When the government offered GMAC's old shareholders a free ride, how could they turn it down?
You would think, at this point, that there would be nothing left to be outraged about when it comes to government bailouts. But the more bailout rocks you turn over, the more well-connected players you find who aren't being forced to pay the full price of their mistakes. One of the little-noticed rocks I've looked under recently: the government's rescue of GMAC, now Ally Financial, which has given its old shareholders a multibillion-dollar windfall.
These folks thought they had a great deal in 2006. General Motors (GM), which had owned GMAC (the name I'm using throughout this column for simplicity's sake), was thrilled to have investors led by Cerberus, the big, smart Wall Street house, fork over $7.2 billion for a 51% stake. Oops. The ink had barely dried when GMAC's mortgage business, much of it subprime, turned from a crown jewel into toxic waste. The world financial system began imploding. GMAC ran out of borrowing power and got government help to stay afloat in late 2008, the first of several bailout infusions. Without the bailout, GMAC would have gone broke, and the old holders' stake would have been worth zippo. What's that stake worth now, mostly because of taxpayer support? Would you believe more than $3 billion? The shares owned by the Cerberus-led investors are worth $2 billion by my conservative math, and GM's stake is worth $1.2 billion.
Those numbers -- which you've probably not seen before -- are based on the value the Treasury placed on GMAC's common stock at year-end, when it converted some of its preferred shares to common shares. The price, $10,340 a share, is GMAC's stated net worth; a stock offering, should one occur, would probably fetch a higher price. The Treasury agrees that allowing GMAC's old shareholders this kind of value wasn't optimal. "One of the unavoidable consequences of not filing GMAC for bankruptcy was that the equity stakes of the legacy shareholders, Cerberus and GM, were not completely wiped out," says Tom Casarella, a top Treasury restructuring expert. However, he says, "we don't think there was a better way to do the bailout, keep GMAC solvent, and protect both the U.S. auto industry and the taxpayers' investment."
The government, probably rightly, felt it had to bail out GMAC because the firm provided about 75% of the "floor plan" financing that dealers use to buy vehicles from GM. Floor-plan finance, unlike retail vehicle finance, is specialized and complex, and has relatively few players. The government feared that if GMAC croaked in the midst of a financial crisis, 75% of GM dealers' floor-plan financing would vanish. As would 75% of GM's sales. As would GM.
So you see why the government didn't dare let GMAC go into bankruptcy. The problem, of course, is that the old GMAC shareholders -- the Cerberus investors and GM -- got a free ride of sorts on the government's nickel. Instead of owning 100% of a company worth nothing, they now own 26% of a company with a stated value of more than $12 billion.
To be fair (three of journalism's most dangerous words), Cerberus's investors did put money into the GMAC bailout pot alongside Uncle Sam in 2008. They kicked in $750 million in cash and GMAC securities. So you can argue -- as I'm sure Cerberus would if it hadn't declined comment -- that its investors bought most of their current stake; it wasn't a total gift from Uncle Sam. Yes, Cerberus is still down $6 billion on an $8 billion investment -- but absent Uncle, it would be down $7.2 billion on a $7.2 billion investment.
By contrast, the $1.2 billion value of the stake owned by GM sure looks gifty -- yet another taxpayer-financed indulgence for GM, which Uncle Sam has kept alive, recapitalized, and coddled endlessly. The money GM put into recapitalizing GMAC in 2008 -- $884 million -- came from the Treasury.
Yes, in a world of multitrillion-dollar bailouts, having big players get a windfall of $2.5 billion or so may seem like small beer. (Math: That's the $3.2 billion value of the Cerberus-GM stake, less the $750 million Cerberus put up in 2008.) But small beer is still beer. Struggling small businesses and unemployed people would kill for a deal like that. But don't hold your breath until they get it.
Is AIG the next Citi?
Treasury will seek to sell off a big chunk of its holdings in AIG (AIG), the government-owned insurance company, in the first quarter of 2011, Reuters reports.
Hours later, AIG, Treasury and the Federal Reserve signed off on a deal formalizing the terms of the latest restructuring of AIG's relationship with its government rescuers, pointing to a likely government stock sale in 2011.
Under the deal outlined Wednesday, AIG will MOREColin Barr - Dec 8, 2010 4:14 AM ET
Considering the routine abuses by Wall Street banks in underwriting IPOs, the GM offering is a real winner.
One of the great fears about the GM offering was that Wall Street would drastically underprice the shares, which is one of the investment banks' favorite practices. During the tech bubble, the shares of newcomers in networking, software and telecom routinely popped 200% to 300% at their debuts, handing the underwriters' prized clients MOREShawn Tully, senior editor-at-large - Nov 18, 2010 3:21 PM ET
As scorching as the GM IPO is, it may not even be the hottest one on Wall Street today.
That honor looks likely to go instead to LPL Financial (LPLA), a Boston-based brokerage service whose initial public offering was priced Wednesday evening at $30 a share. Insiders led by LPL management and private equity backers Hellman & Friedman and TPG stand to rake in more than $450 million in the deal, MOREColin Barr - Nov 18, 2010 2:06 PM ET
So much for former car czar Steve Rattner's victory lap.
Rattner agreed Thursday to pay $6.2 million to settle Securities and Exchange Commission charges that he paid kickbacks to win business with the New York state pension fund for his former investment firm, Quadrangle Group.
Rattner will pay $3.2 million in restitution and a $3 million penalty and be barred from the securities industry for two years, the SEC said.
Not to be upstaged, New MOREColin Barr - Nov 18, 2010 11:15 AM ET
It seems that Andrew Cuomo has a wonderful sense of theater.
On the very day that Steve Rattner is all over cable news to discuss GM's (GM) return to the public markets, he has (finally) been sued by the Governor-in-waiting for his alleged role in the New York public pension kickback scandal.
There actually are three separate actions, with the first two seeking to recover a total of $26 million from the MOREDan Primack - Nov 18, 2010 10:21 AM ET
No question, the GM initial public offering is huge. But is it the biggest global IPO ever? Afraid not.
We live in inflation-obsessed times, after all, and if you look at the General Motors (GM) IPO on an inflation-adjusted basis it is at best No. 3 – and perhaps as low as No. 7, depending on how you rack up the numbers.
So says Linus Wilson, an assistant finance professor at the MOREColin Barr - Nov 17, 2010 5:29 PM ET
One hedge fund manager with stellar recent returns plans to profit on the discrepancy between the valuations of General Motors and Ford.
As General Motors prepares for a November initial public offering, hedge fund manager Michael Kao, founder of Akanthos Capital Management, told the audience at the 6th Annual Value Investing Congress that he is going long GM bonds and short the stock of Ford (F).
Kao's Akanthos makes money by identifying discrepancies MOREKatie Benner - Oct 13, 2010 1:18 PM ET
General Motors says TARP continues to cast a long shadow over the company.
The automaker said in Wednesday's initial public offering filing that executive pay restrictions tied to the company's receipt of some $50 billion in government loans could hamper GM as it tries to revive its fortunes in a hypercompetitive auto market.
As part of the cost reduction initiatives in our business plan, and pursuant to the direction of the Special MOREColin Barr - Aug 18, 2010 4:57 PM ET
General Motors has filed its papers -- and this time, not for bankruptcy.
The car company, taken by the Obama administration through an abbreviated Chapter 11 bankruptcy proceeding last year, filed Wednesday to sell shares to the public.
The filing, made Wednesday afternoon with the Securities and Exchange Commission, is available here.
Of note: the document says the number of shares to be sold and their probable price range haven't been determined.
Published reports have GM MOREColin Barr - Aug 18, 2010 4:00 PM ET
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