Springtime for G.M. will lead to:

(a) a slippery-slope series of industrial bailouts exceeding $100 billion
(b) a "pre-pack bankruptcy" auto rescue sweetened by federal pension protection and guarantee of new-car warranties
(c) a multinational merger with troubled Toyota

William Safire
New York Times
December 28, 2008

In the New York Times this past Sunday, Bill Safire picked "b" among the three unsavory choices facing GM (NYSE:GM) in the New Year, as excerpted above. Would that our political class in Washington had the wit and financial savvy to understand that option "b" is pretty much a given with a forward auto sales estimate for 2009 of 10 million units in North America. Just about every vendor we know is cutting back on headcount and services, part of a generalized deflation not just of asset prices, but of services.

Following that line of thinking, the Fed's 4-1 approval of the GMAC application to become a bank holding company ("BHC") is, to us, the latest evidence that our central bank badly needs a change in leadership. Providing the enablement for this ersatz BHC to access $6 billion in TARP funds will not change the firm's problematic financial picture, a picture colored heavily by exposure to the mortgage, consumer and auto sectors of a shrinking US economy.

What a shame that Fed Chairman Ben Bernanke and the other members of the Federal Reserve Board lacked the courage to say no to the Congress and the automakers when it came to approving the GMAC application. This was a great opportunity to show leadership in favor of a "Prime Solution." But alas, not this time.

Thankfully one member of the Fed Board of Governors was willing to vote against the application, which juxtaposed expedited approval or a GMAC bankruptcy as the two stark choices. Voting for this action: Chairman Bernanke, Vice Chairman Kohn, and Governors Warsh, and Kroszner. Voting against this action: Governor Duke.

And don't cry for Cerberus in the event of a GMAC default. We hear that the buyout fund more than extracted its equity investment in GMAC via dividends and fees, thus the bond holders are the true economic owners. Wonder if the folks at the Fed realize that the imposition of ownership of limitations on Ceberus may really be no imposition at all! Or put another way, does an independent GMAC as envisioned by the Fed's approval order make sense as a stand alone business?

Let's start with a review of the latest SEC filings for GMAC LLC using the IRA SEC Catalog. At the end of Q3 2008, the $211 billion asset business was imploding, to put it generously. Revenue and assets were down from a year ago, and GMAC LLC showed an operating loss of $2.6 billion in Q3 and $5.5 billion for the nine months ended September 30, 2008. Add $6 billion in fresh TARP funds and you buy a couple of quarters more operating losses - maybe.

GMAC's FDIC insured bank, GMAC BANK, rates a "C" on the IRA Bank Monitor's safety & soundness benchmark at the end of Q3 2008. Registered users of the IRA Bank Cart can purchase the profile of GMAC Bank by clicking here.

With an overall stress index of 3 vs. 1.5 for the industry average stress level, to us GMAC Bank is headed in the wrong direction in terms of financial trends. The $32 billion asset bank has decent efficiency in the 60% range and above peer capital, but the defaults at 97bp (annualized) and low ROE drag the bank's score up to 2x the industry average.

While the Fed is allowed to give BHC applications accelerated processing, we'd like to see a more detailed explanation from the Board as to just how GMAC meets the statutory financial strength requirements for a BHC, even with the $6 billion in TARP funds. The Board's written order refers to business plans and other future actions, but the approval of the GMAC application seems to violate the safety and soundness requirements of 12 CFR. How can the members of the Board who voted for this application say that GMAC is able to serve as a source of financial and managerial strength to GMAC Bank?

Again, think of the Fed approving this BHC application by GMAC with a bank unit that may, in our humble opinion, rate a "3" at best on the CAMELS scale. GMAC Bank is by no means ready to fail, at least looking at the Q3 2008 financials, but a "C" rating on our safety and soundness Bank Stress Index is a very bad place to be and close to the border of those institutions that are being resolved by the FDIC. Would it not be better to first restructure GMAC and leave a stronger parent to then become a BHC!?

Article I, Section 8 of the US Constitution provides Congress grant of authority to "establish... uniform laws on the subject of Bankruptcy throughout the United States." The Founding Founders included this explicit enumeration of a federal bankruptcy process, above and beyond the reach of state law, to embed in our system the purifying and self-healing mechanism of public liquidation. The supervision by the federal courts assures a transparent, public process to handle insolvencies and afford fairness to all claimants. At the time, merely having such mechanisms placed exclusively under the federal courts largely isolated insolvencies from politics, but not in the age of systemic risk and "too big to fail."

Today the public bailout financed by Washington has circumvented the quaint checks and balances of the Founding Founders, part of which included the very public resolution of insolvencies. So it is that with American International Group (NYSE:AIG) and GMAC the opaque, bailout model of political economy prevails, with public subsidies provided to private corporations under the rubric of supporting the collective good, and all with minimal public disclosure or debate.

As in the case of the conversions by Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS) and American Express (NYSE:AXP), the GMAC transformation into a BHC does not solve the underlying business issues that somebody, at some point in time, must address. To get the US economy moving again, we all must make tough judgments about the viability and global competitiveness of businesses large and small. In the New Year, we look forward to contributing to that "Prime Solution."

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