[JPRT, 111th Congress]
[From the U.S. Government Publishing Office]
CONGRESSIONAL OVERSIGHT PANEL
MARCH OVERSIGHT REPORT *
_________
THE UNIQUE TREATMENT OF GMAC UNDER THE TARP
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13
March 10, 2010.--Ordered to be printed
* Submitted under Section 125(b)(1) of Title 1 of the Emergency
Economic Stabilization Act of 2008, Pub. L. No. 110-343
U.S. GOVERNMENT PRINTING OFFICE
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CONGRESSIONAL OVERSIGHT PANEL
Panel Members
Elizabeth Warren, Chair
Paul S. Atkins
Richard H. Neiman
Damon Silvers
J. Mark McWatters
C O N T E N T S
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Page
GMAC Executive Summary........................................... 1
Section One: GMAC................................................ 4
A. Overview.................................................. 4
B. Automotive Industry Financing............................. 5
C. GMAC's Business, its Structure, and Why it was Failing.... 9
1. Company Overview and Recent History................... 9
2. BHC Application and Approval.......................... 14
3. GMAC's Relationship with GM........................... 22
4. Global Automotive Finance............................. 27
5. Mortgage Operations................................... 30
D. History/Timeline of Various Stages of Investment.......... 36
1. GMAC Before December 24, 2008......................... 36
2. Timeline of TARP Investments: December 2008-December
2009................................................... 37
3. Government Support from Programs Other than the TARP.. 46
4. Impact of the TARP on Executive Compensation.......... 47
E. Justification for the Rescue of GMAC...................... 48
1. GMAC's Significance to the Financing of the Automotive
Industry............................................... 48
2. Commitments Made by Treasury.......................... 63
3. Systemic Importance of GMAC: Could it Just be
Permitted to Fail?..................................... 66
4. Treasury's Explanations for why Bankruptcy Law Could
Not be Used and Why ResCap Could Not be Abandoned in a
Restructuring.......................................... 71
F. GMAC and the Stress Tests................................. 75
G. GMAC and the AIFP: A More Lenient Approach................ 80
1. Due Diligence and Demonstrations of Viability......... 80
2. Consequences to Shareholders.......................... 81
3. Bankruptcy............................................ 82
H. Exit Strategy and Expected Returns from the GMAC
Investment................................................. 84
1. Treasury's Options for Divesting the GMAC Stake....... 84
2. GMAC's Current Strategy............................... 86
3. The Forthcoming Business Plan......................... 96
4. Treasury's Approach to Managing its Shareholder
Interests.............................................. 97
5. Evaluating the Investment: Current and Required Value. 100
I. Conclusion and Recommendations............................ 102
Section Two: Additional Views.................................... 107
A. J. Mark McWatters and Paul S. Atkins...................... 107
Section Three: Correspondence with Treasury Update............... 113
Section Four: TARP Updates Since Last Report..................... 114
Section Five: Oversight Activities............................... 131
Section Six: About the Congressional Oversight Panel............. 132
Appendices:
APPENDIX I: LETTER FROM SECRETARY TIMOTHY GEITHNER TO CHAIR
ELIZABETH WARREN, RE: RESPONSE TO QUESTIONS ON EXECUTIVE
COMPENSATION, DATED FEBRUARY 16, 2010...................... 133
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MARCH OVERSIGHT REPORT
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March 10, 2010.--Ordered to be printed
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GMAC EXECUTIVE SUMMARY *
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* The Panel adopted this report with a 4-0 vote on March 10, 2010.
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In 1919, to meet the growing demand of American families
hoping to purchase their own automobiles, General Motors
Company (GM) founded its own in-house credit arm, General
Motors Acceptance Corporation. GM's goal was to lay the
groundwork for a successful automotive industry by providing
credit for car dealers to purchase inventory and by extending
loans to individual borrowers to buy their own cars from those
dealers.
Over the decades, GM's once-small credit arm expanded far
beyond the realm of automotive lending, providing home
mortgages beginning in 1985, auto insurance for both dealers
and consumers, and even financing to manufacturers and
distributors in the non-automotive sectors. In 2006, GM spun
the General Motors Acceptance Corporation off into an
independent company, GMAC Inc. (GMAC), which today ranks as the
fourteenth largest bank holding company (BHC) in the United
States.
Soon after GMAC began its independent life, its existence
came under threat when the U.S. financial system plunged into
crisis. By late 2008, GMAC's residential mortgage unit was
suffering crippling losses due to the downturn in the housing
market, and its automotive financing operations faced an
uncertain future as GM barreled toward bankruptcy.
GMAC's historic ties to GM would, in the end, prove to be
its salvation. As Treasury considered using funds from the
Troubled Asset Relief Program (TARP) to rescue GM and Chrysler,
it quickly came to the conclusion that GM could not survive
without GMAC's financial underpinning. In particular, GMAC
provided GM dealers with almost all of their ``floorplan
financing''--that is, loans to purchase their inventory.
Without access to this credit, many dealers would be forced to
close their doors. On December 29, 2008, as part of its bailout
of the domestic automotive industry, the federal government
provided GMAC with $5 billion in emergency funding.
In the months that followed, GMAC became further entwined
in the government's financial rescue efforts. It was one of 19
banks subjected to ``stress tests'' to ensure that it could
withstand even a sharp economic downturn. When the stress tests
revealed that GMAC needed to increase its capital buffers and
it could not raise that capital in the markets, the government
provided further investments of $7.5 billion in May 2009 and of
$3.8 billion in December 2009. As its lending capacity shrank,
GMAC continued financing GM's dealerships, even as it was
forced to shrink the availability of loans to customers to buy
cars. Over the same period, GMAC also acquired part of the
operations of Chrysler Financial Services Americas LLC
(Chrysler Financial) and took on the role of the dominant
floorplan financer for Chrysler dealerships as well.
Although the Panel takes no position on whether Treasury
should have rescued GMAC, it finds that Treasury missed
opportunities to increase accountability and better protect
taxpayers' money. Treasury did not, for example, condition
access to TARP money on the same sweeping changes that it
required from GM and Chrysler: it did not wipe out GMAC's
equity holders; nor did it require GMAC to create a viable plan
for returning to profitability; nor did it require a detailed,
public explanation of how the company would use taxpayer funds
to increase consumer lending.
Moreover, the Panel remains unconvinced that bankruptcy was
not a viable option in 2008. In connection with the Chrysler
and GM bankruptcies, Treasury might have been able to
orchestrate a strategic bankruptcy for GMAC. This bankruptcy
could have preserved GMAC's automotive lending functions while
winding down its other, less significant operations, dealing
with the ongoing liabilities of the mortgage lending
operations, and putting the company on sounder economic
footing. The Panel is also concerned that Treasury has not
given due consideration to the possibility of merging GMAC back
into GM, a step which would restore GM's financing operations
to the model generally shared by other automotive
manufacturers, thus strengthening GM and eliminating other
money-losing operations.
There is no doubt that Treasury's actions to preserve GMAC
played a major role in supporting the domestic automotive
industry. These same steps, however, have reinforced GMAC's
dominance in automotive floorplan financing, perhaps
obstructing the growth of a more competitive lending market.
The rescue also came at great public expense. The federal
government has so far spent $17.2 billion to bail out GMAC and
now owns 56.3 percent of the company. Both GMAC and Treasury
insist that the company is solvent and will not require any
additional bailout funds, but taxpayers already bear
significant exposure to the company, and the Office of
Management and Budget (OMB) currently estimates that $6.3
billion or more may never be repaid.
In light of the scale of these potential losses, the Panel
is deeply concerned that Treasury has not required GMAC to lay
out a clear path to viability or a strategy for fully repaying
taxpayers. Moving forward, Treasury should clearly articulate
its exit strategy from GMAC. More than a year has elapsed since
the government first bailed out GMAC, and it is long past time
for taxpayers to have a clear view of the road ahead.
SECTION ONE: GMAC
A. Overview
The U.S. government has spent a total of $17.2 billion to
support GMAC under the TARP. GMAC received funds on three
separate occasions, spanning both the Bush and Obama
Administrations: in December 2008, May 2009, and December 2009.
As part of the government bail-out effort, GMAC has received
special treatment apart from the funds that it has received. In
an unusual divided vote, the Federal Reserve approved GMAC's
application as a BHC. GMAC was the only bank that needed TARP
funds in order to meet the capital buffers established under
the bank ``stress tests'' because it could not raise funds from
private sources. GMAC is now 56.3 percent owned by Treasury.
Although the total amount of money given to GMAC is
significantly less than that received by some other
institutions, it still constitutes a significant use of
taxpayers' funds and has resulted in a company that is
majority-owned by the U.S. government.
Although often misunderstood as the financial services arm
of GM, which is how it started, GMAC is a diversified financial
services firm that derives its revenues from automotive
finance, where it holds a dominant position, as well as
mortgage operations, insurance operations, and commercial
finance. GMAC is the fourteenth largest BHC in the United
States, with $172 billion in assets on December 31, 2009.
In previous reports, the Panel has examined TARP programs
that affected numerous financial institutions. This report
examines the ways the TARP was used to support a single
institution. The report considers GMAC's financial status at
the various times Treasury provided support and discusses how
GMAC reached the point of needing such assistance. The report
analyzes Treasury's justification for support, which is founded
on the dual pillars of support to the automotive industry and
GMAC's participation in the stress tests, and asks whether
alternative approaches might have been possible. The report
also compares the way GMAC and other banks were treated under
the stress tests and the way GMAC, GM, and Chrysler were
treated under the TARP's Automotive Industry Financing Program
(AIFP).
Looking forward, the report examines the approach that
GMAC's new management is taking to return the company to
profitability and considers whether taxpayers can expect to
receive a return on their investment. The report also evaluates
Treasury's role as the largest shareholder of GMAC.
These questions fall clearly within the Panel's mandate
under the Emergency Economic Stabilization Act of 2008
(EESA).\1\ Specifically, they implicate the use of the
Secretary's authority under EESA, the impact of Treasury's
actions on the financial markets, the TARP's costs and benefits
for the taxpayer, and transparency on the part of Treasury. The
report builds on the Panel's previous work, including its June
2009 report on the stress tests, its September 2009 report on
TARP assistance to the automotive industry, and its January
2010 report on exit strategies from TARP investments.
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\1\ See Emergency Economic Stabilization Act of 2008 (EESA), Pub.
L. No. 110-343 Sec. 125.
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B. Automotive Industry Financing
The government's intervention in GMAC cannot be properly
evaluated without understanding the role that credit plays in
the automotive industry. Financing is crucial to the
distribution and sale of automobiles because of the substantial
capital outlays involved in the purchase of automobiles by
dealers and consumers. There are two distinct types of lending
in the automobile sales industry: wholesale lending, which
enables dealers to stock and replenish their inventories, and
retail lending to consumers. In the United States,
substantially all wholesale purchases by automobile dealers and
about three-quarters of retail consumer purchases are financed
with borrowed funds.\2\ Automobile dealers, which typically
operate as independent franchises affiliated with one or more
automobile manufacturer, serve as intermediaries between
manufacturers and consumers. Dealers finance their wholesale
purchases of automobiles through floorplan financing--a form of
inventory goods financing in which a loan is made against
specific collateral.\3\ Individual customers finance their
automobile purchases or leases by obtaining consumer credit.
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\2\ See Senate Committee on Banking, Housing, and Urban Affairs,
Written Testimony of Ron Bloom, Senior Advisor, U.S. Department of the
Treasury, The State of the Domestic Automobile Industry: Impact of
Federal Assistance (June 10, 2009) (online at banking.senate.gov/
public/index.cfm?FuseAction=Files.View&FileStore_id=40341601-355c-4e6f-
b67f-b9707ac88e32) (hereinafter ``Ron Bloom Testimony before the Senate
Banking Committee''). As of December 2009, 26 percent of all automobile
purchases were cash transactions. This figure has been relatively
constant over the past five years, fluctuating between 22 and 32
percent. Data provided to the Panel by J.D. Power and Associates.
\3\ See U.S. Comptroller of the Currency, Comptroller's Handbook:
Floor Plan Loans, at 1 (Mar. 1990) (online at www.occ.treas.gov/
handbook/floorplan1.pdf) (hereinafter ``Comptroller's Handbook: Floor
Plan Loans'').
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For many consumers, the purchase of a new automobile
represents the largest purchase that they will make other than
the purchase of a house.\4\ Consumer automobile financing is a
type of consumer credit, a category that also includes credit
cards, unsecured cash loans, and student loans.\5\ As of
December 2009, 56 percent of all consumer automobile
acquisitions were financed purchases, 18 percent were financed
leases, and 26 percent were cash transactions--a distribution
that has been broadly stable over the last five years.\6\ A
broad array of automobile financing companies, national and
regional banks, credit unions, and other financial institutions
provide consumer automobile credit, which has lower barriers to
entry than floorplan financing.
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\4\ The average price of a new vehicle is $28,000. See National
Automobile Dealers Association, Understanding Vehicle Financing (online
at www.nada.org/NR/rdonlyres/A7731694-50E7-48CE-94E3-2EC33B446287/0/
Understanding_Vehicle_Financing.pdf) (hereinafter ``Understanding
Vehicle Financing'') (accessed Mar. 8, 2010).
\5\ See Board of Governors of the Federal Reserve System, Report to
the Congress on Practices of the Consumer Credit Industry in Soliciting
and Extending Credit and Their Effects on Consumer Debt and Insolvency,
at 1 (June 2006) (online at www.federalreserve.gov/boarddocs/
rptcongress/bankruptcy/bankruptcybillstudy200606.pdf).
\6\ Data provided to the Panel by J.D. Power and Associates.
FIGURE 1: CONSUMER AUTOMOBILE PURCHASES BY TYPE \7\
[GRAPHIC] [TIFF OMITTED] 54875A.001
FIGURE 2: FINANCED CONSUMER AUTOMOBILE PURCHASES BY CREDIT SOURCE \8\
[GRAPHIC] [TIFF OMITTED] 54875A.002
Floorplan financing is a vital cog in the U.S. automotive
market, as it allows dealers to offer cars to consumers.
Floorplan financing is crucial for dealers because of the
significant cost associated with financing their entire
inventories via wholesale automobile purchases from the
manufacturers. The average floorplan loan is $4.9 million, and
collectively U.S. automobile dealers hold about $100 billion
worth of inventory.\9\ Floorplan loans provide dealers with a
revolving line of credit that allows dealers to maintain their
inventories for sale to customers. This also helps
manufacturers manage their inventory, facilitating the transfer
of automobiles from the plant to the dealer. For the lender,
the generally low profit margins in floorplan financing are
balanced by an attractive credit profile and gateway business
opportunities to other, potentially more lucrative product
lines (e.g., consumer auto and dealer real estate lending).
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\7\ Data provided to the Panel by J.D. Power and Associates.
\8\ Data provided to Panel by J.D. Power and Associates.
\9\ See National Automobile Dealers Association, Understanding the
``TALF'' (Mar. 30, 2009) (online at www.nada.org/NR/rdonlyres/38703F1F-
DC88-4870-9170-7B4778B59261/0/Understanding_the_TALF_MAR_30_2009.pdf).
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A floorplan loan is essentially a two-party contract
between the automobile manufacturer and the dealer, with the
lender serving as a third-party financier. In a typical
floorplan loan, a dealer agrees to purchase a certain number of
cars from a manufacturer for a set price. The lender will
advance the amount of the purchase price of the automobiles to
the dealer and, in turn, take a security interest in the
automobiles as collateral for the loan. Floorplan loans
typically have a set interest rate, require monthly interest
payments by the borrower, and call for a portion of the loan
principal to be repaid upon the sale of part of the loan's
collateral--i.e., each automobile.\10\ Many floorplan loans
also include buyback provisions in which a manufacturer agrees
to repurchase cars that have not been sold after a certain
amount of time.\11\ Floorplan financing is a low-risk business,
particularly in comparison to consumer automotive lending.
Repayment rates have historically exceeded 99 percent, and
delinquency rates have been correspondingly low.\12\ In fact,
losses--to the extent they occur--have been primarily
attributable to fraud, as opposed to credit problems.\13\
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\10\ GMAC, LLC, Form 10-K for the Fiscal Year Ended December 31,
2008, at 46 (Feb. 27, 2009) (online at www.sec.gov/Archives/edgar/data/
40729/000119312509039567/0001193125-09-039567-index.htm) (hereinafter
``GMAC Form 10-K for 2008'') (``[W]e generally require payment of the
principal amount financed for a vehicle upon its sale or lease by the
dealer to a customer. Ordinarily a dealer has between one and five
days, based on risk and exposure to the account, to satisfy the
obligation'').
\11\ See Comptroller's Handbook: Floor Plan Loans, supra note 3, at
2.
\12\ See Congressional Oversight Panel, Transcript: COP Hearing on
GMAC Financial Services (Feb. 25, 2010) (publication forthcoming)
(online at cop.senate.gov/hearings/library/hearing-022510-gmac.cfm)
(hereinafter ``Transcript of COP Hearing on GMAC'') (Testimony of Paul
Atkins, Michael Carpenter, and Chris Whalen). For example, GMAC net
charge-offs on floorplan loans (i.e., losses) increased from $15
million in 2008 to $69 million in 2009, driving a corresponding
increase in charge-offs as a percentage of outstanding loans (charge-
off ratio) from 0.1 percent to 0.4 percent, or 30 basis points. See
GMAC, Inc., Form 10-K for the Fiscal Year Ended December 31, 2009, at
73 (Mar. 1, 2010) (online at www.sec.gov/Archives/edgar/data/40729/
000119312510043252/0001193125-10-043252-index.htm) (hereinafter ``GMAC
Form 10-K for 2009''). While the increase is significant, the absolute
level of losses on floorplan loans is quite modest given the severe
economic, financial, and industrial dislocation affecting GMAC in 2009.
\13\ Industry analysts conversations with Panel staff; market
participants conversations with Panel staff. To the extent there has
been a recent moderate uptick in floorplan lending loss rates, this
reflects strains on the value of dealer collateral resulting from the
economic downturn, credit crisis, and restructuring of the domestic
automotive industry. Id.
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In contrast to the highly competitive and relatively
unconsolidated consumer finance market, the floorplan finance
market is dominated by two types of players: (1) the captive
and former captive automobile finance companies, which are
described as such because they are owned by or have deep ties
to specific automobile manufacturers and which finance about 80
percent of floorplan lending; and (2) national and regional
banks, which finance most of the remainder. Detroit's Big Three
automobile manufacturers--Ford Motor Company, GM, and Chrysler
Group LLC--have traditionally relied on their captive financing
arms to provide the vast majority of floorplan financing for
their dealers and a substantial portion of consumer credit.\14\
GMAC and Chrysler Financial were spun off from their parents in
2006 and 2007, respectively, but their enduring operational and
economic interdependence is illustrated by the largely stable
share of GM dealer financing provided by GMAC and Chrysler
dealer financing provided by Chrysler Financial (until GMAC
took over Chrysler Financial's floorplan business in May 2009).
While all major foreign manufacturers operating in the United
States have their own captive finance companies, among the Big
Three, only Ford retains a captive finance subsidiary.\15\
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\14\ Captive financing organizations can be structured as legally
separate subsidiaries or distinct business lines, but they exist
primarily as extensions of their corporate parents. Their purpose is to
facilitate the parent corporation's sale of goods or services by
providing debt and/or lease financing to the parent's customers. See
Standard & Poor's, Captive Finance Operations (Apr. 17, 2009) (online
at www2.standardandpoors.com/spf/pdf/media/
Captive_Finance_Operations.pdf).
\15\ Although not as substantial as the Big Three in terms of sales
or financing operations, several smaller automakers have licensed third
party banks as their exclusive financing providers. For example,
following changes in Ford ownership of Jaguar Land Rover and Mazda,
both automakers replaced Ford Motor Credit with Chase Auto Finance. See
JPMorgan Chase & Co., Jaguar Land Rover Selects Chase as Exclusive U.S.
Financing Provider (Nov. 6, 2008) (online at investor.shareholder.com/
jpmorganchase/releasedetail.cfm?releaseid=346487); Donna Harris, Mazda
Names Chase Auto As Dealer Lender, Automotive News (Sept. 30, 2008)
(online at www.autonews.com/article/20080930/ZZZ_SPECIAL/309309943).
Chase Auto Finance has also served as the captive financing arm of
Subaru of America since 2001.
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An independent financing company makes a profit by lending
at a rate higher than its cost of funds, at a sufficient spread
to cover credit losses. Captives, however, are able to forgo
some of this spread owing to the economics that underpin their
relationship with the original equipment manufacturer
(OEM).\16\ Captive finance companies have an alignment of
interests with their parents; they exist to facilitate the sale
of their parent companies' products. Therefore, parent
companies have historically been willing to subvent the loans
made by their captives (in the case of the consumer loan
market) \17\ or provide dealer incentives (in the case of the
floorplan financing market) in order to increase sales of the
product--creating fungibility of profits between the OEM and
the captive finance company.
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\16\ Industry analysts conversations with Panel staff.
\17\ See Section C.3(a) of this report. General Motors may elect to
sponsor incentive programs (on both retail contracts and leases) by
supporting financing rates below standard rates at which GMAC purchases
retail contracts. Subvention is the manner in which GM pays for
exclusive promotions offered through GMAC. Through this practice, which
is akin to a marketing expense, GM underwrites customer financing rates
at levels below what GMAC would otherwise offer.
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Accordingly, GMAC is crucial to driving sales of GM
automobiles. When GMAC lost its status as a wholly-owned
subsidiary of GM, its historical relationship as a captive
financing arm was largely replicated in practice (and in many
cases contractually, particularly in the consumer space).\18\
The contracts attempted to replicate the longstanding
relationship between the two entities in the provision of
consumer finance; GM agreed to provide subventing opportunities
to GMAC, and GMAC, in return, agreed to supply consumer credit.
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\18\ See Section C.3(b) of this report.
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In the consumer market, the captive credit organizations
frequently coordinate with their parents in sales promotions,
by which consumers receive below-prime interest rates on
automobile purchases and additionally benefit from the
convenience of ``one-stop shopping.'' \19\
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\19\ See Understanding Vehicle Financing, supra note 4 (accessed
Mar. 8, 2010).
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In the floorplan market, the captive or ``semi-captive''
relationship is best exemplified in the tripartite finance
relationship among a captive finance company, the OEM, and the
dealers. The OEM allows the auto dealer effectively to borrow
interest-free (generally up to 60 days) by extending a credit
to the dealer for helping to finance the OEM's inventory. This
credit, as well as other incentives, helps subsidize the daily
interest charges assessed by the captive finance subsidiary to
the dealer as part of the floorplan finance relationship. The
OEM credit is completely realized by the dealer upon the OEM's
delivery of the inventory. As a result, and because the
financing company's interest charges accumulate daily, the
dealer's net return on the floorplan finance transaction is
higher if the inventory is sold sooner. This arrangement
provides sufficient incentive to the dealer to move inventory
off its lot (i.e., sell cars), aligning its interests with that
of the OEM.\20\
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\20\ Industry analysts conversations with Panel staff; market
participants conversations with Panel staff.
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The difference between the scale of the operating models of
the captives and the banks helps explain why captive finance
companies have traditionally penetrated the floorplan lending
market to a much greater extent than the banks. The OEMs'
finance arms can offer dealers credit that is enhanced by both
the inventory credit underwritten by the OEM (which is also
available to banks) as well as other promotions that the OEM
may sponsor to encourage financing via a captive. Also, in
certain instances, captive finance companies may be willing to
realize lower profits on floorplan lending. Industry sources
add that this market position is enhanced by the stickiness of
these relationships. This owes largely to cultural factors
(long-term relationships, desire to work closely with their
primary manufacturer) as well as logistical ones (integrated
manufacturer and dealer systems). Ultimately, many industry
sources believe that these benefits help captives overcome an
otherwise higher cost of funds versus the lower cost of capital
at many of their third-party bank competitors.\21\
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\21\ Industry analysts conversations with Panel staff; market
participants conversations with Panel staff. There was also a
perception among some market participants that GMAC would be more
willing to facilitate the consumer credit needs of the dealers'
customers--especially less credit-worthy borrowers--if the dealers were
willing to have GMAC also supply their floorplan financing. The
relative advantages of the captives in the auto dealer financing market
are discussed in more detail in section E.1, infra.
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In recent years, the traditional retail and floorplan
finance relationships between GMAC and GM, GM dealers, and GM
customers have been strained by a number of factors, including
GMAC's shift to non-captive status, the higher cost of funds
for GMAC caused by the financial crisis and the associated
credit crisis, and the effects of the restructuring of GM and
Chrysler.
C. GMAC's Business, its Structure, and Why it was Failing
1. Company Overview and Recent History
GMAC Financial Services, formerly known as General Motors
Acceptance Corporation, was founded in 1919 as a wholly owned
subsidiary of GM to provide GM dealers with the financing
necessary to acquire and maintain automobile inventories and to
provide customers with a means to finance automobile
purchases.\22\ GMAC opened branches in Detroit, New York,
Chicago, San Francisco, and Toronto in 1919 and expanded its
automotive finance business to the United Kingdom a year later.
GMAC had financed its 100 millionth vehicle by 1985 and by
2001, had attained net income of $1 billion and arranged more
than $1 trillion of financing for 150 million cars and trucks
across the world.\23\ In 2004, GMAC-SAIC Automotive Finance
Company, China's first automotive finance company, opened for
business.
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\22\ GMAC, Inc., Form 10-Q for the Quarter Ended September 30,
2009, at 65 (Nov. 10, 2009) (online at www.sec.gov/Archives/edgar/data/
40729/000119312509230634/0001193125-09-230634-index.htm) (hereinafter
``GMAC Form 10-Q for Q3 2009'') (stating that ``GMAC was established to
provide dealers with the automotive financing necessary to acquire and
maintain vehicle inventories and to provide retail customers the means
by which to finance vehicle purchases through GM dealers'').
\23\ GMAC, Inc., History (online at www.gmacfs.com/us/en/about/who/
who_history.html) (hereinafter ``GMAC: History'') (accessed Mar. 8,
2010).
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The company's operations have expanded and diversified to
include insurance, mortgages, commercial finance, and online
banking.\24\ GMAC's first expansion outside automotive finance
occurred in 1939, when it entered the automobile insurance
sector with the formation of Motors Insurance Corporation (now
part of GMAC Insurance Holdings).\25\ In 1985, GMAC expanded
into the mortgage sector with the creation of GMAC Mortgage
following the acquisitions of Colonial Mortgage from
Philadelphia National Bank and a mortgage servicing platform
from Norwest Mortgage.\26\ GMAC also formed a real estate
services subsidiary, GMAC Home Services, by purchasing Better
Homes and Gardens Real Estate in 1998.\27\ GMAC's mortgage
operations later expanded to Europe and Latin America with the
formation of International Business Group (IBG) in 2001. GMAC
entered the Canadian residential market with the launching of
GMAC Residential Funding of Canada Ltd. in 2002. GMAC
restructured its mortgage operations in 2005, creating a new
parent holding company for its mortgage business, Residential
Capital, LLC (ResCap), a global real estate finance business.
In 1999, GMAC created the GMAC Commercial Finance Group after
purchasing the Bank of New York's asset-based lending and
factoring business unit.\28\ GMAC entered the banking sector in
2000 by forming GMAC Bank, which received its charter in
2001.\29\ Finally, in 2004, GMAC created GMAC Automotive Bank
to purchase retail installment sale and lease contracts from
automobile dealers, and this institution's application for
federal deposit insurance was approved by the Federal Deposit
Insurance Corporation (FDIC) in June 2004.\30\
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\24\ GMAC, Inc., Who We Are (online at www.gmacfs.com/us/en/about/
who/index.html) (accessed Mar. 8, 2010).
\25\ Id.
\26\ Id. As GMAC CEO Michael Carpenter stated at the Panel's recent
GMAC hearing, ``General Motors decided to diversify its financial
services business many years ago and built up this mortgage banking
business.'' Transcript of COP Hearing on GMAC, supra note 12 (Testimony
of Michael Carpenter).
\27\ In September 2008, ResCap entered into an agreement to sell
the GMAC Home Services business to Brookfield Residential Property
Services.
\28\ GMAC: History, supra note 23.
\29\ GMAC Bank, an insured federal savings bank, received its
charter from the Office of Thrift Supervision (OTS) on August 22, 2001.
Headquartered in Wilmington, Delaware, GMAC Bank was designed to offer
or make available a variety of banking and personal financial services
products, including FDIC-insured money market accounts, certificates of
deposit, and transactional checking accounts, and also to originate and
purchase residential mortgage loans, home equity loans, and lines of
credit. According to GMAC, ``GMAC Bank will not provide any funding for
GMAC's auto finance business and will not make loans to dealers for
wholesale auto financing or loans to consumers for retail auto
financing.'' GMAC, LLC, GMAC Receives OTS Charter to Open New Federal
Savings Bank (Aug. 22, 2001) (online at media.gmacfs.com/
index.php?s=43&item=178).
In connection with GMAC's 2006 spin-off from GM, GMAC Automotive
Bank, an insured state nonmember industrial loan company based in Utah,
purchased certain assets totaling approximately $11.7 billion and
assumed certain liabilities totaling approximately $10.7 billion of
GMAC Bank. At that time, GMAC Automotive Bank was renamed GMAC Bank,
and the federal savings bank charter of GMAC Bank remained active while
that institution was renamed National Motors Bank, FSB. Cerberus was
temporarily allowed to acquire the ILC as a special exception to the
FDIC's then-existing moratorium on such applications. These steps were
taken in order to allow GMAC, then controlling two insured depository
institutions, to consolidate some of its operations. See Federal
Deposit Insurance Corporation, Order and Basis for Corporation Approval
(Nov. 15, 2006) (online at www.fdic.gov/regulations/laws/bankdecisions/
Merger/gmacmerger.pdf). GMAC Bank is a U.S. online bank that offers a
variety of savings products, including certificates of deposit (CDs),
online savings accounts and money market accounts, and remains subject
to regulation and examination primarily by the FDIC and the Utah UDFI.
\30\ Federal Deposit Insurance Corporation, Decisions on Bank
Applications: GMAC Automotive Bank, Application for Federal Deposit
Insurance (June 25, 2004) (online at www.fdic.gov/regulations/laws/
bankdecisions/DepIns/gmacauto.html).
