"Firms That Got Bailout Money Keep Lobbying "

Just as I've been saying, from the NY Times:

"Firms That Got Bailout Money Keep Lobbying

By DAVID D. KIRKPATRICK and CHARLIE SAVAGE

WASHINGTON — The financial giant Bank of America says it is no longer lobbying the federal government about its unfolding bank bailout. After receiving $45 billion in bailout money, lobbying was just too unseemly.

“We are very sensitive to the fact that we have taxpayer money,” said Shirley Norton, a spokeswoman for the company.

Citigroup, recipient of another $45 billion, made the opposite call. While trying to keep a low profile, the company is still fielding an army of Washington lobbyists working on a host of issues, including the bailout. In the fourth quarter, it spent $1.77 million on lobbying fees, according to its lobbyists’ filings. ( YES )

The different approaches from the two banks that have received the most money underscores the growing quandary facing private companies, which increasingly deal with the federal government not only as rule-maker but also as shareholder, lender and trading partner.

Pressing federal policy makers risks the appearance of recycling public money to advance a private agenda, while staying on the sidelines could put a company at a comparative disadvantage.( A HYBRID DILEMMA )

Citigroup and Bank of America are hardly the only two financial firms to confront the issue. During the last three months of 2008, at least seven other firms receiving bailout funds — American Express, Capital One, Goldman Sachs, KeyCorp, Morgan Stanley, PNC and Bank of New York Mellon — all lobbied the government about the bailout, according to a review of their most recent disclosure reports. ( GEE )

The automakers that received billions under the same program lobbied as well( WOW. WHO KNEW? ): including General Motors; its financing arm, GMAC; and Cerberus Capital Management, the private equity firm that controls Chrysler. Other recipients of federal financing also lobbied Congress, the Treasury or both about other matters.( WHAT A SURPRISE )

The American International Group, taken over by the government during an injection of more than $40 billion last fall to prevent the company’s collapse, has discontinued all its federal lobbying; it is now in effect government-owned. But its former executives continue to lobby.( YEP )

Its former chief executive, Maurice R. Greenberg, ousted a few years ago amid allegations of securities fraud, is leading a group of shareholders lobbying for a chance to renegotiate the terms of the government takeover or buy back a bigger stake in the company.

According to a recent filing, A.I.G. shareholders paid $90,000 in the fourth quarter to a lobbying team at Ogilvy Government Relations that includes the Republican lobbying powerhouse Wayne L. Berman, a former assistant secretary of commerce under the first President George Bush and a major fund-raiser for the second.

The group also includes three Democrats who had been top aides to the House speaker, Nancy Pelosi; Senator Edward M. Kennedy; and the former House majority leader, Richard A. Gephardt. (Mickey Kantor, secretary of commerce under President Bill Clinton, has advised the group as a lawyer as well.)

Lawmakers, troubled by the prospect of taxpayer-subsidized influence-peddling, are threatening to crack down. Senator Dianne Feinstein, a California Democrat, and Senator Olympia J. Snowe, a Maine Republican, are pushing legislation that would explicitly bar companies from using bailout funds for lobbying or campaign contributions. ( YOU THINK? )

Although hard to enforce, the measure would put banks on notice that aggressive lobbying could set off a negative reaction from Congress.( NOT LIKELY )

“That taxpayer dollars intended to stabilize the economy could find their way into the bank accounts of lobbying firms” is “completely unacceptable,” Ms. Feinstein said in a speech supporting the measure.

On Friday, President Obama issued his own call for more oversight and transparency, citing “companies that have received taxpayer assistance then going out and renovating bathrooms or offices, or in other ways not managing those dollars appropriately.” This was an apparent allusion to reports of office renovations by the former chief executive at Merrill Lynch, a recent acquisition by Bank of America whose heavy losses led to an expanded bailout for the bank.

Bankers, though, defend their right to a voice in public policy debates about the industry’s future. “Nobody mentioned that you are giving up your Constitutional right to petition the government” when accepting federal money, said Edward L. Yingling, president of the American Bankers Association.( HE'S GOT A POINT )

He acknowledged, however, that Citigroup and Bank of America were in a more ambiguous position than the rest of the roughly 200 banks that accepted money from the Treasury and agreed to pay it interest as part of the bailout program. While most banks are required to demonstrate financial health to qualify for the deal, the two giants received $90 billion in emergency measures to prop them up and agreed to give the government a larger say in management.

