GMAC Needs More Dough. Again.

As if $12.5 billion weren't enough, GMAC is knocking on the Treasury's door, looking for another $2.8 to $5.6 billion. You know, just to tide things over until the next bubble kicks in. I'm still a bit perplexed as to why we are bending over backwards to keep GMAC afloat. Sure the auto finance concern has $181 billion in assets, but it can hardly be described as a systemic risk to the market. While it is true that GMAC provides crucial financing to the auto industry, which the government is now firmly invested in, I just don't understand why the bankruptcy option wouldn't work here. Essentially what we are doing is bailing out GMAC's creditors instead of forcing them to take a hit, like they should be doing for having made such a lousy investment.

What is so irritating about this particular bailout is that we have moved past the point of worrying about a global financial meltdown. The economy, although still fragile, seems to have stabilized, and now we're just randomly picking and choosing who deserves money from the government and who doesn't. Why is cheap financing for the auto industry more important that, say, providing cheap loans for small businesses? CIT was allowed to fend for itself and will likely wind up in bankruptcy soon. But GMAC, no GMAC, we have to continue to shovel money into because everybody has to buy cars. How on earth did it become a national priority that everybody needs cheap financing to buy a new car every couple of years? I know that in the grand scheme of things, another $5 billion or so is insignificant, but I still consider it to be a nice chunk of change that could be better spent on at least 50 other things that are more important for the future of this country.

Capmark Files For Chapter 11

Capmark Financial, one of the nation's largest property lenders with $20 billion in assets, has filed for Chapter 11 bankruptcy protection. Capmark used to be the commercial lending unit of GMAC, the residential mortgage lending arm of GM that has since received excessive amounts of government aid. Seems like everything that GMAC ever touched was bound to be a lousy investment. At least GMAC had a bit of foresight in spinning off Capmark in 2006 to KKR, Goldman Sachs Capital Partners and Five Mile Capital Partners, who paid $1.5 billion in cash to acquire the doomed commercial lender. I'll let you guess what that investment is worth today.

Capmark has a bank in Utah with $10 billion in assets that is not part of the bankruptcy filing. However, the bank has been warned by the FDIC that it needs to boost its capital levels. The bank makes and holds commercial mortgages making it a likely candidate for seizure by our friends at the FDIC. Speaking of the FDIC, it closed seven banks on Friday bringing the YTD total to 106. Now if that isn't bullish news for the stock market, I don't know what is. Otherwise, I have no explanation for this morning's rally.

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. 

Can it Get Any Worse For Cerberus?

While lawmakers were busy attempting to hammer out a bailout plan for the automakers, somebody looked up, scratched his head, and said "Wait a minute, isn't Chrysler owned by a private equity firm?  Don't we hate those guys for contributing to the credit crisis by piling on debt to cyclical companies, laying off employees under the guise of "efficiency" and then driving them to bankruptcy because they didn't really know what they were doing and it was just a bubble?  Don't we also hate them for paying themselves all kinds of money and getting favorable tax treatment?  Wait a minute!  Didn't they hire John Snow, a guy who was so bad as the Treasury Secretary that he was forced out by the worst President in the history of the US?  More importantly, isn't Dan Quayle on their payroll????!"  Bailing out the public automakers, GM and Ford, that have been shut out of the capital markets is one thing.  But why should the government bailout Chrysler, privately owned by the three-headed dogs at Cerberus?  Don't the dogs have loads of capital that they can inject?  Details of the bailout plan will be forthcoming, but I hope Cerberus is at least required to pony up some cash alongside the government.

In other Cerberus Sucks news, GMAC's application to become a bank holding company was denied due to insufficient capital.  GMAC is attempting to complete an old-crappy-debt-for-new-crappy-debt swap to restructure. Again.  After the last restructuring didn't work.  So far, only 25% of investors are going for it.  Without the debt swap, the company's prospects are not looking so hot.  Apparently, there are only so many financial engineering tricks investors are willing to fall for before they throw in the towel and decide to take their chances in bankruptcy court.  Did Cerberus really think that guarding the gates of hell would be easy? 

Grim Earnings News From GMAC, MBI, ABK and AIG?

