Editorial: Chrysler Suicide Watch 47: Chrysler Financial Flames Out

Robert Farago
by Robert Farago

GMAC is a bank. It used to be a lender to both the car and mortgage industries. And not a particularly good one. Or, maybe, too good. Or just right if you were a sub-prime borrower looking for quick cash. GM owned all of GMAC, which was a cash cow. Right until it wasn’t. Just before the now-infamous sub-prime meltdown, GM was trying to cover-up its cash burn. So CEO Rick Wagoner sold a controlling share in GMAC to Cerberus, the same people who bought Chrysler. Flash forward to the waning hours of 2008. GMAC was about to fall into bankruptcy, dragging down Cerberus, Chrysler, GM and that funny-looking guy who used to be your landlord. So Uncle Sam stepped in—and how. The Fed relaxed its banking rules so that GMAC could become a bank, and, thus, hoover-up $6 billion worth of bailout bucks. After that, there’s some stuff about ending leasing, not lending money to car buyers, driving Chrysler and GM dealerships into C11, lending money to car buyers, etc. Up to speed? OK. So here’s the New Deal . . .

To facilitate its plans to turn Chrysler into a union co-op, the Presidential Task Force on Automobiles (PTFOA) wants to unload Chrysler Financial on someone. But who in their right mind would take ownership of Chrysler Financial NOW, when the automaker it supports is about to be turned into a union co-op (see: above) and married (con fucile) to an ailing Italian automaker? In the middle of a contracting new car market? That’s abandoning Chrysler in droves.

Actually, it’s worse than that.

Chrysler Financial is running out of money and has had to rely on $1.5 billion in loans from the federal government. The company also has a line of credit from several major banks, but the interest rate is so high that it cannot use the money profitably.

Furthermore, if Chrysler files for bankruptcy, a prospect that many officials say is highly likely this week, the banks can pull their lines of credit from Chrysler Financial.

Bottom line: no one wants this turkey, obviously. Except anyone who wants Chrysler to survive as a going concern, in one form or another. (Don’t look at me.) Make no mistake: if Chrysler Financial flames out, it will take the automaker down with it. Well, unless Uncle Sam comes to the rescue again.

Chrysler Financial afloat still remains critical to the company’s future, some industry and government officials said. A collapse of the financing arm could take down many dealers, which rely on short-term loans to buy the cars that sit on their lots. Chrysler sales could also grind to a halt as consumers struggle to get car loans. In the present environment, it would be difficult for dealers and customers to get financing from banks.

Luckily, the PTFOA has an idea. A wonderful, awful idea! Sell Chrysler Financial to GMAC. Hey, that was Cerberus’ plan all along, right? Combine GMAC with Chrysler Financial and strip and flip the rest? So, let’s do it! I said, let’s do it. And don’t worry: we got money. Or, more specifically, you got money. Which we gave you.

As Mr. Marley used to sing, four o’clock, roadblock. Now that GMAC is a bank, it falls under the purview of the Federal Deposit Insurance Corporation (FDIC), whose sworn task is to keep banks from doing really stupid things like . . . spending money it doesn’t have buying Chrysler FInancial (again ALSO owned by Cerberus). And the Fed, so forgiving and understanding back in late ’08, aren’t playing ball on this one.

Treasury officials have not yet obtained the agreement of the Federal Deposit Insurance Corp. and the Federal Reserve, sources said. The FDIC, created to backstop the banking industry, is balking out of concern that its resources would be drained in support of an auto manufacturer. And the Fed, which regulates banks, would need to grant a waiver from a long-standing rule that separates banking and commerce.

House of cards anyone? Or should I simply say, let the political arm twisting begin! I mean, continue. And I’m glad that PTFOA head Steve Rattner is a former investment banker, ’cause this one sounds like a real bitch to sew together.

Closing a merger between GMAC and Chrysler Financial would require an infusion of new bailout money from the Treasury. The company also needs access to an FDIC program that allows companies to borrow money at lower interest rates, sources said. And administration officials want the Fed to relax a rule that would restrict the amount of loans that the enlarged GMAC could make to Chrysler’s customers and dealers because both firms are owned in part by the same company, Cerberus Capital Management.

Not to be too much of a downer here, but this clusterfuck illustrates the fact that no matter how this shakes out, Detroit’s federal bailout is doomed to an extremely expensive failure. On our dime. Sigh. Chapter 7 would have been such a clean resolution . . . .

Robert Farago
Robert Farago

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  • Ronman Ronman on Apr 29, 2009

    well well well.... why do i have a feeling that things are so complicated to solve, that all of the collective autobanking sector are shooting in the dark and hoping that something sticks.... after all it's all up to the banks... let them start lending again and a whole waft of trouble can be avoided. i say fix the banks and everything else will ultimately fix itself....