---------------------------------------------------------------------------
The decline in the last decade in GM's credit position--
caused by the downgrade of its debt to non-investment grade
status, decreased sales, and the looming bankruptcy of Delphi
Corporation, GM's biggest parts supplier--negatively impacted
GMAC's credit ratings and increased the cost of financing GM
automobile sales. As noted above, GMAC as a finance arm had
also branched out into other lending sectors besides the auto
industry. These circumstances called into serious question
GMAC's ownership and governance structure. As a result, on
November 30, 2006, GM sold 51 percent of the equity in GMAC to
an investment consortium led by Cerberus Capital Management,
L.P. (Cerberus) for about $14 billion.\31\ GMAC emerged as an
independent global financial services company, which company
management stated provided an opportunity to ``transform GMAC
from a captive operation to a more globally diversified
operation.'' \32\
---------------------------------------------------------------------------
\31\ GM received approximately $14 billion in cash from this
transaction over three years, including distributions from GMAC. The
$14 billion in cash that GM receives as part of the transaction
included $7.4 billion from the Cerberus-led consortium and an estimated
$2.7 billion cash distribution from GMAC related to the conversion of
most of GMAC and its U.S. subsidiaries to limited liability companies.
In addition, GM retained about $20 billion of GMAC automotive lease and
retail assets and associated funding with an estimated net book value
of $4 billion that monetized over three years.
\32\ GMAC, LLC, GMAC Financial Services Reports 2006 and Fourth
Quarter Earnings (Mar. 13, 2007) (online at media.gmacfs.com/
index.php?s=43&item=218) (hereinafter ``GMAC Q4 2006 Earnings'').
---------------------------------------------------------------------------
GMAC's core businesses--automotive finance and residential
mortgages--were previously very profitable. GMAC's Global
Automotive Finance (GAF) segment was profitable through 2007,
and its mortgage operations remained profitable through 2006.
GMAC's results of operations have been recorded in four
business segments, which were recently reduced to three: \33\
---------------------------------------------------------------------------
\33\ As of December 31, 2009, GMAC reclassified the presentation of
the business activities comprising its operating segments. This
reclassification makes it difficult to compare business segments for
the period prior to 2007 to business segments for the restated period
between 2007 and 2009. GMAC now reports its Insurance segment within
Global Automotive Services. Introduction of funds-transfer-pricing
(FTP) methodology shifted certain interest revenue and expenses to
Corporate & Other. For example, prior to the restatement, GMAC reported
$70 million in Corporate & Other net income for 2007, whereas after the
restatement, the company reported a $1.33 billion Corporate & Other
loss. Global Automotive Finance was the primary segment beneficiary of
this reporting change, with net income increasing from $1.5 billion to
$2.9 billion in 2007. See GMAC Form 10-K for 2009, supra note 12, at
203.
---------------------------------------------------------------------------
Dealer and retail automotive financing
services (recorded in the GAF segment, which is now
part of an enlarged Global Automotive Services
segment);
Insurance for consumers, automotive
dealerships, and other businesses (included within
Global Automotive Services, and no longer a standalone
segment);
Mortgage activities focusing primarily on
the residential real estate market in the United
States, with some international operations; this
segment includes the operations of ResCap; \34\ and
---------------------------------------------------------------------------
\34\ The GMAC Board of Directors continues to review various
strategic alternatives related to the wind-down of ResCap, including
asset sales. ResCap no longer provides public financial statements (the
company last provided public financial statements as of June 30, 2009).
For further discussion of GMAC's plans to dispose of some of
ResCap's portfolio through asset sales, see Section H.2, infra.
---------------------------------------------------------------------------
Commercial finance activities that provide
secured lending products and other financing (reflected
in the ``Corporate and Other'' segment, which also
includes corporate operations and interest rate risk
management).
As of December 31, 2009, the company had 15 million
customers and operations in approximately 40 countries, along
with approximately $172 billion in assets, making it one of the
largest U.S. bank holding companies.\35\ The following tables
show the contribution made by its business segments to GMAC's
overall performance and profitability.
---------------------------------------------------------------------------
\35\ GMAC Form 10-K for 2009, supra note 12, at 1. At the time of
the stress tests, GMAC was the 11th largest BHC, with approximately
$189 billion in assets as of December 31, 2008. For comparative
purposes, the four largest BHCs covered by the stress tests--JPMorgan
Chase, Citigroup, Bank of America, and Wells Fargo--had assets of $2.2
trillion, $1.9 trillion, $1.8 trillion, and $1.3 trillion as of
December 31, 2008, respectively.
FIGURE 3: GMAC NET REVENUE BY SEGMENT (MILLIONS OF DOLLARS) \36\
----------------------------------------------------------------------------------------------------------------
2005* 2006* 2007 2008 2009 \37\
----------------------------------------------------------------------------------------------------------------
Global Automotive Finance (GAF).......................... $4,375 $4,361 $6,323 $4,058 $5,029
Mortgage................................................. 4,860 4,318 1,772 953 609
Insurance................................................ 4,259 5,616 3,164 2,961 2,271
Corporate & Other \38\................................... 1,423 527 (1,512) 7,463 (1,648)
------------------------------------------------------
Net Revenue.............................................. $14,917 $14,822 $9,747 $15,435 $6,261
----------------------------------------------------------------------------------------------------------------
\36\ GMAC Form 10-K for 2009, supra note 12; GMAC, LLC, Amendment No. 1 to the Form 10-K for the Fiscal Year
Ended December 31, 2008 (May 14, 2009) (online at www.sec.gov/Archives/edgar/data/40729/000119312509111453/
d10ka.htm) (hereinafter ``Amendment to GMAC Form 10-K for 2008''); GMAC, LLC, Form 10-K for the Fiscal Year
Ended December 31, 2007 (Feb. 27, 2008) (online at www.sec.gov/Archives/edgar/data/40729/000095012408000900/
k23730e10vk.htm) (hereinafter ``GMAC Form 10-K for 2007''); GMAC, LLC, Form 10-K for the Fiscal Year Ended
December 31, 2006 (Mar. 3, 2007) (online at www.sec.gov/Archives/edgar/data/40729/000095012407001471/
k12221e10vk.htm) (hereinafter ``GMAC Form 10-K for 2006''); GMAC, LLC, Form 10-K for the Fiscal Year Ended
December 31, 2005 (Mar. 28, 2006) (online at www.sec.gov/Archives/edgar/data/40729/000095012406001524/
k01870e10vk.htm) (hereinafter ``GMAC Form 10-K for 2005'').
\37\ For further discussion on GMAC's changes to reporting segments that occurred in the fourth quarter of 2009,
see note 33.
\38\ The large ``Other'' revenue in 2008 reflects the effects of a pretax gain arising upon the extinguishment
of $11.5 billion of debt in the exchange offer conducted in the fourth quarter of 2008. For further discussion
of the exchange offer, see Section C.2.(b)1, infra.* Note: Historic 2005-2006 segment results do not correspond with restated segment data for 2007-2009 period.
See footnote 33 for further discussion.
FIGURE 4: GMAC NET REVENUE BY SEGMENT \39\
[GRAPHIC] [TIFF OMITTED] 54875A.003
* Note: Historic 2005-2006 segment results do not correspond
with restated segment data for 2007-2009 period. See footnote
33 for further discussion.
---------------------------------------------------------------------------
\39\ GMAC Form 10-K for 2009, supra note 12; Amendment to GMAC Form
10-K for 2008, supra note 36; GMAC Form 10-K for 2007, supra note 36;
GMAC Form 10-K for 2006, supra note 36; GMAC Form 10-K for 2005, supra
note 36.
FIGURE 5: GMAC NET INCOME/(LOSS) BY SEGMENT
[Dollars in millions] \40\
----------------------------------------------------------------------------------------------------------------
2005* 2006* 2007 2008 2009
----------------------------------------------------------------------------------------------------------------
GAF...................................................... $1,153 $1,243 $2,913 $(216) $(19)
Mortgage................................................. 1,021 705 (4,379) (5,587) (8,273)
Insurance................................................ 417 1,127 459 459 (439)
Corporate & Other........................................ (309) (950) (1,325) 7,212 (1,567)
------------------------------------------------------
Net Income/(Loss)........................................ $2,282 $2,125 $(2,332) $1,868 $(10,298)----------------------------------------------------------------------------------------------------------------
\40\ GMAC Form 10-K for 2009, supra note 12; Amendment to GMAC Form 10-K for 2008, supra note 36; GMAC Form 10-K
for 2007, supra note 36; GMAC Form 10-K for 2006, supra note 36; GMAC Form 10-K for 2005, supra note 36. * Note: Historic 2005-2006 segment results do not correspond with restated segment data for 2007-2009 period.
See footnote 33 for further discussion.
FIGURE 6: GMAC NET INCOME/(LOSS) BY SEGMENT \41\
[GRAPHIC] [TIFF OMITTED] 54875A.004
* Note: Historic 2005-2006 segment results do not correspond
with restated segment data for 2007-2009 period. See footnote
33 for further discussion.
Along with numerous other financial institutions, GMAC was
severely impacted by the downturn in the residential real
estate and capital markets. By early 2007, GMAC started seeing
some signs of distress. In March 2007, it reported 2006 net
income of $2.1 billion, compared to net income of $2.3 billion
for 2005. While GMAC indicated that its performance reflected
``record earnings in the insurance business and continued
strong profitability in automotive finance,'' it reported
significantly reduced net income at ResCap due to the declining
U.S. residential housing market.\42\ As a result of these
market conditions, GMAC incurred a net loss of $2.3 billion for
2007. The housing price depreciation and the frozen credit
markets seen in the fall of 2008 (the peak of the financial
crisis) severely impacted (if not virtually halted) GMAC's core
operations--its mortgage and automotive lending businesses.\43\
These circumstances reduced liquidity, depressed asset
valuations, and required GMAC to post additional loan loss
provisions due to credit deterioration.\44\
---------------------------------------------------------------------------
\41\ GMAC Form 10-K for 2009, supra note 12; Amendment to GMAC Form
10-K for 2008, supra note 36; GMAC Form 10-K for 2007, supra note 36;
GMAC Form 10-K for 2006, supra note 36; GMAC Form 10-K for 2005, supra
note 36.
\42\ GMAC Q4 2006 Earnings, supra note 32.
\43\ GMAC Form 10-K for 2008, supra note 10, at 20.
\44\ GMAC Form 10-K for 2008, supra note 10, at 29.
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2. BHC Application and Approval
a. Rationale for Application
Since the 2006 spin-off, GMAC Bank had operated as an
industrial loan company (ILC) because it did not meet the Bank
Holding Company Act (BHCA)'s definition of a ``bank.'' \45\ In
response to deteriorating market conditions, significant third
quarter losses, and the prospect of looming fourth quarter
losses, on November 20, 2008, GMAC requested the approval of
the Board of Governors of the Federal Reserve System (the
Board) under section 3 of the BHCA \46\ to become a BHC upon
the conversion of GMAC Bank to a commercial bank. GMAC took
this step after conversations with the FDIC and Treasury about
strategies for surviving the financial crisis.\47\ GMAC's
management maintains that the final decision to seek BHC status
was a joint decision resulting from discussions between GMAC
management, the board of directors, Treasury, the Federal
Reserve, and the FDIC.\48\ At the time, GMAC's board of
directors was dominated by GM and Cerberus.
---------------------------------------------------------------------------
\45\ GMAC Bank did not qualify as a ``bank'' under the BHCA because
it was an ILC that did not offer demand deposits. See 12 U.S.C.
Sec. 1841(c)(2)(H). ILCs and industrial banks are FDIC-supervised and
insured financial institutions operating under specific charters that
have ``nearly all of the same powers as commercial banks'' and whose
distinct features include the fact that they can be owned by commercial
firms that are not regulated by a federal banking agency. Kenneth Spong
and Eric Robbins, Industrial Loan Companies: A Growing Industry Sparks
a Public Policy Debate, Federal Reserve Bank of Kansas City Economic
Review, at 41 (Fourth Quarter 2007) (online at www.kc.frb.org/Publicat/
Econrev/PDF/4Q07Spong.pdf). The ILC is subject to oversight by federal
and state bank regulators; however, the controlling company in many
cases is not.
While ILCs were initially developed in the early 1900s to provide
small loans to industrial workers, they have recently ``reemerged as a
way for commercial and financial firms to offer banking services
without being subject to the ownership restrictions and parent company
supervision that typically apply to other companies owning depository
institutions.'' Id. at 43. ILCs support a company's operations by
allowing commercial firms such as auto companies and manufacturers to
offer financing to their customers, clients, or dealers.
For further discussion of the details of GMAC's spin-off from GM in
2006, see Note 29, supra.
\46\ 12 U.S.C. Sec. 1842.
\47\ GMAC conversations with Panel staff (Feb. 16, 2010).
\48\ GMAC conversations with Panel staff (Feb. 16, 2010).
---------------------------------------------------------------------------
The primary reason GMAC sought to convert to a BHC appears
to be to gain access to government assistance related to the
financial crisis. The conversion made GMAC eligible for access
to the FDIC's Temporary Liquidity Guarantee Program (TLGP)
facility and the TARP's Capital Purchase Program (CPP).\49\ The
December 2008 announcement of the AIFP--and the subsequent
funding of GMAC under this program--suggests that it may not
have been necessary for GMAC to become a BHC in order to gain
access to TARP funds. When GMAC submitted its BHC application
one month earlier, however, TARP funds could not have been
allocated to the company unless it became a BHC; it was not
clear at that time that funding for non-BHCs would be provided
under the AIFP.
---------------------------------------------------------------------------
\49\ GMAC conversations with Panel staff (Feb. 16, 2010); GMAC,
LLC, GMAC Files Application With Federal Reserve to Become Bank Holding
Company (Nov. 20, 2008) (online at media.gmacfs.com/
index.php?s=43&item=288) (hereinafter ``GMAC Files BHC Application'');
Federal Deposit Insurance Corporation, Temporary Liquidity Guarantee
Program Frequently Asked Questions (Nov. 17, 2009) (online at
www.fdic.gov/regulations/resources/TLGP/faq.html) (hereinafter
``Temporary Liquidity Guarantee Program FAQs'') (stating that eligible
institutions include any U.S. BHC or financial holding company); U.S.
Department of the Treasury, Process-Related FAQs for Capital Purchase
Program (Mar. 3, 2009) (online at www.financialstability.gov/
roadtostability/CPPappdocs_faq1.htm) (stating that eligible
institutions include ``any bank, savings association, bank holding
company and savings and loan holding company organized under the laws
of the United States''). As an ILC, GMAC Bank (renamed Ally Bank in May
2009) would have had access to CPP funds regardless of whether GMAC
became a BHC. However, even if GMAC Bank was eligible to receive CPP
funds, its parent, GMAC, was not eligible until it became a BHC. See
U.S. Department of the Treasury, TARP Capital Purchase Program: Term
Sheet--Privately Held Institutions (online at
www.financialstability.gov/docs/CPP/Term%20Sheet%20-
%20Private%20C%20Corporations.pdf) (accessed Feb. 22, 2010) (stating
that ``[q]ualifying Financial Institution (`QFI') means any (i) top-
tier Bank Holding Company'').
---------------------------------------------------------------------------
GMAC's management maintains that converting to a BHC also
addressed a weakness in the company's business model.\50\ In
GMAC's view, the financial crisis had taught them that their
reliance on the wholesale funding and securitization markets
was untenable in the long run. GMAC's management believed that
a more sustainable business model could be created by becoming
a ``classic bank'' with access to deposits.\51\
---------------------------------------------------------------------------
\50\ GMAC conversations with Panel staff (Feb. 16, 2010).
\51\ GMAC conversations with Panel staff (Feb. 16, 2010). When GMAC
announced that it would apply for BHC status, its press release made no
reference to the desire to access deposits, instead couching the
application as an effort to ``obtain increased flexibility and
stability'' with ``expanded opportunities for funding and for access to
capital.'' GMAC Files BHC Application, supra note 49.
---------------------------------------------------------------------------
In fact, GMAC Bank would have been able to accept certain
types of deposits even if it had remained an ILC.\52\ As Daniel
Tarullo, member of the Board of Governors of the Federal
Reserve System, has testified, ILCs ``have virtually all of the
deposit-taking powers of commercial banks; and may engage in
the full range of other banking services, including commercial,
mortgage, credit card, and consumer lending activities, as well
as cash management services, trust services, and payment-
related services, such as Fedwire, automated clearinghouse, and
check-clearing services.'' \53\ The primary restriction that
GMAC Bank faced as an ILC was that it was not permitted to
offer demand deposits.\54\
---------------------------------------------------------------------------
\52\ In addition, GMAC did not need to become a BHC to gain access
to the Federal Reserve's discount window because GMAC Bank (its bank
subsidiary) was already a ``depository institution.'' See Federal
Reserve Banks, The Federal Reserve Discount Window (Feb. 19, 2010)
(online at www.frbdiscountwindow.org/
discountwindowbook.cfm?hdrID=14&dtlID=43#eligibility) (``By law,
depository institutions that maintain reservable transaction accounts
or nonpersonal time deposits (as defined in Regulation D) may establish
borrowing privileges at the Discount Window''); Senate Committee on
Banking, Housing, and Urban Affairs, Written Testimony of Daniel K.
Tarullo, member, Board of Governors of the Federal Reserve System,
Strengthening and Streamlining Prudential Bank Supervision, at 11-12
(Aug. 4, 2009) (online at banking.senate.gov/public/
index.cfm?FuseAction=Files.View&FileStore_id=0656fee8-e81c-4081-b99b-
7a7c1571fb4d) (hereinafter ``Written Testimony of Daniel Tarullo'')
(``ILCs are state-chartered banks that have full access to the federal
safety net, including FDIC deposit insurance and the Federal Reserve's
discount window and payments systems'').
\53\ Written Testimony of Daniel Tarullo, supra note 52, at 12.
\54\ See 12 U.S.C. Sec. 1841(c)(2)(H)(i)(I).
---------------------------------------------------------------------------
b. BHC Approval
The Board expedited GMAC's BHC application, citing the
``emergency conditions'' caused by the ``unusual and exigent
circumstances affecting the financial markets.'' \55\ After its
review, the Board, in an unusual 4-1 vote,\56\ approved the
GMAC proposal on December 24, 2008 finding that GMAC had
satisfied the requisite criteria under the BHCA \57\ and
determining that the ``performance of the proposed activities
by GMAC can reasonably be expected to produce benefits to the
public . . . that outweigh possible adverse effects, such as
undue concentration of resources, decreased or unfair
competition, conflicts of interests, or unsound banking
practices.'' \58\ The Board stated that it considered the six
relevant statutory factors in reaching its decision.\59\ It
also stated that it took into account Treasury's actions to
assist GM ``and thereby help ensure the viability of a major
business partner of GMAC and GMAC Bank.'' \60\ The Board also
found that GMAC Bank was ``well capitalized'' under regulatory
guidelines.\61\ Upon the Board's approval of the BHC
application, GMAC Bank converted into a Utah state-chartered
commercial non-member bank. As a BHC, GMAC is subject to the
comprehensive, consolidated supervision of the Federal Reserve,
including risk-based and leverage capital requirements and
information reporting requirements.
---------------------------------------------------------------------------
\55\ Board of Governors of the Federal Reserve System, Order
Approving Formation of Bank Holding Companies and Notice to Engage in
Certain Nonbanking Activities, at 2 (Dec. 24, 2008) (online at
www.federalreserve.gov/newsevents/press/orders/orders20081224a1.pdf).
Typically, Section 3(b)(1) of the BHCA requires the Board to provide
notice of an application to the appropriate federal or state
supervisory authority for the banks to be acquired and provide the
supervisor with a period of time (usually 30 days) to submit views and
recommendations on the proposal. 12 U.S.C. Sec. 1842(b)(1); 12 CFR
Sec. 225.15(b), 12 CFR Sec. 225.16(b)(3).
\56\ The breakdown of this vote is unusual since the votes have
typically been unanimous in recent years. See, e.g., Board of Governors
of the Federal Reserve System, Order Approving the Formation of a Bank
Holding Company, Sandhills Bancshares, Inc. (Oct.1, 2009) (online at
www.federalreserve.gov/newsevents/press/orders/orders20091001a1.pdf);
Board of Governors of the Federal Reserve System, Order Approving
Formation of Bank Holding Companies, The Goldman Sachs Group Inc.
(Sept. 21, 2008) (online at www.federalreserve.gov/newsevents/press/
orders/orders20080922a1.pdf); Board of Governors of the Federal Reserve
System, Order Approving Formation of Bank Holding Companies and Notice
to Engage in Certain Nonbanking Activities, American Express Company
(Nov. 10, 2008) (online at www.federalreserve.gov/newsevents/press/
orders/orders20081110a1.pdf) (all 5-0 votes by the Board).
\57\ 12 U.S.C. Sec. 1841(a)(2); 12 CFR Sec. 225.2(e); see also 12
CFR Sec. 225.31(d) (Regulation Y).
\58\ Board of Governors of the Federal Reserve System, GMAC LLC; IB
Finance Holding Company, LLC: Order Approving Formation of Bank Holding
Companies and Notice to Engage in Certain Nonbanking Activities,
Federal Reserve Bulletin, Vol. 95, Legal Developments: Fourth Quarter,
2008 (May 29, 2009) (online at www.federalreserve.gov/pubs/bulletin/
2009/legal/q408/order6.htm) (hereinafter ``Order Approving GMAC's BHC
Formation''). In this case, the Board provided notice to GMAC Bank's
primary federal and state supervisors, the FDIC, and the Commissioner
of the Utah Department of Financial Institutions (UDFI), and the Board
noted that they expressed no objection to the application's approval.
\59\ The BHCA establishes the factors that the Board considers when
reviewing the formation of a BHC or the acquisition of a bank. 12
U.S.C. Sec. 1842(c)(1)-(6). These standards, and in particular the
language contained in Section 1842, suggest that the Board has a
substantial amount of discretionary power in approving BHC
applications.
\60\ Order Approving GMAC's BHC Formation, supra note 58.
\61\ Order Approving GMAC's BHC Formation, supra note 58. At the
end of 2008, GMAC's solvency ratio was below what is generally
considered to be adequately solvent to meet short- and long-term
obligations. GMAC Form 10-K for 2008, supra note 10, at 107-108.
---------------------------------------------------------------------------
When the Board granted GMAC's BHC application, it addressed
the existence of certain nonbanking operations that are
explicitly permitted under the BHCA, such as credit extension,
servicing, and leasing.\62\ The Board concluded that the
``conduct of the proposed nonbanking activities within the
framework of Regulation Y and Board precedent can reasonably be
expected to produce public benefits that would outweigh any
likely adverse effects.'' \63\ Additionally, even if GMAC
currently engages in some nonbanking activities that do not
conform to the requirements of the BHCA, it has at least two
years to bring these activities into conformity with the
statute.\64\
---------------------------------------------------------------------------
\62\ See Order Approving GMAC's BHC Formation, supra note 58
(citing 12 CFR Sec. 225.28(b)(1)-(3).
\63\ Order Approving GMAC's BHC Formation, supra note 58. According
to Regulation Y, the Board must also find that a proposed activity is
``so closely related to banking, or managing or controlling banks as to
be a proper incident thereto.'' The Board's conclusion that the
``proposed nonbanking activities'' are ``within the framework of
Regulation Y'' implies that it determined that these proposed
activities are sufficiently ``related to banking'' so as to satisfy the
regulation. 12 CFR Sec. 225.21(a)(2).
\64\ Order Approving GMAC's BHC Formation, supra note 58 (citing 12
U.S.C. Sec. 1843(a)(2) (``Section 4 of the BHCA by its terms also
provides any company that becomes a bank holding company two years
within which to conform its existing nonbanking investments and
activities to the section's requirements, with the possibility of three
one-year extensions'')). While GMAC has a period of time to conform its
existing nonbanking activities to the BHCA, its public statements
suggest that it may convert to a financial holding company, allowing it
to ``engage in a broader range of financial and related activities than
those that are permissible for bank holding companies, in particular
securities, insurance, and merchant banking activities.'' GMAC Form 10-
K for 2009, supra note 12, at 6. According to GMAC, as a BHC, it is
``eligible to convert to a financial holding company subject to
satisfying certain regulatory requirements applicable to [GMAC] and to
Ally Bank (and any depository institution subsidiary that [it] may
acquire in the future).'' Id.
---------------------------------------------------------------------------
As a condition of approval for GMAC's application, neither
GM nor Cerberus was allowed to maintain a controlling interest
in GMAC, and GMAC was required to enter into passivity
agreements with both companies.\65\ GM was required to reduce
its ownership stake to less than 10 percent and transfer that
interest to an independent trust, to be approved by the Board
and Treasury. The Board noted that it has permitted trusts
historically only ``as an interim measure in extraordinary and
unusual circumstances when warranted by the public interest to
allow an orderly divestiture of shares to conform with the
requirements of the BHC Act.'' It approved of the trust
structure in this case because ``the divestiture plan is part
of a proposal negotiated with Treasury to provide temporary
assistance to GM and GMAC.'' Cerberus agreed to reduce its GMAC
equity interest to less than 25 percent of the voting equity,
with no single investor owning or controlling more than 5
percent.\66\ Pursuant to these agreements, GM and Cerberus
executed these reductions in ownership in May 2009. GM also
committed to remove any voting representatives from GMAC's
board of directors, but it requested the right to appoint a
nonvoting observer. Cerberus reduced its director
representation from five directors to one.
---------------------------------------------------------------------------
\65\ GM and Cerberus were previously not subject to the BHCA
because GMAC's subsidiary insured depository institution, GMAC Bank,
was an industrial loan company, exempt from the definition of ``bank''
under the BHCA. Board of Governors of the Federal Reserve System,
Letter to B. Robbins Kiessling, Esq., advising that General Motors
Corporation would not control GMAC LLC, both of Detroit, Michigan,
under the Bank Holding Company Act (Mar. 24, 2009) (online at
www.federalreserve.gov/boarddocs/legalint/BHC_ChangeInControl/2009/
20090324b.pdf) (hereinafter ``March 24 Letter to B. Robbins Kiessling,
Esq.''); Board of Governors of the Federal Reserve System, Letter to
Joseph P. Vitale, Esq., advising that Stephen A. Feinberg and the
entities he controls or advises would not control GMAC LLC, Detroit,
Michigan, under the Bank Holding Company Act (Mar. 24, 2009) (online at
www.federalreserve.gov/boarddocs/legalint/BHC_ChangeInControl/2009/
20090324.pdf) (hereinafter ``March 24 Letter to Joseph P. Vitale,
Esq.'').
\66\ March 24 Letter to Joseph P. Vitale, Esq., supra note 65.
---------------------------------------------------------------------------
In connection with its BHC application, at the end of 2008
GMAC made exchange and cash tender offers to restructure GMAC
and ResCap's capital structures. These steps were taken in
order to satisfy the Federal Reserve's requirements that GMAC,
among other things, attain a minimum amount of total regulatory
capital of $30 billion.\67\ In its public statements, GMAC
signaled to the market that meeting this target in the debt
exchange was a necessary condition for the Federal Reserve to
approve its BHC application.\68\ In order to satisfy this
condition, GMAC needed the overall participation rate in the
offers to be approximately 75 percent on a pro-rata basis.\69\
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\67\ GMAC, LLC, GMAC Announces That the Results of Its Exchange
Offers Are Insufficient To Meet Regulatory Capital Requirements To
Become a Bank Holding Company (Dec. 10, 2008) (online at
media.gmacfs.com/index.php?s=43&item=293) (hereinafter ``GMAC Announces
Results of Exchange Offers''). Capital adequacy is one of the factors
that the Federal Reserve Board shall consider when reviewing the
formation of a BHC or the acquisition of a bank. See 12 U.S.C.
Sec. 1842(c)(2).
\68\ See, e.g., GMAC Announces Results of Exchange Offers, supra
note 67 (stating that the ``Federal Reserve has required GMAC to, among
other things, achieve a minimum amount of total regulatory capital of
$30 billion in connection with its application.''); GMAC, LLC, GMAC
Makes Final Amendments to the Exchange Offers After Reaching Agreement
With a Substantial Portion of Bondholders (Dec. 12, 2008) (online at
media.gmacfs.com/index.php?s=43&item=294) (referencing ``the estimated
overall participation that would be required to satisfy the condition
for a minimum amount of regulatory capital in connection with GMAC's
application to become a bank holding company'').
\69\ GMAC Announces Results of Exchange Offers, supra note 67.
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GMAC's bondholders were resistant to the exchange, however,
and did not initially tender the principal amount of bonds
necessary for the BHC conversion.\70\ Only 58 percent of the
GMAC notes and 37 percent of the ResCap notes were tendered as
of December 24, 2008, the date of GMAC's BHC approval.\71\
Ultimately, however, the Federal Reserve approved GMAC's BHC
application despite the shortfall in the amount of tendered
bonds on the grounds that GMAC's capital ratio was nonetheless
adequate.\72\ It is impossible, in retrospect, to determine
what would have happened if GMAC had continued to press its
bondholders in the absence of the Federal Reserve's intervening
BHC application approval.
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\70\ Although GMAC's equity holders were left (all else being
equal) relatively whole (although they were substantially diluted upon
Treasury's series of TARP investments, they were not wiped out
completely), the GMAC bondholders were required to take significant
haircuts in connection with GMAC's application to become a BHC. One
investor, William Gross of Pimco, resisted the offer on the grounds
that it would require bondholders to forgo 50 percent of what GMAC owed
them. Leslie Wayne, New York Times, GMAC Hopes Bondholders Approve Bank
Deal (Dec. 23, 2008) (online at www.nytimes.com/2008/12/24/business/
24gmac.html). The exchange offer was fraught with difficulty, as many
bondholders refused to tender. GMAC Announces Results of Exchange
Offers, supra note 67 (noting that ``[b]ased on the results of the GMAC
and ResCap offers to date, GMAC would not obtain a sufficient amount of
total regulatory capital in connection with the GMAC and ResCap offers
to meet the requirements set forth by the Federal Reserve for GMAC to
become a bank holding company under the Bank Holding Company Act of
1956'').
\71\ GMAC, LLC, GMAC Receives Significant Participation and Extends
Early Delivery Time of its Notes Exchange Offers (Dec. 16, 2008)
(online at media.gmacfs.com/index.php?s=43&item=295).
\72\ Federal Reserve conversations with Panel staff (Feb. 19,
2010).