GMAC, the finance arm of General Motors that is majority-owned by the clowns at Cerberus, continues to bleed cash like a stuck pig.  GMAC's third-quarter loss widened to $2.52 billion, from $1.6 billion a year earlier.  Net revenue declined 43% to $1.72 billion.  ResCap, the mortgage lending arm, was responsible for $1.9 billion in losses for the quarter.  Curiously, these earnings numbers are nearly identical to the losses posted in July, which would lead any rational person to wonder why on earth a company that consistently loses $2.5 billion a quarter should be allowed to stay in business.  The answer lies with GMAC's bond investors, who continue to finance this money-losing venture.  But I suspect their patience for a turnaround is wearing thin.  The company stated that "substantial doubt exists regarding ResCap's ability to continue as a going concern."  In a desperate effort to curtail further losses the company is now only offering auto loans to customers who can actually afford to repay them (i.e. those with the highest credit ratings,) an idea that may have come in handy a few years ago.  GMAC has around $52 billion of bonds outstanding as of last month, with $10.9 billion that mature in 2009.  GMAC may ask bondholders to swap their investments for new debt.  Why am I experiencing deja vu?  Oh that's right, because GMAC tried the old swap-crappy-debt-for-more-crappy debt ploy back in May with ResCap and now "substantial doubts exist regarding ResCap's ability to continue as a going concern."  Perhaps the beleaguered auto-lender will have more luck becoming a bank holding company and asking for handouts from the government.  I, for one, certainly hope not.

In other bleeding-cash-like-stuck-pig news, MBIA posted a third-quarter net loss of $806.48 million due to an increase in loss reserves for its insured exposures to second lien mortgages.  The net loss included an assortment of other realized and unrealized losses on its investments.  You can read further gory details here.

Not to be outdone by its brother MBIA, Ambac lost $2.43 billion as it increased reserves for mortgage securities and derivatives.  I am still struggling with the math on how a company can lose $8.45 a share when its stock price is only $2.30, but the general implication that it sucks and has very little future is crystal clear.  Speaking of sucking, analysts had forecast a loss of 50 cents a share.  Are you finished laughing (or crying) yet?  Because there's more.  The bulk of Ambac's recorded losses of $2.71 billion in credit derivatives came from increased future loss projections on CDOs.  

The real follow-up question here is: if Ambac lost $2.71 billion mostly due to CDO losses, what does this imply about AIG's earnings for the quarter?  AIG, which every American citizen should know by now, has sold credit default swaps on over $400 billion in notional on a variety of CDOs.  The former insurance giant is set to release earnings on Monday, November 10.  I, for one, am officially quaking in my boots as to the number that AIG will post as a loss.  Furthermore, I think it will become painfully obvious with the release of its earnings that AIG will not be able to pay back the loan from the government.  Make no mistake, this is a government-sponsored orderly liquidation.  

GMAC, Cerberus Looking For a Piece of Bailout Money

GM's finance arm, GMAC Financial Services has already been granted some federal assistance.  GMAC was allowed access to the new short-term funding facility created by the Fed that went into operation on Monday.  The Fed's new facility has been credited with returning liquidity back to the commercial paper market which disintegrated after the Lehman bankruptcy caused the largest money market fund to break the buck.  

GMAC is also seeking to become a bank holding company so that it can have access to a piece of the government's $700 billion financial rescue plan.  The Fed has been holding discussions with GMAC about this move for over a month.  The boneheads at Cerberus, the private equity firm that has the misfortune of owning controlling stakes in both Chrysler and GMAC, is attempting to swap its stake in Chrysler for a larger share of GMAC.  Why?  Because why would you own a crappy US auto-maker that cannot compete with foreign rivals that you happened to purchase at the absolute peak of the market, when you can own a bank holding company that has access to federal government bailout money?  So, you see, this swap is absolutely necessary for the good of the US auto-industry, the US consumer, but particularly for Cerberus.  Without some sort of bailout money, both Chrysler and GMAC are toast which would be very bad for Cerberus and its three-headed dog-loving investors.  And that would be bad for America.  When you hear your favorite congressman preaching about the need to bail out the US auto-industry that is finally crashing under its own uncompetitive weight, think about who stands the benefit the most: the private equity clowns that made a terrible investment decision.       

