GMAC Has Finally Been Nationalized

And you thought the bailouts were over and market discipline might be restored. Not a chance – the bailouts will continue, come hell or high water. The latest demonstration of this is GMAC, where the government will now be majority owner. GMAC has officially been nationalized. Now the government is running auto financing in addition to running the companies making the cars.

Below is a quote from the Financial Times. Notice the parts I have bolded.

GMAC, the car financing company, is set to receive up to $5.6bn in a new capital injection from the Treasury, filling a hole identified in the “stress tests” earlier this year and paving the way for the government to become the majority shareholder.

The company, formerly the financing arm of General Motors, was one of 19 institutions to submit to a capital adequacy programme led by the Federal Reserve and completed in May. That determined that GMAC had a shortfall, which will now be provided by the government in the form of preferred equity, according to two people familiar with the situation.

As widely expected, GMAC has been unable to raise the necessary capital in the market and the company – which will take on fresh lending responsibilities when it merges with Chrysler Financial – was seen as vital to the government-led restructuring of the US automotive industry and deserving of more funds from the $700bn troubled asset relief programme.

“When we laid out the stress tests, we expressly said that some additional Tarp capital may be needed given the severity of the downturn – this capital need is not new information,” said an administration official.

“But the transparency brought about by the stress tests allowed all other institutions to raise the capital required by the stress tests to ensure these firms could withstand a more severe economic scenario than anticipated,” the official said.

What you should be reading from this statement is the following:

• All the firms identified as lacking capital under the stress tests were given time to raise funds in the capital market to meet the shortfall.
• Some firms did meet the shortfall and they are now free to do as they please.
• Others have not and we the government are now going to take a more muscular approach in dealing with them.
• GMAC is the first public example of our flexing our muscles.
• But there surely are/will be other examples; some may already be happening in secret.

If the US government is going to throw its weight around to deal with financial firms short of capital, I would personally prefer they try a process which allows these firms to fail whereby equity and debt holders suffer consequences that are consistent with taking market risk. Bailing out GMAC is a moral hazard plain and simple.

But, what’s done is done. The GMAC case does, however, give a lot more credence to my view that Citigroup’s actions are being dictated by government. As I indicated when the stress tests were done in April, firms were going to get some time to raise capital and if they didn’t, the government was going to move on to Plan B (debt-for-equity swaps, nationalization, and FDIC seizure). Expect to see more indications that other financial companies with capital shortfalls are falling under the government umbrella.

Comments

[Dave Wrixon:]

And Americans have the nerve to twitter on about Airbus!

Oct 30 10:12 AM

[Pat C:]

GMAC needs to be put in bankruptcy. The US taxpayers can no longer support bondholders. This is a non-systemic (unless there is too many unhedged CDS's out there - anyone know?) institution that we can reasonable do a change of direction.

Oct 30 10:24 AM

[cffan:]

"...which will take on fresh lending responsibilities when it merges with Chrysler Financial..."

GMAC did not merge with Chrysler Financial. Check your facts.

Oct 30 12:52 PM

[Wildebeest:]

"If the US government is going to throw its weight around to deal with financial firms short of capital, I would personally prefer they try a process which allows these firms to fail whereby equity and debt holders suffer consequences that are consistent with taking market risk."

admirable, and I doubt that anyone on SA would disagree ...but pigs might fly. It ain't gonna happen.

Oct 30 02:51 PM

[DLB40:]

Oh you nonbelievers! Dear leader will make it all better. Remember he promised change and that's exactly what we're getting.

Oct 31 09:51 AM

[The Geoffster:]

When I was in high school, I was required to memorize the Constitution. At the time, I thought it was child abuse. I now appreciate the method to that madness. I know something most Americans don't, the federal government's powers are limited by the Constitution. They are specifically enumerated. Congress has violated the Constitution from the beginning of the Republic. It falls to the courts to correct that abuse, but the courts are not immune to the political winds. In the final analysis, it is the responsibility of the people to uphold their Constitution. Unfortunately most people would rather be comfortable than free.

Oct 31 10:56 AM

[Old Trader:]

"Now the government is running auto financing in addition to running the companies making the cars."

The government is merely taking a page from the capitalist's playbook, and indulging in some "vertical integration". (Snark off).

Oct 31 03:33 PM

[Gregman2:]

"...I would personally prefer they try a process which allows these firms to fail whereby equity and debt holders suffer consequences that are consistent with taking market risk." This has been a lingering, enduring problem--the super-rich ownership class didn't want to take the hit. They wanted to be bailed out. Consider the folks that were ripped off by Madoff--they want the SEC's negligence to be deemed a liability so that they can be compensated, aka "bailed out."

Oct 31 07:18 PM

[artkarl:]

What happens to CIT?
Sure, banks that are toxic should fail. What's the difference here with GMAC, and nationalization under the World Bank?
-Karl Krachenberg

Nov 02 07:05 AM