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In connection with the renaming of GMAC Bank to Ally Bank
in May 2009 and the FDIC's decision to increase the amount of
brokered deposits that the bank could raise, Ally Bank launched
a major brand-building and deposit-generation initiative.\73\
As of December 31, 2009, the deposit base at Ally Bank was
$28.8 billion, an increase of 50 percent from the previous
year.\74\
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\73\ Congressional Oversight Panel, Written Testimony of Ron Bloom,
senior advisor to the Secretary of the Treasury, and Jim Millstein,
chief restructuring officer, U.S. Department of the Treasury, COP
Hearing on GMAC Financial Services, at 9 (Feb. 25, 2010) (online at
cop.senate.gov/documents/testimony-022510-treasury.pdf) (hereinafter
``Written Testimony of Ron Bloom and Jim Millstein''). Treasury, among
others, has seemingly endorsed Ally Bank's increasing role in GMAC's
business model, noting that GMAC has ``access to deposits now through
Ally Bank that they hadn't had before, which lowers their cost of
capital.'' Transcript of COP Hearing on GMAC, supra note 12 (Testimony
of Jim Millstein).
\74\ GMAC Form 10-K for 2009, supra note 12, at 82.
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c. GMAC's Section 23(a) Exemption
After it became a BHC, GMAC requested on two occasions that
the Board grant Ally Bank an exemption from Section 23(a) of
the Federal Reserve Act.\75\ Section 23(a) restricts the amount
of ``covered transactions'' between a bank and its
affiliates.\76\ ``Covered transactions'' are transactions
between a bank and an affiliate, including the purchase of
assets and extensions of credit. Transactions between a bank
and a third party are also considered ``covered transactions''
if the transactions' proceeds are used to benefit an affiliate
of the bank. Section 23(a) authorizes the Board to grant an
exemption if it finds that doing so is in the public interest
and consistent with the statute's purposes.\77\
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\75\ 12 U.S.C. Sec. 371c; 12 CFR part 223.
\76\ Section 23(a) limits the ``amount of `covered transactions'
between a bank and any single affiliate to 10 percent of the bank's
capital stock and surplus and . . . the amount of covered transactions
between a bank and all its affiliates to 20 percent of the bank's
capital stock and surplus.'' Letter from Robert deV. Frierson, deputy
secretary of the Board, Board of Governors of the Federal Reserve
System, to Richard K. Kim, partner, Corporate Department, Wachtell,
Lipton, Rosen, & Katz (May 21, 2009) (online at www.federalreserve.gov/
boarddocs/legalint/FederalReserveAct/2009/20090521/20090521.pdf)
(hereinafter ``May 21 Letter from Robert deV. Frierson'').
\77\ 12 U.S.C. Sec. 371c(f)(2); 12 CFR Sec. 223.43(a).
---------------------------------------------------------------------------
The purpose of the provision is to preserve the safety and
soundness of banks that receive FDIC backing and to promote
competition by reducing the likelihood that banks would favor
certain customers over others.\78\ Section 23(a) is considered
a critical component of the firewall separating banking and
commerce, a principle that stands at the center of banking
law.\79\ One expert referred to Section 23(a) as the ``Magna
Carta'' of banking law.\80\ Exemptions are granted rarely.\81\
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\78\ See Jonathan R. Macey, Geoffrey P. Miller, and Richard Scott
Carnell, Banking Law and Regulation, 3d edition 472 (2001). The Federal
Reserve Board has indicated that the ``twin purposes of section 23(a)
are (i) to protect against a depository institution suffering losses in
transactions with affiliates and (ii) to limit the ability of an
institution to transfer to its affiliates the subsidy arising from the
institution's access to the federal safety net.'' Board of Governors of
the Federal Reserve System, Transactions Between Member Banks and
Affiliates, 67 Fed. Reg. 76560, 76560 (Dec. 12, 2002) (final rule). The
safety net consists of deposit insurance, the Federal Reserve's
discount window, and other banking regulatory tools designed to protect
financial markets and participants.
\79\ For example, the Senate Report on the Gramm-Leach-Bliley Act
stated that the law intended to preserve the separation of banking and
commerce. Senate Committee on Banking, Housing, and Urban Affairs,
Report on the Financial Services Modernization Act of 1999, S.Rep. 106-
44, at 21 (Apr. 28, 1999) (online at www.gpo.gov/fdsys/pkg/CRPT-
106srpt44/pdf/CRPT-106srpt44.pdf) (``This authority provides the Board
with some flexibility to accommodate the affiliation of depository
institutions with insurance companies, securities firms, and other
financial services providers while continuing to be attentive not to
allow the general mixing of banking and commerce in contravention of
the purposes of this Act''); see also Arthur E. Wilmarth, Jr., Subprime
Crisis Confirms Wisdom of Separating Banking and Commerce, Banking &
Financial Services Policy Report, at 3 (May 2008) (hereinafter ``Wisdom
of Separating Banking and Commerce'').
\80\ Analyst conversations with Panel staff (Mar. 1, 2010).
\81\ Prior to the onset of the financial crisis, the Board granted
only a small number of Section 23(a) exemptions. In the past, typical
23(a) exemptions dealt with one-off sales/purchases of assets as
between the bank and its affiliates (e.g., purchase of the premises
from the parent, purchase by the bank of an aircraft from an affiliate,
etc.), corporate reorganizations, and allowing banks to establish
securities lending or borrowing programs with their securities
affiliates. Other examples include blanket exemptions given during
times of significant upheaval or crisis, such as the period following
the attacks of September 11, 2001. Wisdom of Separating Banking and
Commerce, supra note 79, at 9.
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Section 23(a) applies to dealer loans and retail loans made
by Ally Bank because GM and GMAC are both affiliates of Ally
Bank. GMAC applied for an exemption because it sought to engage
in transactions in excess of the limitations imposed by Section
23(a).\82\
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\82\ May 21 Letter from Robert deV. Frierson, supra note 76.
---------------------------------------------------------------------------
On December 24, 2008, the Board granted GMAC's request for
an exemption for retail loans,\83\ and on May 21, 2009, it
granted GMAC's extended request for an exemption for both
retail and dealer loans. In granting this extended exemption,
the Board stated that ``covered transactions'' would ``benefit
the public because they would allow [Ally] Bank to extend
credit to a greater number of retail customers and provide
dealers with greater access to financing, thereby avoiding
further disruption in the credit market for automobile
purchases.'' \84\ The exemption does not expire.
---------------------------------------------------------------------------
\83\ Letter from Robert deV. Frierson, deputy secretary of the
Board, Board of Governors of the Federal Reserve System, to Richard K.
Kim, partner, Corporate Department, Wachtell, Lipton, Rosen, & Katz
(Dec. 24, 2008) (online at www.federalreserve.gov/boarddocs/legalint/
federalreserveact/2008/20081224/20081224.pdf).
\84\ May 21 Letter from Robert deV. Frierson, supra note 76; see
also GMAC Form 10-Q for Q3 2009, supra note 22, at 95.
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To address concerns about the impact of the exemption on
competitiveness and on the safety and soundness of Ally Bank,
the Board required GMAC to satisfy certain conditions.\85\
These conditions apply only to funds originated by Ally Bank.
In other words, if GMAC makes loans using funds from other
sources--such as the securitization market--it does not need to
comply with these conditions. Regardless of the source of
funds, GMAC must abide by BHC-specific regulations and is
subject to ongoing oversight by the Federal Reserve.
---------------------------------------------------------------------------
\85\ May 21 Letter from Robert deV. Frierson, supra note 76.
---------------------------------------------------------------------------
The Board also noted that it granted the exemption ``in
light of the unique circumstances surrounding'' GMAC and
Treasury's provision of ``substantial capital support'' to GMAC
``to allow it to continue its financing of GM automobile
purchases and to expand its activities to include financing
Chrysler automobiles.'' \86\ While the Board historically has
required a parent company to provide a collateralized guarantee
when it transfers assets to an affiliate, it did not obligate
GMAC to provide collateral here because ``GMAC's financial
position will be strengthened by an additional equity
investment by Treasury.'' As a result, the Board determined
that ``Treasury's support helps ensure that GMAC will be in a
position to honor its obligations under the guarantee.'' The
ongoing consequences and implications of these determinations
are reflected in the rest of the report.
---------------------------------------------------------------------------
\86\ May 21 Letter from Robert deV. Frierson, supra note 76; March
24 Letter to B. Robbins Kiessling, Esq., supra note 65; March 24 Letter
to Joseph P. Vitale, Esq., supra note 65.
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d. Impact of BHC Approval
The Board's decision to approve GMAC's BHC application
produced a number of results. The market appears to have had
mixed reactions to the Board's approval of GMAC's BHC
application. The value of some of GMAC's debt increased over
the course of one week after the BHC approval.\87\ That said,
Standard & Poor's (S&P) downgraded certain debt ratings for
GMAC and ResCap, voicing concerns that ``the exchange and the
application for BHC status illustrate the gravity of the
company's financial position.'' \88\
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\87\ GMAC's BHC approval had a dramatic effect on the price of
GMAC's outstanding debt. For example, the price of GMAC's $2 billion,
7.25 percent senior unsecured note with a March 2, 2011 maturity
increased from 40.8 on December 1, 2008 to 87.9 on January 2, 2009. The
price of another issue, GMAC's 7 percent senior unsecured $1 billion
note with a maturity of February 2, 2012, increased from 33 on December
1, 2008 to 80.3 on January 5, 2009. Bloomberg Data (accessed Mar. 9,
2010).
\88\ Standard & Poor's, GMAC LLC, Residential Capital LLC Ratings
Lowered to `SD' From `CC', Taken Off Credit Watch (Dec. 31, 2008).
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Perhaps most significantly, the government's intervention
and ``guarantee'' of GMAC's debt raise substantial moral hazard
concerns. The bondholders who participated in the debt exchange
received significant haircuts, meaning that they incurred some
loss.\89\ Once the Board had approved GMAC's BHC application
and Treasury had provided GMAC with TARP funds, however, the
bondholders who chose not to exchange their debt ranked senior
to the United States and were likely to receive full payment on
their notes. The bondholders learned that in the face of a
potential government rescue, sitting on the sidelines and
holding out may very well result in higher returns and greater
value.
---------------------------------------------------------------------------
\89\ For further discussion about the debt exchange, see note 68,
supra.
---------------------------------------------------------------------------
GMAC's conversion to a BHC failed to stop the tide of
losses. Upon the release of its 2008 financial results in
February 2009, then-GMAC CEO Alvaro G. de Molina commented that
``[t]he past year was clearly an extraordinary period for GMAC.
Our business, like many others, was significantly affected by
the U.S. recession, the global capital and credit market
disruption, falling auto sales and a mortgage market in
turmoil.'' \90\ GMAC reported net income of $3.4 billion for
the 2008 year (which was due solely to an exceptional one-time
gain on the debt exchange in the fourth quarter of 2008),
compared to a net loss of $8.0 billion for the 2009 year.\91\
---------------------------------------------------------------------------
\90\ GMAC, LLC, GMAC Financial Services Reports Preliminary Fourth
Quarter and Full-Year 2008 Financial Results (Feb. 3, 2009) (online at
media.gmacfs.com/index.php?s=43&item=305) (hereinafter ``GMAC Reports
Preliminary Q4 and Full-Year 2008 Results''). Treasury has never argued
that GMAC itself was systemically important, although in December 2008
some communications indicated a belief in Treasury that GMAC's
failure--independent of its effects on the domestic automobile
industry--could have thrown an already precarious financial system into
further disarray during the depths of the financial crisis. For
example, there was mention of potential losses that could be incurred
by holders of GMAC debt, representing a number of other financial
institutions across the industry. Treasury conversations with Panel
staff (Feb. 2, 2010). Chrysler Financial was also adversely affected by
the deterioration in the credit markets, the changed landscape of the
automotive industry in late 2008, and the maturity of outstanding debt.
The situation was more ominous for Chrysler Financial, however, because
its debt situation was even worse. Unlike GMAC, Chrysler Financial
faced the maturity of all of its outstanding debt in July 2009. In the
early spring of 2009, Treasury concluded that Chrysler Financial would
be unable to meet its financing requirements by July 2009. In order to
prevent the collapse of Chrysler, Treasury claimed that the government
acted to orchestrate the continued existence of a viable financing
source for Chrysler dealers and consumers by folding Chrysler
Financial's core operations into GMAC. For further discussion of GMAC's
assumption of Chrysler Financial's business, see Section E.1, infra.
\91\ GMAC Form 10-K for 2009, supra note 12, at 29. In the first
quarter of 2009, the company still reported as GMAC, LLC and GMAC Bank
before changing to GMAC, Inc. and Ally Bank, respectively. Effective
June 30, 2009, GMAC LLC was converted from a Delaware limited liability
company into a Delaware corporation, and was renamed ``GMAC Inc.'' The
Tier 1 risk-based capital ratio represents the percentage of risk-based
capital to total risk-weighted assets and is used by regulators to
measure a financial institution's capital adequacy. According to the
FDIC guidelines, a financial institution is considered ``well
capitalized'' if the Tier 1 risk-based capital ratio is equal to or
greater than 6 percent and ``adequately capitalized'' (i.e., minimum
capitalization ratio) if the ratio is equal to or greater than 4
percent. Based upon the most recent available information, GMAC, Inc.'s
Tier 1 risk-based capital ratio was 14.1 percent (at the end of 2009),
and Ally Bank's Tier 1 risk-based capital ratio was 22.1 percent (for
the third quarter of 2009).
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3. GMAC's Relationship with GM
a. Captive Era
GMAC's current relationship with GM is shaped by the shared
historical relationship between the two entities since 1919.
Until 2006, GMAC was a wholly owned subsidiary of GM,
functioning as GM's captive financing arm with the interests of
both entities very closely aligned. During the time that GMAC
functioned as a captive, GM and GMAC shared the objective of
maximizing profits by selling and leasing as many cars as
possible. GMAC's role was to provide GM dealers with the
financing necessary to acquire and maintain automobile
inventories and to provide GM consumers with a financing source
to purchase or lease automobiles. GMAC's relationship with GM
has been significantly affected by subvention--the way in which
GM pays for incentive programs that it offers through GMAC
exclusively. As GMAC has stated:
General Motors may elect to sponsor incentive
programs (on both retail contracts and leases) by
supporting financing rates below standard rates at
which GMAC purchases retail contracts. Such marketing
incentives are also referred to as rate support or
subvention. General Motors pays the present value
difference between the customer rate and GMAC's
standard rates either directly or indirectly to GM
dealers. GMAC purchases these contracts at a discount,
which is deferred and recognized as a yield adjustment
over the life of the contract. GM may also provide
incentives on leases by supporting residual values
(established at lease inception) in excess of GMAC's
standard residual values and by reimbursing the Company
to the extent vehicle remarketing proceeds are less
than contract residuals. Such lease incentives are also
referred to as residual support. . .\92\
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\92\ GMAC, LLC, Form 10-K for the Fiscal Year Ended December 31,
2004, at 11 (online at www.sec.gov/Archives/edgar/data/40729/
000095012405001563/k91417e10vk.htm). While GMAC made this statement in
its 2004 Annual Report, its more recent annual reports have repeated
this discussion, indicating that such subvention agreements have
continued between GM and GMAC.
Under the arrangements with GM, while GMAC generally
incurred the risk of loss if the value of a leased vehicle upon
resale fell below the projected residual value of the vehicle
at the time the lease contract was signed, GM would reimburse
GMAC if the resale proceeds were less than the residual value
set forth in the lease contract at lease termination.\93\
---------------------------------------------------------------------------
\93\ GMAC Form 10-K for 2005, supra note 36, at 23.
---------------------------------------------------------------------------
In addition, GMAC carved out a particularly critical niche
in automotive finance by providing the vast majority of
floorplan financing to GM dealers,\94\ which, as noted above,
ensures that car dealers will have inventory in place when
sales opportunities arise.
---------------------------------------------------------------------------
\94\ For further discussion regarding GMAC's importance to GM and
the need for GMAC to continue operating in the floorplan lending arena
in particular, see Section E, infra.
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b. Post-captive Era
While GMAC may no longer be a captive in the legal sense
after it became an independent finance company in 2006, it
essentially functions as a captive in many ways as a result of
the contractual codification of its historical relationship
with GM.\95\ As part of the 2006 sale, GMAC and GM entered into
several service agreements that ``codified the mutually
beneficial historic relationship between the companies.'' \96\
One of these agreements was the United States Consumer
Financing Services Agreement (USCFSA), which, among other
things, provided that GM would use GMAC exclusively whenever it
offered vehicle financing and leasing incentives to
customers.\97\ The parties agreed to maintain this relationship
for ten years and, as consideration for this arrangement, GMAC
pays GM an annual exclusivity fee and agrees to meet specified
targets with respect to consumer retail and lease financings of
new GM vehicles.\98\
---------------------------------------------------------------------------
\95\ In conversations with Panel staff, industry analysts also
presented the same view of GMAC's role in the automotive finance
industry.
\96\ GMAC Form 10-K for 2008, supra note 10, at 40.
\97\ GMAC Form 10-K for 2008, supra note 10, at 40.
\98\ In 2009, GMAC paid GM a total of $122 million for services
provided. This includes $75 million for the exclusivity arrangement
under the U.S. Consumer Financing Services Agreement for the GM-
supported U.S. retail business, $15 million for the GM-supported
Canadian retail business, $10 million for the GM-supported retail
business in international operations, marketing royalties of $15
million in connection with the use of the GM name in GMAC's insurance
products, and rent for GMAC's primary executive and administrative
offices located in the Renaissance Center in Detroit, Michigan. For
further information about GMAC's exclusivity arrangement and royalty
agreement with GM, see GMAC Form 10-K for 2009, supra note 12, at 180,
183.
---------------------------------------------------------------------------
On December 29, 2008, after the Federal Reserve approved
GMAC's application to become a BHC, GM and GMAC agreed to
modify certain terms and conditions of the USCFSA.\99\ These
amendments include the following:
---------------------------------------------------------------------------
\99\ GMAC Form 10-K for 2008, supra note 10, at 40.
---------------------------------------------------------------------------
The parties agreed that for a two-year period, GM
could offer retail financing incentive programs through an
alternative financing source under certain conditions (and
sometimes with the limitation that the alternative financing
source's pricing meets certain restrictions).\100\ Following
that two-year period, GM would be able to offer any incentive
programs on a graduated basis through alternative financing
sources, along with GMAC, provided that the pricing satisfies
certain requirements.\101\
---------------------------------------------------------------------------
\100\ GMAC Form 10-K for 2008, supra note 10, at 40.
\101\ GMAC Form 10-K for 2008, supra note 10, at 40.
---------------------------------------------------------------------------
The parties agreed to eliminate the requirement
that GMAC satisfy certain lending and underwriting targets in
order to remain the exclusive underwriter of special
promotional loan programs offered by GM.\102\ GM offered GMAC
the right to finance these special programs for retail
consumers for a five-year period.\103\
---------------------------------------------------------------------------
\102\ March 24 Letter to B. Robbins Kiessling, Esq., supra note 65.
\103\ March 24 Letter to B. Robbins Kiessling, Esq., supra note 65.
---------------------------------------------------------------------------
The parties eliminated the exclusivity arrangement
with respect to promotional programs for GM dealers, and this
change will be phased out over time.\104\
---------------------------------------------------------------------------
\104\ March 24 Letter to B. Robbins Kiessling, Esq., supra note 65.
---------------------------------------------------------------------------
The parties agreed that GMAC would no longer have
an obligation to lend to a particular wholesale or retail
customer, provide operating lease financing products, or be
required to pay a penalty or receive lower payments or
incentives for refusing to lend to a customer or for failing to
satisfy individual or aggregate lending targets.\105\ GMAC can
also make loans to any third party and will use its own
underwriting standards in making loans, including GM-related
loans.\106\
---------------------------------------------------------------------------
\105\ GMAC Form 10-K for 2008, supra note 10, at 40; March 24
Letter to B. Robbins Kiessling, Esq., supra note 65.
\106\ March 24 Letter to B. Robbins Kiessling, Esq., supra note 65.
---------------------------------------------------------------------------
The modified USCFSA is in effect until December 24,
2013.\107\ In addition, the subvention agreements between GM
and GMAC have been continued through these contractual
agreements, and the same accounting and disclosure methods are
used to account for such agreements.\108\
---------------------------------------------------------------------------
\107\ GMAC Form 10-K for 2008, supra note 10, at 40.
\108\ See, e.g., GMAC Form 10-K for 2008, supra note 10, at 162;
GMAC Form 10-K for 2009, supra note 12, at 43-44.
---------------------------------------------------------------------------
GMAC has noted that its profitability and the financial
condition of its operations remain heavily dependent upon the
performance, operations, and prospects of GM.\109\ Despite the
contractual modifications discussed above, GMAC notes that
``[a] primary objective of the [United States Consumer]
Financing Services Agreement continues to be supporting
distribution and marketing of GM products.'' \110\ While GMAC
currently has a relationship with Chrysler after taking over a
substantial component of Chrysler Financial's business, this
does not necessarily mean that the captive issue disappears;
GMAC's operations continue to have many attributes of a captive
relationship, except that it now has those relationships with
both GM and Chrysler. As GMAC CEO Michael Carpenter discussed
recently, GMAC continues to enjoy an extremely close
relationship with GM, which he described as GMAC's
partner.\111\ According to Mr. Carpenter, ``the real difference
between being a partner versus a captive is that, as a partner,
the economic decisions that the manufacturer makes, in terms
of, if you will, subsidizing the sale of the automobile by
using financing, becomes obvious and transparent as opposed to
buried.'' \112\ At the Panel's recent GMAC hearing, Mr.
Carpenter and CFO Robert Hull confirmed that GMAC continues to
enjoy several advantages in the marketplace, including
subvention agreements with GM, extensive knowledge of the
dealership world, and integration with the dealers and
manufacturers from a systems point of view.\113\ GM also
remains contractually obligated to cover some of GMAC's lease
losses and to support the residual values of the vehicles on
GMAC's books.
---------------------------------------------------------------------------
\109\ GMAC Form 10-K for 2009, supra note 12, at 15-16.
\110\ GMAC Form 10-K for 2009, supra note 12, at 2, 44.
\111\ GMAC, Inc., GMAC--Q4 2009 GMAC Inc. Earnings Conference Call,
at 4 (Feb. 4, 2010) (online at www.gmacfs.com/us/en/about/investor/
upcoming_events.html) (hereinafter ``GMAC Q4 2009 Earnings Conference
Call'').
\112\ GMAC Q4 2009 Earnings Conference Call, supra note 111, at 15.
\113\ Transcript of COP Hearing on GMAC, supra note 12 (Testimony
of Michael Carpenter and Robert Hull).
---------------------------------------------------------------------------
Both in GMAC's captive and non-captive states, GM and GMAC
are so intertwined that providing assistance to one is
essentially providing assistance to the other, meaning that the
government's support for GMAC is essentially additional
assistance to GM.
c. Other Issues Raised by GM/GMAC Relationship
The captive finance company model has created a variety of
complications for GM and GMAC. At a certain level, the captive
company model contributed to GMAC's poor performance in
mortgage financing. Prior to GM's rating downgrade, and while
it was still a captive, GMAC relied on its parent's high credit
rating to obtain cheap credit, which it used in its mortgage
operations. In addition, the funds at its ILC were FDIC-
insured, and GMAC therefore had the ability to leverage
government-guaranteed funds to serve its mortgage
operations.\114\ This structure lacked transparency and allowed
the captive to gain leverage either from the health of the
manufacturing parent or the FDIC insurance of the bank. GMAC's
forays into home mortgages were ultimately disastrous, and when
Treasury provided TARP funds to GMAC--given the destabilizing
losses at ResCap--its investment was made in light of the
business model that led GMAC astray. There is a possibility
that Treasury's intervention will distort the competitive
playing field for other captives. This could be detrimental to
systemic and commercial stability, inasmuch as the economic
incentives in the relationships between captives and parents
can be difficult to unwind.\115\
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\114\ Restrictions on affiliate transfers apply to ILCs as well as
BHCs, and so GMAC Bank would have only been able to fund GM subject to
the affiliate transfer restrictions. Because GMAC Bank was an ILC,
however, GMAC, as GMAC Bank's parent, was not subject to supervisory
oversight. See O. Emre Ergungor and James B. Thomson, Industrial Loan
Companies (Oct. 1, 2006) (online at www.clevelandfed.org/research/
Commentary/2006/1001.pdf).
\115\ GMAC Q4 2009 Earnings Conference Call, supra note 111, at 15
(``I think the only--I think the real difference between being a
partner versus a captive is that, as a partner, the economic decisions
that the manufacturer makes, in terms of, if you will, subsidizing the
sale of the automobile by using financing, becomes obvious and
transparent as opposed to buried. And I actually think in the long term
that is actually positive for the auto companies, because it forces
them to make an economic decision in a very rigorous way'').
---------------------------------------------------------------------------
As discussed above, although GMAC is no longer a subsidiary
of GM, the TARP funds provided to GMAC have been cited by at
least one trading partner as giving rise to subsidy concerns
under applicable WTO rules. Thus, another consequence of the
GMAC/GM model, in which GM and GMAC (whether captive or
otherwise) are almost inextricably entwined, is that funds
provided to GMAC have also been viewed as a subsidy to GM
itself. The Panel takes no position on whether funds provided
to either GM or GMAC could in fact constitute a subsidy under
WTO rules. However, one trading partner has included the aid to
GMAC in that analysis, raising the question as to whether any
trading partner could be successful in arguing that support for
GMAC could constitute an actionable subsidy under World Trade
Organization (WTO) rules.\116\
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\116\ Some authors have already considered the relevance of WTO
rules in this context, noting that when the United States first began
discussing a variety of measures to assist the domestic automotive
industry, the President of the European Commission, Jose Manuel
Barroso, warned that the Europeans would ask the WTO if the aid to the
automotive companies constituted illegal state aid. According to these
authors, under the WTO Agreement on Subsidies and Countervailing
Measures (ASCM), a subsidy is defined as a ``financial contribution''
made by a government that confers a benefit on the receiving party. Put
another way, any government assistance must give the company an
advantage that they would not have under normal market conditions. For
example, because the interest rate on the loans to GM and Chrysler was,
in all likelihood, substantially below that which GM and Chrysler would
have been able to get in the market at the time, the loans could be
seen to have conferred upon GM and Chrysler such an advantage.
Accordingly, under the WTO subsidy rules, the loans and guarantees to
the auto industry could be viewed as subsidies. Lastly, the loans and
guarantees could meet the specificity requirement of the WTO, because
they are not available to a wide spectrum of industrial enterprises.
Claire Brunel and Gary Clyde Hufbauer, Money for The Auto Industry:
Consistent with WTO Rules?, at 6-10 (Feb. 2009) (online at www.iie.com/
publications/pb/pb09-4.pdf) (hereinafter ``Money for The Auto Industry:
Consistent with WTO Rules?''). The U.S. Government's equity investments
further complicate the analysis, because not only the loans, but also
the investments, must be evaluated according to the WTO standards. For
a more detailed discussion of the various treaties in the context of
aid to the automotive industry, see Rolf H. Weber and Mirina Grosz,
Journal of World Trade, Governments' Interventions into the Real
Economy under WTO Law Revisited: New Tendencies of Governmental Support
of the Automobile Industry (Oct. 2009) (discussing a variety of topics,
including environmental effects, applicable rules, and legal analysis).
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In September 2009, the People's Republic of China launched
a countervailing duty investigation into the assistance given
the U.S. automobile companies.\117\ Among other things, the
Chinese automotive industry cited aid to GMAC as a portion of
its case. The legal theories are complicated, but the Chinese
industry, at least, sees the GMAC bailout as part of a larger
subsidy to the auto industry. It is not clear whether any other
foreign auto industry will be interested in making such a
claim. The politics are difficult, and as most countries with
large automotive industries were engaged in providing some form
of assistance to their own automobile companies at the time,
maintaining the case might be politically untenable, even if
reciprocity is not a factor in the analysis.\118\ The
possibility remains, however, that other trading partners may
view the support for GMAC as part of a case regarding
actionable subsidies to the U.S. automobile companies.\119\
---------------------------------------------------------------------------
\117\ Ministry of Commerce, the People's Republic of China, China
Launches Anti-Dumping Probe into U.S. Auto, Chicken Products (Sept. 14,
2009) (online at english.mofcom.gov.cn/aarticle/counselorsreport/
americaandoceanreport/200909/20090906515261.html); see also Ministry of
Commerce, the People's Republic of China, Anti-dumping and Anti-Subsidy
Investigation Application (Sept. 9, 2009) (online at
www.chinaustradelawblog.com/uploads/file/Petition(1)(1).pdf).
\118\ GMAC, of course, also has a substantial international
presence, and its business plan is the same in its international
operations. See Section C.4, infra. For comparison, Peugeot and Renault
appear to have captive finance arms that operate much like the U.S.
manufacturing captive finance arms. See Banque PSA Finance, Annual
Results 2009 (Feb. 8, 2010) (online at www.banquepsafinance.com/docs/
rapports/fr/rapports162.pdf); RCI Bankque, History (online at
www.rcibanque.com/en/grou_historique.html) (accessed March 10, 2010).
In its auto bailout, however, the French government offered loans
directly to the automotive companies. See Money for The Auto Industry:
Consistent with WTO Rules?, supra note 116, at 5.
\119\ Money for The Auto Industry: Consistent with WTO Rules?,
supra note 116, at 9. This discussion only touches upon a very few of
the possible legal regimes that may be implicated by government aid to
industry generally, whether in the United States or elsewhere. For
example, the European Commission state aid doctrine holds that state
aid, which confers an improper benefit upon a domestic industry must be
notified to and approved by the European Commission. A number of cases
relating to actions taken during the financial crisis are currently
working their way through the European Commission. The European
Commission has taken the position that despite the crisis, it is
important to maintain rules regarding anti-competitive practices, but
to expedite consideration of the aid if necessary. See generally The
Scottish Parliament, State Aid Regulations (Update) (Oct. 18, 2002)
(online at www.scottish.parliament.uk/business/research/pdf_res_notes/
rn01-43.pdf); see also European Commission, The Contribution of
Competition Policy to Economic Recovery (online at ec.europa.eu/
competition/recovery/index.html) (accessed Mar. 8, 2010). There may be
other laws and doctrines addressing these issues, but they are beyond
the scope of this report.
