Friday, November 07, 2008

GM - Cerberus - Chrysler Bailout Bad for Taxpayers

Why the GM - Cerberus - Chrysler Bailout is Bad for Taxpayers

By Robert Farago

November 6, 2008 -"TTAC" - - [The following analysis was sent to TTAC by a New York City bankruptcy lawyer who wishes to remain anonymous. It's twice as long as our usual editorial, but I think you'll find it's well worth your time. Thanks to you-know-who-you-are.]

Cerberus Capital, a highly secretive NYC-based vulture investment fund, wants the U.S. government and taxpayers to bailout its failed investment in Chrysler and its failing investment in GMAC. Its partner in this raid on the US Treasury is General Motors, a woefully insolvent automobile manufacturer whose CEO is paid $40k each day. Here’s why a bailout for GM and/or Chrysler is a bad idea.


Cerberus Capital uses hedge funds as the vehicles in which to invest in various companies. Apparently, the hedge fund known as Cerberus Series 4 is the owner of an 80 percent interest in Chrysler and a related fund owns or controls a 51 percent interest in GMAC. Not surprisingly for a company known for its secrecy, Cerberus has not disclosed which entities actually own the interests in Chrysler and GMAC, has not disclosed what fees Cerberus has taken or accrued from its investments, and has not disclosed what severance payments would have to be made if GM actually acquired Chrysler. For example, would Chrysler CEO Bob Nardelli get another big payday if he’s cut loose in a merger? The interrelationships among GMAC, Chrysler Financial, Cerberus and other entities are also a well-kept secret.

Secrecy, Secrecy, Secrecy

Why is everything so secret? What happened to the idea of open government? A few questions come to mind:

1. Exactly what is the Cerberus/GM proposal to borrow $10b from the US Treasury in order to fund a merger, the terms of which are also secret? Is it in writing? Where is a copy? What were the proposed terms that were rejected by the current US Treasury? Is another proposal in the works? How is the $10b going to be repaid by two insolvent auto manufacturers?

2. Which lobbyists represented GM and Cerberus in getting their loan application before the US Treasury? How much were the lobbyists paid? With whom did GM/Cerberus meet? Where are the notes of any meeting or other communications about the loan proposal?

3. What do we know about the financial condition of the proposed borrowers? Where is Chrysler’s current balance sheet and income statement? Surely Chrysler is insolvent on an equitable basis, and probably insolvent on a balance sheet basis. Why is basic financial information not available for public inspection and comment?

4. Where are the financial statements for the Cerberus Series Four hedge fund? US taxpayers are being asked to bailout the failed auto related investments by Cerberus Series Four, while the profitable investments in the same fund are not being shared with taxpayers.

GM is woefully insolvent and should file Chapter 11

5. As of June 30, 2008, GM had total assets of $136b and total liabilities of $191b, a $55b deficiency. Thus, GM is insolvent. How can GM ever repay a $10b bailout, or any bailout for that matter? As of June 30, 2008, its current liabilities were $70b, dwarfing its current assets of $55b. Moreover, we do not know what deals GM has made to stretch/defer repayment of its account payables.

6. Is Chrysler in any better shape than GM? Probably not, but without a current balance sheet the definitive answer is a secret.

7. Assuming Chrysler is insolvent (liabilities exceed assets), then the equity interest of Cerberus and Daimler (the 20 percent equity owner) are worthless and these entities are not even entitled to a seat at the merger negotiating table. The real economic owners of Chrysler are its creditors and employees, who are also in the dark about the proposed US treasury bailout.

Who really benefits from a GM/Cerberus/Chrysler merger?

8. The US taxpayers can’t benefit since there is no repayment plan. Not surprisingly, Cerberus and its hedge fund are back door beneficiaries, because the 51 percent Cerberus ownership interest in GMAC will increase in value if GM and GMAC survive. Chrysler is a lost cause, but with the value of the Cerberus investment in GMAC also plummeting, Cerberus is trying to prop-up GMAC by helping GM survive. Is Cerberus pledging its equity interest in GMAC to the US Treasury as security for a government loan to GM? Why not? Is GM pledging its 49 percent equity interest in GMAC to secure repayment of any loan by the US Treasury? More secrets kept from the public.

9. The self-dealing by Cerberus extends to wanting to cherry-pick the Chrysler assets and keep the auto financing arm for itself. What is the value of the Chrysler auto financing business, and why should Cerberus benefit?

10. GMAC had negative net income of $3b for the first 6 months of 2008. GM’s ownership interest in GMAC was impaired by at least $2.7b during the same six month period, meaning that Cerberus Series Four hedge fund had suffered a similar loss in value in its investment in GMAC. Why should taxpayers bailout the millionaire investors in the Cerberus hedge funds?