      

US Equity Futures Perk Up on the Heels of Global Rebound

Optimism about the Fed rate-cut? Renewed confidence that the government interventions are working?  Dead-cat bounce?  Whatever the underlying reason, equity investors around the world decided that stocks are a bargain, for today at least.  The Japanese Nikkei was higher by 6.4%, and Hong Kong soared 14.4%.  European stocks joined the party with sharp rallies across the board.  Germany's DAX jumped an astonishing 8.3% (related in part to a 90% surge in Volkswagen shares due to Porsche's plan to take three-quarter's of Volkswagen's stock.)  Germany aside, the FTSE 100 was 4.6% higher and the French CAC-40 rose 3.2%.  US futures are poised for a rebound.  

GM may receive a $5 billion loan to aid its planned merger with Chrysler.  Ordinarily I would spend at least a paragraph mocking the idea of two huge money-losing companies getting government aid to become one gargantuan money-losing company, but at this point, I am just relieved that they are ONLY receiving $5 billion.  If the government is giving $25 billion to Citigroup, might as well throw the US auto industry a small, but tasty, bone.  The only disheartening aspect of this news is that it indirectly aids the private equity firm Cerberus, who owns part of Chrysler and GMAC.  But at least the private equity guys are finally having to work their butts off to save an investment rather than just borrowing money to pay themselves dividends every few months.  If Cerberus can single-handedly turn the US auto industry around, then they've officially earned all the fees they've been collecting for operating in an easy-credit bull market for the past 15 years. 

Auto Sales, Beige Books and More...

US automakers reported continued declines in sales for the 10th straight month.  August sales dropped 20% for GM, 27% for Ford and a whopping 34% for Chrysler.  GM's results were actually better than expected due to heavy discounting offered yet again to entice potential buyers onto dealers' lots.  I've seen those happy GM employees on television eagerly announcing that GM's employee discount is now available to us all.  I have to give them credit.  None of GM's employees seem bitter about sharing the one and only advantage they derive from living in Detroit and slaving away for a near-bankrupt company.  In any event, the tactic managed to keep GM's numbers from being much worse, like Chrysler's, for example.

In slightly related news, GMAC, the auto and mortgage finance company still partly owned by GM, has announced that it planned to eliminate 5,000 jobs at its Residential Capital mortgage unit and close all 200 GMAC Mortgage retail offices.  The job cuts amount to roughly 60% of its workforce in addition to the closure of all of its retail offices.  It makes me wonder what exactly is left of this business, other than 3,800 employees who no doubt expect their own heads to roll soon.  ResCap claims it will continue offering mortgages directly "where there is a secondary market to sell the loans," assuming they can find that elusive secondary mortgage market.  

Clearly the $60 billion refinancing package crammed down the throats of ResCap's bond investors in June only offered a temporary respite from ResCap's mounting problems.  It was the financial equivalent of a little kid sticking his finger in the dike and hoping for the best.  Only the kid in this case was the private equity firm Cerberus.  And they have several fingers in many dikes, as they also own Chrysler.  Did I mention that Chrysler's sales were down 34% in August?

If you prefer your news to be more macro in style, the Fed released its Beige Book report this afternoon.  The Beige Book gave a rather bleak picture of the economy.  Business across most of the US was "slow," while all districts reported pressure to raise prices because of higher commodity costs.  Certainly commodity prices have dropped significantly in the past couple of weeks, which should alleviate some of those pressures.  But "slow" is never good, particularly when the Fed has little, if any, ammunition it can summon to counteract further declines in economic growth.

