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 (NYSE: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.