More secrecy and lack of disclosure

11. Does GM plan to make any payments to GMAC, payments that directly benefit Cerberus? As vehicle residual values decrease, GM is obligated to make payments to GMAC under “residual support and risk sharing” agreements. On August 6, 2008, GM paid GMAC/Cerberus $646m, money which could have been used by GM to fund its ongoing operations and its obligations to employees.

12. Should any taxpayer money be used to fund payments to GMAC/Cerberus, whether that money is used directly or indirectly? How much, if anything is Cerberus investing in new money to prop up its investment in GMAC? If it is not investing in Chrysler or GMAC we can reasonably conclude that its analysis shows that the investment is a bad one. What’s bad for Cerberus is bad for the US Treasury.

Although it appears that the Cerberus Series Four has money available to make follow-on investments, it makes no sense to throw good money after bad if you can lobby the US Treasury to make the bad investment for you. A related question is whether the Cerberus equity interests in GMAC are going to be used as collateral for the loans that will be used (albeit indirectly) to bailout GMAC. Why should equity bear none of the risk but get all of the benefit?

More non-disclosure

13. What is Cerberus ResCap Financing LLC and who has seen its financial statements or the agreements relating to the $3.5b secured loan facility? How is this secured loan impacted by the bailout of Cerberus/GM/Chrysler?

Deepening insolvency is likely

14. GM’s current insolvency and continuing losses will trigger additional liabilities, and make it doubtful that GM will be able to make payments promised to employees and former employees or perform its labor agreements. GM’s worsening financial condition also deepens its losses from its derivative contracts. How would a GM/Cerberus Chrysler merger affect these liabilities? Will any government loans be used to reduce the $30b of GM accounts payable, or, in the event of a merger, to pay down Chrysler accounts payable in some still unknown amount? Sadly, we don’t even know what Cerberus proposed as the use of funds and we have no idea how Cerberus will benefit since we have no financial information on Chrysler or Cerberus.

15. As GM and Chrysler idle plants and facilities, more employees are laid off the employee related liabilities of GM/Chrysler will increase by hundreds of millions. Since GM and Chrysler are insolvent, who will pay these increased costs? Can any of these costs be avoided in a Chapter 11 case of Chrysler or GM?

16. Should taxpayer money be used, directly or indirectly, to pay GM and Chrysler obligations that are coming due while these entities are unable to pay from their own assets. Surely not, but what is being proposed, and who will benefit if GM debt is redeemed at par by vulture investors that bought the debt at pennies on the dollar? A related question: will any Cerberus entities benefit from government funded redemptions of auto maker debt? Is it possible that Cerberus is trading in credit default swaps and actually benefiting from the difficulties of Chrysler, GM and GMAC? Yet more items of non-disclosure on a long list of secret items.


17. GM, GMAC and Chrysler are not credit worthy and are unable to borrow money on any basis, secured or unsecured.

What’s Good for GM/Chrysler is a Chapter 11 Filing

18. GM needs to be restructured, which means it must change the terms of its legal obligations to suppliers, bondholders and employees. The only vehicle to accomplish the needed changes is Chapter 11, which lets GM reject unfavorable contracts, renegotiate its debt obligations, defer interest and principal payments and gives it time to fix its business. Without a chapter 11 filing a government infusion of $10b cash will be gone in six months when GM uses the money in 2009 to pay bondholders and employees billions of dollars, payments which do nothing to help GM survive.

19. Chrysler, the stepchild of a distressed debt vulture fund, is also a prime candidate for Chapter 11. But Chrysler should be liquidated, not reorganized. A liquidating Chapter 11 case, expressly permitted by the Bankruptcy Code, can be used to keep Chrysler operating while its divisions are sold. With adequate Chapter 11 funding line workers can keep their jobs and benefits, and non-essential executives can be fired at minimal cost to the Chapter 11 debtor, known as the debtor-in-possession. Trade creditors will continue to ship to Chrysler because their post-petition claims will have a priority in payment. Chapter 11 also lets the Bankruptcy Judge appoint an examiner to conduct an investigation into the financial affairs of Chrysler and its equity owners, and to sue to recover any improper payments. Chapter 11 will also make it clear to Daimler and Cerberus that their investment is worthless and they will not be able to use their position of control to improperly benefit.