GMAC Racks Up Another $2.5 Billion in Red Ink

GMAC posted its fourth consecutive quarterly loss of $2.5 billion in the second quarter.  The bulk of the losses, $1.86 billion, came from ResCap, the mortgage lender who has announced it has suspended almost all production outside the US.  Last month Cerberus, GMAC's private equity majority owner arranged a $60 billion debt refinancing package to stave off a bankruptcy filing of ReCap.  As much as I like to mock the clowns at Cerberus for making two of the worst possible private equity investments in the history of investing (the other being Chrysler), I have to hand it to them for having the energy and desire to concoct complicated financing deals to prolong the agony for investors.  Frankly, I'd have thrown the towel in a long time ago, buried my head in the sand, and prepared for a protracted legal battle in bankruptcy court.  So I give them bonus points for sticking it out and attempting to turn things around.  It doesn't mean I think they will succeed with either investment.  If GMAC isn't eventually torpedoed by ResCap, there's a good chance it succumbs to the precipitous decline in automobile sales.  The automotive finance unit of GMAC reported a loss of $717 million in the second quarter.  Furthermore, GMAC will stop subsidized auto leasing in Canada and is reducing new leases in the US which will not help GM sell more cars.  The decision to reduce leasing perhaps stems from the $716 million in impairment charges the company took from the declining value of leased vehicles.  GMAC has $30 billion in leases which includes $12 billion in SUVs and $6 billion in trucks.  Something tells me this is not the last impairment charge it will be taking on its SUV and truck leases.  The good news is, Cerberus can always pump up its profits again by using its precious cash to buyback GMAC's debt, which is trading at a discount.  After all, that has been a nice boost to earnings in the past.  How much longer investors will be willing to extend financing for this type of financial engineering remains to be seen.  Tomorrow, we'll see what type of financing package Cerberus can renegotiate with Chrysler's irritated lenders.  Will the negotiations succeed?  The only thing I know for certain is that Chrysler's borrowing costs aren't going lower.        

Cerberus Newest Fund Down 1%?

According to Bloomberg, Cerberus Capital Management LP's newest fund is down 1% since inception in November 2006.  The $7.5 billion Cerberus Institutional Partners Series Four lost $32 million on $3.3 billion in investments through March 31, according to a copy of the investor presentation that Bloomberg News obtained.  Although this only includes results through March 31, I am going to have to call them out on that one.  There is no way that fund is only down 1%, given that it has huge stakes in Chrysler and GMAC, both of which are teetering on the brink of bankruptcy.  Let me be clear that I have absolutely no inside knowledge of the situation.  I barely have any outside knowledge.  I only know what I read in the financial press.  I know, for example that Cerberus led a group of investors that paid $7.4 billion for a 51% stake in GMAC in 2006.  I also know that GMAC completed a very complicated $60 billion restructuring to avert bankruptcy on June 4th due to its ailing ResCap mortgage unit that is bleeding cash.  I'm thinking, maybe, just maybe, they've lost a bit more than $32 million on just the GMAC investment?  Call me a crazy skeptic....  

Merrill Analyst Says Buy GM at $40 and Sell It At $11

A Merrill Lynch analyst put out some groundbreaking research on GM this morning claiming that bankruptcy was an option for the auto company.  He reversed his prior buy recommendation (issued in February 2007 when the stock was at $40) and cut the stock to an "underperform" now that it is trading below $11.  I'm not quite sure what caused the analyst to change his formerly bullish opinion.  Perhaps it was based on one of the following reasons?

• GM's debt is trading and has been trading at distressed levels for some time.
• GM's credit default swaps are already pricing in a 75% probability that the automaker will default on its debt within the next 5 years.
• Car sales have been in a steep decline and the auto industry just reported a roughly 20% decline in sales for the month of June.
• GMAC, the financing arm still 49% owned by GM, had to completely restructure its financing because its mortgage lending arm ResCap came dangerously close to declaring bankruptcy.
• GM's stock is down 56% year to date.
• The analyst needed to change his recommendation ASAP so he could tell everyone that he warned them of GM's bankruptcy, thus justifying his existence.

Since he didn't issue an apology with his downgrade to make up for being so incredibly ridiculously behind in following the GM headlines, I'm assuming he's not the least bit sorry for losing so much money for investors.  What I find even more absurd is that the stock actually sold off an additional 8% on the downgrade.  Who are the investors that use Merrill Lynch as their sole source of news?  How can anybody still be surprised by a report that claims that GM could go bankrupt?  Did someone actually receive this research report and then call every one of his brokers and scream "Sell all my GM!  All of it!  My analyst told me it might go bankrupt!"  It is price action like this that makes me a serious doubter of the "efficient market" hypothesis.  How on earth can all the negative news be priced into stocks when somebody actually thinks an analyst's opinion matters?     
 

