Take GMAC Down

The big news, really, is that GMAC needs $11.5 billion (and will need $4 billion more if it takes on Chrylser financing).  Can you think of anyone who would loan GMAC $11.50 right now, not to mention $11.5 billion?  Who should they even ask?  Well, I can think of one guy.  Can you guess?

OK, him too, but I’m not allowed to blog about Tim Geithner anymore, am I?  Keep guessing.

Getting warmer, but who knows if he’ll be able to stay awake long enough to count out the money (which, yes, he might have on hand). 

You don’t even know who that is, do you?  It’s OK; you’re not alone.  Hint: It’s Gary Locke.  He’s the Commerce Secretary.

Give up?  The auto task force guy with the power of the purse on this one might actually be this guy:

That’s Steven Rattner, the Car Czar.  Not really sure why he’s so far in the back during this Shame on You Chrysler Lenders speech, since he’s apparently the guy who fired Rick Wagoner at G.M. and heavily rumored to be the guy who told Chrysler’s non-complying creditors the White House would destroy them if they didn’t cooperate.  (He’s also, according to that first link, the guy who’s eyeing Tim Geithner’s parking space at Treasury — or at least was before his own possible scandal popped up).  Rattner is also the guy who will be poring over G.M.’s you-have-60-days-to-get-it-together filing, which is due at the end of this month.

Also due 30 days from now (June 8, to be precise)?  A plan from each of the banks listed above that needs to raise capital about how, exactly, those banks plan to raise that needed capital by November. I’m guessing GMAC’s plan can be summed up in two words: Government bailout.

So my thought is this: How can GMAC make any kind of plan without including the viability of GM (and Chrsyler, for which it might be taking up sales financing for) in its plan?  And if it includes those pieces of the puzzle, doesn’t that make Rattner the point man?

This seems like a good thing. Rattner’s the one who spear-headed the Chrysler effort, which ended, you may remember, with not much government concession to bondholders.  Rattner has shown that he’s willing to see a car company fail.  It can’t be that hard for GMAC to imagine that he wouldn’t mind watching a car company’s finance wing fail, too.

And though Treasury has said that they will support GMAC as needed, I’d guess that’s a reassurance meant more for its counterparties than for GMAC itself.  This is a bank that probably needs to go into receivership.  It’s a bank that, as Floyd Norris writes, “concluded, disastrously, that a good way to offset possible losses on auto loans was to get into mortgage lending.”  Going forward, what are the prospects for GMAC to revive?

I’m not convinced that a GMAC failure would be the same systemic threat that a failure of Citi or BoA might be.  First, I don’t think it would send a confidence shock through the system if GMAC went down — in fact, I think it’s more shocking that it’s being allowed to stand.

Second, GMAC does provide financing for dealerships to buy new inventory, and then provides financing for customers to buy that inventory — but if a contraction in that particular market is going to happen anyway (and it certainly seems it will, as part of Chrysler’s bankruptcy deal will include dealership closings), why not just hand GMAC off to the FDIC now?  Why not call this bank, and all of its attached pieces, a failure?

If anyone’s going to have a come-to-Jesus meeting with this bank, Steven Rattner seems like the guy to do it.  He’s probably got the clearest picture of GM’s predicament right now, and I hope that qualifies him to deal with their semi-detached financing arm, too.

Small Wonder: A Terrible Day for Tim Geithner

Felix Salmon had a nice post today suggesting that major U.S. banks holding Chrysler’s debt are willing to let the company go into bankruptcy instead of taking a haircut on their debt in part because there’s no real way the public could think less of them.  Being the automatic villain gives one a certain freedom to be horrible, and J.P. Morgan Chase and friends certainly find themselves there.

What this made me wonder is, at what point will Tim Geithner hit the so-hated-he-can-do-whatever stage?

I mean, this has been a totally sucky week to be Geithner.  Consider he went into the weekend with Paul Krugman’s “it’s gonna get so much worse” column and Rachel Maddow having invited the “Hey Paul Krugman” singer onto her show (for the 5 people who hadn’t already heard him sing, “Timothy Geithner, he’s like some little weasel,” via the Internet).  Yesterday, he had the hey-guys, cut-your-budgets Cabinet meeting (check out the body language here, too — that’s Geithner slumped next to Biden).  At this point, I’m not sure the man could buy friends (though I have no doubt at least one commenter will say he’s tried).  Just take the last 24 hours:

• The Special Inspector General issued his report, which initially made news for saying that, contrary to the Secretary’s earlier assertions, firms who wanted to participate on either side of the Public-Private Investment Partnerships would be subject to compensation limits.
• Then it made news because, at The Economist, that sounds like the end of the PPIP.
• Then it made news because there are already 20 fraud cases being investigated.
• Then Felix Salmon pointed out that, within the report, there’s open speculation that it could encourage out-right criminal organization money-laundering schemes.
• The IMF also released its Global Financial Stability Report today, and said that bank losses are over $4 trillion, with more than half of that originating in the U.S.  Oh, and we’re going to need substantial additional investment to recapitalize banks, and may need to nationalize some at least temporarily.  And soon.
• All of this before the real fun started: Geithner testified before Elizabeth Warren’s Congressional Oversight Panel.  You may remember her as the woman who made Jon Stewart feel better last week, or the one who released the highly critical — and commendable, at that — report on the Treasury’s plans so far.  Wanna guess how that meeting went down?  Let Andrew Leonard summarize:

The pattern is now sufficiently well established to be definitive. The treasury secretary appears before a congressional committee, and is asked tough, detailed questions by members of both parties. He invariably compliments and thanks the questioner for a “thoughtful” and “important” question, and then proceeds to answer in vague generalities, rarely committing himself to specifics.

