GMAC Claims $6 Billion of the Bailout Pie

The government committed $6 billion in bailout funds to GMAC, the finance arm partly owned by General Motors and Cerberus Capital.  The Treasury purchased $5 billion in senior preferred equity in GMAC that pays an 8% dividend and offered a new $1 billion loan to GM so the auto maker could participate in a rights offering at GMAC.  The new loan to GM was in addition to the $17.4 billion in emergency loans recently announced.  GMAC will issue warrants to the Treasury in an amount equal to 5% of the preferred stock purchase that will pay a 9% dividend if exercised.

Last week, the Federal Reserve approved GMAC as a bank-holding company.  The approval was conditional on GMAC raising new capital, which the company attempted to accomplish through a fancy crappy-debt-for-crappier-equity swap that expired Friday.  GMAC was supposed to raise $30 billion by converting 75% of its issued debt into preferred-stock holdings.  Last week, less than 60% of bondholders had signed on and the offering had been extended four times.  Completely coincidentally, and slightly suspiciously, GMAC announced that it had raised enough capital to satisfy the debt conditions simultaneously with the Treasury's announcement that GMAC had been approved as a bank holding company.  According to the Wall Street Journal's account of the story, it wasn't clear whether the government's intervention prompted or followed GMAC's meeting the capital requirement.  My interpretation of the WSJ's statement is that John Snow, the most politically connected head on the three-headed monster that is Cerberus, is proving that what he lacks in investment savvy, he more than makes up for in Washington connections.  As the former Treasury Secretary to George Bush, Mr. Snow was able to convince the Bush administration in its waning days to help a fellow suffering white, absurdly rich, private equity brother out.  And although Mr. Snow was widely viewed as a terrible Treasury Secretary while at his post, sending Mr. Snow to lobby the government for bailout money was a far more palatable option than dispatching Dan Quayle, the other political clown advisor that Cerberus keeps in its arsenal for government lobbying opportunities when it needs a bailout for its incredibly poor investment decision-making.   

It is easy to argue that a bailout for GMAC is necessary if the government is interested in saving General Motors.  After all, GMAC finances about 80% of the wholesale purchases of GM's cars by dealers worldwide and has traditionally been the largest source of financing for the buyers of the vehicles.  Without access to auto-financing, most people aren't interested or capable of plunking down $20,000-$40,000 for a new car.  But I would've preferred it if Cerberus was forced to cough up a significant amount of new capital alongside the government, or had its equity investment wiped out, much like the shareholders of Fannie Mae, Freddie Mac, and AIG suffered when the government came to their rescues.  On second thought, given how carelessly the government funds have been doled out by the current administration, I'm not sure why I expected anything different.