Rescap Sells Assets to GMAC and Cerberus to Stay Afloat

In yet another shocking securities filing, ResCap has announced that it will need to raise $1.4 billion more than originally stated before June 30th to stave off bankruptcy. It appears as if the company's problems, which may seem complex on the surface, boil down to a simple mathematical error. ResCap just can't seem to come up with one number that will plug the enormous money-sucking hole in its balance sheet. Alternatively, the company just wanted to force through the tender offer before announcing the severity of its liquidity problem. I'll let you mull that one over.
As recently as May 19th, ResCap had claimed that it only needed an additional $600 million once the tender offer was completed. Just two weeks later, it has more than tripled that number. What is the company doing to secure further capital? It is selling assets to its parent GMAC, as well as the bozos at Cerberus, the private equity firm that took a majority stake in GMAC two years ago subsequently flipping it it to a bunch of private equity Wannabes. Cerberus may be trying to make nice with the investors that it roped into the GMAC deal two years ago when it was "hot." But a closer analysis of the new financing arrangements shows that Cerberus is once again looking after its own hide. Cerberus could just inject fresh capital into the firm in the form of equity, yet has chosen to purchase assets from the firm at distressed prices instead. A very complicated host of assets sales and collateralized loans have been announced. GMAC will increase the size of its loan to ResCap to $1.2 billion from $750 million. ResCap will draw $450 million of that money today. GMAC will buy ResCap's resort-finance business as well as some receivables, while Cerberus will purchase $475 million worth of model-home assets. Cerberus has also agreed to buy or backstop sales of $950 million in mortgage loans or MBS, some of which may not be making timely payments. However, and this is a big "however", some of the assets Cerberus will buy may have been pledged as collateral backing notes that will be exchanged for old ResCap debt or a planned credit facility with GMAC. Translation? We're going to work out all the details in bankruptcy court in a few months.

Cerberus Left Other Investors Holding the Bag on GMAC and Chrysler

Cerberus, the private equity firm now notorious for making a host of lousy investments at the height of the private equity boom, has apparently grown tired of the relentless negative publicity. A mysterious report has somehow been leaked to the Financial Times revealing that Cerberus sold "significantly more than half" its equity stakes in GMAC and Chrysler to around 90 other unfortunate losers. While this may improve Cerberus' reputation as a shrewd investor, it may have dented its reputation as a trustworthy partner. In fact, some of those who purchased stakes were Cerberus's own investors. I would be interested in being a fly on the wall the next time Cerebrus attempts to raise capital for a new fund:

Cerberus partner: (calling former investor) Hello! Cerberus here. Can we count on you for a substantial contribution to Cerberus Capital Partners We'll-Make-It-Back-Fund I?

Former Investor: Ha ha ha ha ha ha! Hold on please. (puts phone down, rolls around on the floor clutching stomach) Ha ha ha ha! (picks up phone again) Um, no.

Cerberus partner: How about Cerberus Capital Partners We'll-Make-It-Back Fund II?

Former Investor: Click.

According to the Financial Times story, the investors in the GMAC deal extended beyond Cerberus's investors. Other private equity and hedge fund players were interested in piggy-backing on Cerberus's deal. Cerberus invited 50 hedge funds to its office for a presentation outlining the GMAC investment in 2006. Investors weren't given an opportunity to perform much due diligence if they wanted a piece of the deal but were told to "trust" Cerberus. Considered a "hot deal" at the time, many investors chose to trust Cerberus' due diligence and took part in the investment because they were friends of Steve Feinberg, the founder of Cerberus. If I were an investor in a fund where I was forking over management fee after management fee and I discovered that the fund invested in a deal based on a friendship, without performing any due diligence, I would immediately pull my money. Of course, that is easier said than done, as some of the investors on the list are having trouble figuring out where all the money went (Citigroup and DB Zwirn just to name two.) Once again, further evidence that all sorts of absurd activities occur at the peak of any bubble. Something tells me the stories are just going to get better and better...

