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.  

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....  

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.

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-.