A Fed About-Face on GMAC?

Not that it makes a whit of a difference, but for the record, the GMAC note exchange program failed rather miserably to reach its goal of converting 75% of its debt to preferred stock. The company announced yesterday that about 59% of the debt had been tendered. Nevertheless, GMAC has attained bank holding company status and a $6 billion aid commitment from the federal government.

It’s interesting now to look back at all of the propaganda that surrounded its application to become a bank holding company and the ostensible critical need to complete the debt for equity swap. Throughout the month of December, both the government and GMAC adopted the posture that without success in retiring its debt, the prospects for approval as a bank holding company were non-existent.

Here is what the Fed had to say on December 24th when it approved, conditionally many thought, the application from GMAC:

In analyzing financial factors, the Board consistently has considered capital adequacy to be an especially important aspect. The Board has considered GMAC’s successful efforts to raise additional capital and that, as a result, GMAC will be well capitalized on completion of the proposal, as well as commitments GMAC has made to maintain its capital at a high level for a specified time period. In addition, GMAC Bank is currently well capitalized under applicable federal guidelines. GMAC Bank also would be well capitalized on a pro formabasis on consummation of the proposal. The Board has consulted with the FDIC, the primary federal supervisor of GMAC Bank, about the adequacy of the bank’s capital for its current and pro forma operations and the future prospects of GMAC Bank in light of its business plans. Moreover, as noted above, the Board has considered that the Department of the Treasury has taken a number of steps including providing credit to GM, which for some time will continue to be a major business partner of GMAC, in order to help stabilize GM and improve its viability.

The link above will take you to the entire statement by the Fed. The statement quoted above would certainly seem to indicate that the Fed expected the successful completion of the exchange offer. In fact it reads to me as if the approval was conditional upon the completion of the offer. However, if pressed to the wall, I would probably concede that it could be construed differently and in the context of the entire order, valid arguments could be made that the Fed approved the conversion without condition. Hardly a good way to go about its business so far as the Fed is concerned, but that criticism has lots of targets these days.

A GMAC press release on December 10 tells a different story:

Based on the results of the GMAC and ResCapoffers to date, GMAC would not obtain a sufficient amount of total regulatory capital in connection with the GMAC and ResCap offers to meet the requirements set forthby the Federal Reserve for GMAC to become a bank holding company under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). The Federal Reserve has required GMAC to, among other things, achieve a minimum amount of total regulatory capital of $30 billion in connection with its application. In order for such condition to be satisfied, among other things, the estimated overall participation in the offers would be required to be approximately 75% on a pro rata basis. The Federal Reserve has informed GMAC that if GMAC is unable to meet these capital requirements, it will not approve GMAC’s application to become a bank holding company.

That’s pretty unambiguous and seems to indicate that at one point, the Fed had told GMAC get it done or forget about any conversion. So what happened in the meantime that may have altered the Fed’s stance? Well, the Bush Administration on December 19th agreed to substantial loans to GM and Chrysler and five days later the Fed appears to say that they are OK with the possibility that GMAC will successfully recapitalize.

Of course they didn’t pull it off but they still got what they wanted. Why? Probably because the government recognized that an auto company without the means to finance its dealers and customers was not viable. So, in for a penny, in for a pound. You have to protect your major investment and in this case the only way to do that was to shore up GMAC. It will probably be years before we know what kind of pressure was exerted on the Fed that caused it to compromise its principles. It’s telling that one member of the Fed’s board actually voted against the approval of bank holding company status. In all likelihood, this will not be the last time that expediency trumps policy as the government digs deeper into the economy.

Comments

[{5U}:]

Nice to see the capitalists stick it to the socialists

Jan 02 07:52 AM

[jsc173:]

This is the epitome of non-sensical government intervention.

Tens of billions have been doled out to large banks, in theory to stimulate granting credit, yet the iceberg hasn't thawed. Few of those banks (Chase excepted) did much in the way of supporting the auto industry. Why? Because the maufacturing arms always subsidized the financing arms. How many banks would make 0% loans? Or provide floor plan financing at low rates?

So why is Treasury creating an opportunity for GMAC to do more insane financing?

Better yet, since GMAC was amongst the more aggressive mortgage lenders, why are they being favored when a couple hundred savings and loans (who didn't do stupid mortgage lending) are still waiting for TARP money?

Jan 02 08:48 AM

[Yo Bob:]

Those 59% who voluntarily tendered are looking pretty stupid right now - best to be a hold-out in any "too big too fail" company that the gov't views to be critical. The PIMCOs and others who held out are now financially ahead.

So any chance that the gov't would require Cerberus to contribute, at least some some, to the bailout? notta.

Jan 02 09:08 AM

[John D:]

The TARP monies were to be used for exactly what GMAC is using it for - to give customers a chance to borrow the money to buy a new vehicle,by the way, has anyone seen where the $350 billion went on Wall St. - bonuses you say - I can only hope that there is some kind of a paper trail and that the money gets to where it needs to be to get things moving forward again. It's not right to hammer the auto sector because of the way they got caught in the credit crunch and even after all the pounding they ARE doing the right thing by getting the economy moving by using the funds for what they were intended - I hope the next is that the financials do the same for businesses to borrow & mortgages to be dealt out RESPONSIBLY and help get through this mess with their lessons learned so we don't have to witness the same mess in the future. Here's to 2009 and hopefully a chance for everyone to prosper.

Jan 02 09:21 AM

[Hummeron:]

There is a fundamental WRONG at work here.
Any program of assistance contemplated by the government for mortages is not retroactive to prior failures.
By asking for bailout money GMAC is in fact admitting failure.
The institution is then allowed to convert itself into a qualified entity, after ther fact, and access TARP funds through the back door.
Where is the equity in this for the past housing bankruptcies?
The entire US financial regulation system and the current people who "manage" it, need(s) to be drawn, quartered, and boiled in oil.

Jan 02 01:34 PM

[eric1234:]

So, the government is giving GMAC billions so that consumers who can otherwise not afford to buy new GM cars can now do so with cheap loans. Hmmm, doesn't that sound just like the cause of our housing mess ... facilitating people to get into debts instead of doing without.

Jan 02 01:39 PM

[Mike AFP:]

Here's a pretty similar recounting of the GMAC situation, but taken one step further into the company's decision to go further down the credit scale www.anotherfp.com/blog...

Jan 05 12:03 PM