The two banking behemoths had entered a “middle ground( THEY'RE ALL HYBRIDS. THIS IS BS ),” Mr. Yingling said, between the other private banks accepting federal investments and the three financial firms under full federal control: A.I.G. and the failed mortgage giants Fannie Mae and Freddie Mac. “I would expect that institutions in that middle ground would be well aware that they need to be careful about the tone and manner in which they lobby,” he said.

Citigroup and Bank of America say internal policies prohibit the use of any bailout money for lobbying. Neither, however, has stopped pressing its interests in Washington, albeit more quietly. ( YES )

Though Bank of America says it has stopped lobbying about the bailout legislation — the Troubled Asset Relief Program, or TARP — it continues to lobby on other matters. The bank spent about $1 million on federal lobbying in last year’s fourth quarter, including $820,000 for its own lobbyists, according to filings.

Ms. Norton, the spokeswoman, declined to comment on whether Bank of America was lobbying on other financial crisis proposals, such as creation of a government-controlled “bad bank”( I SAID THAT THIS WOULD HAPPEN ) to take over toxic securities.( WHY NOT? )

Nicholas Calio, Citigroup’s top lobbyist, handled Congressional relations for both the first and second President George Bush. Its team of outside lobbyists has also included a former Congressional liaison for President Clinton, a former chairman of the Federal Deposit Insurance Corporation, a former deputy assistant Treasury secretary and the veteran Democratic strategist Steve Elmendorf.

The two banks’ problem is an increasing one for the industry, said Scott Talbott, top lobbyist for the Financial Services Roundtable. “There is a TARP blowback problem,” he said. "

This was all predictable. I predicted it in the beginning of October. This is our system. This is what happens with a Hybrid Plan, and why Nationalization, while not perfect, is preferable to Hybrid Plans like TARP or a Bad Bank.

"And I don't like the way that Pimco's Bill Gross is trying to paint this as some kind of win for the little people"

Here's Felix Salmon:

"Fragmented Bondholders

During the Great Moderation, institutional fixed-income investors had boring, if lucrative, lives. They'd buy paper, clip coupons, and make money. Now, however, faced with a stream of high-profile defaults, they're going to have to start justifying their former paychecks by getting down in the trenches with the distressed companies they lent money to, and negotiating hard to maximize their eventual payout.

Or not. The biggest bond investor of all, Pimco, has resigned from the investor committee negotiating with General Motors, despite being one of GM's largest bondholders. And I don't like the way that Pimco's Bill Gross is trying to paint this as some kind of win for the little people:

"We're just not good committee members," Bill Gross, Pimco's co-chief investment officer, said in an interview yesterday from his Newport Beach, California-based office. "We have the interests of our clients more at heart than the interests of particular corporations or even the government, I guess, so it's best that we simply look at the situation from afar as opposed to from inside."

Of course bondholders will represent their clients' interests in negotiations. No one's expecting anything else. But that doesn't mean they shouldn't talk at all. Creditor committees exist for a reason: they allow companies and their creditors to gauge which solutions are likely to be mutually acceptable, and move on past a debt restructuring to a period of profitability and growth. After all, neither company nor creditor likes it when bonds are in default, and they both have an interest in ending that state of affairs as soon as possible.

Interestingly, the news of Pimco's resignation from the GM committee arrives just as Ecuador announces that it has managed to find a bank to advise it on its own debt restructuring: Lazard. The last time that Ecuador defaulted, back in 2000, the country evinced very little interest in meeting or negotiating with its creditors, and Ecuador bondholders were furious. They set up the Emerging Market Creditors Association, or EMCA: a forum where the biggest holders of emerging-market bonds could get together and try to force countries to come in good faith to the negotiating table.

And who was the co-founder of, and single largest bondholder within, EMCA? None other than Pimco's very own Mohamed El-Erian. Back then, El-Erian fought hard for the right of bondholders to sit down and negotiate with distressed debtors; now, he seems happy for Pimco to unilaterally resign from such negotiations, citing vague reasons about just not being good on committees.