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4. Global Automotive Finance
GMAC's GAF operations played a significant role in its
declining performance. The GAF operations offer an array of
wholesale and retail automotive financing products and
services. This business unit provides vehicle financing through
purchases of retail automotive and lease contracts primarily
with GM customers, finances the purchase of new and used
vehicles by GM dealers through wholesale financing, provides
floorplan financing for GM dealers to purchase vehicles to rent
or lease to others, provides wholesale vehicle inventory
insurance to GM dealers, and provides automotive extended
service contracts through GM dealers.\120\
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\120\ GMAC Form 10-Q for Q3 2009, supra note 22, at 38.
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Through its GAF operations, GMAC supports the sale of GM
vehicles through floorplan financing new and used vehicles
manufactured or distributed by GM and, less frequently, other
automobile manufacturers before sale or lease to the retail
consumer. Wholesale automotive financing represents a
significant component of GMAC's GAF business and is the primary
source of funding for GM dealers' purchases of new and used
vehicles.\121\ In 2009, GMAC financed 3.9 million new GM
vehicles (representing a 78 percent share of GM sales to
dealers), and financed approximately 249,000 new non-GM
vehicles.\122\ In 2008, GMAC financed 5.4 million new GM
vehicles (representing 81 percent of GM sales to dealers), and
financed approximately 196,000 new non-GM vehicles.\123\
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\121\ GMAC Form 10-K for 2009, supra note 12, at 3. Wholesale
automotive financing's 10 percent contribution to the GAF segment's
total financing revenues (which include total financing revenue and
other interest income), on average, between 2007 and 2009,
significantly understates the importance of this business. While this
segment's contribution on a net revenue basis is not disclosed, lower
financing and credit costs in the wholesale business indicate a more
substantial contribution on a net revenue basis. Further, wholesale
financing often serves as a gateway for other product offerings to the
dealer community.
\122\ GMAC Form 10-K for 2009, supra note 12, at 46.
\123\ GMAC Form 10-K for 2008, supra note 10, at 46.
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Consumer retail financing represents a larger portion of
the company's revenue (producing, on average, 32 percent of the
GAF segment's total financing revenues between 2007 and
2009).\124\ GMAC's share of GM retail sales was 20 and 32
percent for 2009 and 2008, respectively.\125\ Mr. Hull stated
in a conference call with investors that GMAC financed loans
for about 17 percent of GM customers in the first quarter of
2009.\126\ During the fourth quarter of 2009, GMAC originated
$894 million of new Chrysler retail loans, compared to $721
million in the third quarter of 2009, and its U.S. retail
penetration for Chrysler reached 25.5 percent by the end of
2009.\127\ Through operating leases, GMAC financed the leases
for 624,000 new vehicles, 561,000 new vehicles, 309,000 new
vehicles, and 6,000 new vehicles in 2006, 2007, 2008, and 2009,
respectively.\128\ Due to the deteriorating economic conditions
and, in particular, the declines in demand and used vehicle
sale prices in 2008, GAF operations recognized impairment of
$1.2 billion on vehicle operating leases.\129\ While the
greater portion of GMAC's revenue source has historically
derived from consumer as opposed to wholesale automotive
financing, this does not necessarily reflect the relative
importance of these sectors to the automotive industry.\130\
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\124\ GMAC Form 10-K for 2009, supra note 12, at 36, 39, 42. Total
financing revenues include total financing revenue and other interest
income.
\125\ GMAC Form 10-K for 2009, supra note 12, at 2, 43.; GMAC Form
10-K for 2008, supra note 10, at 12. For further discussion of the
decrease in this percentage through 2008, see Section E.1(a), infra.
\126\ GMAC, LLC, Q1 2009 GMAC LLC Earnings Conference Call, at 10
(May 5, 2009) (online at phx.corporate-ir.net/
External.File?item=UGFyZW50SUQ9NDU0M3xDaGlsZElEPS0xfFR5cGU9Mw==&t=1).
\127\ GMAC, Inc., GMAC Financial Services Reports Preliminary
Fourth Quarter and Full-Year 2009 Financial Results (Feb. 4, 2010)
(online at media.gmacfs.com/index.php?s=43&item=383) (hereinafter
``GMAC Reports Preliminary Q4 and Full-Year 2009 Results'').
\128\ GMAC Form 10-K for 2009, supra note 12, at 43; GMAC Form 10-K
for 2008, supra note 10, at 39.
\129\ GMAC Form 10-K for 2008, supra note 10, at 46. GMAC did not
recognize operating lease impairments in 2009, due to improvements in
the used vehicle market.
\130\ For further discussion of the importance of particular
components of GMAC's automotive finance business to the automotive
industry, see Section E.1(a).
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The financial crisis and the resulting slowdown in the
credit markets had widespread economic implications beyond the
housing sector, including a substantial impact on the
automotive industry and credit markets in general. Weak
economic conditions and the deterioration in the housing market
exerted pressure on consumer automotive finance customers,
resulting not only in a depressed automobile market, but also
in higher delinquencies, repossessions, and losses. These
conditions affected both GMAC's ability to fund its operations
and the demand for its financial products.
GMAC relied heavily on the capital markets (and the
securitization markets in particular) for its funding.
Beginning in 2008 (and particularly after the events of
September 2008 including the collapse of Lehman Brothers),
there was a significant decline in the availability of consumer
credit and a severe reduction in overall liquidity in the
consumer finance industry, including substantial disruption in
the automotive asset-backed securities (ABS) markets.
New vehicle demand also decreased as the unemployment rate
increased, consumer demand fell and gasoline prices spiked. As
a result, global vehicles sales declined rapidly across the
board in 2008 and through much of 2009.\131\ Automotive loan
and lease production significantly contracted across the
industry, particularly in the fourth quarter of 2008, due to
stressed economic conditions and their impact on consumer
spending habits, as well as increased interest rates and
tightening of financing terms. The majority of automobile
purchases in the United States are financed, including an
estimated 80-90 percent of consumer purchases and substantially
all dealer inventory purchases.\132\ It has been estimated that
2 million to 2.5 million vehicle sales were lost because either
dealers or customers could not obtain credit.\133\ These
conditions adversely impacted GMAC and many of its
competitors.\134\
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\131\ IHS Global Insights, U.S. Executive Summary, at 2, 9 (Aug.
2009) (noting that U.S. automobile sales fell to a 26-year low, from a
high point of 17.3 million cars and light trucks in 2000 to 13.2
million in 2008. Sales fell much further in the first half of 2009 as a
result of deteriorating economic conditions).
\132\ Written Testimony of Ron Bloom and Jim Millstein, supra note
73, at 2; Ron Bloom Testimony before the Senate Banking Committee,
supra note 2. For further discussion of the nature and landscape of the
automotive finance business, see Section B, infra.
\133\ Office of the Special Inspector General for the Troubled
Asset Relief Program (SIGTARP), Quarterly Report to Congress, at 112
(July 21, 2009) (online at www.sigtarp.gov/reports/congress/2009/
July2009_Quarterly_Report_to_Congress.pdf) (citing SIGTARP interviews
with Auto Task Force, June 1, 2009) (hereinafter ``July 2009 SIGTARP
Report'').
\134\ GMAC Form 10-K for 2008, supra note 10, at 3.
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Without the liquidity provided by the securitization
markets, GMAC made a strategic decision to preserve floorplan
lending at the expense of its retail lending business.\135\ In
mid-October 2008, GMAC announced a more conservative policy for
consumer automotive financing in the United States that
included limiting purchases to consumers with credit scores of
700 or above.\136\ GMAC stated that reduced access to funding
``prompted GMAC to implement a more conservative purchase
policy for consumer automotive financing in the United States
which significantly affected origination volumes in the
[fourth] quarter [of 2008].''\137\ Following its approval to
become a BHC and the receipt of its initial TARP investment in
December 2008, GMAC lifted these restrictions and offered
retail financing for consumers with a credit score of 621 or
above.\138\
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\135\ GMAC conversations with Panel staff (Feb. 1, 2010).
\136\ GMAC, LLC, GMAC Financial Services Statement on Automotive
Finance Purchase Policy (Oct. 13, 2008) (online at media.gmacfs.com/
index.php?s=43&item=280).
\137\ GMAC Reports Preliminary Q4 and Full-Year 2008 Results, supra
note 90.
\138\ GMAC, LLC, GMAC to Expand Retail Auto Financing (Dec. 30,
2008) (online at media.gmacfs.com/index.php?s=43&item=300) (hereinafter
``GMAC to Expand Retail Auto Financing'').
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These factors, coupled with the deterioration in the credit
markets in general, caused GMAC's share of the GM retail market
in the fourth quarter of 2008 to fall to approximately five
percent.\139\ Declines in new vehicle financing originations
due to tighter underwriting standards and higher interest
rates, continued credit market disruption, and lower automotive
industry sales, coupled with low consumer confidence and the
company's strategic decision in late 2008 to curtail leasing
substantially, adversely affected GMAC's revenue. GAF
operations recorded a net loss of $2.1 billion for the year
ended December 31, 2008 (losing money for the first time in its
90-year history), compared to net income of $1.5 billion for
the year ended December 31, 2007.\140\ GAF operations, however,
were consistently profitable during 2009, with net income of
$546 million.\141\
---------------------------------------------------------------------------
\139\ GMAC conversations with Panel staff (Feb. 2, 2010).
\140\ GMAC Form 10-K for 2008, supra note 10, at 35. Congressional
Oversight Panel, Written Testimony of Michael A. Carpenter, chief
executive officer, GMAC Financial Services, COP Hearing on GMAC
Financial Services, at 4 (Feb. 25, 2010) (online at cop.senate.gov/
documents/testimony_022510_carpenter.pdf) (hereinafter ``Written
Statement of Michael Carpenter'').
\141\ GMAC Form 10-K for 2009, supra note 12, at 36; Written
Statement of Michael Carpenter, supra note 140, at 2; Congressional
Oversight Panel, Written Testimony of Robert S. Hull, chief financial
officer, GMAC Financial Services, COP Hearing on GMAC Financial
Services, at 5 (Feb. 25, 2010) (online at cop.senate.gov/documents/
testimony-022510-hull.pdf) (hereinafter ``Written Statement of Robert
Hull'').
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GMAC's difficulties had a significant effect on GM's
vehicle sales overall, since, as GM notes, many of its
competitors have ``captive finance subsidiaries that were
better capitalized than GMAC and thus were able to offer
consumers subsidized financing and leasing offers.'' \142\
According to GMAC, it continues to face competition from
captive automotive finance companies, banks, savings and loan
associations, credit unions, finance companies, mortgage
banking companies, and insurance companies, many of whom
``benefit from lower cost structures and frequently have fewer
regulatory constraints.'' \143\
---------------------------------------------------------------------------
\142\ General Motors, Corp., Form 10-Q for the Quarter Ended March
31, 2009, at 108 (May 8, 2009) (online at www.sec.gov/Archives/edgar/
data/40730/000119312509105365/0001193125-09-105365-index.htm).
\143\ GMAC Form 10-K for 2009, supra note 12, at 4, 21.
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5. Mortgage Operations
The major contributor to GMAC's faltering results was its
mortgage segment. GMAC's mortgage operations, which focus
primarily on the origination, purchase, servicing, sale, and
securitization of residential mortgage loans and mortgage-
related products in the United States (with some international
operations), include ResCap, the mortgage operations of Ally
Bank, and the Canadian mortgage operations of ResMor Trust.
As noted above, GMAC, like other financial institutions,
has been negatively impacted by the events and conditions in
the mortgage banking industry and the broader economy.
According to ResCap, its core mortgage subsidiary, beginning in
2007, ``the mortgage and capital markets * * * experienced
severe stress due to credit concerns and housing market
contractions in the United States and foreign markets in which
we operate, predominantly in the United Kingdom and continental
Europe, and to the residential homebuilders domestically.''
\144\
---------------------------------------------------------------------------
\144\ Residential Capital, LLC, Form 10-Q for the Quarter Ended
March 31, 2009, at 63 (May 11, 2009) (online at www.sec.gov/Archives/
edgar/data/1332815/000119312509105708/d10q.htm) (hereinafter ``ResCap
Form 10-Q for Q2 2009'').
---------------------------------------------------------------------------
GMAC's profitability and financial condition have been
especially affected by ResCap due to its significant presence
in the mortgage origination and servicing industry. Through
ResCap, GMAC became the sixth largest residential mortgage
originator and the fifth largest servicer in the United States
(as ranked by Inside Mortgage Finance), originating
approximately $55 billion in residential mortgage loans in 2008
and servicing approximately $365 billion in residential
mortgage loans as of December 31, 2008.\145\ In 2009, GMAC
originated or purchased approximately $66.1 billion in mortgage
loans.\146\ In 2009, ResCap sold $54.8 billion in mortgage
loans to government-sponsored enterprises (GSEs) such as Fannie
Mae and Freddie Mac (87.0 percent of the total loans
sold),\147\ $6.9 billion to other investors through whole-loan
sales.\148\ While it did not make any non-GSE (also known as
non-agency, or nonconforming) securitizations in 2008, it
completed $1.3 billion of nonagency securitizations in
2009.\149\ As GMAC notes, the ``change in the U.S. mortgage
market [since the second half of 2007] . . . limited [its]
ability to securitize many nonconforming loan products'' and
the ``lack of liquidity also reduced the level of whole-loan
transactions of certain nonconforming mortgages.'' \150\
---------------------------------------------------------------------------
\145\ GMAC Form 10-K for 2008, supra note 10, at 53.
\146\ GMAC Form 10-K for 2009, supra note 12, at 4.
\147\ ResCap's sales of prime conforming mortgage loans take the
form of securitizations guaranteed by Fannie Mae or Freddie Mac, and
its sales of government mortgage loans take the form of securitizations
guaranteed by Ginnie Mae. GMAC Form 10-K for 2009, supra note 12, at 4.
\148\ GMAC Form 10-K for 2009, supra note 12, at 4.
\149\ GMAC Form 10-K for 2009, supra note 12, at 4; GMAC Form 10-K
for 2008, supra note 10, at 56.
\150\ GMAC Form 10-K for 2008, supra note 10, at 56.
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ResCap has been most adversely affected by rising numbers
of mark-to-market write-downs,\151\ the disappearance of
practically all secondary securitization markets (with the
exception of government-sponsored or insured markets),
increased loan delinquencies, and reduced originations.
``Market demand for asset-backed securities, and those backed
by mortgage assets in particular * * * significantly contracted
and in many markets * * * virtually disappeared,'' ResCap
states. ``Further, market demand by whole-loan purchasers * * *
also contracted. These unprecedented market conditions have
adversely impacted [ResCap], as well as [its] competitors.''
\152\ Cerberus' January 22, 2008 letter to investors about
(among other things) GMAC emphasized the significance of the
weakening economy, noting that the mortgage markets were
``hardest hit'' as ``mortgage securities have taken an
unprecedented beating'' (making it ``very difficult to find
buyers for any mortgage-backed security, other than paper
eligible to be sold to Fannie Mae or Freddie Mac'') and housing
prices continued to fall.\153\ The housing price depreciation
and increased number of delinquencies and defaults contributed
to declines in the fair market valuations of ResCap mortgage
loans held for sale (HFS) and of securitized interests that it
continues to hold, reducing the value of the collateral
underlying ResCap's portfolio and leading to higher provisions
for loan losses.\154\ GMAC states that ``many of ResCap's
nonprime \155\ assets were liquidated at a loss or marked
substantially lower to reflect the severe illiquidity and
depressed valuations in the prevailing market environment.''
\156\ As the housing bubble burst, many mortgage loans
(including a substantial number of subprime loans) became
delinquent, entered into default, or were foreclosed. ResCap
stated that its results were negatively impacted ``by domestic
economic conditions, including increases in delinquencies on
our mortgage loans held for investment portfolio and a
significant deterioration in the securitization and residential
housing markets.'' \157\ GMAC management indicated that the
majority of ResCap's losses stem from both domestic and
international mortgage loans on its balance sheet.\158\ The
mortgage segment reported a net loss from continuing operations
of $7.1 billion in 2009, versus losses of $4.0 billion in 2008
and $4.1 billion in 2007.\159\ The decline in the rate of
growth in mortgage debt outstanding also reduced the number of
mortgage loans available for ResCap to originate or securitize,
which led to a reduction in ResCap's revenue, profits and
business prospects.
---------------------------------------------------------------------------
\151\ ResCap wrote down its whole loans and mortgage-related
securities according to Financial Accounting Standard (FAS) 157,
implemented in September 2006, which provided a hierarchy of valuation
techniques for determining the fair value of assets, based on assets'
observable and unobservable valuation factors. The Financial Accounting
Standards Board (FASB) amended its mark-to-market guidance in April
2009. FASB Staff Position (FSP) FAS 157-4 provided eight factors for
determining whether a market is not active enough to require mark-to-
market accounting. Another April 2009 change, FSP FAS 115-2, provided
that permanent impairment attributable to market forces does not reduce
earnings or regulatory capital. For further discussion concerning the
impact of the new mark-to-market accounting rules, see Congressional
Oversight Panel, August Oversight Report: The Continued Risks of
Troubled Assets, at 24-25, nn. 48-49 (Aug. 11, 2009) (online at
cop.senate.gov/documents/cop-081109-report.pdf) (hereinafter ``August
Oversight Report'').
\152\ ResCap Form 10-Q for Q2 2009, supra note 144, at 65.
\153\ Cerberus Institutional Partners, L.P., Letter to Investors,
at 1 (Jan. 22, 2008) (online at online.wsj.com/public/resources/
documents/WSJ-LB-cerberus080214.pdf) (hereinafter ``Letter to
Investors'').
\154\ ResCap Form 10-Q for Q2 2009, supra note 144, at 71. ResCap's
liquidity has also been adversely affected by margin calls under
certain of its secured credit facilities that are dependent in part on
the lenders' valuation of the collateral securing the relevant
financing. See Residential Capital, LLC, Form 10-K for the Fiscal Year
Ended December 31, 2008, at 33 (Feb. 27, 2009) (online at www.sec.gov/
Archives/edgar/data/1332815/000119312509039301/d10k.htm) (hereinafter
``ResCap Form 10-K for 2009''). Each of these credit facilities allows
the lender, to varying degrees, to revalue the collateral to values
that the lender considers to reflect market values. If a lender
determines that the value of the collateral has decreased, it may
initiate a margin call requiring ResCap to post additional collateral
to cover the decrease. When ResCap is subject to such a margin call, it
must provide the lender with additional collateral or repay a portion
of the outstanding borrowings with minimal notice. Any such margin
calls harm ResCap's liquidity, results of operation, financial
condition and business prospects. See id.
\155\ In response to the market downturn, ResCap has
``substantially eliminated production of loans that do not conform to
the underwriting guidelines of Fannie Mae, Freddie Mac, and Ginnie
Mae.'' GMAC Form 10-Q for Q3 2009, supra note 22, at 67.
\156\ GMAC, LLC, GMAC Financial Services Reports Preliminary First
Quarter Results (May 2, 2007) (online at media.gmacfs.com/
index.php?s=43&item=217).
\157\ ResCap Form 10-K for 2009, supra note 154, at 68.
\158\ GMAC conversations with Panel staff (Feb. 2, 2010).
\159\ GMAC Form 10-K for 2009, supra note 12, at 51, 139. These
figures exclude net losses from discontinued mortgage operations of
$1.2 billion in 2009, $1.5 billion in 2008 and $250 million in 2007.
---------------------------------------------------------------------------
In addition, the decline in ResCap's profitability and
financial condition has been exacerbated by repurchase
agreements associated with mortgage loans. Beginning in 2007,
ResCap was no longer able to issue certain nonprime
securitizations in the absence of various representations for
early payment defaults.\160\ As a result, ResCap agreed that
its sales of mortgage loans through whole-loan sales or
securitizations would require it to make representations and
warranties about the mortgage loans to the purchaser or
securitization trust, and it ``may be required to repurchase
mortgage loans as a result of borrower fraud or if a payment
default occurs on a mortgage loan shortly after its
origination.''\161\ Upon the finding of a breach of a
representation, ResCap ``will either correct the loans in a
manner conforming to the provisions of the sale agreement,
replace the loans with similar loans that conform to the
provisions, or purchase the loans at a price determined by the
related transaction documents, consistent with industry
practice.'' \162\ According to Mr. Carpenter, ``the way this
works is if a Fannie Mae or a Freddie Mac reaches the
conclusion that they believe there was inadequate underwriting
on loans, they have the right to put back those loans to us, or
claim a credit from us.'' \163\ ResCap purchased $1.3 billion
in mortgage loans under these provisions in 2007 and $988
million in 2008.\164\ ResCap's mortgage repurchase reserve
expense for 2009 was $1.5 billion, and, ``like others in the
mortgage industry,'' it continues to experience ``a material
increase in repurchase requests.'' \165\ Since repurchases only
happen if there was something wrong with the origination,
ResCap's continued exposure to repurchases clearly indicates
the imperfections and deficiencies in its model of loan pricing
and origination.
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\160\ GMAC Form 10-K for 2008, supra note 10, at 87.
\161\ GMAC Form 10-K for 2009, supra note 12, at 19.
\162\ GMAC Form 10-K for 2008, supra note 10, at 189.
\163\ Transcript of COP Hearing on GMAC, supra note 12 (Testimony
of Michael Carpenter).
\164\ GMAC Form 10-K for 2008, supra note 10, at 189.
\165\ GMAC Form 10-K for 2008, supra note 10, at 19-20.
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In response to the economic downturn and an analysis of the
nature and performance history of the collateral, credit rating
agencies downgraded asset-backed and mortgage-backed
securities, which significantly reduced the liquidity available
to finance ResCap's operations.\166\ Despite GM's
disentanglement from GMAC in 2006, several credit rating
agencies, including S&P and Moody's Investors Service,
continued to rate GMAC below investment grade while maintaining
ResCap at only one step above investment grade. ``The
challenging market environment--including pressure on home
prices and weakening consumer credit--severely depressed the
value of ResCap's large nonprime asset portfolio, resulting in
significant operating losses at its U.S. Residential Finance
Group,'' ResCap stated.\167\ ResCap incurred a total of $7.2
billion in losses between the beginning of 2007 and the middle
of 2008, which caused Moody's to downgrade ResCap by seven
notches (S&P also made a downgrade), dramatically weakening
ResCap's capital base.
---------------------------------------------------------------------------
\166\ ResCap Form 10-Q for Q2 2009, supra note 144, at 64.
\167\ GMAC Q4 2006 Earnings, supra note 32.
---------------------------------------------------------------------------
While ResCap was a notable competitor in subprime and
nonconforming mortgage lending and was widely known for its
involvement in subprime lending, the company is a ``broad-based
market participant'' in the mortgage industry and serves a
broader spectrum of borrowers, according to GMAC.\168\ GMAC
made more than $50 billion in subprime mortgage loans over the
three-year period ending in 2007, according to data compiled by
Inside Mortgage Finance. In each of those years, GMAC ranked
among the 25 largest subprime lenders (including being ranked
12th among subprime lenders in 2006), but it has retained a
substantial mortgage loan origination business involving prime
conforming and government mortgage loans. One of ResCap's main
issues with respect to its subprime exposure is that while it
started moving away from and reduced its exposure to the
subprime market in late 2006 (and has not participated in
subprime origination since 2008), it ``still held substantial
exposure when dislocation occurred in the fourth quarter [of
2006].'' \169\ As a result, ResCap was forced to sell many of
its subprime mortgage-related assets at a substantial loss. In
2007, then-ResCap CEO Bruce Paradis acknowledged that, for its
part, ResCap moved too slowly in reducing its subprime exposure
in the face of the subprime mortgage downturn, along with being
``too slow to reduce infrastructure and modify business
processes in the face of new market conditions.'' \170\
Industry analysts have suggested, however, that ResCap's
subprime lending and exposure were not unusually bad, but very
comparable to the challenges faced by other major mortgage
lenders.\171\
---------------------------------------------------------------------------
\168\ Industry analyst conversations with Panel staff.
\169\ GMAC, LLC and Residential Capital, LLC, 2007 Investor Forum
(online at www.slideshare.net/finance8/rescap-chief-executive-officer-
bruce-paradis-gmac-llc-and-residential-capital-llc-2007-investor-forum)
(hereinafter ``2007 Investor Forum'') (accessed Mar. 8, 2010).
\170\ 2007 Investor Forum, supra note 169.
\171\ Industry analyst conversations with Panel staff.
---------------------------------------------------------------------------
By early 2008, ResCap's net worth had dropped from $7.6
billion on December 31, 2006 to $5.8 billion, just $400 million
above the minimum amount it needed to maintain in order to
comply with debt covenants. From net income of $705.1 million
in 2006, ResCap recorded a net loss of $4.3 billion in 2007 and
a net loss of $5.6 billion in 2008.
GMAC has been forced to reorganize its operations and its
capital structure on several different occasions to respond to
deteriorating economic conditions and the collapse of ResCap's
portfolio. As severe weakness in the housing market and
mortgage industry persisted, GMAC announced a major
restructuring of ResCap operations in October 2007. This plan
included a streamlining of operations, a revised cost
structure, and a 25 percent reduction in ResCap's workforce (in
addition to the elimination of 2,000 positions undertaken in
the first half of 2007). In June 2008, as ResCap faced
approximately $4 billion of maturing debt obligations, GMAC
refinanced more than $60 billion in debt (involving more than
50 institutions from around the world). This refinancing
included several key steps designed to increase the amount of
available funding and to enhance liquidity, such as GMAC
obtaining a new $11.4 billion secured credit facility with a
three-year maturity, GMAC renewing a one-year $10 billion
commercial paper facility, ResCap extending the maturity on
virtually all of its bank facilities equaling approximately
$11.6 billion, and ResCap obtaining a new $2.5 billion
repurchase facility. GMAC also increased its own capital
reserves with a new three-year credit line, in addition to
providing ResCap with a two-year $3.5 billion credit line, $750
million of which Cerberus and GM guaranteed.
On September 3, 2008, ResCap announced another
restructuring plan to streamline its operations, reduce costs,
and refocus its lending and servicing activities. The
restructuring plan included closing all GMAC Mortgage retail
offices, terminating originations through the wholesale broker
channel, curtailing business lending, and selling its GMAC Home
Services business. As ResCap Chairman and CEO Tom Marano
stated, ``[c]onditions in the mortgage and credit markets have
not abated and, therefore, we need to respond aggressively by
further reducing both operating costs and business risk.''
\172\ These actions reduced ResCap's workforce by approximately
3,300 employees, or 37 percent.\173\ In conjunction with the
GMAC Home Services business sale, 1,000 employees were
transferred effective January 1, 2009, and an additional 500
employees were notified of their termination prior to December
31, 2008, with a termination date in the first quarter of
2009.\174\
---------------------------------------------------------------------------
\172\ GMAC, LLC, GMAC Financial Services and ResCap Announce
Further Streamlining of Mortgage Operation (Sept. 3, 2008) (online at
media.gmacfs.com/index.php?s=43&item=273).
\173\ ResCap Form 10-K for 2009, supra note 154, at 55.
\174\ ResCap Form 10-K for 2009, supra note 154, at 55.
---------------------------------------------------------------------------
Both the industry analysts who talked to Panel staff and
the witnesses at the Panel's recent GMAC hearing have asserted
that GMAC's major mistake was taking advantage of and
leveraging its relatively high credit rating to move away from
its core mission of automotive financing and diversify into
other areas such as mortgage lending.\175\ While other mortgage
lenders including New Century Financial and American Home
Mortgage Investment have become bankrupt and Bank of America
purchased Countrywide Financial in early 2008, GMAC kept its
mortgage subsidiary alive by channeling much of its capital (as
well as liquidity support) into ResCap as its condition
worsened.\176\ GMAC, unlike other TARP recipients such as
Citigroup, does not provide a separate section in its SEC
filings devoted to its use of TARP funds. Mr. Hull, however,
testified at the Panel's recent GMAC hearing that the company
has used its TARP assistance ``to create capital, so we could
borrow, so we could go to the markets and get more liquidity to
give it to that kind of origination,'' signaling that the TARP
funds have ``gone to the originations for autos and mortgages
over the course of time.'' \177\ The Panel notes that GMAC has
supported ResCap with a total of $6.60 billion, including $2.94
billion of cash contributions and $3.66 billion of debt
forgiveness since 2007.\178\ Given ResCap's limited available
capital and liquidity, its ongoing existence and viability have
remained highly doubtful without continued contributions from
its parent. GMAC's contributions to ResCap would not have been
possible, however, had GMAC not received TARP assistance.
---------------------------------------------------------------------------
\175\ Panel staff conversations with industry analysts; Transcript
of COP Hearing on GMAC, supra note 12 (Testimony of Christopher Whalen
and Michael Ward).
\176\ For further discussion of GMAC's articulated justification
for not letting ResCap go bankrupt, see Section H.2., infra.
\177\ Transcript of COP Hearing on GMAC, supra note 12 (Testimony
of Robert Hull).
\178\ Residential Capital, LLC, 2007 Annual Report, Form 10-K-A, at
49 (Feb. 27, 2008) (online at www.sec.gov/Archives/edgar/data/1332815/
000095013708002852/c22171e10vk.htm); ResCap Form 10-K for 2009, supra
note 154, at 55; GMAC Reports Preliminary Q4 and Full-Year 2009
Results, supra note 127. GMAC confirmed that these numbers have been
previously reported publicly. The Panel's cash calculation does not
include $1.44 billion in loans GMAC contributed to ResCap at fair value
in 2009. In addition, the Panel's calculations do not reflect other
types of internal support that GMAC has provided to ResCap, including
preferred membership interests, gains on extinguishment of debt,
accounting contributions, and intercompany loans.
---------------------------------------------------------------------------
Mr. Carpenter calls ResCap ``a millstone around the
company's neck.'' \179\ ResCap remains heavily dependent on
GMAC in order to meet its liquidity and capital requirements,
including approximately $2.1 billion in principal amount of
bonds slated to mature in 2010.\180\ GMAC management has
indicated that if ResCap were to need additional support, it
``would provide that support so long as it was in the best
interests'' of its stakeholders.\181\ ResCap is also highly
leveraged relative to its cash flow and continues to recognize
substantial losses resulting in a significant deterioration in
capital.\182\ As of December 31, 2009, ResCap's liquidity
portfolio (the cash readily available to cover operating
demands) totaled $354 million, with cash and cash equivalents
totaling $765 million.\183\ Given ResCap's liquidity and
capital needs, combined with the volatility in the marketplace,
GMAC recently stated that ``there is substantial doubt about
ResCap's ability to continue as a going concern.'' \184\ Until
recently, ResCap's continued operations have substantially
impeded GMAC's short- and long-term financial health, including
its ability to access the capital markets and raise third-party
financing.\185\ In its press release detailing its receipt of
the latest round of TARP assistance, GMAC indicated that it
continues to ``explore strategic alternatives for ResCap and
the mortgage business.'' \186\
---------------------------------------------------------------------------
\179\ GMAC Q4 2009 Earnings Conference Call, supra note 111; GMAC
conversations with Panel staff (Feb. 16, 2010).
