Watchdog: GMAC bailout could cost taxpayers $6.3B

WASHINGTON (AP) -- The Treasury Department sank billions into auto finance giant GMAC Inc. without an exit strategy or proof the company was viable -- a decision that could cost taxpayers $6.3 billion, a new watchdog report says.

The government said the $17.2 billion bailout was a necessary step to save troubled automakers General Motors and Chrysler. GMAC provides critical financing to auto dealers, who borrow to finance their fleets until the cars can be sold to consumers.

Yet GMAC faced far fewer conditions than the bailed-out automakers, the report says. When the automakers were rescued, they were forced into bankruptcy. Shareholders lost their investments, creditors took a hit and executives were forced to detail plans for making the companies viable.

GMAC was treated more like banks that received bailouts without having to explain what they were doing with the money, the report says.

The report was released Thursday by the Congressional Oversight Panel overseeing the $700 billion financial bailout that Congress passed in October 2008.

AUGUST 2009 Taxpayers Face Heavy Losses on Auto Bailout. The Congressional Oversight Panel recommends the Treasury Dept perform a legal analysis for providing TARP funds to (1) GM, (2) Chrysler Motors, (3) their financing arm.

BIGGER QUESTION---WHERE IS THE MONEY? Americans have yet to learn the full extent of official corruption, thievery, schemes and scams involving $TRILLIONS of tax dollars aided and abetted by the dupes on Capitol Hill.

THE WHIFF OF MADOFF J, Ezra Merkin---ousted head of GMAC (GenMotors financing arm)---got a $6 Billion taxpayer bailout---and was also feeding hundreds of millions to jailed money launderer Bernie Madoff from Merkin's four offshore investment vehicles.

BAILOUT SWILLERS Stephen A. Fineberg's private equity firm---Cerberus Capital Management LP--- owns Chrysler Motors. The US Treasury bought a $5 billion stake in GMAC (GM's financing arm), and lent $1 billion to GM. This latest loan is IN ADDITION to the $13.4 billion the US Treasury lent earlier to Merkin's GMAC, and Fineberg's Chrysler.

SWILLING TIMELINE In 2006, GM sold 51% of Merkin's GMAC to Feinberg's private equity firm Cerberus Capital Management LP (which also owns Chrysler).

HOGGING AT THE PUBLIC TROUGH In May 2004, Feinberg's "private investment group," Cerberus Capital Management, LP became majority owner of IAP Worldwide Services, Inc, one of the US Army’s largest contractors in Iraq. In Afghanistan, Feinberg's IAP runs a drug/addiction center" in Kunduz---Kunduz is the largest opium supplier in the world. BUSY LITTLE BEAVER IAP also provides infrastructure support for the British Ministry of Defence in Kandahar....apart from supporting the US Army in Basra.

BAILED OUT AND STILL SWILLING Stephen A. Feinberg's IAP also serves a broad array of federal clients including the US DOD, NASA, the US Geological Survey, the US Agency for International Development, the IRS, and a variety of other federal agencies.

BACKSTORY GMAC's Merkin and Chrysler's Feinberg paid the Israeli govt $500M to buy Bank Leumi. An “inside” deal not just anybody could get. Bank Leumi looms large in the missing billion dollar bailouts since Israel is the only place in the world where an individual can fly-in, go to a bank with a suitcase full of cash, and nobody asks where they got it, or whether taxes were paid on it.

======================================= REFERENCE Treasury Dept officials have acknowledged that most of the $23 billion provided by the Bush administration is likely to be lost.

Bush should have refused to do it (there was $15B fund already appropriated and committed but unspent - for "greening" of the auto industry - that should have been used) and could help convince the management of both companies to file for prepackaged bankruptcy, which would allow both companies (and maybe Ford, as well) to restructure their debts and union and pension contracts, reorganize and emerge far stronger, without taxpayers losing a dime. Now he is (rightly) being blamed by media and Democrats, who at the time demanded the auto companies bailout, for wasting taxpayers money.............

The report also recommends the department perform a legal analysis of its decision to provide TARP funds to GM and Chrysler, their financing arms and many auto parts suppliers. Some critics say the law creating TARP didn't allow for such funding.

DID YOU KNOW? TARP was not designed to be a pool of money available for bailout of just anything that didn't move, like a couple of bankrupt unionized companies in the automobile industry. It was very specific in its purpose to provide liquidity to frozen banking and financial system and stave off the run on the banks (attack on the financial system, by proxy) and allow the 'netting' of the [frozen] assets on the books of financial institutions, in the aftermath of fall of Lehman Bros and run on trillions of dollars in the money market funds in the consequent "breaking the buck" by Reserve Primary Fund managed by Bruce Bent.

Ezra Merkin Relationships Map (interactive at web site)

NOTE: In the Merkin relationship map, Daphne is his sister.