EMCA no longer exists, which is a shame, since it's needed now more than ever, in the wake of Ecuador's default and as emerging-market bond spreads price in a massive wave of further defaults in the future. But maybe that's symptomatic of a broader problem: bondholders compete against each other, to see who can get the highest returns, and are never very comfortable when they try to cooperate. Which means that they fragment -- as the GM bondholders just did with Pimco's departure from the negotiating table -- and leave debtors in a more powerful position.

Clearly, Lazard wasn't scared enough of its buy-side clients to refuse the Ecuador mandate. What that says to me is that bondholders don't have teeth these days. You'd think that Pimco would be worried about that state of affairs, but evidently not."

Here's Bloomberg:

"By Caroline Salas and Kathleen Hays

Jan. 21 (Bloomberg) -- Pacific Investment Management Co., manager of the world’s biggest bond fund, resigned from an investor committee negotiating with General Motors Corp. to exchange debt for shares.

The decision by Pimco comes about a month after it reneged on a Dec. 15 agreement to join bondholders in GMAC LLC’s $38 billion debt swap. The 10-member GM bondholder committee overlaps with the GMAC group, including San Mateo, California- based Franklin Resources Inc. and Fidelity Investments of Boston, said a person with knowledge of the situation who declined to be identified because the members haven’t been publicly announced.

“We’re just not good committee members,” Bill Gross, Pimco’s co-chief investment officer, said in an interview yesterday from his Newport Beach, California-based office. “We have the interests of our clients more at heart than the interests of particular corporations or even the government, I guess, so it’s best that we simply look at the situation from afar as opposed to from inside.( GET IT. HE HAS NO INSIDE INFO. )”

The withdrawal means Pimco may gain less information from other investors or have a smaller influence in talks with Detroit-based GM, which needs to cut two-thirds of its $27.5 billion in unsecured public debt. GM is negotiating with the committee of creditors as part of a government bailout of the biggest U.S. carmaker.

Reducing Debt

GM is attempting to reduce debt to avoid bankruptcy as the economy sinks deeper into a recession. Pimco’s resignation from the committee may not hamper GM’s restructuring given that GM Chief Executive Officer Rick Wagoner said last week it was too early to say how GM would work with creditors to win their assent in slashing debt.

GM’s 77-year reign as the world’s largest automaker ended after it said today that 2008 sales fell more than 11 percent to 8.35 million vehicles. Toyota Motor Corp. recorded a 4 percent drop to 8.92 million. GM’s U.S. sales fell 23 percent last year, outpacing the 18 percent industrywide decline. The company has posted about $73 billion in losses since the end of 2004, the last time it recorded an annual profit.

Pimco pulled out of its agreement with a committee of GMAC bondholders to swap their debt for as little as 60 cents on the dollar. The exchange allowed Detroit-based GMAC, the main lender to GM dealers, to convert to a bank and obtain federal aid. GM sold a 51 percent stake in GMAC to a group led by New York-based private equity firm Cerberus Capital Management LP in 2006 for $7.4 billion.

Government Blessing

The decision by Gross, 64, initially raised concern the swap would fail to meet government requirements that 75 percent of the bonds be tendered. Without Pimco’s participation, 59 percent of the bonds were exchanged. Pimco is a unit of Munich- based Allianz SE, Europe’s largest insurer.

Pimco bet correctly that GMAC would get bailed out anyway because the government wouldn’t allow the lender or GM to collapse. The value of the firm’s holdings soared as much as 83 percent, to 80.5 cents on the dollar.

Members of the GMAC committee “probably felt shortchanged and rightly so,” Sean Egan, president of ratings company Egan- Jones Ratings Co., said in an interview from his Haverford, Pennsylvania, office. “There’s a variety of reasons why the other creditors would have cause for being upset with Pimco.”

Gross said he “can understand” how other committee members would be upset( YES ).

“All members of the GMAC deal basically agreed with each other that each member was able to, you know, go their own route in terms of decision making, so the fact that Pimco did I think would not have been an abrogation of the agreement,” he said.

Bullying Creditors

Gross told the New York Times last month he wouldn’t tender because Cerberus was trying to bully creditors to reduce their claims by as much as half. Gross told the Times he wanted Cerberus to put more money into GMAC. Pimco owned more than $340 million of GMAC debt as of Sept. 30, according to regulatory filings and data compiled by Bloomberg.

Such committees often negotiate with troubled borrowers to obtain the best terms in a restructuring for bondholders, who get repaid after banks and ahead of shareholders in a bankruptcy.