\180\ GMAC Form 10-K for 2009, supra note 12, at 12.
\181\ GMAC Form 10-Q for Q3 2009, supra note 22, at 8.
\182\ GMAC Form 10-Q for Q3 2009, supra note 22, at 7.
\183\ GMAC Form 10-K for 2009, supra note 12, at 16.
\184\ GMAC Form 10-K for 2009, supra note 12, at 16.
\185\ Treasury conversations with Panel staff (Feb. 2, 2010);
Treasury conversations with Panel staff (Jan. 29, 2010). GMAC has
recently accessed the capital markets ``for the first time since
2007,'' and in February 2010, was successful in raising $2.0 billion of
5-year unsecured debt funding. Written Statement of Michael Carpenter,
supra note 140, at 2.
\186\ GMAC Form 10-K for 2009, supra note 12, at 4. For further
discussion on GMAC's strategy with respect to ResCap, see Section C.5,
infra.
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D. History/Timeline of Various Stages of Investment
1. GMAC Before December 24, 2008
In December 2008, the U.S. automotive industry was on the
brink of bankruptcy. Declining car sales, coupled with high
costs, had crippled an industry that once stood at the
forefront of global innovation. The Big Three lagged far behind
their foreign competitors. The CEOs of GM, Ford, and Chrysler
flew to Washington to appeal to lawmakers for $25 billion in
public funds. The companies were unable to muster sufficient
congressional support to get a bill through the Senate, and on
December 19, President Bush announced a government-funded
rescue package for the automotive industry: the AIFP.\187\ The
AIFP called for an investment of $13.4 billion in GM and
Chrysler by mid-January 2009 and additional funding for GM up
to $4 billion.\188\ In announcing the plan, then-Treasury
Secretary Henry Paulson stated that EESA provided him with the
authority to make the investment, even as he acknowledged that
``the purpose of [the TARP] program and the enabling
legislation is to stabilize our financial sector.'' \189\
---------------------------------------------------------------------------
\187\ Then-Secretary Paulson did not use the name ``Automotive
Industry Financing Plan'' at the time of the announcement. See
generally U.S. Department of the Treasury, Secretary Paulson Statement
on Stabilizing the Automotive Industry (Dec. 19, 2008) (online at
www.financialstability.gov/latest/hp1332.html) (hereinafter ``Sec.
Paulson Statement on the Automotive Industry''). Nonetheless, the
investments to GM and Chrysler were made under this program. See
generally U.S. Department of the Treasury, Troubled Asset Relief
Program Transactions Report for Period Ending February 1, 2010, at 15
(Feb. 3, 2010) (online at www.financialstability.gov/docs/
transaction-reports/2-3-10%20Transactions%20Report%20as%20of%202-1-
10.pdf).
\188\ See U.S. Department of the Treasury, Indicative Summary of
Terms for Secured Term Loan Facility [GM], Appendix A (Dec. 19, 2008)
(online at www.treas.gov/press/releases/reports/
gm%20final%20term%20&%20appendix.pdf); see U.S. Department of the
Treasury, Indicative Summary of Terms for Secured Term Loan Facility
[Chrysler], Appendix A (Dec. 19, 2008) (online at www.treas.gov/press/
releases/reports/chrysler%20final%20term%20&%20appendix.pdf).
\189\ Sec. Paulson Statement on the Automotive Industry, supra note
187 (``Treasury will make these loans using authority provided for the
Troubled Asset Relief Program. While the purpose of this program and
the enabling legislation is to stabilize our financial sector, the
authority allows us to take this action. Absent Congressional action,
no other authorities existed to stave off a disorderly bankruptcy of
one or more auto companies''); Congressional Oversight Panel, September
Oversight Report: The Use of TARP Funds in the Support and
Reorganization of the Domestic Auto Industry, at Section G.1 (Sept. 9,
2009) (online at cop.senate.gov/documents/cop-090909-report.pdf)
(hereinafter ``September Oversight Report'').
---------------------------------------------------------------------------
General economic conditions, including the slowdown in the
capital and credit markets, the problems in the automotive
industry, and the accelerating crisis in the housing market,
dramatically affected GMAC's revenues and operations.\190\ GMAC
reported a net loss of $2.5 billion for the third quarter of
2008,\191\ bringing its losses over five consecutive quarters
to $7.9 billion. GMAC's mortgage operations incurred
substantial losses due to the depreciation in housing prices,
mortgage loan defaults and delinquencies, and write-downs on
mortgage loans and mortgage-related assets. For GMAC's
principal mortgage business, ResCap, the third quarter of 2008
marked a period of continued turmoil as it reported a net loss
of $1.9 billion for the third quarter of 2008, and its
operations only slightly improved for the fourth quarter of
2008, when it reported a net loss of $981 million.\192\ At the
same time, the fourth quarter of 2008, with dramatic changes to
the landscape of the automotive industry, marked the worst
period for GMAC's automotive finance operations. Coming off of
a net loss of $294 million for the third quarter of 2008,
GMAC's automotive finance operations reported a net loss of
$1.3 billion in the fourth quarter of 2008.\193\
---------------------------------------------------------------------------
\190\ For further discussion of GMAC's operations and the reasons
for its deteriorating economic condition, see Section C, supra.
\191\ GMAC, LLC, GMAC Financial Services Reports Preliminary Third
Quarter 2008 Financial Results (Nov. 5, 2008) (online at
media.gmacfs.com/index.php?s=43&item=286) (hereinafter ``GMAC Reports
Preliminary Q3 2008 Results'').
\192\ GMAC Reports Preliminary Q3 2008 Results, supra note 191;
GMAC Reports Preliminary Q4 and Full-Year 2008 Results, supra note 90.
\193\ GMAC Reports Preliminary Q3 2008 Results, supra note 191;
GMAC Reports Preliminary Q4 and Full-Year 2008 Results, supra note 90.
---------------------------------------------------------------------------
2. Timeline of TARP Investments: December 2008-December 2009
a. December 2008 Investment
On the same day it submitted its application to become a
BHC,\194\ GMAC submitted an application to Treasury to
participate in the CPP.\195\ While GMAC's management believed
the BHC application would assist its transition to a stronger
long-term business model, management hoped the CPP application
would help it to survive the immediate ``liquidity crunch.''
\196\
---------------------------------------------------------------------------
\194\ For further discussion of GMAC's BHC application and
approval, see Section C.2, supra.
\195\ GMAC Files BHC Application, supra note 49 (noting that GMAC
``submitted an application to the U.S. Treasury to participate in the
Capital Purchase Program created under the Emergency Economic
Stabilization Act of 2008, conditional upon becoming a bank holding
company''). For further discussion of GMAC's BHC application and
approval, see Section C.2, supra.
\196\ GMAC conversations with Panel staff (Feb. 16, 2010). Treasury
also stated that it is preferable for a company of this size to be
subject to more supervision. Treasury conversations with Panel staff
(Feb. 2, 2010).
---------------------------------------------------------------------------
On December 24, 2008, four days after President Bush
announced the AIFP, the Federal Reserve Board approved GMAC's
application to become a BHC.\197\ As part of this approval, the
Federal Reserve required GMAC to raise $7 billion in new
equity.\198\ The government immediately took two separate steps
to help GMAC reach this goal.
---------------------------------------------------------------------------
\197\ For further information about the Board's approval of GMAC's
BHC application, see Section C.2, supra. See also GMAC, LLC, GMAC
Receives $5.0 Billion Investment from the U.S. Treasury (Dec. 29, 2008)
(online at media.gmacfs.com/index.php?s=43&item=299) (hereinafter
``GMAC Receives $5 Billion Investment'').
\198\ Office of the Special Inspector General for the Troubled
Asset Relief Program, Quarterly Report to Congress, at 84 (Apr. 21,
2009) (online at www.sigtarp.gov/reports/congress/2009/
April2009_Quarterly_Report_to_Congress.pdf) (hereinafter ``April 2009
SIGTARP Report''). As part of the process of granting approval to
GMAC's BHC application, the Federal Reserve imposed a number of
additional requirements, considered GMAC's business plans, and
evaluated its actions to strengthen its risk-management infrastructure.
Under the ongoing supervision of the Federal Reserve after approval of
the application, GMAC was required to submit a more detailed business
plan that was acceptable to the Federal Reserve. Federal Reserve
conversations with Panel staff (Feb. 19, 2010).
---------------------------------------------------------------------------
First, on December 29, 2008, Treasury announced that it
would purchase $5 billion in GMAC Fixed Rate Cumulative
Perpetual Preferred stock with an 8 percent dividend (the
Senior Preferreds) under the AIFP.\199\ It also received
warrants for an additional $250 million in preferred equity
with a 9 percent dividend (the Preferred Warrants).\200\ These
purchases were completed on December 30, 2008, and Treasury
exercised the Preferred Warrants immediately.\201\ As a result
of this transaction, Treasury held $5.25 billion in Senior
Preferreds.
---------------------------------------------------------------------------
\199\ U.S. Department of the Treasury, Treasury Announces TARP
Investment in GMAC (Dec. 29, 2008) (online at
www.financialstability.gov/latest/hp1335.html) (hereinafter ``Treasury
Announces TARP Investment in GMAC''); see also U.S. Department of the
Treasury, USG Capital Outstanding in GMAC (Dec. 30, 2009) (online at
treas.gov/images/usg_capital.gif) (hereinafter ``USG Capital
Outstanding in GMAC''). Specifically, the preferred securities were
Fixed Rate Cumulative Perpetual Preferred Membership Interests, Series
D-l. U.S. Department of the Treasury, Contract [GMAC], Schedule A (Dec.
29, 2008) (online at www.financialstability.gov/docs/AIFP/
Posted%20to%20AIFP%20Website%20-%20GMAC%202008.pdf) (hereinafter
``Treasury GMAC Contract''). In contrast, the CPP Preferred pays
quarterly dividends at a rate of five percent per year for the first
five years, and nine percent thereafter. U.S. Department of the
Treasury, Factsheet on Capital Purchase Program (Mar. 17, 2009) (online
at www.financialstability.gov/roadtostability/CPPfactsheet.htm)
(hereinafter ``CPP Factsheet'').
As a firm that has received exceptional TARP assistance, GMAC is
subject to EESA's general corporate governance standards and executive
compensation restrictions, as amended by the American Recovery and
Reinvestment Act of 2009 (ARRA), as well as the rulings of Special
Master Feinberg.
\200\ Treasury Announces TARP Investment in GMAC, supra note 199;
see also USG Capital Outstanding in GMAC, supra note 199. Specifically,
the preferred securities were Fixed Rate Cumulative Perpetual Preferred
Membership Interests, Series D-l. Treasury GMAC Contract, supra note
199. In contrast, the CPP Preferred pays quarterly dividends at a rate
of five percent per year for the first five years, and nine percent
thereafter. CPP Factsheet, supra note 199.
\201\ Treasury conversations with Panel staff (Jan. 7, 2010).
---------------------------------------------------------------------------
Second, GMAC made an equity rights offering to its existing
shareholders to raise the remaining $2 billion. Treasury agreed
to provide GM with a secured loan of up to $1 billion to
participate in this rights offering. Treasury stated that this
loan would ``support GMAC's reorganization as a BHC.'' \202\
The rights offering closed on January 16, 2009, with Treasury
lending GM $884 million to participate in the offering \203\
and FIM Holdings, an investment consortium led by Cerberus,
purchasing $366 million in new equity.\204\ The terms of the
agreement gave Treasury the right to exchange its loan for the
shares purchased by GM.\205\
---------------------------------------------------------------------------
\202\ Treasury Announces TARP Investment in GMAC, supra note 199;
see Section C.2, supra.
\203\ April 2009 SIGTARP Report, supra note 198, at 84; September
Oversight Report, supra note 189, at 54 n.267.
\204\ GMAC Form 10-K for 2008, supra note 10, at 194; April 2009
SIGTARP Report, supra note 198; see Office of the Special Inspector
General for the Troubled Asset Relief Program, Additional Insight on
Use of Trouble Asset Relief Program Funds, at Appendix D (Dec. 10,
2009) (online at sigtarp.gov/reports/audit/2009/
Additional_Insight_on_Use_of_Troubled_Asset_Relief_Program_Funds.pdf)
(``At the time of the initial Treasury investment, the Federal Reserve
required GMAC to raise $2 billion of new equity. GMAC raised $1.1
billion through private investments . . . .''); GMAC Receives $5
Billion Investment, supra note 197.
\205\ April 2009 SIGTARP Report, supra note 198, at 84. Treasury
exercised that right on May 29, 2009 and received a 35 percent equity
stake in GMAC. Government Accountability Office, Office of Financial
Stability (Troubled Asset Relief Program) Fiscal Year 2009 Financial
Statements, GAO-10-301, at 62, 74, (Dec. 2009) (online at www.gao.gov/
new.items/d10301.pdf) (hereinafter ``OFS FY 2009 Financial
Statements''); see Section D.2.(b), infra.
---------------------------------------------------------------------------
Treasury purchased the Senior Preferreds under the
AIFP.\206\ Treasury suggested that it provided the investments
under the AIFP because GMAC is a ``financing company that
supports GM.'' \207\ Treasury stated that the investment was
``part of an auto industry-focused TARP program that will
include the $17.4 billion in assistance for domestic automakers
announced earlier this month.'' \208\ Treasury did not indicate
why it did not make its investments under the CPP, despite the
fact that GMAC had become a BHC by that time.
---------------------------------------------------------------------------
\206\ U.S. Department of the Treasury, Section 105(a) Trouble Asset
Relief Program Report to Congress for the Period December 1, 2008 to
December 31, 2008, at 4 (Jan. 5, 2009) (online at
www.financialstability.gov/docs/105CongressionalReports/
105Report_010609.pdf) (hereinafter ``Section 105(a) TARP Report to
Congress for December 2008'').
\207\ Section 105(a) TARP Report to Congress for December 2008,
supra note 206, at 1.
\208\ Treasury Announces TARP Investment in GMAC, supra note 199
(referring to Treasury's investments in GM and Chrysler on Dec. 19,
2008).
---------------------------------------------------------------------------
Given that Treasury had $700 billion in TARP funds at its
disposal, it had the power in December 2008 to consider a wide
range of options for addressing GMAC's situation.\209\ It is
not clear whether Treasury considered alternative options
before it made the $5.25 billion equity investment in
GMAC.\210\ It is certain, however, that once it determined that
GMAC would not be forced into bankruptcy and that the company
and its shareholders would not be required to bear the full
cost of their mistakes, its future options were severely
constrained. After Treasury made this initial investment,
permitting the company to fail in the future would require
wiping out Treasury's stake.\211\
---------------------------------------------------------------------------
\209\ See September Oversight Report, supra note 189, at 3, 86-87
(discussing Treasury as a ``tough negotiator'' when it invested
taxpayer funds in the automotive companies and describing the
imposition of conditions on institutions that receive ``exceptional
assistance'').
\210\ Ron Bloom, senior advisor to the Secretary of the Treasury,
testified that the administration considered bankruptcy in April and
May 2009. He did not state whether bankruptcy was considered before
Treasury made the December 2008 investment. See Transcript of COP
Hearing on GMAC, supra note 12 (Testimony of Ron Bloom). GMAC maintains
that it considered bankruptcy at this time and that this option was
ultimately not chosen because it would have required prohibitively
large financing and would have caused severe disruption for GM dealers.
GMAC conversations with Panel staff (Mar. 3, 2010); see Section G.3,
infra.
\211\ For an extended discussion of the bankruptcy option, see
Section G.3, infra. That GMAC avoided bankruptcy is particularly
noteworthy in light of the fact that GM and Chrysler did not. See
Section G, infra.
---------------------------------------------------------------------------
In contrast to the conditions Treasury placed on its
support to Chrysler and GM, discussed below,\212\ Treasury's
GMAC investment was not conditioned on the approval of a
specific business plan. It was, however, made on the
understanding that the Federal Reserve required GMAC to make
two substantial changes in its ownership and management
structure as part of its application to become a BHC. First,
the Federal Reserve required GM and Cerberus to reduce their
stakes in the company.\213\ Second, GMAC was required to
restructure its board of directors to include seven members;
two of these seven would be appointed by a trust approved by
Treasury.\214\ The board changes were required to occur no
later than March 24, 2009.\215\
---------------------------------------------------------------------------
\212\ See Section G, infra.
\213\ See Section C.2, infra.
\214\ April 2009 SIGTARP Report, supra note 198, at 84; see U.S.
Department of the Treasury, Treasury Announces Restructuring of
Commitment To GMAC (Dec. 30, 2009) (online at ustreas.gov/press/
releases/tg501.htm) (hereinafter ``December 2009 Restructuring
Announcement'') (stating that Treasury had the right to appoint two
directors prior to the December 2009 investment).
\215\ April 2009 SIGTARP Report, supra note 198, at 84; see
December 2009 Restructuring Announcement, supra note 214 (stating that
Treasury had the right to appoint two directors prior to the December
2009 investment).
---------------------------------------------------------------------------
On December 30, 2008, one day after GMAC received the
federal government's investment, GMAC President Bill Muir
declared that ``the actions of the federal government to
support GMAC are having an immediate and meaningful effect on
our ability to provide credit to automotive customers.'' \216\
He stated that the government's support would permit GMAC to
``relax the [credit] constraints we put in place a few months
ago due to the credit crisis.'' \217\
---------------------------------------------------------------------------
\216\ GMAC to Expand Retail Auto Financing, supra note 138.
\217\ GMAC to Expand Retail Auto Financing, supra note 138; see
Section C.2, supra (discussing GMAC's decision to restrict financing to
consumers with a credit score of 700 or above).
---------------------------------------------------------------------------
b. May 2009 Investment
In early 2009, the Federal Reserve conducted ``stress
tests'' of the nation's largest BHCs (also known as the
Supervisory Capital Assessment Program, or SCAP) to ensure that
they would be adequately capitalized even if economic
conditions worsened beyond expectations. GMAC's participation
in the stress tests is discussed in more detail in Section F
below.\218\ At the conclusion of the stress tests in May 2009,
the Federal Reserve announced that GMAC needed an additional
$11.5 billion in capital, $9.1 billion of which had to be in
the form of fresh capital.\219\ Treasury understood that GMAC,
in contrast to the other financial institutions that were found
to need capital under the stress tests, would not be able to
meet its required capital targets by tapping private
markets.\220\ GMAC itself acknowledged that there is
``uncertainty regarding our ability to raise the additional
capital required as a result of the recently completed
Supervisory Capital Assessment Program and uncertainty around
the ultimate form, amount, and terms of such capital.'' \221\
This uncertainty was due principally to the pending
bankruptcies of GM and Chrysler.\222\ At the time, it was
unclear how much residual values would suffer as a result of
the bankruptcy process, how dealers would be treated, and
whether GM and Chrysler would experience a ``customer
backlash'' that would impact future car sales.\223\
---------------------------------------------------------------------------
\218\ See Section F, infra.
\219\ Treasury conversations with Panel staff (Jan. 8, 2010). The
balance of $2.4 billion could be obtained through other methods, such
as conversion of preferred stock.
\220\ Treasury conversations with Panel staff (Feb. 2, 2010).
\221\ GMAC, LLC, Form 10-Q for the Quarter Ended March 31, 2009, at
90 (May 11, 2009) (online at www.sec.gov/Archives/edgar/data/40729/
000119312509105735/0001193125-09-105735-index.htm).
\222\ GMAC conversations with Panel staff (Feb. 1, 2010). GMAC
management also stated that private markets wanted to see a return to
profitability prior to providing financing to GMAC.
\223\ Sell-side analyst conversations with Panel staff (Feb. 17,
2010); Treasury conversations with Panel staff (Feb. 2, 2010).
---------------------------------------------------------------------------
On May 21, 2009, Treasury made a ``down payment'' of $3.5
billion of the $9.1 billion fresh capital requirement to
support GMAC in meeting its capital target, plus a $4 billion
investment to permit GMAC to acquire part of the business of
Chrysler Financial,\224\ for a total contribution of $7.5
billion.\225\ In return for its $7.5 billion, Treasury received
Mandatory Convertible Preferred Stock (MCP) with a face value
of $7.875 billion.\226\ Treasury acknowledged that GMAC would
need additional capital support--the term sheet for this
investment (the May Term Sheet) provided that Treasury would
invest ``up to $5.6 billion'' at a later date.\227\
---------------------------------------------------------------------------
\224\ Treasury made a $1.5 billion loan to Chrysler Financial on
January 16, 2009. U.S. Department of the Treasury, Chrysler LB
Receivables Trust: Summary of Terms (Jan. 16, 2009) (online at
www.treas.gov/press/releases/reports/
011608%20term%20sheet%20chrysler%20fin.pdf). Chrysler Financial has
repaid the $1.5 billion loan.
\225\ U.S. Department of the Treasury, Treasury Announces
Additional Investment in GMAC LLC (May 21, 2009) (online at
www.treas.gov/press/releases/tg154.htm) (hereinafter ``Treasury
Announces Additional Investment in GMAC''); Treasury conversations with
Panel staff (Jan. 8, 2010). At the time, press reports suggested that
the administration's decision to provide GMAC with new capital was
contingent--at least in part--on GMAC's willingness to take over this
business. See Mike Ramsey and Jason Kelly, Cerberus Said to Study
Chrysler Financial as Stand-Alone Lender, Bloomberg (May 19, 2009)
(online at www.bloomberg.com/apps/news?sid=aMkCt0PgMVLI&pid=20601087).
Treasury looked at a variety of different alternatives for Chrysler
Financial, including merging it with GMAC. It decided against this
approach because it would have involved GMAC taking over all of
Chrysler Financial's legacy assets. Treasury stated that its ultimate
solution--financing GMAC's acquisition of only part of Chrysler
Financial's business--was preferable because it gave GMAC control over
the credit quality of future originations, but not responsibility for
losses on legacy assets. Treasury conversations with Panel staff (Feb.
2, 2010).
\226\ Treasury received $7.5 billion face value in Fixed Rate
Cumulative MCP together with warrants for a further $375 million, which
it exercised immediately. U.S. Department of the Treasury, Contract
[GMAC], at 173 (May 21, 2009) (online at www.financialstability.gov/
docs/AIFP/Posted%20to%20AIFP%20Website%20-%20GMAC%202009.pdf)
(hereinafter ``Treasury GMAC Contract''). Treasury conversations with
Panel staff (Jan. 7, 2010). The May Securities Purchase Agreement and
Treasury's accompanying press release refer to the preferred interests
as ``mandatorily convertible preferred interests.'' Treasury Announces
Additional Investment in GMAC, supra note 225 (emphasis added).
However, Treasury's December 2009 press release refers to the stock as
``Mandatory Convertible Preferred Stock.'' December 2009 Restructuring
Announcement, supra note 214. The contract for the December 2009
investment also refers to the stock as ``mandatorily convertible
preferred stock.'' Id., at 482. In May 2009, the terms of the MCP
specified that GMAC could convert the stock at any time, except that if
the conversion would result in Treasury owning more than 49 percent of
the company, then GMAC would need Treasury's approval or an order from
the Federal Reserve. The terms of this MCP were revised in exchange for
Treasury's additional investment in December 2009. After the December
2009 investment, GMAC could only convert the MCP if it received prior
written approval from Treasury or an order from the Federal Reserve.
Additional terms of the December 2009 investment are discussed in more
detail in Section D.2.(c), infra.
\227\ Treasury GMAC Contract, supra note 226, at 60.
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Additionally, on May 29, 2009, Treasury exercised its
option to exchange the $884 million loan it had made to GM to
participate in the December 2008 rights offering for GMAC
common stock; this amounted to about 35 percent of GMAC's
common stock.\228\ After these transactions closed, Treasury
owned $13.1 billion in preferred stock ($5.25 billion in Senior
Preferreds acquired in the December 2008 investment and $7.875
billion in MCP acquired in May 2009) and 35 percent of GMAC's
common stock.
---------------------------------------------------------------------------
\228\ OFS FY 2009 Financial Statements, supra note 205, at 62, 74.
Treasury has stated that one of the concerns it had about taking GMAC
into bankruptcy was ``execution risk''--that three complex bankruptcies
would be much harder to execute successfully than two. In this context,
it is worth noting that when it converted the loan into GMAC common
shares on the eve of the GM bankruptcy, Treasury took an action that
reinforced GMAC's support while reducing its exposure to GM. These
actions may or may not have heightened execution risk, but they put
Treasury into a position where its interests as an equity holder might
have increased its reluctance to put GMAC into bankruptcy. See Section
G.3, infra.
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Although Treasury had initially created the Capital
Assistance Program (CAP) to provide capital to financial
institutions in connection with the stress tests,\229\ Treasury
attributed its May 2009 investment--an investment made pursuant
to the stress test results--to the AIFP.\230\ Treasury
subsequently stated that it used the AIFP because its previous
capital injections in GMAC had been under the AIFP, because
GMAC was closely tied to the automotive industry, and because
it did not view the CAP to have advantages to the terms it has
under the existing investment.\231\ Further, Treasury noted
that no other banks were being funded via the CAP.\232\ The
terms of the MCP received under the AIFP are also more
advantageous to Treasury than the terms of the MCP that would
have been received under the CAP: while the CAP MCP was
convertible at GMAC's option at any time, GMAC may not convert
the AIFP MCP without receiving written approval from Treasury
or, unless conversion is required by the Federal Reserve
Board.\233\
---------------------------------------------------------------------------
\229\ U.S. Department of the Treasury, Capital Assistance Program
(March 3, 2009) (online at www.financialstability.gov/roadtostability/
capitalassistance.html) (hereinafter ``Capital Assistance Program'').
\230\ Treasury Announces Additional Investment in GMAC, supra note
225.
\231\ Treasury conversations with Panel staff (Jan. 8, 2010 and
Feb. 2, 2010).
\232\ Treasury conversations with Panel staff (Jan. 8, 2010 and
Feb. 2, 2010); see Section F, infra.
\233\ Treasury GMAC Contract, supra note 226, at 485 with U.S.
Department of the Treasury, Capital Assistance Program: Summary of
Mandatorily Convertible Preferred Stock (``Convertible Preferred'')
Terms (online at www.treas.gov/press/releases/reports/
tg40_captermsheet.pdf) (accessed Mar. 8, 2010).
---------------------------------------------------------------------------
Some of the terms of the CAP were more onerous for
recipients, however, than the terms of the AIFP. A white paper
on the CAP indicated that any investments under the program
were required to be placed in a trust, and the trustees would
be obligated to aim to ``protect and create value for the
taxpayer as a shareholder over time.'' \234\ The CAP also
imposed conditions on recipient institutions that were not
imposed on institutions that received funding under the AIFP.
Every institution applying for funds under the CAP was required
to submit a plan to Treasury indicating how it intended to use
the funds to ``preserve and strengthen their lending
capacity.'' \235\ The institution was required to detail how it
would use the funds to ``increase lending above levels relative
to what would have been possible without government support.''
\236\ After submitting this initial plan as part of the
application process, a recipient institution would then need to
submit monthly reports to Treasury on its lending ``broken out
by category.'' \237\ Treasury would make all documentation--the
initial plan, as well as the monthly reports--available to the
public.\238\
---------------------------------------------------------------------------
\234\ U.S. Department of the Treasury, Treasury White Paper: The
Capital Assistance Program and its Role in the Financial Stability
Plan, at 3 (online at www.treas.gov/press/releases/reports/
tg40_capwhitepaper.pdf) (hereinafter ``CAP White Paper'') (accessed
Mar. 8, 2010) (``In addition, any capital investments made by Treasury
under this plan will be placed in a separate trust set up to manage the
government's investments in US financial institutions''). In subsequent
conversations with Panel staff, Treasury stated that it considered a
trust structure as a possibility, but that the decision to place CAP
investments in a trust was never finalized. Treasury conversations with
Panel staff (Feb. 2, 2010). Mr. Bloom testified that Treasury concluded
that a trust ``does not enhance our position.'' Transcript of COP
Hearing on GMAC, supra note 12 (Testimony of Ron Bloom).
\235\ See Capital Assistance Program, supra note 229.
\236\ Capital Assistance Program, supra note 229 (accessed Mar. 8,
2010). According to Treasury, GMAC has been providing these reports to
Treasury, even though it received funding under the AIFP. See
Transcript of COP Hearing on GMAC, supra note 12 (Testimony of Jim
Millstein). The terms of the May and December 2009 investments
stipulate that GMAC ``shall use its reasonable best efforts to account
for the lending and financing activities it undertakes through the use
of its available capital.'' See Treasury GMAC Contract, supra note 226,
at 46, 159. Treasury does not make these reports public. Treasury
conversations with Panel staff (Mar. 2, 2010).
\237\ Capital Assistance Program, supra note 229.
\238\ Capital Assistance Program, supra note 229.
---------------------------------------------------------------------------
In addition, the CAP included a deadline of November 9,
2009, and each institution that was included in the stress
tests was required to raise the required capital buffer by that
date. According to Treasury's guidelines for the CAP program,
if the stress tests should ``indicate the need for a bank to
establish an additional capital buffer to withstand more
stressful conditions, the bank will have a six month window to
raise that capital privately or to access the capital made
available by the Treasury under the CAP.'' \239\ On November 9,
Treasury announced that it would close the CAP without making
any investments and that GMAC--the sole institution that
depended upon Treasury's assistance to meets its SCAP target--
was ``expected to access'' TARP funds through the AIFP.\240\
Treasury provided no additional funding to GMAC on that date.
---------------------------------------------------------------------------
\239\ CAP White Paper, supra note 234, at 2.
\240\ See U.S. Department of the Treasury, Treasury Announcement
Regarding the Capital Assistance Program (Nov. 9, 2009) (online at
www.financialstability.gov/latest/tg_11092009.html) (hereinafter
``Treasury Announcement Regarding the CAP'').