THE MERKIN STORY J. Ezra Merkin lives in a posh duplex at 740 Park Ave, Manhattan, known as the richest address in NYC. Merkin is the son of the late Hermann Merkin, a lion of Jewish philanthropy who gave millions to help build Yeshiva University, the Fifth Avenue Synagogue, and NYC's Merkin Concert Hall. Merkin's father was a director of the Israel Discount Bank of New York......the bank US investigators investigated for money laundering fraud.

MERKIN'S CAYMAN ISLAND HEDGE FUND As GMAC chairman, J Ezra Merkin ran hedge funds as a sideline and was feeding funds into Madoff's operation (and pocketing hundreds of $millions in fees)-----Merkin's name is connected to 1) Ariel Fund, based in the Cayman Islands (an infamous money laundering haven--a partnership between Merkin and London's Fortis Bank), (2) Ascot Partners, (3) general partner of Gabriel Capital LP, a $5 billion family of hedge funds, and, (4) managing partner of Gotham Capital.

MERKIN BIO Jacob Ezra Merkin (born 1954) is an American money manager, financier, and philanthropist. He served as the Non-executive Chairman of GMAC until his resignation on January 9, 2009, at the insistence of the U.S. government.

He is the general partner of Gabriel Capital LP, a $5 billion family of hedge funds.

On April 6, 2009, Mr. Merkin was charged with civil fraud by the State of New York, for "secretly steering $2.4 billion in client money into Bernard Madoff's Ponzi fraud without their permission."

Merkin is the son of Hermann Merkin, a prominent banker, philanthropist, and author, and Ursula Merkin. He is the brother or Daphne Merkin, a writer. He is married, and the father of four children.

Merkin attended Ramaz, an Upper East Side Modern Orthodox prep school, two yeshivas in Israel, then Columbia University and Harvard Law School.

He briefly worked for the law firm Milbank Tweed. But in the early 1980s he moved on to Wall Street finance, his father’s business, working at a hedge fund run by Alan Slifka, his father's friend.

There he met Joel Greenblatt, who founded Gotham Capital in 1985, where Merkin worked as an analyst until 1988. “It’s very, very difficult for Ezra to make decisions. He worried about the big picture, fretted over allocations. His gift was that he was a world-class salesman. He recognized that many people didn’t have (investment decision) confidence, that if people had confidence in him, then he could give them confidence,” said one money manager who worked with him over the years.

In 1995, he paid $11 million for an apartment at 740 Park Avenue, an 18-room duplex formerly owned by Ron Perelman, a member of his synagogue. In 2003, he began to collect 12 Mark Rothko paintings, the largest private collection in the world, worth an estimated $150 million.

In 1988, Merkin started Gabriel Capital to raise capital, and funnel it to managers in exchange for a fee.

By 1992, Merkin was raising money and co-managing securities with and for Stephen A. Feinberg, a manager whose private-equity firm Cerberus Capital Management, later bought controlling shares in Chrysler (80%) and GMAC (51%, at a cost of $ 6.4 billion), the financing arm of General Motors.

Merkin invested his funds into Cerberus and its portfolio companies. His Gabriel fund invested $79 million in Chrysler, $66 million in GMAC, and $67 million in Cerberus partnerships, according to year-end statements. On March 30, 2009, it was announced that Cerberus would lose its controlling stake in Chrysler.

Merkin manages Ascot Partners LP, a hedge fund which was valued at $1.8 billion prior to the collapse of Bernard L. Madoff Investment Securities LLC.

GMAC should not have had any funding under TARP or TALF, period. It was not a real bank, it was a supply-chain part of GM and Chrysler auto financing pipeline, separated for legal and financial purposes. It was not vital to auto sales financing (which could be accomodated by any regular bank) and certainly, its problems were not tied to the issues of acute liquidity and frozen credit markets which is what TARP / TALF programs were designed to solve. This was done only to help sales at bankrupt GM and Chrysler, instead of restructuring them properly to fit the market - in other words, more support of union jobs at taxpayers expense.

GMAC only "converted" to commercial bank status to get these "loans" - it didn't suffer from illiquidity, it had problems with broken (auto-based) business models and bad a lousy credit rating, so it had no real collateral assets.