“The advantage of being on a committee is you can help guide the firm and have an active voice in the firm’s future,” Egan said. The disadvantage is holders on the committee may have trading restrictions imposed if they gain access to insider information( YES ), he said.

Pimco’s Holdings

Pimco is among the biggest holders of GM bonds, behind Franklin, Capital Research & Management Co. and Fidelity, Bloomberg data show. Pimco owns more than $138 million of the debt, according to Bloomberg data based on regulatory filings in September. Its largest holding is 39 million euros ($50 million) of GM’s 1.5 billion euros of 8.375 percent bonds due in 2033, according to Bloomberg data.

Those bonds, part of a $13.5 billion sale of dollar-, pound- and euro-denominated debt in 2003, closed today at 16 cents on the dollar to yield 51 percent, down from 73 cents on the dollar a year ago, according to Bloomberg data.

GM’s bonds have gained 1 percent on average this month, compared with a return of 4.7 percent for high-yield, high-risk securities, according to Merrill Lynch & Co. index data. On Jan. 12, analysts at JPMorgan Securities Inc. cut their recommendation on GM’s bonds to “hold” from “buy.”

Bonds rated below BBB- at Standard & Poor’s and less than Baa3 at Moody’s Investors Service are considered high-yield, or junk. GM’s senior unsecured debt is rated C by Moody’s, the lowest grade, and CC by S&P. As recently as 2005, the company had investment-grade ratings.

GM shares rose 3 cents to $3.53 in New York Stock Exchange composite trading today.

Beating Peers

Gross’s Total Return Fund, which outperformed 99 percent of its peers over five years, rose 4.8 percent in 2008, Bloomberg data show. Its peers, government and corporate funds, declined an average of 8 percent last year, according to Bloomberg.

The government provided $6 billion in aid to GMAC. Cerberus and GM must divest most of their ownership under the accord. GM received $4 billion in government loans last month through the Troubled Asset Relief Program after saying it would run short of operating cash by the end of 2008. It’s due to get an additional $5.4 billion this month.

With the release of the second $350 billion in TARP funds, approved by the Senate on Jan. 15, GM is scheduled to get $4 billion more in February. The automaker has to restructure its business and present a progress report to the Treasury Department by Feb. 17. The TARP program was originally designed to purchase bad mortgage assets, then later expanded to inject capital directly into troubled companies.

To contact the reporters on this story: Caroline Salas in New York at csalas1@bloomberg.net; Kathleen Hays in New York at khays4@bloomberg.net"

Here's my take on Salmon's blog:

"Let me take a stab at Pimco's decision. They are widely perceived to have taken a risky bet on the GMAC bonds and won out. Of course, this can also look like collusion, since Pimco is buying MBSs for the Fed, among other things. The GMAC business might someday be investigated because, among other things, I believe that Snow works for Cerberus. Even though I like Pimco and am a big fan of Gross, I suggested that they excuse themselves from the Fed deal as this big win on GMAC would bother some people.
Now, the reason that Gross gave for his GMAC position was that he was protecting his clients,so he held firm. He can hardly change his position now, and then win big again. It will look very bad.
Personally, I believe it makes good sense to bet on government intervention these days, and so Gross was smart with GMAC. But this entire GM and GMAC business has a real downside if it smells funny, so that I believe that Gross has to be consistent from here on in.

By DonthelibertarianDemocrat Posted: Jan 21 2009 2:15pm ET"

"Bill Gross’s decision to back out of a $38 billion bond swap for GMAC LLC debt is paying off "

My question about Pimco and GMAC has been answered:

"Gross Wins ‘Game of Chicken’ Shunning GMAC Debt Swap (Update1)

Email | Print | A A A

By Caroline Salas and Ari Levy

Jan. 9 (Bloomberg) -- Bill Gross’s decision to back out of a $38 billion bond swap for GMAC LLC debt is paying off for his Pacific Investment Management Co. investors now that the U.S. government has bailed out the auto and mortgage lender( THIS LOOKS BAD IF PIMCO IS PARTICIPATING IN BUYING MORTGAGES FOR THE FED ).

