GM about to Throw away More Money

I remain surprised that GM is still in business. It loses money on cars, on financing, and it is behind the curve on a transition away from SUVs. GM is the walking dead, a true Zombie corporation.

Now I see that GM, Cerberus May Pledge $750 Million to ResCap Rescue.

General Motors Corp. and Cerberus Capital Management LP may agree to guarantee part of a $3.5 billion debt package designed to help GMAC LLC's Residential Capital unit avert bankruptcy.

GM, the world's biggest automaker, and Cerberus, the New York-based private-equity firm, may pay debt holders as much as $750 million if ResCap defaults, GMAC said in a filing today. The cost would be split by the two firms according to their stakes in GMAC, the Detroit-based auto and home lender said. GM sold 51 percent of GMAC to Cerberus-led investors in 2006.

The accord would mark a reversal for GM, which has said it has no obligation to support ResCap after the GMAC unit was battered by subprime mortgage losses. ResCap ranked among the 10 biggest U.S. mortgage lenders last year. The new arrangement is part of a financial plan that should provide enough liquidity for 12 months, GMAC said.

"It's good for GMAC in that it shows support for a troubled operation and it suggests the strategic importance of the unit," said Pete Hastings, a fixed-income analyst at Morgan Keegan & Co. in Memphis, Tennessee. "It remains to be seen how far they will go."

My Comment: There is no strategic importance of GMAC. If there was, why did GM sell 51% of it? More to the point, GM had a chance to unload the whole shebang to a bunch of complete suckers at Cerberus. Instead it hung on and on and on, eventually getting way less than it could have, then still not having the brains to get rid of it all.

Who was stupider? Cerberus for getting involved, or GM for not having the common sense to dump the whole thing? By the way, this is not 20-20 hindsight. I recommended GM to unload GMAC (all of it) years ago.

The rescue plan for ResCap may also include selling interests in mortgage securitizations, loans secured by time- shares and loan portfolios in the U.K. and Europe, GMAC said.

Failure to complete the plan "would have a material adverse effect on our business, results of operations and financial position," GMAC said. The mortgage unit posted about $5.3 billion in losses over the past six quarters.

ResCap reported an $859 million first-quarter loss last week, erasing GMAC's profit from its auto-finance subsidiary. The results renewed doubt about ResCap's survival, and credit-rating firms say GMAC may harm itself by continuing to support the money-losing subsidiary.

My Comment: There is no rescue plan for ResCap that can possibly work.

ResCap said on May 2 that it is seeking a $3.5 billion loan from GMAC as part of a bigger financing agreement. GM Chief Operating Officer Fritz Henderson said in February, when he was still GM's chief financial officer, that the automaker might consider more support for GMAC if its former unit fell significantly short of a forecast for a 2008 profit. GMAC has since said it may not make money this year.

My Comment: If GM is stupid enough to give ResCap $3.5 Billion, then GM can kiss it all goodbye. That GM is even considering this is a testimonial to the willingness of GM to piss away more money.

Gimme Credit analyst Kathleen Shanley said in a report last week that Minneapolis-based ResCap was on "deathwatch" because it can't pay debt due in 2008. Today, she wrote that ResCap may be better off in bankruptcy so a court could determine how the incoming funds are being used. As it stands, GMAC and Cerberus are providing forms of secured financing "that put the owners of ResCap ahead of its bondholders," she wrote.

My Comment: Is it death watch or death bed?

Cerberus founder Stephen Feinberg said in February that GMAC faces "substantial difficulty" if credit markets don't improve. Cerberus, which backed out of two acquisitions late last year, has yet to say if it will provide additional financing to ResCap.

My Comment: This is interesting. The minority holder (GM) seems more willing to throw good money after bad than the majority holder. That in and of itself is a testimonial to the thinking process at GM.

Comments

[ronh]

two other headlines of note today. GM spent 826M buying it building and a couple of other ones in Detroit, and also offered upn 200M to Axle to help break the UAW deadlock. Surprising decisions from GM whose management said quite explicitly that they were very concerned about liquidity and cash flow on the conference call last week. They burned through 3.6B in cash last quarter, and this quarter looks much worse. With only 23B in cash, and over 30B in trade payables, they seem to be in deep trouble....

[fxtrader07]

a bankrupt wasting the remaining cash to support his bankrupt subsidiary. in the end, whgat difference does it make.
nice article - i wonder why gm isn't a penny stock already given their prospects

[UH2L]

These are questionable moves given the cash issues GM has, but to say it has no idea what it's doing when it comes to the automotive industry and that its stock should be a penny stock is a little harsh. Their cars and trucks are very competitive (despite the healthcare and pension cost disadvantage that foreign competitors don't have), and they still sell more cars and trucks than any other manufacturer in N. America (depsite a lot more competition) with some great new products, and are growing in other major markets. Part of the reason they face difficulty is because of the constant negativity they get from the press that makes it difficult to change consumer perceptions. I doubt that either the author or the commenters have ever worked in the auto industry so don't try to oversimplify things.

UH2L
www.thingsivenoticed.c...

[ronh]

uh21, I certainly did not suggest that GM management was incompetent. I have been following the company for about 3 years, and the current management is doing is a good job in a tough environment. Their overseas growth is impressive. Unfortunately, although they have grown the foreign business, they have not been able to make enough money to make up for the continuing NA losses. The UAW legacy burdens make the long term survival almost impossible. They now have health care and pension responsibility for more than a million pelople, on the back on a much smaller work force. Once they take the pain and reorganize, they will be a force to be reckoned with...but their currrent equity is worthless.