Credit Woes at GM, Cerberus, and Residential Capital

Here are a couple of charts of Residential Capital (RESCAP) posted by Minyanville professor Fil Zucchi earlier today.

Residential Capital Credit Default Swap Pricing



click on chart for crisper image

That chart does not suggest possible bankruptcy that chart is trading at bankruptcy levels. Professor Zucchi had these comments.

Residential Capital Bonds



click on chart for crisper image

Clearly $16 billion in bonds are going up in smoke.

Professor Zucchi offered these comments.

RES...t in Peace?

RESCAP Corp., the old GMAC mortgage unit now owned by GMAC and Cerberus, is not much of a household name. However, if things keep going the way they are, it soon will be. RESCAP has more than $16 bln of debt most of which is trading at "bankruptcy prices." And the Credit Default Swaps seem to be suggesting the same.

As I have been repeating almost weekly for months now, the problem does not necessarily lie in a RESCAP bankruptcy filing and the consequent restructuring of its $16 bln in debt, but in the payouts on its CDs should the bonds default. That payout is probably multiples of the $16 bln in debt face-value and someone out there is on the hook for it as we speak. This type of dynamic is what keeps me awake at night.

$16 billion is pretty significant in and of itself but it could be the tip of the iceberg. For example, consider GM's market cap vs. the amount of credit default swaps bet on GM's solvency. The following numbers are from Spring 2006 and are thus out of date but this can give you an idea of how carried away things got with derivatives.

GM's Market Cap vs. Swaps

• GM's Market Cap : $15 billion+-
• Credit Default Swaps on GM : $1 trillion+-

So when professor Zucchi says that the payout "is probably multiples of the $16 billion in debt face-value" he could be way understating the problem. Someone is on the hook for whatever the number is.

Chrysler Loan Sale Likely Postponed

The Wall Street Journal is reporting Chrysler Loan Sale Likely Postponed.

The $4 billion sale of loans connected to Cerberus Capital’s August purchase of Chrysler that was to take place this week will likely be postponed, a person briefed on the matter tells Deal Journal. Orders for the paper were due today, and so far, demand has been sluggish. (The underwriters are J.P. Morgan Chase, Citigroup, Goldman Sachs Group, Morgan Stanley and Bear Stearns.)

Chrysler’s woes are the latest setback for Cerberus, which went on a buying binge early in the year when the credit markets were booming. Now it faces a rough road at Chrysler and the GMAC auto-finance business it bought from General Motors last year, not to mention its effort to walk away from its pending buyout of United Rentals.

It looks to me that Cerberus bit off way more than it can possibly chew.

A quick check on the Cerberus Capital Management website proudly flashes three current investments.

Cerberus Current Investments

• GMAC
• Chrysler
• Air Canada

If I was Cerberus, I would not be boldly advertising those.

GM Share Prices Sink On Credit Concerns

Thomson Financial is reporting General Motors falls to 1 1/2-year low amid concerns over credit, incentive plan.

Shares of General Motors Corp (GM) slumped to a 1 1/2-year low Monday, as investors expressed concern over credit issues at the automaker's financing arm, as well as over a new sales incentive program.

Lehman Bros. Analyst Brian Johnson said the 60-plus delinquency rate on recent auto asset-backed securities from GM's financial arm, GMAC, have witnessed a 'sharp uptick' since July 2007.

'We are beginning to see deterioration in the auto ABS credit conditions,' Johnson said in a research note. 'This could indicate higher charge-offs in the future, if the delinquent loans do not cure.'

Bloomberg has a different take on GM's woes: GM Plunges Most in Two Years on 2008 Sales Concerns.

General Motors Corp., the largest U.S. automaker, fell the most in more than two years on concerns that 2008 industry sales may slide and the U.S. may adopt tougher fuel-economy standards for light trucks.

"There are some real concerns about how strong, or how weak, auto sales are going to be next year," Efraim Levy, a New York-based Standard & Poor's equity analyst, said today in an interview. Investors also may have reacted to last week's U.S. appeals court ruling ordering a revision in U.S. fuel-mileage rules, he said. Levy rates GM as a "sell."

My comment: The concerns should be that people keep spending money they do not have on cars and trucks they cannot afford.

GM reported a record $39 billion third-quarter loss on Nov. 7, with most of the deficit coming from a deferred tax charge. Home-lending woes have also damaged GM's results as its partly- owned GMAC LLC reported its largest loss ever, including a $2.3 billion loss at the Residential Capital LLC home-lending unit.

My Comment: For more on GM's record $39 billion loss please see Implications of GM's non-cash writeoff.

On Nov. 15, the 9th U.S. Circuit Court of Appeals ruled that the U.S. must revise fuel-economy standards for light trucks, which are now lower than the benchmarks for cars. Light trucks account for roughly 53 percent of all vehicles sold in the U.S.

Separately, GM said it began its annual "Red Tag" incentive event on Nov. 15 featuring offers of no-interest loans for five years on some 2007 models and new cash rebates of as much as $1,000 on 2008 models. The offers run to Jan. 2.

My Comment: Didn't GM vow to end cash rebates?

GM's 8.375 percent note due July 2033 fell 1 cent to 79 cents on the dollar, yielding 10.81 percent, according to Trace, the NASD's bond-price reporting service.

Credit-default swaps tied to GM climbed 51 basis points to 797.1 basis points, the highest since July 2006, according to CMA Datavision in New York. An increase signals declining investor confidence in the company's ability to pay back its debt.

My Comment: GM clearly has 9 lives. We will soon find out if has any lives remaining as we head into a severe consumer led recession.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com
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