GM won't go into bankruptcy

From one of my favorite publications The Economist this afternoon Two passages of interest:

IN DECEMBER, when GM secured a large slice of government bail-out funds to keep it alive, the giant car company was jokingly dubbed Government Motors. The company’s latest—and most sweeping—restructuring plan, announced on Monday April 27th, could make the joke a grim reality. GM had until the end of May to present proposals to persuade America’s government to release billions more of taxpayers' dollars to keep it from the bankruptcy court. GM believes it has done the job already with a plan that gives the government a 50% stake in the firm. Now the important deadline is May 26th, by when the company’s creditors are supposed to agree to a deal which treats them far less generously.

This my friends is why Rick Wagoner had to go. No CEO worth his golden parachute would have devised a plan such as this; this makes GM a ward of the state and essentially launders taxpayer dollars to be paid out to the UAW through dividends and the continuing support of taxpayer dollars.

Despite protestations from the White House that the government had no desire to own or run a big car company, the politicians may have little choice but to get involved, if the deal goes through in its present form. The alternative might be to cede control to the UAW, the second-biggest shareholder, which is hardly blameless for GM’s current parlous state. Rumours also abound that a similar deal to avoid bankruptcy at Chrysler would see the UAW take a 55% stake in America’s third-largest homegrown car company. If so, it is unclear whether further concession from unions, if they are needed at the two carmakers, would be easier or harder to extract.

Standing in the way of restructuring outside of the bankruptcy courts are GM’s aggrieved bondholders. GM wants holders of just over $27 billion in unsecured debt to swap it for a mere 10% of shares in the company. If debts cannot be cut by 90% then GM will file for Chapter 11 bankruptcy protection. Bondholders smell an unsavoury deal cooked up between the UAW and Barack Obama, who had the union's support in last year’s election. Early signs suggest that the bondholders may conclude that they will do better to hope for a bigger pay-out in bankruptcy rather than agree to a deal on these terms.

It may be that by announcing the proposals early GM has left time for renegotiation with the bondholders. But the ferocity of their initial disapproval suggests that small sweeteners will not persuade creditors to change their minds. Bondholders face the prospect of a small stake in a clapped out car company run by a union-friendly government with a zeal for green cars that may not have much of a market. With that as an alternative, a gamble in a bankruptcy court may seem quite appealing.

If I were a bondholder in GM, I would hold off and allow them to go into bankruptcy court. Of course, with the way that we saw the FEDS handle the transaction of Merrill Lynch to BofA, the question becomes will the FEDS hold the bondholders feet to the fire in their quest for a "green" car company.

Read the article here.

I believe that this video covers it all.



Video H/T to Iowahawk

Stress Tests and the Bank Situation

A good news piece from the WSJ this morning talking about the results of the Treasury's "Stress Tests" and how to handle the findings.

The Obama administration is considering making public some results of the stress tests being conducted on the country's 19 largest banks, said people familiar with the matter, a move that could help more clearly separate healthy banks from the weaklings.

Until now, the government has tried to treat all banks equally, pouring cash into both strong and struggling institutions to prop up the financial sector. The strategy has provided cover for beleaguered banks, which received funds along with their stronger brethren.

What the government has done through TARP and the capital injections has been to treat all banks that could be considered a systemic risk as though they all have, or might get the flu. The idea being that by inoculating all the banks with extra cash they will continue to lend.

This possible move, combined with first-quarter bank earnings and the push by some financial institutions to raise new capital and repay their bailout funds, could lay the groundwork for a new phase in the financial crisis. Within weeks, the stronger banks could emerge free of government shackles and flush with new funds, with weaker ones still reliant on federal largesse. That would transform how investors and the government view the financial sector.

Since announcing the stress tests earlier this year, the government hasn't made clear what, if anything, would be disclosed about the assessments. The Treasury originally suggested it would defer to individual banks to disclose results. But some regulators worried about banks selectively leaking information, causing a possible bias against rivals.

We should look at how these findings are released to investors, as we don't want to have a run on the weaker financial institutions. The truth is that we have signed up to support the flu-ridden banks until they get better. This is the fundamental problem with the intervention by the government. Banks that would have continued lending through the crisis and not over-leveraging themselves have been almost forced to over-leverage their balance sheets as the FEDS are forcing them to extend credit as a condition of the TARP funds. This is why the banks that are strong are doing everything possible to get out of TARP.

The stress tests were designed to build confidence that the nation's largest banks could weather a severe and prolonged economic downturn. Regulators are trying to determine how much assistance banks might need to continue lending in such circumstances. Banks that need more capital will get six months to raise it from private investors or take cash infusions from the government.

Banks not under the TARP protection will have an easier time raising capital than a large bank, like Citi, for instance. Investors know that the FEDS are in the capital injection game for the long-haul and are the lender of last resort. They should just drop the six months provision. They won't get the money from the market. We are trying to cure the flu with anti-biotics.

A senior U.S. Treasury official said the government will accept repayment of rescue funds from any institution whose regulator dubs it healthy enough to operate without federal capital.

The move to stop treating banks equally is sparking concern about the effect on specific institutions seen as weaker than peers. "You can create a run on a bank pretty quickly," said Eugene Ludwig, chief executive of consulting firm Promontory Financial Group and a former Comptroller of the Currency.

Of course you can create a run on a bank, just ask Chuck Schumer. However, I was under the impression that we increased the FDIC deposit insurance amount to $250,000 to prevent runs on the bank. What the government needs to do is make the "stress test" information available to the public so that they can choose what to do with their money.

Wayne Abernathy, executive vice president of financial institutions policy and regulator affairs at the American Bankers Association, said the government needs to provide information about the results but also protect examination data.

"I don't think they can ignore the appetite they have created for this information," Mr. Abernathy said. Having the government publicize some information would allow policy makers to control the message. "It's what can we say that is meaningful while still protecting the quality of that exam data," he said.

Mr. Ludwig cautioned that any information could give rise to mischief. "Bank exams are confidential for good reason," he said. "Given the kind of confidential information they contain, there is always the possibility of misuse or misinterpretation."

I fear that we will have some bad news come out of the release of the stress test results. Of course then again, the banks are lending free money so even a moron could make money, but we will see.

Goldman posts profit, will raise $5 Billion through stock offering to pay back TARP Funds

A news alert from the NY Times:

Goldman Sachs, the first of a string of banks to announce first quarter results over the next few weeks, also said it intends to raise $5 billion in common stock from the public. The bank said that new capital would help it return the $10 billion in government aid that it received last fall. Goldman will need approval from regulators to return the taxpayer capital.

In other news, an unnamed source within Goldman Sachs stated that the company was looking forward to running as far away from the Treasury Secretary as humanly possible.