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How to get a bailout: become a bank!

I was surprised at how little coverage there has been about General Motors (GM) clever way of getting a US Government bailout by becoming a bank.

Over the quiet holidays GMAC Financial LLC, GM's car finance business, officially converted itself into a bank.  As a result, they got $5 billion of the TARP funds through the US Treasury buying their preference shares, plus a further $1 billion loan. 

They also completed a $21.2 billion debt for equity swap last week, although that fell well short of the $38 billion they hoped to get.

No worries as the Treasury thinks GMAC is a bank, so there's more funding there if needed.

The last time I blogged about GMAC was to say that they'd sold Bradford & Bingley (B&B) a pup in the form of their toxic mortgage book.   Well, that one proved true as B&B has since disappeared, with the UK Government absorbing all that toxic debt and Santander taking B&B's nice customers and deposits as a result.

Apparently, GMAC is now offering tasty 4% CD's in the USA, well above the usual 2.66% national average, to attract consumer's deposits.

What would concern me here however, is how stable is this bank?

Does that matter, some would ask, as the Treasury and FDIC (Federal Deposit Insurance Corporation) will help out.

For example, the FDIC sent out a nice press release last Friday about another failed bank, IndyMac, that shows the way forward: "FDIC Board Approves Letter of Intent to Sell IndyMac Federal".

IndyMac was the distressed bank the US Government seized last July, before everything hit the fan.

The good news is that the FDIC has now lined up an impressive array of private equity buyers – including Michael Dell, George Soros and J. Christopher Flowers – to buy the remains of the failed bank.

The bad news is that the FDIC estimates the cost to their insurance fund of dealing with IndyMac has cost between $8.5 to $9.4
billion, roughly one-quarter of the $38
billion the fund had on its books at year-end 2008.

I wonder how much the GMAC Bank would cost if that one fails …

… meantime, on the other side of the pond, the UK has troubles as The Telegraph reports
that Gordon Brown's bailout for the banks isn't working. 

Yes, that's
the bailout that everyone copied, which involves buying shares from
banks and giving them loans. 

The one the US Treasury has just used by buying preference shares in GMAC.

The Telegraph states that there is a "a shower of evidence" that the bailout is failing, as banks
have not increased lending or passed on interest rate cuts.

"What do we do now?" ask Mr. Brown and Mr. Darling.

One option being rumoured is that "the Treasury plans to focus on state-backed guarantees to encourage private
finance".  Is so, I'd be delighted as that is the solution proposed late last year in my Parliamentary briefing paper (mail me if you want a full copy of this paper).

Alternatively, another rumour is to create a toxic bank. where toxic assets can be exchanged for government bonds  … that sounds like just what the US has created with GMAC bank.

About Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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