Pass the sugar, please

By: PAUL JACKSON
January 6, 2009 11:04 AM CST

If you do nothing else today, I recommend taking a look at this, via the NYT’s DealBook. It’s becoming pretty clear that GMAC got a sweet deal in taking money from the government, despite efforts from lawmakers and regulators to suggest that the taxpayer handout came under duress and with onerous terms.

Consider:

Unlike other Treasury investments under the TARP, Treasury is not receiving warrants convertible into common equity of GMAC and so will receive no upside. Instead, the best Treasury can do on this deal is be paid back its investment plus interest. In addition, the 5 percent warrant value is below the 15 percent in value that other TARP recipients had to agree to and the program requirements specify.

That’s just for starters. The GMAC deal essentially gives the freshly-flush financier a competitive edge in free market government-controlled competition, too:

The day after the completion of the infusion, General Motors announced “Significant New Loan Financing as Low as 0% APR” and GMAC lowered its credit score for financing to 621, which is one point above what is generally considered a subprime loan. Both entities asserted that these new offers were made possible by the government bailout. Of course, the sales that G.M. reaps on the government’s financing subsidy will come at the expense of Ford and the transplant automakers. Notably, Ford has refused government funds so far and is now being penalized at taxpayer expense. How about them apples?

I’m not a huge fan of Ford, personally, but it has to hurt to decide to go it alone and then see a competitor blow by you in a government-sponsored ride. A Ford representative sent a tweet to me the other day noting that the company had increased its market share over the past three quarters and performed better than the rest of the Big 6 in sales during a literally HORRIBLE December (feel free to follow me over at Twitter via @pjackson). Worse yet, all of the taxpayer money now put at risk is likely to really be at risk, if you follow the reasoning of analysts like Christopher Whalen over at Institutional Risk Analytics.

Whalen thinks the infusion of fresh capital into GMAC changes little about the future outlook for a company that is literally bleeding cash:

At the end of Q3 2008, the $211 billion asset business was imploding, to put it generously. Revenue and assets were down from a year ago, and GMAC LLC showed an operating loss of $2.6 billion in Q3 and $5.5 billion for the nine months ended September 30, 2008. Add $6 billion in fresh TARP funds and you buy a couple of quarters more operating losses - maybe.

… As in the case of the conversions by Goldman Sachs, Morgan Stanley and American Express, the GMAC transformation into a BHC does not solve the underlying business issues that somebody, at some point in time, must address.

An emerging fiscal policy of strong market intervention, married with quantitative easing on the monetary policy side of the fence, will still likely have little power in the end to stop an entire financial market from operating otherwise rationally: in other words, home prices will correct, risk will be repriced, and well-managed firms will earn their way out of this mess. As Whalen notes, intervention ultimately won’t solve for poorly run companies that made bad choices; likewise, all the extra money in the world won’t stop banks from deleveraging, or home prices from reaching some semblance of balance in line with household incomes.

Yet it appears that such strong intervention and a willingness to flood the markets with capital just might help poorly run companies — and, yes, I think GMAC fits that bill — temporarily leapfrog past competitors that had until recently been seen regularly running past them in the open market. At least, until the run out of cash again. Ditto for the housing market, where a growing determination to stop foreclosures at all costs seems increasingly likely to confer below-market rates and better loan terms to the most troubled of borrowers, rather than to the healthiest.