Pimco, manager of the world’s biggest bond fund, reneged on a Dec. 15 agreement to join an investor group participating in GMAC’s debt swap and ignored warnings that bankruptcy might follow. While holders led by Dodge & Cox accepted as little as 60 cents on the dollar to reduce GMAC’s debt, the bonds Pimco kept soared as much as 83 percent, to 80.5 cents on the dollar, after GMAC won approval to become a federally backed bank( COLLUSION ? ).

Gross, whose fund beat 99 percent of its peers in the past five years, won a bet that the U.S. wouldn’t allow Detroit-based GMAC to fail because its car loans were needed to prop up General Motors Corp. The government approved GMAC’s conversion to a bank on Dec. 24, giving it access to the Treasury’s $700 billion rescue program even though the debt swap didn’t get the 75 percent participation required by the Federal Reserve.

“It was a game of chicken,” said Sean Egan, president of bond ratings firm Egan-Jones Ratings Co. in Haverford, Pennsylvania. “Some investors benefited whereas others were harmed. They were harmed because they relied on information that was provided by the federal government, which proved to be inaccurate.”

GMAC’s $797 million of 7.25 percent notes maturing in 2011, which Pimco owned as of September according to data compiled by Bloomberg, rose to 80.5 cents from 44 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Holders who tendered those notes for cash got 70 cents on the dollar.

Ownership Stake

GM owned all of GMAC until the Detroit-based automaker sold a 51 percent stake for $7.4 billion in 2006 to a group led by Cerberus Capital Management LP( SNOW WORKS HERE ), the New York-based private equity firm. In 2007, GMAC financed about 75 percent of the inventory at GM dealers and a third of GM car buyers.

Soured subprime mortgages and plunging auto sales led to $7.9 billion of losses over the past five quarters, raising doubt about the lender’s survival. GMAC applied to become a bank on Nov. 20 so it could get access to federal rescue funds, and the bond swap was designed to help the firm qualify. GMAC said the Fed would reject its application if less than 75 percent of the debt covered by the swap was tendered.

While Pimco was part of the investor group that negotiated better terms and then agreed to tender $10.5 billion in debt, the firm never surrendered its holdings. Gross’s refusal to participate cast doubt on whether the debt swap would be completed, sending GMAC bonds down as much as 5.5 cents.

Relaxed Rules

Gross, 64, told the New York Times last month he wouldn’t tender because Cerberus was trying to bully creditors to reduce their claims by as much as half. Gross told the Times he wanted Cerberus to put more money into GMAC. Pimco owned more than $340 million of GMAC debt as of Sept. 30, according to regulatory filings and Bloomberg data.

Only 59 percent of the bonds were tendered. Instead of allowing GMAC to fail, the government relaxed its requirements for the debt exchange and provided $6 billion in aid, saying that the lender’s collapse must be prevented to protect GM, the biggest U.S. automaker, and the nation’s economy. Cerberus and GM must divest most of their ownership under the accord.

“The government said that they needed X, and when push came to shove they were willing to settle for a lower number than X,” Egan said. “Certain investors either through direct knowledge or through other means( COLLUSION ? ) were able to determine that the Fed was willing to bend its rules for bank holding companies.”

Bond Rally

Pimco, a unit of Munich-based Allianz SE, manages almost $800 billion in assets, including the $128 billion Total Return Fund. Led by Gross, the fund returned 4.8 percent last year, in the 93rd percentile among its peers, according to data compiled by Bloomberg. It returned an average of 5.4 percent over the past five years, in the 99th percentile.

Mark Porterfield, spokesman for Pimco in Newport Beach, California, declined to comment. Analyst Adam Rubinson of Dodge & Cox, who led the bondholder committee, declined comment.

“The bonds have rallied tremendously based on the fact they’ve received this federal support( TRUE ),” said Kathleen Shanley, an analyst at bond research firm Gimme Credit LLC in Chicago. “There’s improved odds they would be paid off at 100 percent. So, that would be better than people who had to make concessions” in the exchange offer, she said.

The cost of credit-default swaps protecting against a GMAC default has plunged since Dec. 24 to levels that indicate about an 18 percent chance of default over one year, compared with 45 percent before the swap, according to CMA DataVision in London.

‘Dumb Luck’

The upfront price of five-year credit-default swaps on GMAC have dropped 28.5 percentage points to 15.5 percentage points, CMA data show. That’s in addition to 5 percentage points a year and means it would cost $1.55 million initially and $500,000 a year to protect $10 million of GMAC bonds. Credit swaps pay the buyer face value in exchange for the underlying bonds, or the cash equivalent, if the company defaults.

