As Treasury Bails Out GMAC, Is It Overdrawing Federal Bailout Funds?

Posted by: Theo Francis on December 29

Maybe it’s not quite as bad as it looks.

Tonight, the Treasury said it would funnel $6 billion of the federal bailout funds to GMAC, the big auto-financing company. This is above and beyond the cash infusion for General Motors itself, and Chrysler, that President Bush announced on Dec. 19, and it isn’t explicitly tied to GMAC’s conversion to a bank holding company.

But wait — all $350 billion of the funds allocated so far by Congress are spoken for, promised to banks, AIG, Citigroup and the automakers themselves, among others. Congress hasn’t unleashed the second $350 billion; Treasury Secretary Henry Paulson hasn’t even asked for it yet.

So what gives — is the Treasury doing a little deficit spending of its own? Kiting checks? Something else?

It's the difference between cash-flow and a budget: The Treasury has said it would use $250 billion of the first installment on shoring up bank capital, by purchasing preferred shares and warrants from banks and thrifts; in a sense, it has budgeted for that much.

But much of that money hasn't yet gone out the door -- at last count, the agency has paid $172.4 billion to more than 130 banks. Other bank applications are still pending. So while the Treasury has said it would spend up to $250 billion on the program, it still has billions in cash available for new programs; in theory, if Congress doesn't hand over the second $350 billion, it would just mean that banks get a little less.

GMAC might not be the end of it for auto financiers and manufacturers: Within a couple days, a Treasury official says, the agency will post guidelines for loans to auto companies generally. No word yet on how broad eligibility might be.

In another curious twist, the GMAC bailout appears to include a loan to let General Motors increase its stake in GMAC -- even as Federal Reserve banking rules appear to require it to shed ownership.

Of the $6 billion announced tonight, $5 billion goes to purchase preferred shares in GMAC (with an 8% coupon for the government, a nice bump up from the 5% banks are paying).

But the remainder, of up to $1 billion, is a loan to General Motors -- a loan that allows GM to participate in a rights offering from GMAC. That rights offering, of course, is being presented as part of a make-or-break strategy by GMAC to refashion itself into a bank holding company and avoid bankruptcy. The Federal Reserve approved GMAC's application to become a bank holding company on Christmas Eve -- but GM, and co-owner Cerberus, has to give up control of of the lender to comply with bank ownership rules.

In other words, it appears that the Treasury is lending to GM so it can keep GMAC afloat by increasing its stake in it -- an investment GM apparently can't maintain for long.

Reader Comments

tyler

December 30, 2008 12:38 AM

What an absolute Scam ! How can the Treasury claim to purchase 6 billion worth of stock in GMAC when they are insolvent ! They dont have 6 billion worth of equity to give to the U.S. Taxpayers ! Can you spell congressional investigation ?

Tony

December 30, 2008 02:36 AM

Unbelievable - Let's do a GM bailout through backhanded means. These guys are absolutely slimy

Mike Reardon

December 30, 2008 03:20 AM

GMAC may not have a chance of establishing itself as a separate bank outside financing auto purchases, but $6 billion to GMAC as a bank does make great sense as a window into the Fed’s discount window to support retooling a troubled auto industry later.

That access into major investments along with government projects that support a green tech auto industry does have a possibility of gaining a payback for the Treasury.

P.S. All online media need to have some clearer footnotes on these transactions.

The Federal Reserve and the Treasury have also: contributed - lent - placed and promised - trillions of dollars on authority outside the TARP. The other Federal Financial Institutions like FDIC have also contributed extra billions to failing banks all outside the TARP.

The numbers come close to $7.4 trillion and after Ben‘s last declaration on commercial paper, they may push the extras to over $9.4 trillion.

Bloomberg did a full history on the $850 billion TARP, it never carried any of those extra Federal transactions.

With $9.4 trillion Federal Agencies transactions. It seems hard to question a simple advancement to a new banking concern like GMAC that is only a matter of re-placement inside a minor section of a massive injection into banking and finance.

- I want a BIG fiscal stimulus package from Congress to restart the economy, one that reflects these extra efforts to help banking.

Jason

December 30, 2008 07:21 AM

If you don't have some bad loans you are not in business. - Paul Volcker

A little bit of bad loan is alrite

Insert famous quotes and jokes in your writings at... http://www.xlpert.com/quotes.htm

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