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Monday, December 29, 2008 11:04 PM


Paulson's $6 Billion Foot In The Door Play


The US Treasury continues to throw $billions around like peanut shells. Bloomberg is reporting Treasury to Buy $5 Billion GMAC Stake, Expand GM Loan.

The U.S. Treasury committed $6 billion to support GMAC LLC, the financing arm of General Motors Corp., the latest step in the government’s widening effort to keep the largest U.S. automaker out of bankruptcy.

Treasury said it will purchase a $5 billion stake in GMAC, and lend $1 billion to GM so the automaker can participate in a rights offering at GMAC to support the lender’s reorganization as a bank holding company. The loan is in addition to $13.4 billion the Treasury agreed earlier this month to lend to GM and Chrysler LLC.

“This is a good start by the federal government,” said Thomas Atteberry, who helps manage $3.5 billion in fixed-income assets at First Pacific Advisors in Los Angeles. Still unknown, he said, is whether the government cash will “make it palatable for new investors to come in.”
My Question: How much GM and GMAC bonds is First Pacific Advisors sitting on?
A Treasury official said there is no cap or deadline for aid to automakers under the TARP. Congress “will need to release” the second half of the $700 billion TARP under Treasury’s rescue plan, the official said on condition of anonymity during a conference call with reporters.
Separately, GMAC said it has accepted all bonds tendered in a debt swap designed to reduce its debt load.

“Once the offers are settled, which we expect to do promptly, results will be disclosed,” said spokeswoman Gina Proia in an e-mail.

GMAC joins more than 190 regional banks, commercial lenders, insurers and credit-card issuers seeking funds from the Treasury’s bailout program for financial firms. American Express Co., the biggest U.S. card company by sales, and CIT Group Inc., the biggest independent commercial lender last year, won capital infusions last week after converting into banks.

The Fed has since granted approval before the swap was finished.

GMAC, which had 26,700 employees as of Dec. 31, 2007, had about $161 billion of unsecured and secured debt as of Sept. 30, according to a filing last month. The proposal asked holders of $38 billion of debt to swap for as little as 55 cents on the dollar in cash or a combination of new notes and preferred stock. Individual owners of about $15 billion of debt were excluded from the exchange.
Foot In The Door Play

With hundreds of $billions handed out so far, another $6 billion seems like peanut shells. However, by agreeing to waste $6 billion on GMAC, the Treasury now needs to tap the second $350 billion because it has already squandered every bit of the first $350 billion.

In total, the Treasury has now committed to squander $700 billion and that is before Obama squanders anywhere from $750 billion to $1 trillion trying to prop up a dying consumer-based economy that really can't be propped up.

Addendum:

I am very cynical of statements regarding bailouts because there have been many instances by PIMCO and others positioning for bailouts then asking, almost demanding them, promising Armageddon if the bailouts are not granted. The automakers used the same ploy.

With that in mind, I asked: "How much GM and GMAC bonds is First Pacific Advisors sitting on?" (see context above).

Tom Atteberry at First Pacific Advisors just pinged me with this:
I can understand your cynical comment asking how many GMAC bonds does First Pacific Advisors own. As a partner at the firm, Co Portfolio Manager of the FPA New Income Fund, and Portfolio Manager for the firm's fixed income accounts we do not own any GMAC or GM bonds nor have we owned them in the past. As an aside the reporter for Bloomberg asked me the same question. I assume because my answer is none he felt no need to mention that fact in his article.

Our firm is not a proponent of government bail outs of private industry which in today's society is a minority view. If the government decides to bail out an industry the least it can do is set the situation up where it could attract private capital and thus enable the government to exit the transaction. In the case of GMAC I doubt that will happen. In the case of AIG the government at least asked the CEO to leave. In this case there is no management change request or new board.

In both cases the management and board of GMAC ran the company into the ground. I would submit that the same is true for GM. I am surprised to see little mentioned about a strong need to replace management. Under new management maybe new private capital could be attracted to the company. With the same old management in place that created the problem why would a new investor put a dime into either company. Finally we should be asking the question why was Cerberus allowed to continue to have an equity stake. At a minimum the taxpayer or a new equity owner should be put in place and the Cerberus position reduced to "0".
Thanks Tom.

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