---------------------------------------------------------------------------
c. December 2009 Investment
Nine of the 10 BHCs that were identified as needing to
raise additional capital as a result of the stress tests met or
exceeded their capital raising requirements without government
assistance.\241\ GMAC was the lone BHC that could not meet the
required capital target on its own. As Treasury Secretary
Timothy Geithner stated in his December testimony before the
Panel, raising money in the private markets ``was never going
to be possible for GMAC. They are in a unique and difficult
situation.'' \242\ GMAC's initial inability to raise additional
money from the capital markets stemmed largely from the
uncertainty surrounding GM's bankruptcy. Treasury maintains
that after the GM bankruptcy, GMAC continued to struggle to
raise money from the private markets because it was the only
private BHC in the stress tests--the other 18 banks had an
existing shareholder base--and because its debt holders would
have demanded a majority of the company's equity in exchange
for their conversion.\243\ As a result, GMAC was the only
participant that sought additional TARP funds from Treasury to
meet the capital buffer needs identified in the stress tests.
---------------------------------------------------------------------------
\241\ OFS FY 2009 Financial Statements, supra note 205, at 47.
\242\ Congressional Oversight Panel, Transcript: COP Hearing with
Treasury Secretary Timothy Geithner (Dec. 10, 2009) (publication
forthcoming) (online at cop.senate.gov/hearings/library/hearing-121009-
geithner.cfm) (Testimony of Timothy Geithner).
\243\ Treasury stated that without its assistance, GMAC could have
raised some of the required capital through conversions; the principal
challenge was satisfying the SCAP requirement that GMAC raise $3.8
billion in fresh capital--for GMAC to do this, it would have
essentially needed to ``give the company to bondholders,'' which would
have wiped out Treasury's prior investment. Treasury conversations with
Panel staff (Feb. 2, 2010).
---------------------------------------------------------------------------
On December 30, 2009, Treasury provided GMAC with $3.8
billion in new capital.\244\ This amount was $1.8 billion less
than the remaining $5.6 billion shortfall on the capital buffer
calculated in May by the Federal Reserve.\245\ The additional
funds were provided in the form of $2.54 billion in Trust
Preferred Securities (TruPs) and $1.25 billion in MCP.\246\
Treasury also received warrants to purchase $127 million of
TruPs and $63 million of MCP, which it exercised upon
closing.\247\ At the same time, Treasury converted $5.25
billion of its Senior Preferreds to MCP, which have a more
advantageous conversion rate. It also converted $3 billion of
its MCP to common stock, increasing its ownership stake from 35
percent to 56 percent.\248\ Treasury also took the opportunity
to recut the conversion terms of its existing securities.\249\
With its enlarged ownership stake, Treasury has the right to
appoint four of the nine seats on GMAC's board of
directors.\250\ In total, Treasury now holds $2.67 billion in
TruPs and $11.4 billion in MCP. As with the December 2008 and
May 2009 investments, this investment was made under the
AIFP.\251\
---------------------------------------------------------------------------
\244\ December 2009 Restructuring Announcement, supra note 214. The
transaction closed and was funded on December 30, 2009. Treasury
conversations with Panel staff (Jan. 6, 2010). Treasury stated that it
timed the transaction to close in fiscal year 2009 in order to help the
company become SCAP compliant before year end. Treasury conversations
with Panel staff (Jan. 8, 2010).
\245\ December 2009 Restructuring Announcement, supra note 214;
Treasury Announcement Regarding the CAP, supra note 240 (``[GMAC's]
capital need is expected to be lower than anticipated at the time the
SCAP results were announced''); U.S. Department of the Treasury,
Questions for the Record for U.S. Department of the Treasury Assistant
Secretary Herbert M. Allison Jr., at 9 (Oct. 22, 2009) (online at
cop.senate.gov/documents/testimony-102209-allison-qfr.pdf) (hereinafter
``QFRs for Assistant Secretary Herbert M. Allison''); OFS FY 2009
Financial Statements, supra note 205, at 62 (``GMAC is in discussions
with the Treasury-OFS regarding additional financing to complete GMAC's
post-SCAP capital needs up to the amount of $5.6 billion, as previously
discussed in May'').
\246\ December 2009 Restructuring Announcement, supra note 214.
\247\ December 2009 Restructuring Announcement, supra note 214.
\248\ December 2009 Restructuring Announcement, supra note 214.
Cerberus holds a 14.9 percent stake of the company, third-party
investors hold 12.2 percent, a trust ``managed . . . for the benefit of
General Motors'' holds 9.9 percent, and an ``affiliate of General
Motors LLC'' holds 6.7 percent. GMAC, Inc., GMAC Financial Services
Announces Key Capital and Strategic Actions (Dec. 30, 2009) (online at
media.gmacfs.com/index.php?s=43&item=377) (hereinafter ``GMAC Announces
Capital and Strategic Actions'').
\249\ See December 2009 Restructuring Announcement, supra note 214
(``Treasury will acquire a `reset' feature on the entirety of its MCP
holdings such that the conversion price under which its MCP can be
converted into common equity will be adjusted in 2011, if beneficial to
Treasury, based on the market price of private capital transactions
occurring in 2010''); see also Treasury GMAC Contract, supra note 226,
at 478 (``The Series F-2 shall be convertible to common stock, in whole
or in part, at the applicable Conversion Rate at the option of the
holder upon specified corporate events, including any public offering
of GMAC's common stock, certain sales, mergers or changes of control at
GMAC''). This feature preserves Treasury's ability to assess whether it
is advantageous to Treasury to convert considering all the facts and
circumstances available at the time.
\250\ December 2009 Restructuring Announcement, supra note 214. The
increase in ownership stake from 35 percent to 56 percent gave Treasury
the right to appoint two additional directors.
\251\ December 2009 Restructuring Announcement, supra note 214.
---------------------------------------------------------------------------
When GMAC announced this investment in a press release on
December 30, 2009, it also announced that it was making a $2.7
billion capital contribution to ResCap and a $1.3 billion
capital contribution to Ally Bank.\252\ For ResCap, the capital
contribution permitted the ``reclassification of certain
international mortgage assets and businesses from held for
investment (HFI) to held for sale (HFS),'' which resulted in a
pre-tax charge of $1.3 billion.\253\ Its reclassification of
domestic assets and businesses incurred a pre-tax charge of
$700 million.\254\ With the capital contribution in Ally Bank,
GMAC purchased high-risk mortgage assets at ``fair value'' of
$1.4 billion, resulting in a pre-tax charge of $1.3
billion.\255\ GMAC then contributed these high-risk assets to
ResCap.\256\ In total, GMAC recognized a pre-tax charge of $3.8
billion: $3.3 billion from the mortgage-related charges at
ResCap and Ally Bank and $500 million from increasing ResCap's
repurchase reserve liability.\257\
---------------------------------------------------------------------------
\252\ GMAC, Inc., Form 8-K for the Period Ending December 31, 2009,
at Ex. 99.2 (Jan. 5, 2010) (online at www.sec.gov/Archives/edgar/data/
40729/000119312510001220/dex992.htm) (hereinafter ``Form 8-K for Q4
2009''); GMAC Announces Capital and Strategic Actions, supra note 248.
\253\ GMAC Announces Capital and Strategic Actions, supra note 248.
See also Form 8-K for Q4 2009, supra note 252, at Ex. 99.2.
\254\ GMAC Announces Capital and Strategic Actions, supra note 248.
See also Form 8-K for Q4 2009, supra note 252, at Ex. 99.2.
\255\ GMAC Announces Capital and Strategic Actions, supra note 248.
Prior to GMAC's purchase of these assets, Ally Bank reclassified them
from HFI to HFS. See Form 8-K for Q4 2009, supra note 252, at Ex. 99.2.
\256\ GMAC Announces Capital and Strategic Actions, supra note 248.
See also Form 8-K for Q4 2009, supra note 252, at Ex. 99.2; GMAC
conversations with Panel staff (Feb. 1, 2010) (discussing its efforts
to ``ringfence'' ResCap).
\257\ Form 8-K for Q4 2009, supra note 252, at Ex. 99.2.
---------------------------------------------------------------------------
Treasury stated that the investment honored its
``commitments made in May to GMAC in a manner which protects
taxpayers to the greatest extent possible. These actions offer
the best chance for GMAC to complete its overall restructuring
plan and return to the private capital markets for its debt
financing and capital needs in 2010.'' \258\ Treasury also
noted that the investment would help to ``provide stability to
the American auto industry'' \259\ and would demonstrate the
government's commitment to honoring its promises.\260\
---------------------------------------------------------------------------
\258\ December 2009 Restructuring Announcement, supra note 214.
\259\ See December 2009 Restructuring Announcement, supra note 214;
Treasury conversations with Panel staff (Jan. 8, 2010).
\260\ Treasury conversations with Panel staff (Jan. 8, 2010).
---------------------------------------------------------------------------
Treasury used a ``staged'' investment strategy--providing
one investment in May 2009 and a second investment in December
2009--as a means of tying future assistance to a satisfactory
review of certain of GMAC's plans.\261\ The May Term Sheet
states that any additional Treasury investment would be
contingent upon its approval of GMAC's capital plan.\262\ GMAC
submitted the capital plan to the Federal Reserve Bank of
Chicago on June 8, 2009, and the plan was approved after input
from both the Federal Reserve and Treasury.\263\
---------------------------------------------------------------------------
\261\ These conditions were similar, though not identical, to the
conditions Treasury imposed on GM and Chrysler when it first provided
the automotive industry with assistance in December 2008. See Section
H, infra.
\262\ The Term Sheet also specified that if liquidity was
``separately addressed,'' then GMAC would also need Treasury's approval
of its ``Liquidity Plan.'' Treasury GMAC Contract, supra note 226, at
60. In addition, Treasury's announcement of its May 2009 investment
states that ``[a]s a participant in the SCAP program, GMAC will
announce an approved Capital Plan on June 8. This plan will outline how
GMAC will meet the full $9.1 billion in new capital need identified in
the SCAP program.'' Treasury Announces Additional Investment in GMAC,
supra note 225.
\263\ GMAC, Inc., Form 10-Q for the Quarter Ended June 30, 2009, at
110 (Aug. 7, 2009) (online at www.sec.gov/Archives/edgar/data/40729/
000119312509169238/0001193125-09-169238-index.htm); GMAC conversations
with Panel staff (Feb. 16, 2010). In addition, Treasury used the
December 2009 investment as an opportunity to acquire some control over
the future conversion of its MCP stock. Because converting Treasury's
sizeable MCP stock would substantially dilute any existing
shareholders, the right to determine the timing of this conversion
provided Treasury with additional control over GMAC's capital
decisions. In a decision not characteristically taken in an arm's
length capital infusion situation, Treasury determined that it did not
need to review GMAC's business plan prior to making the December 2009
investment, giving the new CEO and Board of Directors time to formulate
GMAC's go-forward business plan. Treasury conversations with Panel
staff (Feb. 2, 2010).
---------------------------------------------------------------------------
FIGURE 7: FLOWCHART OF INVESTMENTS \264\
[GRAPHIC] [TIFF OMITTED] 54875A.005
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\264\ These figures reflect the corresponding warrants that were
exercised immediately. U.S. Department of the Treasury, Troubled Asset
Relief Program Transactions Report for Period Ending February 25, 2010
(Mar. 4, 2010) (online at www.financialstability.gov/docs/transaction-
reports/3-1-10%20Transactions%20Report%20as%20of%202-25-10.pdf)
(hereinafter ``Treasury Transactions Report'').
---------------------------------------------------------------------------
3. Government Support from Programs Other Than the TARP
a. The FDIC's Temporary Liquidity Guarantee Program
In the second quarter of 2009, GMAC received approval to
issue debt up to $7.4 billion under the FDIC's TLGP.\265\
Pursuant to the program, it issued $4.5 billion of unsecured
long-term debt during the second quarter, which included $3.5
billion of senior fixed-rate notes and $1.0 billion of senior
floating rate notes. Both types of notes are due in December
2012.\266\ On October 30, 2009, GMAC issued an additional $2.9
billion of unsecured debt in the form of senior fixed-rate
notes. These notes are due in October 2012.\267\
---------------------------------------------------------------------------
\265\ GMAC Form 10-Q for Q3 2009, supra note 22, at 64.
\266\ GMAC Form 10-K for 2009, supra note 12, at 83.
\267\ GMAC Form 10-Q for Q3 2009, supra note 22, at 64.
---------------------------------------------------------------------------
b. The Federal Reserve's Discount Window and Term Auction
Facility
Ally Bank was eligible to borrow at the Federal Reserve's
discount window, and becoming a BHC made GMAC eligible to
participate in the Term Auction Facility (TAF), a Federal
Reserve program that auctions funds to depository
institutions.\268\ The program aims to ``ensure that liquidity
provisions can be disseminated efficiently even when the
unsecured interbank markets are under stress'' by providing
funds ``against a broader range of collateral than open market
operations,'' according to the Federal Reserve.\269\ On
December 31, 2009, according to GMAC, ``Ally Bank had pledged
collateral in an amount sufficient to generate total capacity
of $7.8 billion of which $5.0 billion was outstanding and $2.8
billion was unused capacity.'' \270\
---------------------------------------------------------------------------
\268\ See Federal Reserve Bank of New York, Term Auction Facility
Questions and Answers (Jan. 12, 2009) (online at
www.federalreserve.gov/monetarypolicy/taffaq.htm#q3).
\269\ Federal Reserve Bank of New York, Term Auction Facility
Questions and Answers (Jan. 12, 2009) (online at
www.federalreserve.gov/monetarypolicy/taffaq.htm#q1).
\270\ GMAC Form 10-K for 2009, supra note 12, at 83.
---------------------------------------------------------------------------
c. The Federal Reserve's Term Asset-Backed Securities Loan
Facility
The Federal Reserve launched the Term Asset-Backed
Securities Loan Facility (TALF) on November 25, 2008. The
program intends to support lending by financing credit through
ABS.\271\
---------------------------------------------------------------------------
\271\ A more extensive discussion of the TALF and its impact on
lending can be found in the Panel's May report. Congressional Oversight
Panel, May Oversight Report: Reviving Lending to Small Businesses and
Families and the Impact of the TALF (May 7, 2009) (online at
cop.senate.gov/documents/cop-050709-report.pdf).
---------------------------------------------------------------------------
GMAC made two offerings of TALF-eligible securities in
2009,\272\ the first in September and the second in
November.\273\ Backed by retail automotive loans, the
transactions totaled $2.2 billion. GMAC stated that it expected
to ``continue pursuing the execution of TALF-eligible
transactions during the first quarter of 2010,'' \274\ and in
February 2010 made a $1.4 billion offering of securities, of
which $900 million of were TALF-eligible, backed by wholesale
automotive loans.\275\
---------------------------------------------------------------------------
\272\ GMAC Form 10-K for 2009, supra note 12, at 83.
\273\ GMAC, Inc., GMAC Financial Services Reports Preliminary Third
Quarter 2009 Financial Results (Nov. 4, 2009) (online at
media.gmacfs.com/index.php?s=43&item=371) (hereinafter ``GMAC Reports
Preliminary Q3 2009 Results'').
\274\ GMAC Form 10-K for 2009, supra note 12, at 83.
\275\ Data provided to the Panel by GMAC.
---------------------------------------------------------------------------
d. The Federal Reserve's Commercial Paper Funding Facility
GMAC has participated in the Federal Reserve's Commercial
Paper Funding Facility (CPFF) since the program became
operational on October 27, 2008. As a participant, GMAC has
sold asset-backed commercial paper to the Federal Reserve
through its New Center Asset Trust (NCAT). By December 31,
2008, GMAC had approximately $8 billion of outstanding asset-
backed commercial paper, 95 percent ($7.6 billion) of which was
financed by the CPFF.\276\
---------------------------------------------------------------------------
\276\ GMAC Form 10-K for 2008, supra note 10, at 80.
---------------------------------------------------------------------------
On November 25, 2008, Moody's and S&P downgraded some of
the ABS owned by NCAT.\277\ On January 23, 2009, after NCAT was
unable to secure a ratings upgrade, GMAC began a wind-down of
NCAT's operations. As a consequence of entering this wind-down
process, NCAT could no longer issue commercial paper.\278\ The
downgrade also prevented NCAT from participating in the
CPFF.\279\ As of December 31, 2009, GMAC had approximately $2.9
billion outstanding under NCAT.\280\
---------------------------------------------------------------------------
\277\ GMAC Form 10-K for 2008, supra note 10, at 80. The commercial
paper was downgraded below A-1/P-1. GMAC, Inc., Form 10-Q for the
Quarter Ended June 30, 2009, at 101 (Aug. 7, 2009) (online at
www.sec.gov/Archives/edgar/data/40729/000119312509169238/d10q.htm)
(hereinafter ``GMAC Form 10-Q for the Q3 2009'').
\278\ GMAC Form 10-K for 2008, supra note 10, at 80.
\279\ GMAC Form 10-Q for the Q3 2009, supra note 277, at 101.
\280\ GMAC Form 10-K for 2009, supra note 12, at 88.
---------------------------------------------------------------------------
4. Impact of the TARP on Executive Compensation
Mr. Carpenter was appointed CEO of GMAC in November 2009.
Subsequently, a pay package was developed by the GMAC
Compensation Committee and submitted to Special Master for TARP
Executive Compensation Kenneth Feinberg for approval.\281\ The
Special Master set the compensation for Mr. Carpenter in a
determination letter dated December 20, 2009 as follows in
Figure 8:
---------------------------------------------------------------------------
\281\ GMAC is subject to executive compensation levels set by
Treasury's Special Master Feinberg because the company is classed by
Treasury regulations as one of a group of companies that has received
``exceptional assistance'' under the TARP.
FIGURE 8: COMPENSATION OF MR. CARPENTER \282\
------------------------------------------------------------------------
Base salary
--------------------------------------- Restricted Target total
Deferred stock stock units compensation
Cash units
------------------------------------------------------------------------
$950,000 $5,415,000 $3,135,000 $9,500,000
------------------------------------------------------------------------
\282\ U.S. Department of the Treasury, Supplemental Determination
Regarding 2009 Compensation Payments for the Chief Executive Officer
(Dec. 23, 2009) (online at www.financialstability.gov/docs/
20091223%20GMAC%20Supplemental%20Determination%20Letter.pdf).
A portion of Mr. Carpenter's salary comprises deferred
stock units (DSUs), which vest immediately, but are subject to
restrictions on the timing of payout: ``DSUs cannot be paid out
until at least two years after the date of grant. After the
two-year time restriction has passed, the DSUs will be paid out
in installments beginning immediately and continuing over the
next three years.'' Another portion of Mr. Carpenter's salary
comprises restricted stock units (RSUs), which ``vest in full
three years after they are granted.'' After the vesting
requirement is met, payouts will be made only ``when the
Company starts to repay its TARP obligations. Payouts will be
made on an incremental basis.'' \283\
---------------------------------------------------------------------------
\283\ GMAC Form 10-K for 2009, supra note 12, at 224-225.
---------------------------------------------------------------------------
The Panel believes that the levels of compensation set for
the CEO of GMAC (and of other companies classed as receiving
``exceptional assistance'' under the TARP) raise significant
questions, which the Panel will continue to study. These
include whether particular levels of compensation are either
necessary or appropriate, the nature of the incentives the
compensation creates, and the manner in which Treasury is
exercising its authority under the EESA compensation
restrictions as amended by the American Recovery and
Reinvestment Act of 2009 (ARRA).
E. Justification for the Rescue of GMAC
Treasury presents a twofold justification for its
intervention in GMAC: first, GMAC's significance to the
automotive industry and to GM and Chrysler in particular; and
second, GMAC's inclusion in the stress tests, pursuant to which
Treasury committed to provide funds for BHCs that could not
raise funds privately. Treasury has declined to say whether
either one of these factors in the absence of the other would
have led to the same result, explaining that it was dealing
with the facts as they existed at the time of the intervention
and that Treasury staff cannot speculate on the outcome of
hypothetical events.\284\
---------------------------------------------------------------------------
\284\ Treasury conversations with Panel staff (Jan. 8, 2010);
Treasury conversations with Panel staff (Jan. 29, 2010).
---------------------------------------------------------------------------
1. GMAC's Significance to the Financing of the Automotive Industry
a. Automobile Companies' Reliance on GMAC
Treasury's first justification for support of GMAC is the
role played by GMAC in automotive industry financing.\285\ In
answers to questions posed by the Panel, Assistant Secretary of
the Treasury for Financial Stability Herb Allison stated that
Treasury's assistance to GMAC has provided a ``reliable source
of financing to both auto dealers and customers seeking to buy
cars,'' helped ``stabilize our auto financing market,'' and
contributed ``to the overall economic recovery.'' \286\ As
discussed in more detail below, GMAC is a primary source of
retail and wholesale financing for both GM and Chrysler. In
conversations with Panel staff, Treasury stated that if
Treasury had refused to support GMAC after providing assistance
to GM and Chrysler, it would have undermined the government's
investments in the automotive companies.\287\
---------------------------------------------------------------------------
\285\ Treasury stated that its desire to ensure that GMAC's non-
automobile operations, including ResCap, continue operation played a
``minimal, at most'' role in its decision to support GMAC. Treasury
conversations with Panel staff (Jan. 29, 2010).
\286\ QFRs for Assistant Secretary Herbert M. Allison, supra note
245. See also July 2009 SIGTARP Report, supra note 133, at 112
(``Treasury has stated that it believes its investment in GMAC will
help provide a reliable source of financing to both auto dealers and
customers seeking to buy cars, and that a recapitalized GMAC will offer
strong credit opportunities, help stabilize the auto financing market,
and contribute to the overall economic recovery'').
\287\ Treasury conversations with Panel staff (Jan. 8, 2010);
Treasury conversations with Panel staff (Jan. 29, 2010).
---------------------------------------------------------------------------
According to Treasury, it is almost certain that GMAC and
Chrysler Financial would have failed without Treasury's
intervention.\288\ Relying on outside industry estimates,
Treasury stated that the impact of letting GMAC and Chrysler
Financial fail (together with credit conditions) would likely
have been a further immediate decline of 1.5 to 2.5 million
domestic automobile sales, primarily because of these
companies' roles in providing floorplan financing to GM and
Chrysler dealers.\289\ Treasury believes that such a decline in
sales would, in turn, have immediately threatened the economic
viability of GM and Chrysler.\290\
---------------------------------------------------------------------------
\288\ Treasury conversations with Panel staff (Jan. 8, 2010).
\289\ Treasury conversations with Panel staff (Feb. 2, 2010).
\290\ Treasury conversations with Panel staff (Feb. 2, 2010);
Written Testimony of Ron Bloom and Jim Millstein, supra note 73, at 3
(``Without government assistance, GMAC would have been forced to
suspend financing lines to creditworthy dealerships, leaving them
unable to purchase automobile inventory for their lots. Without orders
for cars, GM would have been forced to slow or shut down its factories
indefinitely to match the drop in demand. Given its significant
overhead, a slow-down or stoppage in production of this magnitude would
have toppled GM'').
---------------------------------------------------------------------------
GM similarly has taken the position that the continued
solvency of GMAC was crucial for GM's ability to continue
operating, especially in the context of the financial crisis.
In December 2008, GM Chief Executive Rick Wagoner stated that
``GMAC's difficulties were `hammering' the carmaker's ability
to sell automobiles.'' \291\ The importance of GMAC for GM's
sales is underscored in GM's public filings and discussions
with the Panel staff, in which GM explained that GMAC's severe
financial difficulties in late 2008 and the first quarter of
2009 were an important independent contributing factor in its
ability to sell automobiles. GM emphasized its historical and
continued reliance on GMAC for financing and explained that
when GMAC tightened its floorplan financing to GM dealers and
radically rolled back its retail lending (including a complete
cessation of lease finance by the end of 2008), vehicle sales
declined.\292\ In discussions between the Panel staff and GM,
the company repeated its contention that the continuation of
financing from GMAC, especially floorplan financing, was
essential for GM's continued ability to operate in 2008 and
2009 and that a complete disruption of floorplan financing--as
opposed to the relatively minor credit contraction that
actually occurred--would have crippled the company.\293\
---------------------------------------------------------------------------
\291\ Soyoung Kim and Karen Brettell, GM Shares Up, GMAC May be
Eyeing $6 Billion Loans, Reuters (Dec. 26, 2008) (online at
www.reuters.com/article/idUSTRE4BP27120081227).
\292\ Motors Liquidation Co., Form 10-Q for the Quarter Ended March
31, 2009, Part II, Item 1, at 108 (May 8, 2009) (online at www.sec.gov/
Archives/edgar/data/40730/000119312509105365/d10q.htm) (hereinafter
``Motors Liquidation Form 10-Q for Q2 2009'') (explaining that ``[a]s a
result'' of reduced consumer finance by GMAC in this period, ``the
number of vehicles sold with a subsidized financing rate or under a
lease contract declined rapidly in the second half of the year, with
lease contract volume dropping to zero by the end of 2008. This had a
significant effect on our vehicles sales overall, since many of our
competitors have captive finance subsidiaries that were better
capitalized than GMAC and thus were able to offer consumers subsidized
financing and leasing offers''). In addition, GM stated that the
declining availability of GMAC wholesale financing to GM dealers
``caused and will likely continue to cause dealers to modify their
plans to purchase vehicles from us.'' Id.
\293\ GM conversations with Panel staff (Feb. 12, 2010).
---------------------------------------------------------------------------
Treasury provides a similar rationale for the additional
support it provided GMAC in order to assume the wholesale and
retail financing of Chrysler dealers and customers from
Chrysler Financial. On April 30, 2009, when Chrysler filed for
bankruptcy, GMAC entered into an agreement with Chrysler that
made GMAC the ``preferred provider of new wholesale financing
for Chrysler dealer inventory.'' \294\ In its announcement of
this agreement, GMAC stated that the government ``indicated
that it intends to support GMAC in promoting the availability
of credit for dealers and customers by making liquidity and
capital available and by providing the capitalization that GMAC
requires to support the Chrysler business.'' \295\ With GMAC
moving quickly into the business of providing Chrysler
financing, Chrysler Financial has begun to wind down the
minimal portion of its operations not assumed by GMAC and aims
to complete the process by December 31, 2011.\296\ GMAC's
relatively rapid assumption of most of Chrysler Financial's
floorplan lending business provides the justification for
support of GMAC to encompass the credit needs of Chrysler
dealers and car purchasers.
---------------------------------------------------------------------------
\294\ GMAC LLC, GMAC Financial Services Enters Agreement to Provide
Financing for Chrysler Dealers and Customers (Apr. 30, 2009) (online at
gmacfs.mediaroom.com/index.php?s=43&item=324) (hereinafter ``GMAC to
Provide Financing for Chrysler Dealers and Customers'').
\295\ GMAC to Provide Financing for Chrysler Dealers and Customers,
supra note 294.
\296\ See letter from Kenneth R. Feinberg, special master for TARP
executive compensation, to Tracy Hackman, vice president, general
counsel and secretary, Chrysler Financial, Proposed Compensation
Payments and Structures for Senior Executive Officers and Most Highly
Compensated Employees, Annex A, at A5 (Oct. 22, 2009) (online at
treas.gov/press/releases/docs/
20091022%20Chrysler%20Financial%20Letter.pdf). Treasury explained that
it began to orchestrate the transfer of most of Chrysler Financial's
business into GMAC because it realized in the Spring 2009 that by July
2009, Chrysler Financial would be unable to meet its financing
requirements. Treasury indicated that while parties explored merging
Chrysler Financial with GMAC, such a solution would have been
impractical because GMAC would assume all of Chrysler's debt
obligations (and problems within its legacy portfolio). Instead,
Treasury decided that it would allow the legacy portfolio to be placed
in run-off and then capitalize the GMAC system that it believes has
been shown to work. Treasury conversations with Panel staff (Feb. 2,
2010).
---------------------------------------------------------------------------
Industry analysts and market participants who were
consulted by the Panel overwhelmingly agreed that GM and
Chrysler were heavily reliant on GMAC and Chrysler Financial--
and, after May 2009, on GMAC alone--for the provision of
floorplan financing for dealers who held their franchises.\297\
They underscored the considerable aggregate credit needs of
GM's and Chrysler's vast network of dealers, the need for
floorplan credit to be renewed continually to ensure that
dealers would have funds to take inventory, and the
considerable infrastructure and historical ties that GMAC had
developed to meet these needs.\298\ Industry sources also
generally agreed that while GMAC had historically been crucial
in providing some consumer financing for GM, particularly
subvented financing, GM was considerably less dependent overall
on GMAC for consumer financing than for floorplan
financing.\299\
---------------------------------------------------------------------------
\297\ National Automobile Dealers Association conversations with
Panel staff (Feb. 2, 2010); industry analyst conversations with Panel
staff; market participants conversations with Panel staff.
\298\ National Automobile Dealers Association conversations with
Panel staff (Feb. 2, 2010); industry analyst conversations with Panel
staff; market participants conversations with Panel staff.
\299\ National Automobile Dealers Association conversations with
Panel staff (Feb. 2, 2010); industry analyst conversations with Panel
staff; market participants conversations with Panel staff.
---------------------------------------------------------------------------
In addition to speaking to Treasury, GMAC, GM, and industry
sources, the Panel reviewed data on automotive financing. The
Panel's review of this data supports the automobile
manufacturers' and Treasury's contentions that GMAC and
Chrysler Financial provided important financing for the
wholesale and consumer customers of GM and Chrysler. In
general, GMAC and Chrysler Financial provided financing almost
exclusively to dealers affiliated with GM and Chrysler,
respectively, and to purchasers of automobiles manufactured by
these companies; their role in financing GM's and Chrysler's
competitors was negligible. GMAC and Chrysler Financial were,
however, a significant source of GM's and Chrysler's financing
needs--especially for floorplan financing but also in some
segments of the consumer financing market.
GMAC's financial statements demonstrate that it derives
significant revenues from automotive financing. Before the
financial crisis, around a third of GMAC's revenue came from
its GAF operations, with net revenue of nearly $5 billion in
2007.\300\ Those revenues are primarily derived from GM
customers and dealers, as demonstrated in more detail by the
charts below.
---------------------------------------------------------------------------
\300\ GMAC Form 10-K for 2008, supra note 10, at 35.
---------------------------------------------------------------------------
From the point of view of GM dealers, GMAC has provided the
vast majority of floorplan financing received--typically
between 80 and 85 percent of total GM international and North
American sales \301\--and this percentage has remained
relatively stable through both GMAC's transition to non-captive
status and the stresses caused by the financial crisis and
other recent shocks to the automotive industry and market. The
balance of the floorplan financing needs of GM dealers was
provided by national and regional banks.\302\ In contrast,
GMAC's role in financing non-GM dealers was negligible,
typically amounting to only three percent of GMAC's floorplan
business and not a substantial proportion of floorplan
financing for any other OEM's dealers.
