Bleed 'em and Bail: GM's MO Exposed

Forget what the folks at GM are telling you about declining market share and foreign competition. That's only half the story.

GM's financial arm, GMAC, and the bankers behind it, are the primary reason for the downfall of GM's production arm.

From its inception, GMAC has been bleeding GM dry AND facilitating its abysmal business decisions, and in turn its downfall.

Now, GMAC's principal benefactors are protecting their assets by bailing out before the ship sinks.

The finance unit is by far the most profitable operation at General Motors, producing net income of $2.8 billion in 2005, while GM as a whole reported a loss.

GMAC's mortgage business became its primary profit driver last year, producing $1.4 billion in earnings compared with $1.1 billion from auto finance.

Could it be because the Fed raised interest rates 15 times in the last 21 months? And this doesn't include the money GMAC sucks out of GM in interest on operational loans.

Still, GMAC's operations have been hampered since GM's debt got cut to "junk bond" status by the major debt-rating agencies, a move that raised GM's cost of raising capital.

A sale of a majority stake in GMAC is seen as the surest way to restore its investment grade rating, while at the same time providing a cash infusion for GM's embattled auto operations.

That's a LIE. In the short term, sure the sale of GMAC will bring in a few dollars. But in no time, the auto division will be reeling from increased interest payments, with no possible way to recover.

"Although the sale [of GMAC] raises liquidity, it is the last valuable non-auto asset in GM's portfolio, increasing the risk of investment in GM's equity," Merrill Lynch analyst John Murphy wrote in a research note.

"The sale of GMAC is a tremendous drain on GM's earnings power," he added.

In the long run, auto sales at GM will continue to drop, and eventually it will have to close down.

What this sale does accomplish, however, is it legally separates the profitable GMAC assets from the failing GM operations such that the former CANNOT be reached in bankruptcy. And THAT, my friends, is the primary motivator behind this transaction. Everything else is smoke and mirrors.

It's the master plan for both GM and Ford.

Ford Credit Canada Ltd., a subsidiary of Ford Motor Co., says it has sold a number of its auto loans for $1.2 billion Cdn.

Parent firm Ford Motor Credit is one of the largest auto finance companies, with about 14,000 employees and $150 billion US in receivables.

Thursday's sale is part of a streamlining of Ford Motor to focus on its core automaking business. [LIE - part of the MO - freeing it from bankruptcy liability]

Indeed, this has been the modus operandi for creditors as far back as the 80's, during the Chrysler crisis. The following excerpt, from Moritz and Seaman's Going Broke: The Chrysler Story, illustrates.

For the most part, banks had not been all that interested in Chrysler while it continued to pay its interest and principal on time . . .

[Then, Chrysler's Senior financial officer,] Greenwald dropped the final bomb when he asked Steve Miller [then Chrysler's assistant treasurer (now, CEO at Delphi)] and a Los Angeles bankruptcy expert . . . to explain the details of a ten page "Memo for Liquidation."

The tersely worded memo [dealt] a blow to . . . the company [folklore] that the assets of Chrysler Corporation and Chrysler Financial were seperable in a bankruptcy.

The bankers were told that the situation was so complex that both the parent company and the subsidiary would tumble into the same barrel.

* * *

That, together with the expectation of a payoff as low as ten cents on the dollar for loans extended to Chrysler Corporation, shattered the bankers' decorum. The banks desperately wanted to seperate Chrysler from CFC so that the former can be pushed into bankruptcy without jeopordizing loans to the latter.

And history repeats itself.

Analysts said they welcomed the distance being created between GM and its financing arm.

[A] credit analyst . . . said the deal appears "to radically reduce bankruptcy risk for GMAC by removing it from the controlled group of GM ..."

"This is exactly what they needed to be delinked from GM. Their borrowing costs have got to be better -- they've got to be."

* * *

"For GMAC bondholders, they can wipe their brows -- for the most part they're out of the woods," said Gimme Credit's Lombard.

Lombard said even if GMAC does not get investment grade status, "this is still a great thing for GMAC bondholders."

But, it didn't do much for GM.

GM shares fell $1.13 to $20.14 on the New York Stock Exchange.

So, who are these lucky GMAC bondholders?

[A] consortium led by hedge fund Cerberus Capital Management LP . . .

Cerberus made its name as a distressed asset buyer and has grown to become one of the largest hedge fund traders and buyout firms in the world.

Sound familiar?

Fittingly, it took its name from the three-headed watchdog in Greek mythology that guards the gates of hell.

Very fitting, indeed.