Shanley recommends investors take advantage of the rally and sell because GMAC may continue to report losses and require more capital. Should GMAC fail, the guaranteed( YES ) notes issued in the exchange would rank ahead of the old notes for repayment.

“The company is in a much more competitive position for the long term as a result of the bank holding company approval,” said Gina Proia, a spokeswoman for GMAC. “We needed to execute the things we did in order to get the approval. Everyone is in a better position.”

Holders of notes that were ineligible for the exchange, such as individual investors who held about $14.6 billion of so- called SmartNotes, also gained from the deal. GMAC’s 7.5 percent SmartNotes due in 2017 climbed to 41.5 cents on the dollar from 15 cents before the conversion, Bloomberg data show.

They’re benefiting from “dumb luck,” said Egan of Egan- Jones. “GMAC is certainly out of the woods for the next 12 months. After that, it’s an open issue.”

I think that Pimco has to step away from buying MBSs for the Fed. I like Pimco and William Gross, but this could easily lead to accusations of collusion and conflict of interest. They made out in the GMAC bailout, and they should be happy with that.

"Did Pimco stay out of the tender offer to the end?"

Felix Salmon has this one covered:

"GMAC, the Fed, and Moral Hazard

The GMAC announcement on December 10 was quite unambiguous. The headline alone told you everything you needed to know:

GMAC Announces That the Results of Its Exchange Offers Are Insufficient To Meet Regulatory Capital Requirements To Become a Bank Holding Company

GMAC went on to explain:

The Federal Reserve has required GMAC to, among other things, achieve a minimum amount of total regulatory capital of $30 billion in connection with its application. In order for such condition to be satisfied, among other things, the estimated overall participation in the offers would be required to be approximately 75% on a pro rata basis. The Federal Reserve has informed GMAC that if GMAC is unable to meet these capital requirements, it will not approve GMAC's application to become a bank holding company.

As a result, GMAC extended its offer to bondholders until December 26, in what I thought at the time was a game of chicken between GMAC's bondholders and its majority shareholder.

On December 24, with the tender offer over in all but name, the Fed announced that it was going to allowe GMAC to become a bank holding company after all. It was clearly in close contact with GMAC: did it have inside knowledge that the 75% acceptance level had been reached? Or was the Fed's decision contingent on that happening?

Actually, it turns out that the Fed was happy to let GMAC become a bank regardless of whether or not the tender offer succeeded. In the game of chicken, neither the bondholders nor Cerberus( FORMER BUSH TREASURY SECRETARY SNOW WORKS THERE, AMONG OTHERS. I MIGHT OWE JAMES HENLEY AN APOLOGY. ) needed to blink, since the Fed simply climbed down from its previous stance( BAD NEWS ). Bloomberg reports today:

The Federal Reserve last week approved GMAC's application to become a bank holding company. GMAC said yesterday that the Fed's approval didn't hinge on the debt swap.

Yep, a 180-degree about-face from its stance a couple of weeks ago. Back then, it was crucial that the debt swap go through in order to get Fed approval; now, it really doesn't matter either way. ( KABUKI? )

It's actually worse than that, though. The Fed clearly spent a large amount of time approving GMAC's application to become a bank holding company: the order announcing the fact is 15 pages long, and densely-argued. But it looks very much as though the Fed delayed making the announcement until the bond exchange was all but over: it essentially conspired with GMAC to keep the decision secret so that GMAC could continue to threaten bondholders with the Fed's earlier statement and thereby get them to tender into the exchange( COLLUSION ).

Now the Fed is actually quite good at keeping secrets. But it's also very close to Pimco, which was the largest of the bondholders refusing to tender into the exchange as of December 10. Did Pimco stay out of the tender offer to the end( WHEN I SAW THIS STORY ABOUT PIMCO, I ACTUALLY THOUGHT THAT THEY WERE GOING TO TAKE A HIT. SILLY ME. )? Did they know or strongly suspect that GMAC would be allowed to become a bank holding company even if the exchange offer failed? Are they now essentially free-riding on all the bondholders who took the Fed's earlier statement at face value, and tendered into the exchange believing that the only other option was bankruptcy?( EXCELLENT QUESTIONS )