---------------------------------------------------------------------------
\301\ The proportion of GM U.S. sales supported by GMAC floorplan
financing has historically been slightly higher: approximately 85
percent at year-end 2008 and 91 percent at year-end 2009. See Written
Statement of Robert Hull, supra note 141, at 3.
\302\ See Written Testimony of Ron Bloom and Jim Millstein, supra
note 73, at 4 (``For example, in December 2008, 75% of GM dealers
received their financing from GMAC while the next five lenders made up
only 8%. The remaining dealers were serviced by 200 banks, most of
which provided financing for only a single dealer'').
FIGURE 9: GMAC FLOORPLAN FINANCING TO GM AND NON-GM DEALERS \303\
----------------------------------------------------------------------------------------------------------------
2005 2006 2007 2008 2009
----------------------------------------------------------------------------------------------------------------
Total GM Units................................. 6,260,000 6,122,000 6,093,000 5,404,000 3,876,000
Total GM Units NA.............................. 3,798,000 3,464,000 3,161,000 2,540,000 1,374,000
Total GM Units Int'l........................... 2,462,000 2,658,000 2,932,000 2,864,000 2,502,000
Non GM Units................................... 180,000 145,000 199,000 196,000 \304\ 249,0
00
Percent of GM Sales............................ 82% 80% 82% 81% 78%
Percent of GM NA............................... 80% 76% 77% 76% 77%
Percent of GM Int'l............................ 84% 86% 88% 85% 79%
----------------------------------------------------------------------------------------------------------------
\303\ See GMAC LLC and GMAC, Inc., Forms 10-K for the Fiscal Years Ended December 31, 2003-2009 (online at
www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0000040729&type=10-K&dateb=&owner=exclude&count=40)
(hereinafter ``GMAC Forms 10-K for FY 2003-2009'').
\304\ Of the 249,000 non-GM units GMAC financed through its wholesale financing, 131,000 were financings of
Chrysler units compared to only 7,000 Chrysler units in 2008. See GMAC Form 10-K for 2009, supra note 12, at
47.
FIGURE 10: GMAC FLOORPLAN FINANCING TO GM AND NON-GM DEALERS \305\
---------------------------------------------------------------------------
\305\ See GMAC Forms 10-K for FY 2003-2009, supra note 303. This
chart includes North American and international sales.
[GRAPHIC] [TIFF OMITTED] 54875A.006
The heavy reliance of GM dealers on GMAC for floorplan
financing is typical of the industry; the majority of floorplan
financing for dealers of a particular OEM has historically been
provided by the OEM's captive (or former captive) finance
company.\306\ A similar pattern is apparent with respect to
Chrysler, where Chrysler Financial has historically provided
between 70 and 75 percent of Chrysler dealers' floorplan
financing.\307\ GMAC has rapidly replaced Chrysler Financial as
the prime supplier of floorplan financing for Chrysler dealers,
and by the end of 2009, it provided wholesale financing for 77
percent of Chrysler dealership inventory in the United States,
which is substantially the same proportion of floorplan
financing that it provided before the financial crisis.\308\
---------------------------------------------------------------------------
\306\ For example, Ford Motor Credit provided a roughly equivalent
proportion of floorplan financing to Ford North American dealerships
that GMAC provided to GM North American dealers. In 2006, Ford Motor
Credit supplied 80 percent of floorplan credit; in 2007, 78 percent of
floorplan credit; and in 2008, 77 percent of floorplan credit. See Ford
Motor Company, Form 10-K for the Fiscal Year Ended December 31, 2008,
at 10, 49, 52 (Feb. 26, 2009) (online at www.sec.gov/Archives/edgar/
data/37996/000114036109005071/form10k.htm); Ford Motor Company, Form
10-K for the Fiscal Year Ended December 31, 2007, at 10, 46-50 (Feb.
27, 2008) (online at www.sec.gov/Archives/edgar/data/37996/
000114036108005181/form10k.htm).
\307\ See Figure 11, infra. Compared to GMAC, Chrysler Financial
historically did a higher proportion of its floorplan financing
business with dealers associated with its OEM, with average monthly
non-Chrysler units financed generally constituting 20-25 percent of
Chrysler Financial's floorplan business. See id.
\308\ See Figure 11, infra. See also GMAC, Inc., GMAC Statement on
Financing of Chrysler Dealers, Customers (Nov. 5, 2009) (online at
media.gmacfs.com/index.php?s=43&item=372) (hereinafter ``GMAC Statement
on Financing of Chrysler Dealers, Customers'') (reporting that as of
November 2009, GMAC was providing wholesale financing for 85 percent of
dealer inventory in Canada). Based on other metrics, such as floorplan
loans outstanding and number of units financed, however, the transfer
of Chrysler dealers' floorplan financing from Chrysler Financial to
GMAC has been more gradual. See Note 341, infra.
FIGURE 11: CHRYSLER FINANCIAL (SUBSEQUENTLY GMAC) FLOORPLAN FINANCING TO CHRYSLER AND NON-CHRYSLER DEALERS \309\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Q3 2009
2005 2006 2007 2008 Q1 2009 Q2 2009 \310\ Q4 2009
--------------------------------------------------------------------------------------------------------------------------------------------------------
Share of Chrysler U.S. Sales........................... 70% 73% 75% 75% 74% Not 67% 77%.
Available
Average Monthly Chrysler Units Financed \311\.......... 407,000 406,000 355,000 308,000 262,000 Not Not Not
Available \3 Available Available.
12\
Average Monthly Non-Chrysler Units Financed............ 90,000 71,000 69,000 60,000 44,000 Not Not Not
Available Available Available.
--------------------------------------------------------------------------------------------------------------------------------------------------------
\309\ Unless otherwise noted, the table is based on data provided to the Panel from Chrysler Financial. All data contained in the table reflects
financing of U.S. Chrysler dealers. Unit numbers have been rounded to the nearest thousand.
\310\ Third and fourth quarter 2009 figures represent GMAC's provision of floorplan financing to Chrysler dealers. See Written Statement of Robert Hull,
supra note 141, at 3.
\311\ Unlike GMAC, Chrysler Financial did not track total units financed, but instead tracked average monthly units in dealer inventories that were
supported by Chrysler Financial floorplan lending. An estimate of units financed per year cannot be derived from the monthly figures because vehicles
often remain on dealer lots for more than one month and are thus reflected in more than one month's numbers.
\312\ Chrysler Financial stopped financing new floorplan loans in April 2009 with the transition of its floorplan financing business to GMAC. GMAC does
not disclose comparable data.
In contrast to floorplan financing, automobile credit
companies face greater competition in the consumer finance
market from national and regional banks and credit unions.\313\
Despite the relatively competitive environment, however, both
GM and Chrysler relied on their credit companies for a
substantial portion of their consumer financing.
---------------------------------------------------------------------------
\313\ See Figure 2, supra.
---------------------------------------------------------------------------
In 2006, despite its spin-off from its parent, GMAC still
provided 38 percent of GM's consumer financing, a figure that
included 48 percent of financing for its North American
sales.\314\ GM relied on GMAC even more heavily, however, for
particular types of consumer financing; as GM stated in its
public filings, GMAC ``finances a significant percentage of our
global vehicle sales and virtually all of our U.S. sales
involving subsidized financing such as below-market interest
rates.'' \315\ In fact, approximately 80 percent of GMAC's
consumer financing has historically been subvented
financing.\316\
---------------------------------------------------------------------------
\314\ See Figure 12.
\315\ Motors Liquidation Form 10-Q for Q2 2009, supra note 292, at
108.
\316\ GMAC Form 10-K for 2008, supra note 10, at 163.
FIGURE 12: GMAC CONSUMER AUTOMOBILE FINANCING \317\
----------------------------------------------------------------------------------------------------------------
2005 2006 2007 2008 2009
----------------------------------------------------------------------------------------------------------------
Total Units.................................... 2,157,000 2,198,000 2,092,000 1,564,000 1,115,000
GM Units....................................... 2,085,000 2,130,000 1,984,00 1,468,000 840,000
Non GM Units................................... 72,000 68,000 108,000 96,000 111,000
Percent of GM Sales/Leases..................... 36% 38% 35% 32% 20
Percent of GM NA............................... 42% 48% 45% 38% 27
Percent of GM Int'l............................ 26% 24% 23% 25% 14
----------------------------------------------------------------------------------------------------------------
\317\ See GMAC Forms 10-K for FY 2003-2009, supra note 303.
FIGURE 13: GM RETAIL SALES BY FINANCING SOURCE \318\
\318\ Data provided to the Panel by J.D. Power and Associates.
[GRAPHIC] [TIFF OMITTED] 54875A.007
With respect to Chrysler, before the crisis, approximately
70 percent of the consumer purchases at Chrysler dealers were
provided by Chrysler Financial, with the rest coming from local
banks and credit unions.\319\ Although GMAC rapidly assumed
most of Chrysler Financial's floorplan financing of Chrysler
dealers, GMAC's assumption of Chrysler Financial's consumer
financing has been neither as swift nor as complete. During the
fourth quarter of 2009, GMAC was the leading provider of
consumer financing for Chrysler vehicles in the United States,
providing financing for 25.5 percent of retail sales.\320\
While GMAC's share is increasing, it is still substantially
below the pre-transition figure, and it is not clear whether
Chrysler consumers have permanently shifted a portion of their
financing business to GMAC's competitors.
---------------------------------------------------------------------------
\319\ See Chrysler Bankruptcy Filing (April 30, 2009) In re
Chrysler LLC, et al., Bankr. S.D.N.Y. (No. 09-50002-ajg) (online at
graphics8.nytimes.com/packages/images/nytint/docs/chrysler-bankruptcy-
filing/original.pdf).
\320\ Data provided to the Panel by J.D. Power and Associates
(reporting 35 percent by fourth quarter 2009); Written Statement of
Michael Carpenter, supra note 140, at 1 (reporting that GMAC financed
25.5 percent of Chrysler retail sales in the United States); GMAC
Reports Preliminary Q4 and Full-Year 2009 Results, supra note 127
(reporting that GMAC financed 25.5 percent of Chrysler's U.S. retail
sales in the fourth quarter of 2009 in October 2009, compared to 13.3
percent in the third quarter of 2009).
Chrysler Financial no longer engages in new dealer financing. See
Chrysler Financial, Chrysler Financial Restructures Its Business
Operations (June 30, 2009) (online at corp.chryslerfinancial.com/
news_business_restructure.html). Instead, it provides ``dealership
insurance and consumer retail financing products.'' Id. During the
wind-down process, it will also continue to ``service and collect on
its on-going loan portfolio of about $45 billion.'' Id.
---------------------------------------------------------------------------
FIGURE 14: CHRYSLER RETAIL SALES BY FINANCING SOURCE \321\
---------------------------------------------------------------------------
\321\ Data provided to the Panel by J.D. Power and Associates.
[GRAPHIC] [TIFF OMITTED] 54875A.008
These data support the position that both GMAC and Chrysler
Financial were important suppliers of credit for GM's and
Chrysler's operations, especially with respect to floorplan
financing. In line with the historical relationship between
OEM's and their captive financing arms, GMAC and Chrysler
Financial provided the vast majority of floorplan financing for
their respective OEMs' dealers even after GMAC and Chrysler
Financial lost their subsidiary status, while the provision of
retail financing was much less consolidated.
b. Could Financing Have Been Provided by Other Market
Participants?
The financial crisis disrupted the automotive financing
market in several different ways, constraining the ability of
all market participants to provide wholesale or retail
financing.
In December 2008 and January of 2009, the credit ratings of
GMAC and Chrysler Financial were each downgraded,\322\ which,
in turn, raised their borrowing costs. The securitization
market, GMAC's primary source of funds for its automobile
finance operations, dried up. While GMAC had a bank with access
to the Federal Reserve's discount window and the TLGP beginning
at the end of 2008, it was unable to use bank funds to finance
loans to GM dealers until May 2009 because of restrictions on
related-party transactions.\323\ The result was that GMAC
rolled back its consumer lending in order to focus on providing
floorplan lending, which GMAC believed was key to the survival
of both itself and GM, and where it believed it could not
easily be replaced.\324\ Thus, despite the challenging
financial climate, GMAC slightly expanded, and Chrysler
Financial maintained, their respective market shares in
floorplan financing. GMAC did, however, respond to its
difficulties in raising funds by raising interest rates on
floorplan loans and tightening its floorplan financing
standards \325\--actions that theoretically presented an
opportunity for some dealers to seek third-party lending from
other market participants.
---------------------------------------------------------------------------
\322\ See Bloomberg Data (Fitch downgraded GMAC's Senior Unsecured
Debt to ``RD'' from ``CCC'' on January 9, 2009); Standard and Poor's,
DaimlerChrysler Financial Services Americas LLC Rating Lowered to `CCC-
'; on Watch Dev., at 2 (Dec. 23, 2008).
\323\ GMAC conversations with Panel staff (Feb. 1, 2010); industry
analysts conversations with Panel staff. In late December 2008, GMAC
received an exemption from the related-party restrictions for its
retail loans, but it did not receive an exemption for its dealer loans
until May 2009. See Section C.2, supra. Representatives of the credit
union industry, while conceding the need to bail out GMAC to avoid a GM
bankruptcy, object to the GMAC's continuing receipt of bailout-related
subsidies and liquidity and, most significantly, its open-ended ability
to fund its automobile lending with deposits from Ally Bank. Panel
discussions with credit industry representatives. They believe that
these measures provide GMAC with an unfair competitive advantage in
making retail loans to purchasers of GM automobiles. Id. This complaint
raises the question of whether GMAC's access to federally-insured
deposits through Ally Bank, the ``covered transactions'' exemptions it
has received under Section 23A of the Federal Reserve Act, see Section
C.2, supra, and its status as a hybrid BHC/quasi-captive automobile
finance company are appropriate going forward in a non-emergency
context, see Section H.2., infra.
\324\ GMAC conversations with Panel staff (Feb. 1, 2010); industry
analysts conversations with Panel staff.
\325\ GMAC conversations with Panel staff (Feb. 16, 2010).
---------------------------------------------------------------------------
Few bank competitors, however, stepped up as the captive
finance companies struggled. The Panel staff's discussions with
numerous market participants, market analysts, and experts in
finance and economics suggest that if GMAC's floorplan lending
were significantly disrupted in the end of 2008 and the first
half of 2009, it was highly unlikely that, absent significant
government backing, other market participants could have
compensated for the loss of floorplan lending to preserve GM's
operations absent significant government backing.
The primary obstacle facing national and regional banks was
that the industry had entered a risk-reduction mode, with
depository banks curtailing their lending during the financial
crisis because of their large and uncertain exposures to real
estate-related assets; the dramatic slowdown in the economy;
and their needs to write down assets and to boost capital
ratios.\326\ In addition, banks were subject to some of the
same pressures in funding their floorplan lending as the
finance companies. Nine out of the top ten non-captive
providers of floorplan financing were depository
institutions.\327\ While financing companies, including GMAC,
traditionally funded their operations through access to
wholesale finance markets and funded their floorplan lending
through the securitization markets, banks supported their
floorplan lending by adding assets to their balance sheets,
financed by funds raised in the wholesale finance market and
consumer deposits from their affiliated banks.\328\ During the
financial crisis, banks faced a significant disruption in their
access to the wholesale finance market. Moreover, if banks
lacked the appetite to increase substantially the amount of
floorplan loans in their portfolios, they could not reduce
their exposure by securitizing these loans. In 2008 and the
first part of 2009, floorplan securitization almost completely
evaporated until the TALF slowly began to revive the moribund
floorplan securitization market.\329\ Another indication of
banks' low appetite for forging new floorplan financing
relationships with GM dealers is the fact that GMAC's share of
floorplan financing actually increased from 80 percent to 85
percent of GM-affiliated dealers even as GMAC was tightening
its credit standards.\330\ This shift can be attributed to the
fact that non-GMAC floorplan lenders were remaining at least as
cautious as they were before, if not being more diligent or
tightening their standards.\331\
---------------------------------------------------------------------------
\326\ Written Testimony of Ron Bloom and Jim Millstein, supra note
73, at 4 (``It is also important to remember that when the initial
investment decision was being made, many large national banks faced
significant threats to their own financial health (e.g., deteriorating
legacy asset values, diminished access to capital, mounting losses).
Finally, most banks lack the capacity to aggressively grow their
automotive lending portfolios, given internal and regulatory limits on
borrower and industry concentrations'').
\327\ Treasury conversations with Panel staff (Feb. 2, 2010).
\328\ Market participants discussions with Panel staff; industry
analysts conversations with Panel staff.
\329\ Floorplan securitizations declined from $12.3 billion in 2006
to $5.6 billion in 2007 and $0 in 2008 before slightly recovering to
$2.5 billion in 2009. Data provided to the Panel by the Securities
Industry and Financial Markets Association (relying on data from
Thomson Reuters).
\330\ GMAC conversations with Panel staff (Feb. 1, 2010).
\331\ Industry analysts conversations with Panel staff; market
participants conversations with Panel staff.
---------------------------------------------------------------------------
Banks feared that floorplan lenders were at risk of being
saddled with loan collateral comprised of vehicles that were
rapidly depreciating in value because the manufacturers were at
risk of bankruptcy.\332\ These were the same factors that
credit rating agencies used to justify downgrading the ratings
of the existing securitizations of GMAC and Chrysler Financial
and to refuse to grant AAA ratings to new securitizations.\333\
While industry groups believe that these fears were
misplaced,\334\ banks feared that the vehicles branded by a
bankrupt GM and Chrysler would remain unsold and depreciate
because demand for vehicles would dry up and the warranties
would not be honored.\335\ Banks also had additional fears.
Because they were less familiar with the auto dealers, they
were unsure which dealers would survive the downturn, and
lacking the strong relationships with GM and Chrysler that GMAC
and Chrysler Financial had, they were less certain about the
impact of a GM and Chrysler bankruptcy.\336\
---------------------------------------------------------------------------
\332\ Industry analysts conversations with Panel staff; market
participants conversations with Panel staff.
\333\ The rating agencies were also concerned that if either GM or
Chrysler entered bankruptcy or was severely disabled, it would be
unable to honor the buyback obligations that would be triggered upon
default of the dealer. National Automobile Dealers Association
conversations with Panel staff (Mar. 5, 2010).
\334\ National Automobile Dealers Association conversations with
Panel staff (Feb. 2, 2010 and Mar. 5, 2010) (explaining that there was
typically sufficient collateral and credit protections for providers of
floorplan financing, including the dealership's unsecured promise to
pay, the dealer's personal guarantee, the intrinsic value of the
collateral, and various enhancements and haircuts in the
securitizations).
\335\ In fact, some market participants have noted that they were
reluctant to provide floorplan financing to any GM or Chrysler dealers
at times in late 2008 and early 2009. Market participants conversations
with Panel staff.
\336\ Treasury conversations with Panel staff (Feb. 2, 2010);
industry analysts conversations with Panel staff. For its part, GMAC
denied that it had inside knowledge of dealer closings. GMAC
conversations with Panel staff. GM had already contracted its
dealership network from 7,367 in 2004 to 6,246 in 2008. See General
Motors Corp., 2009-2014 Restructuring Plan, at 17 (Feb. 17, 2009)
(online at www.financialstability.gov/docs/AIFP/
GMRestructuringPlan.pdf). Additionally, GM announced in May 2009 that
it was planning to reduce further its dealer network to 3,600 by the
end of 2010. See General Motors Corp., GM Statement Regarding Dealer
Network Communications (May 15, 2009) (online at media.gm.com/content/
media/us/en/news/news_detail.brand_gm.html/content/Pages/news/us/en/
2009/May/0515_ReducingDealers).
Complicating the picture is the fact that the sources of floorplan
financing also often provided dealers with other credit products. While
the floorplan financing was collateralized in large part by the
dealer's inventory, the collateral for these other products was often
based on the value of the dealer's property. Given the large decline
and uncertainty in property values, dealers became increased credit
risks, which would have been a factor in market participant's decisions
whether to provide floorplan and other financing to dealers. Industry
analysts conversations with Panel staff.
---------------------------------------------------------------------------
In fact, by the time of the financial crisis, the wholesale
financing market was substantially bifurcated, with the
captives financing the vast majority of dealers, including
relatively higher-risk dealers, and banks typically funding the
lower-risk dealers.\337\ GMAC retained some of the incentives
of a captive and was willing to provide less profitable
floorplan financing--impacted by its increased costs of funds
relative to banks--in order to ensure that GM continued to
produce and market its cars.\338\
---------------------------------------------------------------------------
\337\ Market participants conversations with Panel staff.
\388\ GMAC conversations with Panel staff (Feb. 1, 2010).
---------------------------------------------------------------------------
Banks and other financial institutions that did not
previously have floorplan lending operations did not enter the
segment significantly, and those banks that were already in the
market did not expand their operations.\339\ There were also
structural barriers to entry or further penetration of this
segment of the market. Some market observers have stressed what
they believed were GMAC's substantial advantages of human and
institutional capital over their bank competitors as important
barriers to entry.\340\ GMAC stressed that it had developed a
substantial amount of operational and management expertise to
support its proprietary floorplan finance operations, including
sophisticated inventory control systems, and long-established
ties to, knowledge of, and monitoring of dealers.\341\ While
some market participants and analysts believed that these
historical links functioned as a substantial barrier to further
penetration of the market by banks, others believed that non-
captive companies could have gained the expertise, management
systems, and capacity in the medium term and that some of these
barriers, like the need to implement new information technology
systems, were overstated.\342\ However, the prospect of this
happening in the context of a dual financial and automotive
industry crisis, where many were seeking to reduce their
exposure to the industry, was remote.
---------------------------------------------------------------------------
\339\ Industry analysts conversations with Panel staff; market
participants conversations with Panel staff.
\340\ Industry analysts conversations with Panel staff; market
participants conversations with Panel staff.
\341\ GMAC conversations with Panel staff (Feb. 16, 2010). See also
Written Testimony of Ron Bloom and Jim Millstein, supra note 73, at 4
(``In addition to size and capital constraints, providing new dealers
with financing is complex and requires time that was not available.
Moreover, GM estimates that it would have taken a new provider up to
six months to create the infrastructure, systems, and human capital
necessary to replace GMAC''); Transcript of COP Hearing on GMAC, supra
note 12 (Testimony of Michael Carpenter) (``And I think the barrier to
entry, if you will, is not money and cost of money--it's infrastructure
and the knowledge--it's the knowledge of the automobile business, how
automobiles are dealt with in the wholesale channel, the retail channel
and the systems that are acquired and the relationships that are
necessary to manage that business over time--represents a very
significant barrier to entry. Now, is it a barrier to entry that a
major bank could overcome over many years? Absolutely. It would cost a
great deal of money and historically they have not shown the appetite
to do it. So, if you look at where the, you know, which of these
dealers actually get financing from banks, they fall into two
categories. One is the local bank down the street, where the bank is
taking a very different risk. We're a secured lender, they're taking a
risk on the business, the character of the business person in the
community. And the other characteristics are some of the largest--often
public--dealerships which are of interest to the larger banks, just
like any other major commercial credit'').
\342\ In fact, one market participant stated that he believed his
institution's inventory tracking, and dealer auditing and monitoring
capabilities were on par with GMAC's and that transition from GMAC's
systems would not have been burdensome. Market participant conversation
with Panel staff.
---------------------------------------------------------------------------
Market analysts and participants with whom the Panel staff
spoke stated that some of the barriers to entry and concerns
about credit could have been mitigated if the government had
been willing to provide guarantees for financing or related
incentives or credit enhancements. Alternatively, GMAC's
floorplan financing business could have been transferred to
another party voluntarily and in an orderly manner.\343\ Yet
even these government-sponsored options may not have ensured
the continuation of the supply of floorplan credit. Even with
guarantees or a government-brokered transfer of existing
business, market participants cited the political risk--the
fear that the government would later change its policies--as
another obstacle to the industry's participation in any such
plan. The experience of the government's taking Chrysler into
bankruptcy and the rapid shifts in federal financial regulatory
policies amidst the financial crisis led to a distrust by Wall
Street of federal intervention. Given the need for a rapid
takeover, this lack of trust might have undermined any attempts
to facilitate an orderly transition of business. To a certain
extent Treasury was forced to address a problem of its own
making, as government intervention in the automotive and
financial services industries added to the existing uncertainty
and may have constrained Treasury's ability to allow GMAC to
fail and instead facilitate, through guarantees or incentives,
a process by which existing and new market participants would
have replaced GMAC's floorplan lending operations.\344\
---------------------------------------------------------------------------
\343\ The relatively rapid and successful transition of Chrysler
Financial's floorplan financing operations to GMAC beginning in May
2009 would be an encouraging example. This experience, however, does
not necessarily suggest that GMAC's floorplan operations could be as
easily assumed by other market participants. GMAC's ability to absorb
Chrysler Financial's floorplan lending operations was based on a number
of important factors. First, GMAC's floorplan operations dwarfed those
of Chrysler Financial, and the addition of Chrysler Financial's
floorplan lending portfolio represented a significant but not
overwhelming expansion of GMAC's business. In December 2008, GMAC
managed about $26.5 billion of wholesale automobile loans. See Written
Testimony of Ron Bloom and Jim Millstein, supra note 73, at 3. By
comparison, on April 30, 2009--the eve of GMAC's assumption of Chrysler
Financial's floorplan financing business--Chrysler Financial's U.S. and
Canada floorplan lending portfolio in support of Chrysler dealers was
about $8.4 billion. Data provided to the Panel by Chrysler Financial.
In addition, there is reason to believe that the aggregate floorplan
lending numbers overstate the burden GMAC faced, and, in fact, GMAC had
the luxury of a relatively slow ramp up in providing floorplan
financing for Chrysler dealers. First, as of September 30, 2009, GMAC's
outstanding balance of wholesale financing of Chrysler dealers was
approximately $3.3 billion, only a fraction of the $8.4 billion market.
See GMAC Statement on Financing of Chrysler Dealers, Customers, supra
note 308. Moreover, while the percentage of Chrysler dealers supported
by GMAC approached pre-GMAC levels by end of the third quarter of 2009,
see Figure 11, infra GMAC indicates that it provided floorplan
financing for only 131,000 Chrysler units in 2009 out of a total 4.125
million units financed in 2009, see Figure 10, infra [GMAC Floorplan
Financing to GM and Non-GMAC Dealers]. Finally, GMAC was already
identified as having a sufficient operational and financial
infrastructure to meet the floorplan financing needs of Chrysler
dealers--new market players did not have to step in and provide
financing--and the transition was facilitated by Treasury's heavy
subsidization of GMAC's effort to assume Chrysler Financial floorplan
(and retail) lending operations. Treasury provided GMAC with $4.0
billion in May 2009 designated expressly for that purpose. See Treasury
Announces Additional Investment in GMAC, supra note 225.
\344\ Industry analysts conversations with Panel staff.
---------------------------------------------------------------------------
The industry analysts and market participants consulted by
the Panel were consistent in stating that the likely result of
the disappearance of GMAC from the floorplan lending market in
late 2008 or early 2009 would have been an immediate and severe
decline in the total availability of floorplan credit. As a
result of this decline, credit would have been available at
much higher prices, if at all, to already-struggling GM
dealers, and less creditworthy, more thinly-capitalized dealers
would have been forced into insolvency.\345\
---------------------------------------------------------------------------
\345\ This conclusion is reflected in the opinion of Mr. de Molina,
CEO of GMAC from March 1, 2008 to November 18, 2009, who stated: ``No
one, either by itself or together, could have done it [replaced GMAC's
floorplan financing of GM dealers] at the time . . . There was a
concentration of risk that no one would take on. I don't know anyone
who opposes that view.'' Panel staff conversation with Alvaro G. de
Molina (Feb. 19, 2009). See also Transcript of COP Hearing on GMAC,
supra note 12 (Testimony of Ron Bloom) (``Had Treasury allowed GMAC to
fail, no single competitor or group of competitors could have stepped
in to absorb GMAC's entire loan portfolio''); Transcript of COP Hearing
on GMAC, supra note 12 (Testimony of Michael Ward) (``It's gone. I
mean, if they didn't rescue GMAC--if GMAC did not exist, GM would have
been Chapter 7'').
Panel hearing witness Christopher Whalen stated in his written
testimony that ``[t]here were private alternatives available to GM and
Chrysler in the marketplace for floor plan lending'' that could have
stepped in ``[w]ith a little bit of effort and imagination,'' ``albeit
at a higher cost level.'' See Congressional Oversight Panel, Written
Testimony of Christopher Whalen, senior vice president and managing
director, Institutional Risk Analytics, COP Hearing on GMAC Financial
Services, at 4, 8-9 (Feb. 25, 2010) (online at cop.senate.gov/
documents/testimony-022510-whalen.pdf) (hereinafter ``Testimony of
Christopher Whalen''). During his oral testimony, however, Mr. Whalen,
while stating that other market participants have been unable to
compete with captives (and former captives) because of the economic
advantages the last two enjoy by dint of their relationships with OEMs,
agreed that GMAC's floorplan financing was crucial to the survival of
GM because of the inability of market participants to step in
adequately to fill GMAC's large market share at the time of Treasury's
assistance. See Transcript of COP Hearing on GMAC, supra note 12
(Testimony of Christopher Whalen, Senior Vice President and Managing
Director, Institutional Risk Analytics).
---------------------------------------------------------------------------
The story for consumer lending was different. The captive
automotive finance companies were not as indispensable for
consumer lending as for floorplan lending, and there was a wide
array of players competing in the market.\346\ GMAC's temporary
abandonment of the consumer financing market to concentrate on
floorplan lending, which led its market share to plummet from
over 30 to five to six percent in the fourth quarter of 2008
\347\--and its more permanent complete withdrawal from the
subprime automobile lending market--had a disruptive but not
catastrophic effect on the availability of consumer financing
for purchasers of GM automobiles. As discussed above, a much
wider range of sources is available for consumer automotive
financing.\348\ The degree to which the banks and other market
participants stepped in (and could have filled the void if GMAC
completely exited the market) is mixed. In response to the
various stresses in the financial, credit, and automobile
markets discussed above, national and regional banks were
curtailing their consumer lending, including their lending to
consumers to purchase and lease new and used automobiles.\349\
Consumer automotive lending was heavily dependent on the
ability to securitize auto loans, and consumer automobile
securitizations halved in 2008.\350\
---------------------------------------------------------------------------
\346\ See General Motors, Corp., Form 10-K for the Fiscal Year
Ended December 31, 2008, at 45 (Mar. 5, 2009) (online at www.sec.gov/
Archives/edgar/data/40730/000119312509045144/0001193125-09-045144-
index.htm) (hereinafter ``GM Form 10-K for 2008'') (disclosing risks to
GMAC's continued ability to operate because it might fare poorly in the
``highly competitive'' ``markets for automotive and mortgage financing,
insurance, and reinsurance'' and further explaining that the ``market
for automotive financing has grown more competitive as more consumers
are financing their vehicle purchases, primarily in North America and
Europe'').
