Are We Bailing Out GMAC Bondholders?

Amid all the noise about the government doing unspeakable things to Detroit bondholders, it looks very much to me as though in fact we’re shamelessly bailing them out:

The Treasury Department is preparing to announce as early as today that it will invest an additional $7.5 billion in GMAC LLC…

The Treasury and Federal Reserve Board this month announced GMAC needs $11.5 billion in additional capital reserves as the result of government stress tests. The additional assistance to be announced this week is likely not the end of government support for GMAC.

Credit default swaps on GMAC are trading at 900bp these days, and its bonds are trading at yields in the 50% range. GMAC’s bond investors mark to market: they’ve already taken their losses. So let’s take advantage of that fact, and convert their debt to equity, before pouring billions of fresh dollars into this particular black hole.

Comments

[Jas1:]

Sure Felix, let's make sure that no one ever wants to lend to GMAC again and have the Treasury expand and make all auto loans in this country.

May 20 11:33 AM

[user396040:]

I have to admit that I am talking my book here, but we should bear in mind that any government action will help some investors and hurt others. The TARP program probably hurt a lot of short sellers in bank stocks and helped holders of bank bonds, the stimulus program helps certain construction companies, the AIG bailout clearly helped lots of investors,etc. We can debate the merits of any and all of these goverment actions - and we should. But it really doesn't make sense to say that a certain government program is bad because it happens to benefit certain investors. All government action(and inaction) benefits(and harms) different groups of investors. One of the things you have to bear in mind when making an investment is the likely impact of future government action on that investment.

May 20 11:58 AM

[Mad Hedge F...:]

A former community organizer from Chicago has taken over the role of a bankruptcy judge and upended this precedent. We are now learning that the “prepackaged bankruptcy” of General Motors (GM) is Obamese for screwing bond investors, who are being stripped of their rights, so the United Auto Workers can have a booby prize. For years, widows, orphans, and pension fund investors regularly flocked to GMAC debt to capture the 400 basis points over Treasuries they offered. Now we know why. The last time I checked, the bond holders were only being offered 28 cents on the dollar, compared to the 43 cents the employee health care trust is getting; plus, they get control of the company. No wonder the hedge fund owners of the bonds prefer a normal bankruptcy. At least they would get the factories. But they are doing better than unsecured creditors, who are getting a mere five cents on the dollar. The trashing of bond holders’ rights makes a mockery of 400 years of contract law, and is not exactly the right signal to send when you are betting the future of the country on selling gargantuan quantities of more bonds to finance exploding federal deficits.

May 20 11:58 AM

[Michael Terry:]

The govt is not bailing out bondholders, they are preserving the value of their investment. GMAC is the lynchpin of the great obama auto takeover ("GOAT") as it will be financing both GM and Chrysler/Fiat. That and the fact that the govt can then have a controlling interest in another financial firm (lets not forget that GMAC owns Rescap) that will help accomplish policy objectives.

May 20 12:26 PM

[babyray:]

Why give anything to the greedy wall street bond holders who created this economic mess in the first place?

May 20 12:39 PM

[fxmaven:]

Bondholders would prefer a bankruptcy, as their credit insurance would kick in (at least for the pros).This is nothing but a complete capitulation to labor (don't forget Michigan is a swing state).

May 20 01:56 PM

[User 328926:]

Bond holders are not all professionals and take advantage of complex postions. No other banks caused bondholders to lose. Why should gmac. Bondholders in all car related bailouts have lost already.

May 20 02:23 PM

[doublindoug:]

gmac wasn't even a bank until two months ago, it would appear another bone thrown at the government's friends at cerebus . so sad...

May 20 02:25 PM

[casey00001:]

Baby Ray, you mean Barney Frank and Christopher Dodd who created this mess.


On May 20 12:39 PM babyray wrote:

> Why give anything to the greedy wall street bond holders who created
> this economic mess in the first place?

May 20 02:45 PM

[cynnatalie2000:]

GMAC is not a lost cause in that there is no UAW presence.

GMAC is likely to be profitable very soon.

May 21 03:26 AM

[spope33:]

It's not necessary to consider too many subjective factors to determine whether bondholders are getting bailed out, are treated fairly, or are getting a raw deal.

Evaluate all the cash, new stock, and new corporate debt being given stakeholders who are lower priority than the bondholders. If this value exceeds the amount of money the U.S. and Canada has loaned the automaker pre-bankrupcy, then the bondholders are getting a raw deal (i.e. the low-priority, but politically-favored stakeholders are receiving more value than the government had to put up).

If this value is less than the amount the U.S. and Canada put in pre-bankruptcy, then the bondholders are getting a bailout.

If this value is equal to the amount the put in pre-bankruptcy, then the plan is fair to the bondholders.

Newer government loans to the post-bankruptcy entity don't affect the equation.

By this measure, I calculate the Chrysler bondholders were shorted by about 0.5 billion, and I haven't done the calculation for GM yet. Recent reports (UK Guardian) state the administration may be backing down and offering a fairer deal this time, given the poor reception and negative ramifications they had from the Chrysler deal.

May 21 03:26 PM

[elliot_mllr:]

This is not a bailout of GM or GMAC. It is not a bailout of the bondholders. This is a bailout of the UAW, pure and simple.

May 21 05:09 PM