The US government could of backed all loans to suppliers to prevent the cascade of collapses. They could even promise to back all warranties as the transition was being made.

A truth - this goes for not just GM but the banks - Avoiding bankruptcy helps mainly current shareholders and the executive team.

GMAC plan is trying to prop up demand. You cant believe the solution is to prop up people buying cars when they dont need one and/or cant afford it? WHY is it the solution for many is to go back to living beyond our means? Its not sustainable.

On Dec 31 09:29 PM sr9web wrote:

> Ok, so what would you recommend? Let GMAC fail?
>
> Get real, you have no f'n idea how bad things will be if GM fails
> and GM needs GMAC.

Jan 01 10:33 PM

[monday1929:]

I think we are far more sophisticated now than we were 3 days ago. Although the same crooks are running things, I believe the lessons of the past 2 hours have made them see the light and they will all work for the betterment of their fellow citizens.
The lessons of the past 10 seconds have chastened us. In the last nano-second, surely even the SEC and Madoff have come to their senses. All should be forgiven, the Rich have felt badly for hours now.

Jan 06 09:35 AM