  • Robert Farago Robert Farago on Apr 29, 2009

    amadorgmowner From the FRB (federal reserve board) re: the enforced extrication of Cerberus/GM from GMAC. When it approved GMAC LLC ("GMAC") as a bank holding company ("BHC") in December 2008 (the "December Order") (see the December 30, 2008 Alert), the FRB also discussed the necessary actions by the two principal owners of GMAC, entities controlled by or affiliated with the private equity firm Cerberus Capital Management, L.P. ("Cerberus entities"), and General Motors Corporation ("GM"), to avoid the Cerberus entities or GM themselves being deemed BHCs. The FRB has issued two interpretive letters, each dated March 24, 2009, to provide further detail on the necessary actions of the Cerberus entities and GM, respectively. Cerberus Entities. The interpretive letter relating to the Cerberus entities first lists the historical factors that create a BHC status concern for them: (1) ownership of 51% of the voting interests in GMAC, (2) having 5 GMAC board members, and (3) maintaining substantial business relationships with GMAC and its subsidiaries. To address the first of these concerns, the Cerberus entities would distribute a portion of those voting interests to unaffiliated investors, such that the Cerberus entities would own less than 25% of the voting interests in GMAC, and the unaffiliated investors would each own less than 5%. In the December Order, consistent with the FRB's 2008 Policy Statement on equity investments in banks and bank holding companies ("Policy Statement") (see the September 23, 2008 Alert), the Cerberus entities would hold less than 15% of the voting interests and 33% of the total equity in GMAC. In the interpretive letter, the Cerberus entities committed to own approximately 22% of GMAC's voting interests (and no other equity), which also is consistent with the Policy Statement. Moreover, in the interpretive letter the Cerberus entities committed that the co-investors would have unencumbered rights to vote and dispose of their shares, that there would be no voting agreements, and that Cerberus would not advise co-investors regarding the voting of shares. As to the second concern (GMAC director representation), consistent with the Policy Statement, the Cerberus entities would reduce their representation on the GMAC board to one director, and that director would not serve as Chairman of the Board or the Chairman of any committee. Any employee interlocks and advisory agreements with GMAC also would be eliminated. Finally, as to the third concern (business relationships), the Cerberus entities would limit their business relationships with GMAC to those maintained historically (largely lending related). The Cerberus entities also agreed to enter into passivity commitments similar to those historically approved by the FRB (modified to address the Policy Statement), which were attached as exhibits to the interpretive letter. GM. In the GM interpretive letter, the FRB addressed the additional concern that GM has controlled GMAC since the latter's formation, and GM and GMAC have been integral to each other's operations. Under analogous circumstances, the FRB has determined that the controlling company remained able to exert a controlling influence on the other even after a significant divestiture, and thus to avoid being deemed a BHC has required the controlling company to reduce its ownership below 5% of voting equity and only permitted the controlling company to maintain "minimal ongoing business relationships." 12 CFR 225.138. To address this concern while also recognizing the "unique circumstances surrounding the proposal by GMAC" and, perhaps, the more lenient stance of the Policy Statement, the interpretive letter permits GM to reduce its holdings to less than 10% of the voting and total equity of GMAC, and to transfer the remainder of its equity interest to a trust with an independent trustee. The trustee will be required to dispose of those shares within 3 years, and will have sole discretion to vote and dispose of the shares in the interim. GM also will have to treat GMAC as an affiliate for purposes of the FRB's affiliate transaction rules until GM, either directly or as beneficiary of the trust, owns less than 10% of the voting or total equity of GMAC.

  • Analoggrotto Kia EV9 was voted the best vehicle in the world and this is the best TOYOTA can do? Nice try, next.
  • 3-On-The-Tree 4cyl as well.
  • Luke42 I want more information about Ford’s Project T3.The Silverado EV needs some competition beyond just the Rivian truck. The Cybertruck has missed the mark.The Cybertruck is special in that it’s the first time Tesla has introduced an uncompetitive EV. I hope the company learns from their mistakes. While Tesla is learning what they did wrong, I’ll be shopping to replace my GMC Sierra Hybrid with a Chevy, a Ford, or a Rivian — all while happily driving my Model Y.
  • 3-On-The-Tree I wished they wouldn’t go to the twin turbo V6. That’s why I bought a 2021 Tundra V8.
  • Oberkanone My grid hurts!Good luck with installing charger locations at leased locations with aging infrastructure. Perhaps USPS would have better start modernizing it's Post offices to meet future needs. Of course, USPS has no money for anything.
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