These are important questions, because this is not the last time that bondholders are going to be asked to give up money they're owed in order to save a company. In fact, a much bigger bond exchange is looming: one from GM itself( PLEASE DON'T TELL ME THAT ). And nowhere are moral hazard considerations more important than when it comes to the tactics of distressed-debt exchanges. If a bailout is coming anyway, then a smart bondholder will always stay out of any exchange. And if most bondholders are smart, then no distressed company can effect a significant debt reduction without declaring bankruptcy.( THIS HAS BEEN MY FEAR ALL ALONG )

The Fed has set a nasty precedent here -- one which will make it much harder for GM to negotiate effectively with its bondholders. The government is now so deeply invested in both GM and GMAC that it's hard to see how it won't blink a second time if and when bondholders refuse to go along with their debtor company's restructuring plans. Which raises the specter of the worst kind of bailout of all: one in which the primary beneficiaries aren't GM's workers and dealers, but rather its bondholders, who have been paid very well in recent years to take GM default risk.( ANOTHER EXCELLENT POINT )

There's one other option. GM is still current on its debt payments, which means it is allowed to buy up its debt at distressed levels in the secondary market. Since GMAC now has access to Fed liquidity, there might be some way in which it can start buying up those bonds and cancelling them. But even that would consitute a rescue of holdouts who don't sell at these levels and just hold on to their bonds.

This whole tale is really rather sordid -- as Henry Blodget says this morning, it even approaches the level of an illegal check-kiting scheme. I do hope that come January 20 we'll see no more deals like this one. But I'm not holding my breath, especially given that Tim Geithner must have signed off on this decision."

This is terrible news on so many fronts. I've said over and over that I'm a big William Gross fan. But if Pimco, which has already been hired by the government for various things, has just gotten bailed out from taking a hit, and if Gross were buying Toxic Assets or whatever for TARP, charges of Conflict Of Interest would surely have been raised( I do realize that such a scenario might not have led to this GMAC bailout at all. But who knows? ). Not only that, this automaker's bailout cannot be seen to be another financial sector bailout. Its only use is as a jobs bill, and a sign that the government is not engaged in cronyism. Oh, what am I saying? That's the main characteristic of the Bush Administration.

Here's Blodget on Clusterstock:

"Treasury GMAC Bailout A Fraudulent "Kiting" Scheme?

Henry Blodget | Dec 30, 08 7:36 AM

The Bush Administration seems determined to extend the US auto industry's life until January 21st come hell or high water. The latest sign of this desperation? The Treasury just bailed out GMAC with $5 billion of taxpayer TARP money that it doesn't really have ( IS THAT LEGAL? ).

NYT: The Treasury Department injected $5 billion into GMAC, the automobile financing company, as part of a deal announced Monday night that will let GMAC convert itself into a bank holding company to reduce its borrowing costs and thus borrow money at low rates from the Federal Reserve...

In shoring up GMAC, the Treasury resorted to using money from the Troubled Asset Relief Fund, the $700 billion rescue program for financial institutions that Congress approved in early October.

The Treasury had already allocated all the $350 billion that Congress authorized for the first half of the program. But even though the Treasury Department has not yet requested the second half of the money, officials said they could provide the financing to GMAC because they have not actually used all of the money allocated for recapitalizing banks.

Catch that? This sounds equivalent to writing $1,100 of checks on a checking account with $1,000 in it because only $900 of the checks have already been cashed. In the real world, this is called "check kiting," and it's illegal.

(Note also when the GMAC bailout was announced: After GMAC already had the money. Much harder for angry outsiders to reverse a decision like this than to stop it before it is made).

So will the Treasury now at least ask for the remaining $350 billion of the TARP to cover commitments it has already made, or will it try to pass that buck to Obama, too?"

Take a wild guess?

"Cerberus will be back to ask for more taxpayer dollars, and will continue to avoid responsiblity for repaying them. "

I have a different take on this than James Henley on Postive Liberty. I believe that the Automaker's Bailout is happening precisely to ward off posts like his:

"Not so widely reported in the auto bailout story is the link between Bush and principals of Chrysler owner Cerberus Financial Management. Amost immediately after stepping down as Bush’s Secretary of the Treasury, John Snow became chairman of Cerberus. Former Republican Veep Dan Quayle, who has been lobbying hard on this issue, runs one of Cerberus’s investment units. And Cerberus has just received a $4 billion loan from the government, thanks to Bush’s decisiont to tap the Troubled Asset Relief Program (TARP) funds. This decision is troubling on multiple dimensions.