"Liar Loans" Live Up To Expectations

Investors who purchased soured mortgages securities are forcing lenders to repurchase the original loans based on a provision that required lenders to take back loans that defaulted unusually fast if mistakes were made or fraud was committed during the underwriting process. The Wall Street Journal reported yesterday that Countrywide estimated that its liability for such claims rose to nearly $1 billion as of March 31, 2008. Countrywide took a first-quarter charge of $133 million for claims that have already been paid. The loan disputes allege bogus appraisals, inflated borrower incomes, and other misrepresentations made at the time the loans were originated. Demands from loan buyers include Fannie Mae, who claimed in a recent conference call that it was attempting to review every loan that defaults and force lenders to buy back loans that failed to meet promised standards. The bond insurers including Ambac and MBIA which guaranteed investment-grade securities backed by home-equity loans and lines of credit are also getting in the game of scrutinizing the quality of loans in the original pools and taking action where necessary. Even GE, through its subprime mortgage subsidiary WMC Mortgage, is being sued by PMI Group who alleges that WMC misrepresented the quality of loans it included in a pool of subprime loans that were insured by PMI.
Offering further proof that the incidence of misrepresentation was not merely a subprime problem, S&P cut or downgraded its ratings on $34 Billion of Alt-A securities yesterday. Ratings on 1,326 classes of bonds created in the first half of 2007 were reduced. Another 567 similar bonds with AAA ratings were placed on review. A total of 14% of the bond issuance from the period was either cut or placed under review. Late payments of at least 90 days and defaults among Alt-A loans underlying the bonds issued last year rose to 6.64% as of April 2008, up 65% since January of 2008. Clearly the situation is getting worse rather quickly. Alt-A loans were made to borrowers who provided little-to-no documentation of income or assets but had respectable credit scores. Among skeptics they were deemed "liar loans", as it gave borrowers ample opportunity to fabricate their income and assets in order to receive loans to purchase houses they otherwise could not afford. Investors in the securities must've assumed that either borrowers were telling the truth or home prices would never decline. Loans were offloaded by the originators to investors who were more than willing to purchase diversified pools of these loans as they were given AAA ratings by the ratings firms.
Investors are now facing the double whammy of misrepresentations of the borrower's financial condition coupled with declining home prices across the nation. As a consequence, default rates on the loans are surging beyond original estimates when the securities were structured, leaving investors with losses. The ratings agencies are, of course, late to the downgrade party as the securities are already being pummeled in the market. Pissed off investors are now attempting to recoup losses by forcing the originators to repurchase the loans because the quality of the loans was misrepresented. The top four Alt-A lenders in early 2007 were Indymac, Countrywide, GMAC, and Washington Mutual. Clearly these once celebrated lenders have suffered a considerable drubbing. Yet, bottom-fishers have emerged, betting that their fortunes will turn. Given the continuing parade of lousy housing news, I remain a skeptic. Furthermore, I'm disappointed that I never took advantage of the opportunity to purchase a $25 million home using my imaginary bars of gold as a stated asset.

ResCap Bondholders Begrudgingly Accept Tender Offer

Residential Capital announced that the company could go forward with the $14 billion proposed tender offer to stave off bankruptcy. ResCap, the mortgage finance unit of GMAC, has been hit very hard by the credit crisis. The company had losses totaling $5.3 billion in the past six quarters, with no end in sight, threatening its ability to remain an ongoing concern. Although the holders of the debt threatened to oppose the restructuring, they ultimately had little choice as any holdouts to the plan would have become subordinated to a very long line of creditors. Simply stated, since bonds are no longer issued in paper due to advances in technology, their claims on the company would've actually been worth less than toilet paper.
The tender offer requires debt holders to exchange their notes for new notes with longer maturities. Holders of the short term debt will receive new notes worth as much as 100 cents on the dollar, while longer term debt holders will receive new notes worth roughly 80 cents on the dollar. GMAC, the parent, would help finance the tender offer by increasing its credit line to ResCap, again, by $3.5 billion. GMAC's credit line would become senior to all the existing note holders. What ResCap should've done was issue PIK toggle bonds, similar to those I mentioned in my prior post this morning. If you have the option of rolling debt into more debt, you don't even need to get approval to screw the debt holders. The buyers of the debt sign up to get screwed from the get go.
Why should anyone even care about yet another mortgage lender going bankrupt? Well, Rescap's inability to remain an ongoing concern would threaten GMAC's viability, which would hurt GM. Most people who purchase cars from GM use GMAC for financing. Furthermore, GM still owns 49% of GMAC, meaning it would take a financial hit as well. The possible failure of ResCap would clearly have negative reverberations beyond the mortgage finance market. Why investors are willing to take this risk by purchasing shares in GM is a complete mystery to me. Anyone with any insight is welcome to comment.

