GMAC Bailout

by Larry Levin

Today was almost a carbon copy of yesterday; it was slow, suffered from low volume all day, and very late experienced a sudden buying spurt. Can tomorrow be more of the same, or can a dead horse get even deader? As they say, there's no sense in beating a dead horse.

This morning's economic data was in a word: bad. According to the monthly Conference Board index, consumer confidence hit a record low in December - as in NEVER BEEN THAT LOW IN HISTORY. The December consumer confidence index fell to 38 from a downwardly revised 44.7 in November. Most economists proved once again that they know nothing as they had expected a December reading of 45.8. Economists are like Wall Street analysts - USELESS as laminated pizza!

And home price data got in on the act as well, showing further deterioration. The S&P Case-Shiller index of home prices fell 2.2% in October from September. The index also showed home prices were down 18% from October 2007.

Luckily for all of the good little Socialists on Wall Street, however, the government came to the rescue again - with YOUR money.

You know GMAC as the financing arm of General Motors, now Government Motors. A large portion of it (51%) was sold off to Cerberus Capital, which also owns Chrysler. Cerberus Capital is a private Wall Street investment firm that made horribly bad (stupid?) bets that YOU are now paying off. This GMAC bailout will allow this private company to actually retain ownership, albeit at a lower 33%, while it also gives Cerberus' wealthy investor's time to bail out. When has the Treasury done that for you?

This afternoon Treasury said it will be giving GMAC a $6-billion handout, allow it to become a bank, and will give GM another $1-billion. This is in addition to the $17.4-billion handout to GM and Chrysler. The money is said to have come from the TARP funds; however, the TARP is tapped out. The money that was stolen from you for GM, Chrysler, and the UAW was the last dime in the TARP kitty. Congress must approve the second half of the TARP, which hasn't even been discussed yet. And this new $7-billion (total) handout was not approved by the House of Representatives, yet the House is where all funding starts.

So one has to wonder: Where the hell is this money coming from? Who approved it? Is the Treasury appropriating its own funding?

But that's not where this pathetic story ends - oh no, there's more! The Treasury funneled GMAC the money by buying preferred shares of stock in order to make it look like an investment. Un-huh. With your tax dollars, GMAC will be lending money to deadbeats again.

In a Bloomberg story today, GMAC president Bill Muir said that the company said it won't finance higher-risk transactions, instead concentrating on prime customers who are more likely to repay using responsible credit standards. The relaxed policy will allow us to return to more normal levels of financing volume, and should help in efforts to stabilize the U.S. auto industry, GMAC President Bill Muir said in today's statement.

So he says they won't lend to the worst of the worst - yeah, right. The piece goes on to describe how GMAC is simply reinventing what a prime borrower is: a lower credit score is the new normal. GMAC will reduce its prime borrower category FICO score from 700 to 621, and voila - we now have a prime borrower again. If this doesn't work, GMAC will just lower the score-threshold again. Haven't these clowns learned anything?

But wait, there's more! Why would GMAC consider such an odd number as 621 as a prime borrower? The US median credit score is 723 and 620 is considered sub-prime. So if GMAC uses 621 as the score, they're not a credit risk, they're prime borrowers. According to Mr. Muir of GMAC, using 621 instead of 620, is actually using responsible credit standards. You can put perfume on a pig, but it's still going to stink! The government has now put you in the business of sub-prime lending, which is a lot like running into a burning building as it's falling to the ground.

In fact, I predicted this would happen on 9-23-08 in my missive titled, Illustrating Absurdity with the Absurd. In it I said... And then we have Congress itself holding court over the whole absurd mess, which is like asking the cat who ate the canary.

I'll assume we can agree to blame the trio just mentioned; but isn't there a larger reason? This country, public and private alike, has been living on CREDIT for far too long. Nobody saves anymore - it's all about instant gratification. And now that credit is tight and getting tighter, very few people will qualify for loans to keep the house of cards standing much longer. The average American won't be able to buy something he doesn't need with money he doesn't have. And Congress won't stand for that.

So I'm guessing that the absurd answer to this by Congress will be (as usual) to ignore the root causes, especially its own role, and go for the quick fix. Few if any will be held accountable. Like forcing tests to be dumbed-down so Sally the cheerleader doesn't develop a deserved idiot-complex, Congress will force rating agencies to change their FICO score tallies. For example, Congress will decree that a FICO score of 500 is now the new 700 and so on.

Voila - everything is solved. Borrow, borrow, borrow, spend, spend, spend. And that folks is illustrating absurdity by being absurd! I was pretty damn close. Expect the insanity to spread.

But wait - there's more! Within hours, GM was offering no-interest loans for as long as five years to counter this year's 22 percent drop in sales, caused in part by the inability of its customers to get financing. What? ZERO percent financing? How will this finance company make profits when it loans out OUR money for free?

But wait - there's more! GMAC will pay an 8 percent dividend on the Treasury's $5 billion of senior preferred equity. The company will also issue warrants in the form of additional preferred equity that will equal 5 percent of the preferred-stock purchase and pay a 9 percent dividend if exercised.

OK, read those two paragraphs again. Now stop laughing and let's ask in unison - How the #%@* can GMAC pay off "loan" 8% loan when it in turn loans out said money at NO PROFIT? Well folks, that's why I renamed GM to Government Motors. Only a government can do something so philosophically and fundamentally stupid and expect it to work.

Are any of you still wondering if government intervention is a good thing? Do you still believe the government has to "do something?" I say NO! Government meddling only makes it worse. Sadly, when the mayors and governors across this country get their greedy mitts on this money, the GMAC handout will pale by comparison to the PORK they will piss it away on.

The more money wasted on stupidity like this, the longer and deeper the recession will while it slows the recovery. There is only so much capital, and using that capital to keep failed business and municipalities alive is sickening.


Previous Day's Trading Room Results:

Trade Date: 12/29/08

E-Mini S&P Trades*
(before fees and commissions):

1) OTF buy @ 11:25am at 879.50 = -1.75 (1 lot)

2) OTF sell @ 1:10pm at 878.75 = +.25 (1 lot)

3) Algorithm positions (9)...combined daily total...+3.75

ZB (30 Year Bond) Trades*
(before fees and commissions):


1) No trades today.



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