First, the hint of crony capitalism just can’t be waved away by noting that Bush also made a loan, a bigger one, to GM. GM’s failure is a more serious issue than Chrysler’s by far, because it employs far more people, not just directly, but because of its larger production level, indirectly as well. And the death of Chrysler is not likely to be wholesale–the Jeep brand remains a valuable commodity that Cerberus could sell to recoup at least some of its loss, and thereby keep some of their production plants going.

Second, we once again see the president making decisions that bypass the legislative process and distort the purposes of legislation he himself has signed. The TARP money was authorized by Congress for the purpose of bailing out the financial markets. However good an idea it may be to also bail out the auto industry, the people’s representatives have chosen not to do so. But Congress’s decisions no longer matter to presidents. The evisceration of representative democracy continues apace, and we all collectively yawn as legislative power continues to shift away from the legislative branch to the executive branch.

Third, Cerberus may have gotten what they most wanted, the ability to avoid responsibility for the loan if Chrysler doesn’t survive. They originally asked for $7 billion, curiously similar to the $7.4 billion they paid Daimler to acquire Chrysler just last year. Although that was $30 billion less than Daimler paid for Chrysler nine years earlier, most observers still couldn’t figure out why Cerberus thought it was a good deal, even at the fire sale price. The amount Cerberus asked led to the suspicion that they were looking for the taxpayers to cover the upfront price of their bad business decision.

But that’s not the really bad part of it. One of the reasons Congress balked at giving Chrysler a loan was that Cerberus did not want to open their books. The suspicion remains that Cerberus’s coffers are capable of providing the funding needed, but Cerberus closely guards its figures and wasn’t willing to make them public in order to disprove that notion.

But that’s not yet the really bad part of it. Another reason Congress balked was that Cerberus wanted Chrysler alone to be responsible for repayment of the loan. That way, if Chrysler still went under, Cerberus would be wholly off the hook for the taxpayer money it begged for. A nice trick, if you can swing it, and it appears that Bush has allowed his former Sec Treas to do so. At least as reported so far, the details of the loan don’t hold Cerberus responsible for repayment. Yet again we see that Republicans, despite their long-standing claim, are not a party of fiscal responsibliity. If one group of them isn’t spending the public’s money like drunken sailors, another group of them will quickly step in to do so.

My prediction for the new year? Cerberus will be back to ask for more taxpayer dollars, and will continue to avoid responsiblity for repaying them. If only Carter had let Chrysler die 30 years ago."

The bailouts cannot be confined to simply a financial bailout. That already has plenty of charges of conflict of interest and cronyism. Many people see the Automaker's Bailout as a Jobs Bill, as opposed to a bailout of the employers. That is the reason the Fed and Treasury Department are working so hard to do something for the Automakers and Home Buyers. They need some Bailout money to effect the lives of Middle Class Citizens. Solely bailing out the Financial Sector will be perceived as Cronyism by Definition.

Also, if unemployment were to drastically rise after a failure to Bailout the Automakers, and bailing out the Financial Sector had failed to keep that from happening, that would be a disaster of enormous proportions for the Bush Administration.

By definition, the Big 3 are Bush Cronies in the minds of many people. That is why my bailout plan included replacing the management, even though their incompetence was more than enough reason. But the UAW and the auxiliary jobs associated with the auto industry are viewed as a Middle Class issue, and dearly important to some people, especially the ones who find the Financial Sector Bailout dubious.

The Cerberus connection should be investigated, in order to make sure that they did not receive special treatment in this bailout, but their power and connections with the Bush Administration are not enough to kill this deal. We are battling Deflation. Some people don't see that as a big deal, but I disagree. We do not know how to deal with deflation other than causing inflation, which is what we are trying to do now. Failure to bail out the automakers could be a second Lehman, and two Lehmans could send us into a Deflationary Spiral. Beyond a certain point, in order to get inflation, the result could actually be hyperinflation. We're not there yet, and we don't want to be.

This crisis has taxed all of our knowledge and expectations as it is. We cannot afford to move the battle to territory we have no real map or experience for. That could lead to not only economic, but social problems. Problems that this Burkean takes very seriously.