I’ve watched or pored over the transcripts of almost all of Geithner’s testimony before Congress, and it’s getting harder and harder to make a case in defense of his brief tenure. Tuesday’s hearing, before the Congressional Oversight Panel empowered by Congress to watch over the TARP program, ranks as one of his least satisfying performances so far. 

(I would say it was sort of like watching the robot from Small Wonder face off with Minerva McGonagall from Harry Potter — you start off rooting for both sides, but by the end, you just want McGonagall to put the robot out of her repetitve, wide-eyed misery).

• The stock market did rally a bit over Geithner’s assertion that “the vast majority of banks have more capital than they need to be considered well capitalized by their regulators.”  That sounds like great news, until you realize he never said that (he skipped those pages, somewhat dramatically, in his testimony).
• Also, even if he had said that, it was meaningless and earned, again, bafflement and concern (and use of the word “ominous” in the first paragraph) from Paul Krugman.
• Finally, The Wall Street Journal ran an interview with Geithner (“Geithner Weighs Bank Repayments“) where he said he’s considering whether to let banks repay their TARP debt early or not.
• Finance blogger Nemo and a reader point out that, no, he can’t do that — he has to let banks pay the money back whenever they want to.  Strike… what? 56 or so? for Geithner.

It’s those last two points that bring us to the importance of the villain question.  The two banks currently talking about repayment are Goldman Sachs and J.P. Morgan Chase.  Paying back TARP funds would free these two from compensation limits — present and looming — and also make them look strong and solvent.  JPMC CEO Jamie Dimon has called TARP assistance a “scarlet letter,” and he’s looking to shed it as quickly as possible.  This would possibly inspire further investment in these banks and certainly encourage concentration of power into their hands.

Which is partly why the Treasury Department isn’t keen on just letting them repay so quickly.  Banks shedding TARP funds could make other banks want to jump ship — banks whose life-vests aren’t properly inflated.  So you could see Bank of America trying to pay back TARP, and either failing after payback, or failing to payback at all — and either way looking so weak as to inspire (who thought it was possible) less confidence than even now.  Which would, of course, benefit those who do survive the leap — probably a big part of the JPMC/Goldman dream right now.

In fact, the only reason that a firm wouldn’t leave TARP right now is a desire NOT to piss off the U.S. Treasury Department.  It’s in their individual interests to run, even while it might be in the interest of the entire system for them to stay a while.  So let me ask you this: Is Tim Geithner someone you’d want mad at you?  Does a real villain lurk somewhere within the Small Wonder facade, just waiting for the day when it no longer matters what Wall Street thinks — and if so, was today that day?  Does he have enough power, inside or out of the Treasury, to make things more uncomfortable for these banks than they already are?

My guess?  If there’s pressure to be brought to bear, it will have to be done by the President — and if that’s the case, Geithner’s days at the grown-up table are going to be limited.

New Treasury Plan: This Ain’t Yo’ Momma’s TARP

Treasury officials are considering a new plan, the New York Times reports, to help banks recapitalize: they’d convert their current loans into common stock in the bank, which would translate to actual equity and, perhaps, the accompanying power that comes with being a shareholder.  This would include some power to decide who stays on the board and, yes, would probably be a big step toward nationalization — all without having to ask Congress for any additional money.

The problem is that, for at least some of these banks, we’d be converting not just loans, as the Times leads with, but preferred stock into common stock.  One stock for another? Paul Krugman was quick to call the plan baffling, and he came up with this analogy:

Here’s how I think about it: you started a business with a bunch of borrowed money, but of course had to put some of your own money in. Now, actually some of the money you put in was borrowed from your mother, but the original lenders don’t care about that, since they have prior claim.

Eventually you run into some business difficulties, and your creditworthiness is in doubt — which in turn is making it hard for you to do business. What you need is evidence of ability to repay the money you already owe.

So does it help if your mother converts her loan into a share of the business? Not really, because she won’t get repaid anyway unless all your other creditors get paid first. So the terms of her agreement with you don’t affect their prospects of payment.

And in this case, the TARP is your mother.

OK.  But I think it actually would help me, as a business, survive — and would certainly increase the confidence lenders had in me — if my mother happened to have a GDP of $14 trillion when she became an official part-owner of my business.

No?

If that seems too cute by far, Felix Salmon likes the new plan, too, and says it in actual econo-speak.  I’ll try and translate, but he’s speaking pretty plain English, too (this is me suggesting you scoot over and read him; he’s very good).  Essentially, whether you like the new suggestion or not depends on how you looked at the original preferred stock plan.  If, like Krugman, you considered preferred stock to come with equity, then this plan makes very little sense — it’s a swap of what we have for what we have, only with increased risk of losing everything.  But Salmon makes the argument that preferred shares didn’t automatically confer ownership in the same way that common stock does, which seems to be generally true of preferred stock.  Preferred stockholders are exactly that — preferred — in the case of bankruptcy.  They (usually) get their money back just after bondholders, and certainly always before common stock holders.  In exchange, preferred stock usually doesn’t come with voting rights, and isn’t usually as profitable in the long term as common stock.

The glass-half-empty way to look at this is that, if any of the nation’s 19 largest banks go under, we’re trading stock that would have guaranteed us at least some of our money back for stock where we could very well and easily lose everything.

Glass half full?  We’re trading stock that gave us no say-so for stock that lets us start cleaning house, at least in a few places, and if we really get the house cleaned, we have a better chance of turning a profit.

I’ll just be over here drinking the rest of the glass.  Now that TARP is my mother, I assume my inheritance is going to be huge.