ResCap May Need Even More Cash

ResCap began its $14 billion debt exchange or buy back today to help improve its liquidity position, which is looking bleaker by the day. As I mentioned in my earlier post on ResCap, the company is seeking a new $3.5 billion credit line from its parent GMAC to finance the debt restructuring. Additionally ResCap wants GMAC to contribute $350 million of ResCap notes outstanding by the end of the month and give it $150 million more in borrowings under an existing credit facility. The mortgage lender is asking alot from its parent GMAC, whose own financial prospects have been greatly harmed by the residential mortgage lender's abominable financial performance. I think I once asked for a $20 credit line increase from my parents, and they scoffed at me. And I'm fairly certain I've never punted billions of dollars of their money.

ResCap goes on to say that it will need to enact assets sales or other capital generating actions in order to provide additional cash of $600 million by June 30th. This news prompted me to dig up GMAC's 8-K released on April 29th. One interesting tidbit in GMAC's earnings announcement stuck out at me that hadn't received much attention in the financial press. ResCap reported a 2008 first quarter loss of $859 million, which looked positively rosy compared to the $910 million loss posted in the first quarter of 2007. However, the losses would have actually been much larger had ResCap not bought back $1.2 billion of its own debt at a discount, which boosted its earnings by $480 million. Without it, ResCap would've posted a loss of $1.339 billion. Furthermore, GMAC's loss would've ballooned to $1.069 billion. You've got to love a company experiencing major liquidity problems that is attempting to boost its own earnings by wasting precious cash to buy back its own distressed debt. Whether this new $14 billion debt buyback scheme will actually keep ResCap solvent remains to be seen. My guess is the money could have been better spent investing in the actual operations of the firm. But I'm sure the financial geniuses at Cerberus would never stoop to such an old-school, unsophisticated solution to a major financial blow-up.

ResCap Offers To Buy Back Debt at Discount

In an effort to shore up liquidity, Residential Capital, the mortgage-finance arm owned by GMAC, is offering as little at $.80 to exchange or buy back $14 billion of bonds to stave off bankruptcy. The beleaguered mortgage lender will offer cash or notes as part of a tender offer to start next week. ResCap's cash position has been greatly eroded by problems in the housing market that have led to six straight quarterly losses. The company will not be able to meet its current debt obligations so it must attempt to extend the maturity on its debt until 2010 and 2015, when credit market conditions will hopefully improve. The new debt will be senior to the old debt so investors have little choice other than to exchange their bonds at $.80 to receive new ones.
According to the Bloomberg article, ResCap is also seeking a $3.5 billion credit facility from its parent, GMAC, to help finance the restructuring, less than a month after receiving a $750 million credit line. GMAC is getting sucked into the mortgage death spiral at an alarming rate. Will it suck GM down with it? Fitch downgraded ResCap to C from B+. When I was in high school and I did a mediocre job on an assignment, I would get a C from my teacher. What ResCap deserves from the ratings agencies is an F-.

GM Posts $3.25 Billion Loss, Analysts and Investors Cheer

General Motors posted a $3.25 billion loss for the first quarter, a loss acquired in a multitude of creative and interesting ways. The following is a direct quote from the Reuters link "GM on Wednesday posted a first-quarter loss due to a costly supplier strike, waning demand for its most profitable vehicles and charges related to struggling former subsidiaries, although results beat Wall Street expectations." In summary, costs rose, revenues declined on lack of demand, and it had to take huge charges on its investment in GMAC, the finance unit. Perhaps the market is cheering that GM only owns 49% of GMAC having spun the balance off to Cerebrus Capital in a very well-timed move in 2006. That spin-off was initially orchestrated to protect GMAC's credit rating from GM's deteriorating financial situation, since GM cannot sell cars without offering financing to its customers. Ironically, GM has stabilized somewhat, while GMAC has been dragged down by its residential mortgage lending unit. Perhaps the market is celebrating the fact that GM's overseas sales were better than expected, although I'm certain this was due mostly to a weak dollar. Whatever the reason, GM is up on the news. Maybe by the end of the day, investors will notice that beating analysts estimates of some "core earnings excluding everything" number that may not even include car sales, is really not such a lofty achievement.