With operations in about 30 countries, GMAC offers financing to General Motors (GM) and Chrysler dealerships and their customers. GMAC is also one of the largest mortgage issuers and servicers in the US through its Residential Capital (ResCap) subsidiary. GMAC Insurance offers vehicle service contracts and coverage of GM dealers' inventories. Its commercial finance arm offers financing to middle-market businesses, as well as factoring and accounts receivable financing. GMAC was founded in 1919. The company was not included in GM's 2009 Chapter 11 bankruptcy filing.
In 2006 a group of investors led by Cerberus Capital Management bought 51% of GMAC from GM, which retained a 49% stake. Citigroup, Aozora Bank, and PNC Financial Services were also in on the deal, which raised more than $7 billion for cash-strapped GM. Three years later, GM temporarily upped its stake in GMAC to 60% using proceeds of an $884 million loan from the US Treasury to increase its equity in the lender. (In order to exceed the ownership limits set by the 2008 Treasury agreement, any stakes above 10% will be placed in a fund overseen by an independent trustee.)
With the threat of a junk credit rating by two leading rating agencies looming (GMAC had been downgraded because of its beleaguered parent), the company in 2006 sold a 78% stake in its commercial mortgage operations (since renamed Capmark Financial) to a private equity group consisting of Kohlberg Kravis Roberts, GS Capital Partners*, and Five Mile Partners. With heavy losses, a lackluster product mix, waning market share, and stiff competition, the added headache of a downgraded credit rating sent GM hunting for other ways to fund its sprawling operations.
To insulate its residential mortgage operations from the credit rating woes of GM, GMAC restructured its residential mortgage operations under a new holding company - ResCap - in 2005 to garner a more positive stand-alone credit rating, apart from its junk-rated former parent. The move, however, did not make GMAC immune to the deflating mortgage market and in 2009 the company sold ResCap's real estate brokerage, franchising and relocation business to Canada's Brookfield Asset Management. The company also laid off 5,000 ResCap employees, or 60% of its workforce, and closed some 200 offices.
The slashing of its mortgage operations came after the company's efforts to restructure its North American auto finance business. The company streamlined this sector by consolidating its business offices to five regional centers and cut back its workforce by nearly 1,000 people, which represented a 15% reduction. It also announced it would limit auto loans to consumers with credit scores of 700 or above in the US and ceased originating auto loans in nearly 10 European countries. The company then began scaling back its vehicle leasing program after suffering losses in its US leasing operations caused by softening of demand and declining sales in the used car market (where leased vehicles go after their contracts are up).
Later in 2008 GMAC converted to a bank holding company structure in order to gain access to funds made available by the US Treasury as part of its $750 billion bank bailout; GMAC received $6 billion in aid.
In 2009, the still-troubled GM received additional aid from the government along with the condition that debt and labor costs be cut. Within days, GMAC reinstituted its subprime lending, offering loans to borrowers with credit scores lower than 620, and eased financing charges for US auto dealers. The changes were intended to ramp up auto sales and to help auto dealerships hit hard by the industry slump to stay afloat.
When those measures proved to be not yet enough, the Treasury - which determined GMAC lacked sufficient capital - announced another $7.5 billion to be injected into the company. The funds were meant to shore up GMAC's balance sheet and fuel lending for both GM and Chrysler vehicles after the company agreed to provide financing to Chrysler dealers and customers as part of a government-backed restructuring of the bankrupt automaker. The government also gave GMAC access to its debt guarantee program, despite its low ratings, giving the lender an advantage over other auto finance companies.
With the $13.5 billion in aid, the US government took an equity stake of 35% in GMAC. The company then converted from a limited liability corporation to a corporation, which gives GMAC the option to take itself public through an IPO when it is strong enough to operate without government assistance, which continued in late 2009, when the Treasury purchased nearly $3.8 billion worth of additional securities from the company.
To raise additional capital, the company sold GMAC Insurance's consumer property/casualty business, including auto, commercial fleet, and recreational vehicle coverage, to property/casualty insurer AmTrust Financial Services in 2010.
In a move designed to distance itself from GM, GMAC Bank was renamed Ally Bank. GMAC management hopes that the new moniker will help it raise cash through retail deposit growth.

For recent debacle with ResCap see http://www.freerepublic.com/focus/news/2460977/posts?page=431#431

*GS Capital Partners is the private equity arm of Goldman Sachs Group.
Five Mile Capital Partners LLC is an alternative investment and asset management company established in 2003, with more than $20B under management.

GMAC was founded in 1919. The company was not included in GM's 2009 Chapter 11 bankruptcy filing. GMAC should not have had any funding under TARP or TALF, period. It was not a real bank, it was a supply-chain part of GM and Chrysler auto financing pipeline, separated for legal and financial purposes.

It was not vital to auto sales financing (which could be accommodated by any regular bank) and certainly, its problems were not tied to the issues of acute liquidity and frozen credit markets which is what TARP / TALF programs were designed to solve.

This was done only to help sales at bankrupt GM and Chrysler, instead of restructuring them properly to fit the market - in other words, more support of union jobs at taxpayers expense. GMAC only "converted" to commercial bank status to get these "loans" - it didn't suffer from illiquidity, it had problems with broken (auto-based) business models and bad a lousy credit rating, so it had no real collateral assets.

Amen. Thanks for the post.

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