bank run blog

The government has allowed GMAC, the financial services division of General Motors, to become a bank holding company in a bid to qualify for federal bailout assistance and thereby avoid an impending bankruptcy.

Originally founded as an auto financing operation for GM, GMAC branched out into credit cards and residential mortgages, with disastrous results. It now joins investment houses, insurance companies, and credit card firms in transforming itself into a bank to gain access to federal funds. The Associated Press reports :

“The Federal Reserve gave an early Christmas present to General Motors’ finance arm, allowing the ailing provider of auto loans to qualify for the government’s $700 billion rescue fund.

The Fed announced late Wednesday that it had approved GMAC Financial Services’ request to become a bank holding company. That designation makes GMAC eligible to receive a portion of the bailout fund and get emergency loans directly from the Fed. The plan also significantly reduces the ownership stakes of GM and Cerberus Capital Management in GMAC.

Analysts had speculated that without financial help, GMAC would have had to file for bankruptcy protection or shut down, dealing a serious blow to GM’s own chances for survival. The Fed cited ‘emergency conditions’ in justifying its decision.”

Simply qualifying for government money may not save GMAC, as the company must now roll over its debt in this market, which has been frozen for months since governments began aggressively intervention. According to the New York Times :

“General Motors may have its lifeline from the federal government, but another crucial vote is looming that will affect its ability to provide car loans to customers.

The vote is over the future of GMAC, its financial arm that is now awash in red ink. A decision on whether GMAC will continue to function — or, in the worst case, be forced into bankruptcy — may come as early as this weekend.

Holders of GMAC bonds are being asked to support a complicated transaction to reduce GMAC’s outstanding debt and allow it to become a bank holding company. This move would enable GMAC to issue more car loans by accessing low-cost money under the Treasury’s $700 billion financial plan. But it is unclear whether GMAC’s bondholders will go along with the program. To date, some important bondholders have balked. Meanwhile, GMAC has sweetened the offer and may even extend a Friday deadline for the bond-exchange deal.”

Associated Press : Fed grants GMAC ability to seek bailout funds

New York Times : GMAC’s Bondholders Near Crucial Deadline

Observers may be confused about the striking differences between the massive bailouts that have been given to banks and financial services companies and the much smaller, highly qualified package approved for GM and Chrysler. The auto companies were forced to beg repeatedly and agree to significant concessions for a mere $17.4 billion, roughly one tenth of the amount given to insurance firm AIG with no discernible oversight.

While it would be poor public relations to say so, for Paulson, Bernanke, Geithner, and Summers, rescuing moribund US manufacturing is simply not a priority. Stabilizing the financial sector, which remains insolvent through the incompetence and criminality of their Wall Street colleagues, is the only item on the agenda.

And of course, transparency and accountability are only for the little fish, like carmakers, unemployed workers, welfare recipients, and foolish Democratic governors. The Federal Reserve has refused to hand over details of the emergency liquidity measures it has undertaken, amounting to trillions of dollars, even after being sued by news organizations for the information.

It was left to reporters at the Associated Press to piece together the data for an article published this morning, headlined AP study finds $1.6B went to bailed-out bank execs :

“Banks that are getting taxpayer bailouts awarded their top executives nearly $1.6 billion in salaries, bonuses, and other benefits last year, an Associated Press analysis reveals.

The rewards came even at banks where poor results last year foretold the economic crisis that sent them to Washington for a government rescue. Some trimmed their executive compensation due to lagging bank performance, but still forked over multimillion-dollar executive pay packages.

Benefits included cash bonuses, stock options, personal use of company jets and chauffeurs, home security, country club memberships and professional money management, the AP review of federal securities documents found.

The total amount given to nearly 600 executives would cover bailout costs for many of the 116 banks that have so far accepted tax dollars to boost their bottom lines.”

The embarrassing facts illustrate why the Fed and the Treasury are committed to obscuring the terms of their handouts to the banks. While the details of the bailouts remain secret, the motives of the bailers are becoming more and more transparent :

“Banks that got bailout funds also paid out millions for home security systems, private chauffeured cars, and club dues. Some banks even paid for financial advisers. Wells Fargo of San Francisco, which took $25 billion in taxpayer bailout money, gave its top executives up to $20,000 each to pay personal financial planners.

At Bank of New York Mellon Corp., chief executive Robert P. Kelly’s stipend for financial planning services came to $66,748, on top of his $975,000 salary and $7.5 million bonus. His car and driver cost $178,879. Kelly also received $846,000 in relocation expenses, including help selling his home in Pittsburgh and purchasing one in Manhattan, the company said.

Goldman Sachs’ tab for leased cars and drivers ran as high as $233,000 per executive. The firm told its shareholders this year that financial counseling and chauffeurs are important in giving executives more time to focus on their jobs.”

full story

The US government has taken the unprecedented step of encouraging the Federal Reserve to intervene on behalf of a private insurance company as it approves of the bailout “loan” for insolvent AIG. ABC News reports :

“Hoping to avoid a worldwide financial meltdown, the U.S. government last night took the unprecedented step of loaning insurance giant American International Group, or AIG, $85 billion in exchange for a shocking 80 percent ownership in the company.

The move was a stark about-face for regulators, who just days ago resisted pleas from AIG for help, and was the latest in a stream of massive government bailouts for financial firms that bet wrong on the subprime housing market.”

Time Magazine is just one of many media outlets that will repeat the “too interconnected to fail” explanation :

“After establishing a supposed hard line against bailouts over the weekend with Lehman Brothers, the government abruptly abandoned it Tuesday and announced an $85 billion Federal Reserve loan to insurance giant AIG. The explanation: AIG was deemed too huge (its assets top $1 trillion), too global and too interconnected to fail.”

ABC News : AIG Bailout Means Drastic About-Face for Feds

Time : Why the Government Wouldn’t Let AIG Fail

US Treasury Secretary Henry Paulson attempted to calm the fears of average Americans as some of the largest financial institutions in the US crumbled before their eyes over the past few days. Paulson said in a press conference on Monday;

“We’re working through a difficult period in our financial markets right now as we work of some of the past excesses, but the American people can remain confident in the soundness and resilience of our financial system.”

Nouriel Roubini, an economist from New York University’s Stern School, believes, however, that a “slow-motion run on retail banks” is already taking place in America. Yahoo News writes that Roubini believes that the modern day bank run “could accelerate as people realize the FDIC fund has about $50 billion to “insure” about $1 trillion in assets at the nation’s financial institutions,” and according to Roubini, “They’re going to run out of money…unless Congress acts soon to recapitalize the FDIC.”

Yahoo notes, “Roubini is one of the few market watchers to correctly predict the severity of this ongoing credit crisis.”

see story-
Yahoo News : Top Economist: Americans Should Worry About Bank Deposits if Congress Doesn’t Act

Even with higher prices for credit, energy, and a number of consumer commodities, the Federal Reserve noted a retrenchment in consumer spending in August, according to the latest Beige Book, released today. Reuters reports :

“U.S. economic activity was slow in August amid slack consumer spending, the Federal Reserve said on Wednesday, while one official warned the credit crunch had offset low Fed interest rates.

‘Many described business conditions as “weak,” ‘”soft,” or ‘”subdued,”’ the Fed said in its regular Beige Book, an anecdotal economic assessment compiled from reports by the 12 regional Federal Reserve banks.

‘Consumer spending was reported to be slow in most Districts, with purchasing concentrated on necessary items and retrenchment in discretionary spending,’ the Fed said.”

Reuters : U.S. growth sluggish in face of credit crunch: Fed

Federal Reserve : Beige Book, September 3, 2008