Forgive those of us who have been skeptical about the bailouts of Citigroup (NYSE: C ) , Bank of America (NYSE: BAC ) , and JPMorgan Chase (NYSE: JPM ) if we continue to remain unconvinced about the lifeline tossed to GMAC.
The financing arm of General Motors (NYSE: GM ) got a $5 billion cash infusion from Wall Street's sugar daddy, Hank Paulson, while GM itself got an extra billion to inject into it, too. Treasury approved GMAC's conversion to a bank holding company even though it had failed to persuade the requisite number of bondholders to participate in a debt swap.
Perhaps those bondholders had a good idea that Paulson would cave in anyway. If GMAC went under, what would that mean for GM's survival? Treasury had just agreed to pump $17.4 billion into GM and Chrysler. If cheap financing for cars wasn't available to entice buyers, the carmaker might go under anyway. The death spiral that everyone feared would drag down even Ford (NYSE: F ) might just manifest itself.
No more bazookas
But consider the bucket of bolts Paulson just spilled on the ground. As part of the auto bailout, GM has to reduce its debt by two-thirds through debt swaps. Yet now that Paulson has set precedent of requiring bondholders to do nothing, what are the chances that GM's bondholders will give up their hands?
And why should the unions agree to any demands now either? Although they're supposed to agree to wage cuts equal to levels of foreign carmakers, there's probably little incentive to give in since Uncle Sugar has shown a propensity to keep handing out the sweets. Paulson has effectively swept the threat of bankruptcy from the table.
Dogging an exit strategy
The financing deal with GMAC requires its majority private equity owner, Cerberus Capital Management, to reduce its ownership stake to 33% by distributing portions of its equity directly to it co-investors. GM, which owns the other 49% of the financing outfit, will have to reduce its holdings to 10% within three years, and that has some thinking that there may be an IPO for GMAC in the works.
A public offering might be just the thing to allow Cerberus to get out of its investment, something it has been unable to do since the financial markets collapsed. The government, which gets 5 million preferred GMAC shares paying 8% interest, would likely benefit, too.
The initial cash infusion is also giving GM an unfair marketing advantage. With GMAC offering low- and no-cost financing -- while also lowering the FICO credit score that borrowers need to qualify -- GM is able to offer deals unavailable to Ford. Although Toyota (NYSE: TM ) and Nissan (Nasdaq: NSANY ) are also offering zero-percent deals, they're not getting direct government infusions. Treasury is essentially putting its ownership stake ahead of the rest of the industry.
Cerberus, meanwhile, is angling to extricate itself from a bad bet on a damaged auto industry at taxpayer expense. Paulson has stepped in to save them twice now, but in doing so has jeopardized any chance of real reform of the auto industry. It's not that he's saying some rules are made to be broken, but rather that they just don't apply to him. Pardon us if we critics continue to think these bailouts have more to do with helping Wall Street than fixing what's wrong for the benefit of Main Street.
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