20. Cerberus should acknowledge the financial reality and either file a Chapter 11 case for Chrysler or have a federal receiver appointed so that the value of the Chrysler assets can be maximized in an orderly sale procedure. The US government should fund the Chapter 11 case and keep Chrysler operating by giving Chrysler a debtor-in-possession loan having seniority over all other liabilities of Chrysler, thereby assuring taxpayers that the money will be repaid out of the proceeds of asset sales. The US could also give a senior secured loan to GM to help GM acquire assets from Chrysler, but this would require the cooperation of bondholders, cooperation not likely to be forthcoming. On the other hand, if GM is in Chapter 11 then the government could refinance the GM operations without fear that taxpayer money would be diverted to pay existing creditors.

Wednesday, November 05, 2008

Last Champion of Financial Deregulation

Gordon Campbell,
Premier Campbell: radical among peers? The crash should have killed TILMA.
By Murray Dobbin

In the midst of the financial meltdown, one man, apparently, stands alone calling for more deregulation. While anti-government George Bush buys up banks and insurance companies, former Fed chair Alan Greenspan admits he was "partially wrong" in his hands-off approach towards the banking industry, and the crisis has caused right-wing French President Sarkozy to virtually denounce capitalism.

Yet, while everyone else is demanding the rogue financial industry be brought to heel, B.C. Premier Gordon Campbell is actually pushing for even more financial deregulation right across the country.

That would seem to be the only logical interpretation of his call at the premiers' meeting in Montreal to get every province signed on to his pet project, the Trade, Investment and Labour Mobility Agreement, or TILMA. Campbell claimed this would help counter the economic slowdown. But what TILMA does is make a broad range of government regulations vulnerable to challenge, including regulations over the financial sector.

How TILMA ties regulators' hands

Among other things, TILMA has a standstill clause so that any new regulations on financial services that got in the way of investment would be a violation, potentially subject to a $5 million penalty. Article 5(3) of TILMA states: "Parties shall not establish new standards or regulations that operate to restrict or impair trade, investment or labour mobility."

Existing financial regulations will also be open to challenges under TILMA if they restrict investment. And unlike other trade agreements, there is nothing in TILMA to exempt regulations designed to ensure the stability of the financial system. In stark contrast to other agreements, TILMA has no safeguards to protect prudential regulations from challenges by investors.

TILMA does allow governments to do things that are inconsistent with the agreement if they are pursuing objectives the agreement defines as legitimate. But nowhere on TILMA's list of "legitimate objectives" is anything about safeguarding the soundness of financial institutions.

Right now, just Alberta and B.C. are TILMA signatories. The Yukon recently said no, as have all other provinces either by act or omission. Most seem to have decided the agreement is too radical -- an ideological solution looking for a problem. But despite repeated rejections, Campbell continues to push his fellow premiers to join. It makes him the most determined deregulation advocate among the premiers.

Anyone not blinded by laissez faire theology can see the agreement for what it is: the most radical investment agreement in existence. Article 3, "No Obstacles," states unequivocally: "Each Party shall ensure that its measures do not operate to restrict or impair trade between or through the territory of the Parties, or investment or labour mobility between the Parties." Period. You cannot put up obstacles to investment, which is arguably what every government regulation does by definition.

Learn from Quebec's narrow escape

So what would happen if other provinces accepted Campbell's sales pitch and signed on? Take for example Quebec, and its recent moves to regulate the financial sector. In July, Quebec gave royal assent to Bill 77, the Derivatives Act, which establishes a broad legal framework specifically aimed at regulating derivatives traded in Québec. Québec is the first province to take on the regulation of these investments, the most toxic of any of the financial "innovations" unleashed on the world over the past 10 years. Warren Buffett refers to derivatives as "financial weapons of mass destruction."

But Quebec's laudable efforts to get some control over these risky financial products would have been impossible if the province had signed TILMA. Its regulatory initiative on derivatives would have broken TILMA's rules: that governments cannot introduce new regulations that restrict investment; that they have to reconcile their regulations with those of other parties to the agreement; that they cannot create obstacles to investment.

As of April 1, 2009, all existing B.C. and Alberta regulations over financial institutions and products will be challengeable under TILMA -- never mind these provinces ever trying to introduce new financial reforms. What about other provinces that might hopefully follow Quebec's lead in strengthening financial regulation? If they sign TILMA, they might as well forget it, as they would in effect be setting their own regulations up for a legal challenge.

Who says the Washington Consensus is dead? It is being defended by deregulation's last crusader, Premier Gordon Campbell.

Related Tyee stories:

Vancouver Joins Towns Spooked by TILMA
Council wants more info on trade pact.

'Very Big Teeth' Threaten Campbell's Green Ambitions
TILMA trade agreement would penalize his plans.

Trade Debate Libs Don't Want
Talk of TILMA deal censored in the leg. But not here.