So just in case you’ve been living in a cave this week, Congress is struggling to figure out how to bailout the big three automakers. The House passed a bill which died in the Senate late Thursday night. The reports of the bill’s demise reached the White House where it was rumored the Treasury Secretary would be ordered to fund the bailout with monies under the TARP program.
TARP Money For Detroit
The initial TARP allocation was $350 Billion and Neil Kashkari was told this week by Barney Frank he wasn’t getting the second disbursement until Treasury forced mortgage servicers to modify defaulted loans en mass.
So this mean Hank and Neil are going to have to tally up how much they’ve spent and see if any is left.
If there is a few billion left, is it legal for Hank to use TARP funds to bail out non-banking institutions?
Well, first the bailout bill was written with such wide-reaching powers for the Secretary, he can do virtually anything he wants.
However, what most folks don’t know is all three automakers have significant financial service companies. For example, Ford has Ford Motor Credit. GM owns GMAC Financial, a huge financing company that operates lending divisions including the cable TV advertiser, Ditech Mortgage.
Just a few years back, GM made $1 Billion in a single year from just their mortgage lending, both commercial and residential, which just so happened to match the revenue that same year as their auto sales divisions.
Who would have ever guessed that GM could generate the same amount of revenues from mortgage lending as they did from building and selling cars?
GM is still in bed with Cerberus Capital Management as the major shareholder in GMAC and owns Chrysler. Cerberus is pushing for TARP funds as they started floating their option of putting GMAC in bankruptcy if they don’t get bondholders to agree to an exchange to raise the capital needed to qualify as a bank holding company.
(Supposedly Cerberus believes Hank can’t use TARP to bailout non-bank companies or “unqualified” bank holding companies….or they are just using this crisis as leverage to skin their bondholders…you be the judge.)
Either way, it was clear that the smart money for an automaker bailout would be on the Bush Administration and their man, Hank to solve the problem…not Congress.
And Maybe He Should
Originally I was siding with the Senate Republican’s who have simply had enough of poorly run car companies and championed their efforts to kill the bailout.
However, the more I looked into the “banking” tentacles the automakers have, the rationale for the original banking bailout holds true for the automakers…since the modern automaker is not so much automaker as auto, dealership, and real estate financier.
Dealbook.com reported it this way,
“Whatever happens at GMAC will ripple through the auto industry. The financing company provides loans to consumers for cars and to dealers for their inventories. General Motors, which retains a large stake in the financing company, said in its latest turnaround plan to Congress that it was counting on GMAC’s viability. Otherwise, G.M.’s financial problems, and its need for government assistance, could grow.
For G.M., any additional problems at the financing company would bring more pain for its dealers, who have long depended on GMAC to provide consumer financing and to carry its inventory. The automaker set up the unit in 1919 to help customers buy its cars.”
Dealers all over the country need GMAC to fund all those cars on the lots and they need access to those funds to help customers buy a new car too. Killing the bailout kills the financial arm of the automakers and subsequently, the dealerships. The bailout is to keep credit flowing and to keep the dealers in business. If we don’t keep the credit flowing, car buyers would be forced into the hands of the scared local banks.
That won’t work…
So, Hank go ahead and get out your check book…cut them a check for the $34 Billion Congress choked on.
You’ll be able find that small amount the cushions of the Treasury Department sofa, eh?