\347\ See Figure 13, supra.
\348\ See Section E.1(a-b), infra.
\349\ See Board of Governors of the Federal Reserve, Federal
Reserve Statistical Release G.19: Consumer Credit (Jan. 8, 2010)
(online at www.federalreserve.gov/releases/g19/) (hereinafter ``Federal
Reserve Statistical Release G.19'') (showing that nonrevolving consumer
credit--a category that includes automobile loans and that had grown at
an average annualized rate of 5 percent from 2004-2008--declined at an
annualized rate of 1.0 percent in the third quarter of 2008, 0.4
percent in the fourth quarter of 2008, grew at 0.2 percent in the first
quarter of 2009, and declined 1.9 percent in the second quarter of
2009).
\350\ Consumer auto securitizations declined from $72.7 billion in
2007 to $35.7 billion in 2008 before partially recovering to $52.6
billion in 2009. Data provided to the Panel by Security Industry and
Financial Markets Association (relying on data from Thomson Reuters).
But reliance on aggregated yearly data understates the depth of
reduction in the consumer auto loan securitization market. Total auto
securitization (a measure which, while also including wholesale and
other types of securitizations, is mostly constituted by consumer
securitization) failed to reach $3 billion in either the third or
fourth quarters of 2008. See Security Industry and Financial Markets
Association, US ABS Issuance 1996-2010 (online at www.sifma.org/
uploadedFiles/Research/Statistics/SIFMA_USABSIssuance.pdf) (relying in
part on Thomson Reuters data).
---------------------------------------------------------------------------
FIGURE 15: INTEREST RATE SPREADS AND LOAN-TO-VALUE RATIOS ON NEW CAR
LOANS \351\
[GRAPHIC] [TIFF OMITTED] 54875A.009
When GMAC exited the market for several months, credit for
subprime consumer borrowers disappeared.\352\ Credit unions
made a coordinated effort to pick up the slack and assumed some
of the market share exited by GMAC.\353\ As shown in the charts
above, for those who were approved, the terms were less
favorable: interest rates--especially those offered by
automobile finance companies--climbed, and lower limits on
loan-to-value ratios were imposed.\354\ While demand for
automobiles also decreased, the lack of availability of
consumer automotive finance was an independent factor that hurt
GM sales.
---------------------------------------------------------------------------
\351\ See Federal Reserve Statistical Release G.19, supra note 349
(accessed Mar. 8, 2010) (interest rate data adjusted to reflect spreads
over 10-year Treasuries).
\352\ Market participants conversations with Panel staff; industry
analysts conversations with Panel staff.
\353\ See Figure 13, supra; market participants (including credit
union representatives) conversations with Panel staff.
\354\ Treasury conversations with Panel staff (Jan. 29, 2010);
Federal Reserve Statistical Release G.19, supra note 349 (accessed Mar.
8, 2010); Written Testimony of Ron Bloom and Jim Millstein, supra note
73, at 3 (reporting that loan approval rates to prime borrowers dropped
from mid-80 percent to approximately 60 percent, loan-to-value ratios
decreased from 95 percent to 85 percent, and interest rates increased
from approximately 5 percent to over 8 percent). See also Figure 15,
supra.
---------------------------------------------------------------------------
But even assuming that there were adequate substitutes for
consumer credit, the availability of financing for consumers
would have been irrelevant if GM and Chrysler dealers had been
unable to finance the purchase of their inventories.
The TALF, the federal government's other major effort to
support the automotive credit market by restarting the
securitization markets, was not timed sufficiently to alter
this analysis. The TALF was launched in the beginning of 2009
by the Federal Reserve Bank of New York and backstopped by TARP
funds.\355\ At that time, Treasury had already made financing
decisions with respect to GMAC and Chrysler Financial,
including the provision of bridge loans to the companies. The
inability of GMAC, Chrysler Financial, and Ford Motor Credit
Corporation (FMCC) to obtain AAA ratings on floorplan
securitizations effectively closed the TALF to them for
floorplan securitizations, and efforts to expand the TALF to
lower-rated securitizations were not successful.\356\ It was
not until August 2009 that TALF become available for any
industry floorplan securitizations, and GMAC did not do a
floorplan ABS issuance until 2010.\357\
---------------------------------------------------------------------------
\355\ Automobile-industry loans eligible for securitization under
TALF included floorplan financing for automobile dealers, prime and
subprime consumer purchase loans, prime consumer lease loans; and loans
supporting government, commercial, and rental fleets. Federal Reserve
Bank of New York, Term Asset-Backed Securities Loan Facility:
Frequently Asked Questions (Feb. 17, 2010) (online at
www.newyorkfed.org/markets/talf_faq.html) (hereinafter ``Term Asset-
Backed Securities Loan Facility: FAQs'').
\356\ Industry analysts conversations with Panel staff; National
Automobile Dealers Association conversations with Panel staff (Feb. 2,
2010 and Mar. 5, 2010).
\357\ National Automobile Dealers Association conversations with
Panel staff (Feb. 2, 2010 and Mar. 5, 2010); GMAC conversations with
Panel staff (Feb. 16, 2010). Data provided to the Panel by GMAC
(reporting on GMAC's $900 million offering of TALF-eligible securities
backed by wholesale automotive loans in February 2010). Similarly,
while the Small Business Administration opened up Section 7(a) lending
to dealer floorplan lendings, specifics of this program made it
impractical to significantly ease the floorplan credit crunch. See
Section E, infra.
---------------------------------------------------------------------------
It is clear that disruptions in GMAC's provision of
wholesale and consumer credit materially affected GM's business
at a particularly crucial time when GM was undergoing
bankruptcy and restructuring amidst a severe financial crisis
and deep recession. At least at that point, there may have not
been adequate substitute market players to step sufficiently
into the breach. What is less clear is whether these other
market players would eventually have increased their capacity
to step into the breach, especially after the credit crunch
eased. Treasury has indicated that it was focused on the short
and medium term; it did not consider whether there would be
adequate substitutes for the traditional roles of GMAC and
Chrysler Financial five years down the road.\358\
---------------------------------------------------------------------------
\358\ In fact, one of the results of the financial crisis and
restructuring was to accelerate the weakening of the relationship
between GMAC and GM. On December 29, 2008, GMAC and GM agreed to modify
the GMAC Services Agreement to provide that ``GMAC no longer is subject
to contractual wholesale funding commitments or retail underwriting
targets.'' See GM Form 10-K for 2008, supra note 346.
---------------------------------------------------------------------------
2. Commitments Made by Treasury
The other primary justification Treasury has provided for
its continued support of GMAC is that these transactions,
especially the most recent transaction in late December 2009,
were not new commitments, but were made in fulfillment of
previously made commitments. In its December 30, 2009 press
release announcing an additional investment of $3.8 billion of
new capital, Treasury stated that it was ``acting on its
previously announced commitment to provide capital to GMAC as
identified in May as a result of the SCAP.'' \359\
---------------------------------------------------------------------------
\359\ December 2009 Restructuring Announcement, supra note 214. As
described in greater detail in Section F, the SCAP was designed to
``stress test'' the nation's largest bank holding companies--those with
$100 billion or more in assets--and provide additional capital to those
that were found to be potentially at risk in the case of an even deeper
recession. See Section F, infra (analyzing the inclusion of GMAC in the
SCAP and the implications of the funding that was ultimately provided).
---------------------------------------------------------------------------
As discussed in more detail in Section F below, a key
element of the SCAP or stress tests was the unconditional
commitment of Treasury to provide necessary capital to banks
that were unable to raise it privately.
There was no specific contractual obligation to GMAC either
as a result of the stress tests or as a result of previous
injections of capital. At the time of the May 2009 investment,
Treasury and GMAC executed the May Stock Purchase Agreement
(SPA), which described the terms under which Treasury would
provide capital to GMAC should it be unable to obtain
additional capital from private sources. The term sheet
appended as a schedule to the May SPA, however, only stated
that Treasury stood ready to commit ``up to $5.6 billion'' in
additional capital.\360\ Treasury clearly retained the legal
flexibility to provide less than that amount--even zero--if
circumstances warranted.
---------------------------------------------------------------------------
\360\ Treasury GMAC Contract, supra note 226, at Schedule A.
---------------------------------------------------------------------------
Over the course of the financial crisis, Treasury has
variously argued that its decisions have been influenced by the
potentially conflicting needs to change its strategy as the
economic environment has shifted \361\ and to protect the
government's credibility by following through on its
promises.\362\ The best example of the former justification is
the overall shift in emphasis from the original purpose behind
the TARP to the TARP in its current form. On September 18,
2008, then-Secretary Paulson issued a statement attributing
much of the crisis to an inability to value residential
mortgage-backed assets and calling for a program to ``remove
these illiquid assets that are weighing down our financial
institutions and threatening our economy.'' \363\ As
implemented, the TARP has only one relatively small program,
the Public-Private Investment Program, aimed at buying such
assets. In its first report, the Panel asked Treasury to
explain this shift in strategy.\364\ In response, Treasury
explained:
---------------------------------------------------------------------------
\361\ U.S. Department of the Treasury, Responses to Questions of
the First Report of the Congressional Oversight Panel for Economic
Stabilization, at 4-5 (Dec. 30, 2008) (online at www.treas.gov/press/
releases/reports/123108%20cop%20response.pdf) (hereinafter ``Treasury
Response to December 2008 Oversight Report'').
\362\ Treasury meeting with Panel staff (Jan. 29, 2010).
\363\ U.S. Department of the Treasury, Statement by Secretary Henry
M. Paulson, Jr. on Comprehensive Approach to Market Developments (Sept.
19, 2008) (online at www.financialstability.gov/latest/hp1149.html).
\364\ Congressional Oversight Panel, December Oversight Report:
Questions About the $700 Billion Emergency Economic Stabilization
Funds, at 4 (Dec. 10, 2008) (online at frwebgate.access.gpo.gov/cgi-
bin/getdoc.cgi?dbname=110_cong_senate_committee_prints&docid=f:45840.pdf
) (hereinafter ``December Oversight Report'').
Given [the existing] market conditions, Secretary
Paulson and Chairman Bernanke recognized that Treasury
needed to use the authority and flexibility granted
under the EESA as aggressively as possible to help
stabilize the financial system. They determined the
fastest, most direct way was to increase capital in the
system by buying equity in healthy banks of all sizes.
Illiquid asset purchases, in contrast, require much
longer to execute.\365\
---------------------------------------------------------------------------
\365\ Treasury Response to December 2008 Oversight Report, supra
note 361, at 5.
Shifting strategy with regard to one transaction with one
institution--i.e., deciding not to proceed with the December
30, 2009 transaction--could be argued to be a less drastic
shift than Treasury's shift in overall TARP strategy a year
earlier.
It might also be argued that conditions have changed
significantly since the May 2009 statement regarding future
funding, such that revisiting that position might not have such
an adverse impact as it would have earlier. The economic
environment had shifted noticeably between December 2008, when
Treasury first articulated its intent to support GMAC as a part
of the U.S. automotive industry, and December 2009, when it
executed its most recent investment in GMAC.\366\ It may even
be argued that the economic environment underwent a major shift
between the completion of the stress tests in May and the
December 2009 investment. For example, in November 2009,
Secretary Geithner stated that ``[t]he U.S. economy and the
global economy are growing again'' and that ``the value of
savings around the world has risen'' and ``[t]he cost of credit
has fallen.'' \367\ Later in the month, he stated that ``we
have stabilized the financial system and brought down the cost
of borrowing for business and families. Companies across the
country are now able again to raise equity and issue bonds.
Credit terms are easing as markets that were once frozen are
beginning to open up.'' \368\
---------------------------------------------------------------------------
\366\ The TED Spread, which measures the difference between 3-month
LIBOR and 3-month Treasury Securities, is a widely used financial
metric seen as an indicator of economic stability and market liquidity.
By December 31, 2009, the TED Spread decreased 85 percent from its
December 2008 level of 135 basis points, signaling a marked increase in
overall financial stability (online at www.bloomberg.com/apps/
cbuilder?ticker1=.TEDSP:IND).
\367\ U.S. Department of the Treasury, Statement by Secretary
Geithner at the G-20 Meeting of Finance Ministers and Central Bank
Governors (Nov. 7, 2009) (online at www.treas.gov/press/releases/
tg358.htm).
\368\ U.S. Department of the Treasury, Treasury Secretary Timothy
Geithner Opening Remarks--Small Business Conference (Nov. 18, 2009)
(online at www.treas.gov/press/releases/tg412.htm). See also
Congressional Oversight Panel, December Oversight Report: Taking Stock:
What Has the Troubled Asset Relief Program Achieved, at 101 (Dec. 9,
2009) (online at cop.senate.gov/documents/cop-120909-09report.pdf)
(hereinafter ``December 2009 Oversight Report''). In addition, the
September Auto Industry Brief authored by Manheim Consulting Chief
Economist Tom Webb noted several statistics suggesting targeted
improvement in the automotive sector, including the following facts:
The Manheim Used Vehicle Value Index for August was up for
the eighth consecutive month; at 116.4, this represents a year-over-
year increase of 5.1%;
The Cash-for-Clunkers program spurred new vehicle sales in
August, significantly depleting inventories. The seasonally adjusted
annual rate of new sales reached 14.1 million in August, compared to
``10 million in the first half of the year.'' This means that ``there
will be virtually no `carryover' inventory this fall'';
Household net worth increased in the second quarter of
2009 ``after six consecutive quarterly declines,'' ``primarily the
result of a rising stock market--a trend which continued in the third
quarter.''
Manheim Consulting, Auto Industry Brief, at 3, 5 (Sept. 2009)
(provided to the Panel by Thomas Webb).
---------------------------------------------------------------------------
Treasury, however, has approached the issue of GMAC's
financing from the position that it must follow through on its
commitments, even if the commitments are not legally
enforceable, to maintain the credibility of the federal
government. Treasury, in coordination with the FDIC and the
Federal Reserve, has used guarantees to prevent further
destabilization of the markets at the height of the crisis.
Treasury has argued that its ability to establish stability
might be significantly impaired if it failed to follow through
on its statements with respect to funding, although that
involvement carries countervailing effects as well.\369\ Much
of the progress in stabilizing the markets that has been
experienced since early 2009 arguably might have crumbled if
Treasury had failed to follow through in this way with respect
to GMAC. Moreover, Treasury has noted that the impact of other
guarantees it has provided throughout this crisis might decline
in value and its ability to use guarantees to alleviate future
crises might be limited if the markets doubted the reliability
of Treasury's word.\370\ As discussed in the Panel's November
report, the guarantees that Treasury has used to increase
stability during the present crisis have allowed Treasury to
leverage a small pool of assets to guarantee a larger pool of
assets in the market. Treasury has taken the view that it has
been able to obtain guarantees at such a low cost to taxpayers
because the value of Treasury's guarantee--which is another way
of saying the likelihood that it will honor its commitments--is
so high.\371\ If the market came to believe that Treasury was
less likely to honor commitments, Treasury has stated, it might
be obliged to put up a larger fund to guarantee the same pool
of market assets. Other Treasury commitments may also have been
impaired. Most notably, Treasury argues that the value of other
government-supported entities may have deteriorated had its
government backing been devalued.
---------------------------------------------------------------------------
\369\ Treasury conversations with Panel staff (Mar. 2, 2010). A
decision by Treasury that GMAC did not require the additional funding
in December may not, however, have been interpreted in the market as a
decision to let GMAC fail. Given Treasury's previous support for the
company, the market may have believed that Treasury had merely changed
its strategy with regard to its support for GMAC.
\370\ Treasury conversations with Panel staff (Mar. 2, 2010).
\371\ Treasury conversations with Panel staff (Jan. 29, 2010).
---------------------------------------------------------------------------
Taking a more limited view, the collapse of GMAC may itself
have caused ripple effects. The fact that Treasury intended to
provide capital to GMAC may have been a factor in the business
decisions of entities that do business with GMAC. These
entities would have relied on the expectation of future
Treasury funding for GMAC and may have been disadvantaged if
GMAC had failed to survive.
3. Systemic Importance of GMAC: Could it Just be Permitted to Fail?
Treasury has never argued that GMAC itself was systemically
important, although in 2008 some Treasury staff members
believed that GMAC's failure at that time--independent of its
effects on the domestic automotive industry--could have thrown
an already precarious financial system into further disarray
during the depths of the financial crisis.\372\
---------------------------------------------------------------------------
\372\ Treasury conversations with Panel staff (Feb. 2, 2010)
(reporting on a review of internal Treasury Department memoranda from
October and November 2008 considering support for GMAC based on
systemic risk caused by failure of GM and Chrysler and on fear of
financial contagion of possible default of GMAC's debt).
---------------------------------------------------------------------------
As discussed above, Treasury defends its assistance to GMAC
as crucial to supporting its extensive investments in GM and
Chrysler, which, in turn, were made for a variety of reasons,
including the fear of shock to the economy--perhaps rising to
the level of systemic risk if the domestic auto industry were
to fail.\373\ The Panel's previous review of statements of the
last two administrations concluded:
---------------------------------------------------------------------------
\373\ See September Oversight Report, supra note 189, at Section D.
Treasury's intervention in the automotive industry
could be attributed to one of (or a combination of)
three broad policy objectives: (1) the prevention of a
systemic threat to the U.S. financial markets and
broader economy; (2) the advancement of social policy
(such as tempering the impact of unemployment,
environmental improvement, or provision of retirement
benefits); or (3) the maintenance of a viable American
automotive presence in the United States.\374\
---------------------------------------------------------------------------
\374\ September Oversight Report, supra note 189, at 103 (citing
various sources).
Apart from the role it plays with respect to automotive
financing, GMAC's operations do not appear to have any systemic
significance. Until revenues from ResCap plummeted upon the
implosion of the housing market in 2007, GMAC's revenue over
the last five years was roughly equally distributed among
automobile finance, mortgage finance, and insurance
operations.\375\ In fact, insurance has been the most
consistent source of GMAC revenue recently, accounting for
almost double GMAC's automobile finance revenue in 2008, a year
where both the mortgage and automobile sales industries were
severely depressed. Loss of GMAC's operations in this sector
would not seem to pose a systemic threat. Finally, while ResCap
was once a profitable venture for GMAC, and ResCap holds
significant market shares in both the mortgage origination and
mortgage servicing sectors,\376\ there has been no suggestion
that the disruption of these businesses caused by a bankruptcy
would have any direct systemic effect. Treasury has stated that
while it has some interest in ResCap's holdings in the mortgage
market,\377\ it regarded ResCap as ``marginal, at best'' as a
factor in the decision to support GMAC.\378\
---------------------------------------------------------------------------
\375\ See Section C.1, supra.
\376\ ResCap is the sixth largest mortgage originator and fifth
largest mortgage servicers in the United States. GMAC Form 10-K for
2008, supra note 10, at 53.
\377\ GMAC and one other institution have 50 percent of their HAMP-
eligible mortgages in active trial or permanent modifications. U.S.
Department of the Treasury, Making Home Affordable Program Servicer
Performance Report Through January 2010, at 7 (Feb. 18, 2010) (online
at www.financialstability.gov/docs/press/
January%20Report%20FINAL%2002%2016%2010.pdf).
\378\ Treasury conversations with Panel staff (Jan. 29, 2010).
---------------------------------------------------------------------------
It is the automotive finance operations of GMAC, then, that
would have the most impact on the U.S. economy if GMAC were to
be allowed to fail. Treasury has cited estimates of automobile
sales declines solely attributable to diminished availability
of credit ranging from 1.5 to 2.5 million vehicle sales per
year.\379\ Treasury estimated that a further reduction of
between 2 and 2.5 million in yearly automobile sales could have
been expected if GMAC were allowed to fail--a number that
Treasury believed might affect the overall viability of the
domestic automotive industry.\380\
---------------------------------------------------------------------------
\379\ See Written Testimony of Ron Bloom and Jim Millstein, supra
note 73, at 3 (citing estimates of the effect of diminished credit on
the Seasonally Adjusted Annualized Rate (SAAR) of auto sales,
including: 2.6 million units (Barclays), 1 to 1.5 million units (the
Federal Reserve), and 1.6 million units in 2009 and 3.1 million units
in 2010 (AutoNation)).
\380\ Treasury conversations with Panel staff (Feb. 2, 2010).
---------------------------------------------------------------------------
Treasury's support of GMAC can be contrasted to its
treatment of CIT Group, Inc., a finance company that received
initial support from Treasury, in part because of its perceived
systemic significance, only later to be allowed to go into
bankruptcy, resulting in over $2 billion of losses to Treasury.
CIT Group was a hundred-year-old company that provided a
variety of commercial financing and leasing products and
services, including factoring, and was an important source of
lending for small businesses nationwide.\381\ The financial
crisis deeply affected CIT Group's business, and the company's
losses accelerated in the second quarter of 2007 because of its
heavy exposure to underperforming assets, including subprime
mortgages and student loans. As its losses mounted and CIT
expended over $7 billion in emergency bank credit, CIT Group's
credit was downgraded, and it had difficulty accessing credit
in short-term debt markets, on which its business model was
heavily reliant.\382\
---------------------------------------------------------------------------
\381\ Factoring is a financial transaction whereby a business sells
its accounts receivable (i.e., invoices) to a third party (called a
factor, here, CIT Group) at a discount in exchange for immediate money
with which to finance continued business.
\382\ In June, CIT entered into a 20-year secured lending facility
with Goldman Sachs, Inc. with the intention of reducing its reliance on
unsecured credit markets. CIT Group, Inc., Form 8-K for the Period
Ending June 6, 2008 (June 9, 2008) (online at www.sec.gov/Archives/
edgar/data/1171825/000089109208002979/e31893_8k.htm).
---------------------------------------------------------------------------
In December 2008, the Federal Reserve, citing ``unusual and
exigent circumstances affecting the financial markets'' and
``emergency conditions,'' approved the conversion of CIT Group,
Inc. from an ILC to a BHC upon conversion of its subsidiary CIT
Bank from a limited purpose bank to a state bank for the
purposes of the Bank Holding Act.\383\ In making that
determination, the Federal Reserve found that CIT was
``adequately capitalized and as a result of its successful
efforts to raise additional capital, will be well capitalized
prior to consummation.'' \384\ The Federal Reserve's action
allowed the company to become eligible for TARP funds. One day
after the conversion, Treasury preliminarily approved what
became a $2.33 billion investment in CIT Group under the CPP,
and the capital injection was complete on December 31,
2008.\385\
---------------------------------------------------------------------------
\383\ See Board of Governors of the Federal Reserve System, CIT
Group Inc.: Order Approving Formation of a Bank Holding Company and
Notice to Engage in Certain Nonbanking Activities, Federal Reserve
Bulletin Volume 95: Legal Developments: Fourth Quarter, 2008 (May 29,
2009) (online at www.federalreserve.gov/pubs/bulletin/2009/legal/q408/
order5.htm).
\384\ See Id. The Federal Reserve also approved CIT Group's bid to
continue to engage in nonbanking activities through its subsidiaries
based on the Board's belief that the public benefits of CIT Group
strengthening its position as a ``leading provider of factoring
services in the United States and a leading lender in the Small
Business Administration's 7a programs'' would ``outweigh any likely
adverse effects.'' Id.
\385\ U.S. Department of the Treasury, Troubled Asset Relief
Program Transactions Report for Period Ending November 18, 2009, at 5
(Nov. 20, 2009) (online at www.financialstability.gov/docs/transaction-
reports/11-20-09%20Transactions%20Report%20as%20of%2011-18-09.pdf).
---------------------------------------------------------------------------
Up to this point, there are significant parallels between
the two companies' appeals for government support. The Federal
Reserve's reference to ``emergency conditions'' in the
financial markets when issuing an expedited approval of CIT
Group's BHC application underscores the concern in late 2008
that the failure of CIT Group could be harmful to an already
fragile economy because of CIT Group's specialized provision of
certain financial services--small business lending and
factoring services. Similarly, the Federal Reserve's expedited
approval of GMAC's BHC application (and Treasury's subsequent
support under the AIFP) both relied on Treasury's belief that
GMAC played a critical role in its specialized provision of
financial services--automobile finance.\386\ Both suffered
heavy credit losses in large part because of their exposures to
the subprime mortgage market, and their inability to access
capital markets further imperiled their abilities to function
in their market niches.\387\ Moreover, like GMAC, CIT Group was
denied access to capital markets, suffered a damaging downgrade
in its credit rating, and successfully petitioned the Federal
Reserve for an emergency conversion of its ILC to a BHC to gain
access to the deposit market and government financial
assistance programs. Both institutions received emergency
injections of TARP funds, promptly sought access from the FDIC
to the TLGP, and eventually applied for additional TARP
assistance.
---------------------------------------------------------------------------
\386\ See section C.2(b) (discussion of Federal Reserve's approval
of GMAC's BHC application), supra.
\387\ GMAC's consumer automobile finance shriveled in 2008, see
section E.1, supra; CIT Group's consumer small business declined
precipitously (from $4.46 billion in the first quarter of 2007 to $127
million in the second quarter of 2008). See CIT Group, Inc., Form 10-Q
for the Quarter Ending Sept. 30, 2008 (Nov. 10, 2008) (online at
www.sec.gov/Archives/edgar/data/1171825/000089109208005502/
e33450_10q.htm).
---------------------------------------------------------------------------
But there were significant differences in the respective
treatment and fates of the companies. Unlike GMAC, CIT Group's
TLGP application with the FDIC was pending for several months
as its capital needs became even more pressing. CIT Group
aggressively sought to increase deposits in CIT Bank, but that
was not sufficient to offset a lack of short-term financing and
capital deficiencies. In mid-July 2009, the Federal Reserve
Bank of New York completed a stress test of CIT Group and
concluded that the same institution that it had found
``adequately capitalized'' four months earlier would need to
raise $4 billion.
But Treasury, the Federal Reserve, and the FDIC did not
coordinate to rescue CIT Group and preserve Treasury's
investment; instead, the federal government allowed CIT Group
to continue on the path toward bankruptcy. After months of
delay, the FDIC denied CIT Group's TLGP application and issued
a cease-and-desist order prohibiting CIT Bank from increasing
its deposits.\388\ Treasury was unwilling to prop up CIT Group
alone and withheld additional CPP funds, finding that CIT did
not qualify for receipt of ``exceptional assistance'' under the
TARP, based in part on Treasury's view of the importance (or,
in this case, relative unimportance) of CIT's role in the
financial system and the existence of alternate sources of
credit for CIT's customers.\389\
---------------------------------------------------------------------------
\388\ See Federal Deposit Insurance Corporation, In the Matter of
CIT Bank, Salt Lake City, Utah, Order to Cease and Desist (July 16,
2009) (online at www.fdic.gov/bank/individual/enforcement/2009-07-
18.pdf).
\389\ Congressional Oversight Panel, February Oversight Report:
Commercial Real Estate Losses and the Risk to Financial Stability, at
184 (Feb. 10, 2010) (online at cop.senate.gov/documents/cop-021110-
report.pdf) (hereinafter ``February Oversight Report'') (citing Letter
from Timothy F. Geithner, secretary of the Treasury, to Elizabeth
Warren, chair, Congressional Oversight Panel (Jan. 13, 2010))
(responding to Panel's question whether it deemed CIT to be
``systemically significant'', that Treasury considered CIT's role in
the financial system; the availability of alternative sources of
liquidity to CIT; the likelihood that CIT would continue as a going
concern in the absence of exceptional assistance; the existence of
alternative credit channels for CIT's customers; the condition of the
financial system at the time of the determination; and CIT's size and
funding structure).
---------------------------------------------------------------------------
Unable to raise sufficient private capital, CIT had to
either restructure or enter bankruptcy. In October 2009, CIT
Group's bondholders and creditors rejected a restructuring
plan, which would have at least partially preserved Treasury's
CPP investment, in favor of a prepackaged bankruptcy.\390\ CIT
filed for bankruptcy on November 1, 2009.\391\ CIT emerged from
bankruptcy on December 10, 2009.\392\ As part of CIT's
reorganization plan, Treasury's investment, valued at $2.3
billion, was deemed an ``old preferred interest'' and
subordinated to the interests of CIT's senior creditors.\393\
As a byproduct of CIT's bankruptcy, taxpayers have lost the
entirety of their TARP investment in CIT Group.\394\ Perhaps
equally notable, the original fear that the failure of CIT
Group would further weaken the already anemic small business
lending sector has not materialized. CIT Group was forced to
reduce its lending well before its eventual bankruptcy,\395\
and while small business lending is still weak nationally,
market observers have not pointed to CIT Group's demise as a
major factor in this continued weakness.
---------------------------------------------------------------------------
\390\ CIT Group, Inc., CIT Board of Directors Approves Proceeding
with Prepackaged Plan with Overwhelming Support of Debtholders (Nov. 1,
2009) (online at cit.com/media-room/press-releases/index.htm). Under
the rejected restructuring plan, bondholders would have received 70
cents on the dollar and equity in a newly restructured company and
Treasury would have converted its preferred shares into 3.5 and 5
percent of CIT's common equity. See CIT Group, Inc., Form 8-K for the
Period Ending October 1, 2009, at 5 (Oct. 1, 2009) (online at
www.sec.gov/Archives/edgar/data/1171825/000095012309047816/
y02330exv99w2.htm).
\391\ See Voluntary Petition for CIT Group Inc. (Nov. 1, 2009), In
re CIT Group Inc., No. 09-16565, 2009 WL 4824498 (Bankr. S.D.N.Y. Dec.
8, 2009) (online at www.kccllc.net/documents/8803600/
8803600091101000000000002.pdf).
\392\ See Notice of Filing of Confirmed Modified Second Amended
Prepackaged Reorganization Plan of CIT Group Inc. and CIT Group Funding
Company of Delaware LLA (Dec. 10, 2009), In re CIT Group Inc., No. 09-
16565, 2009 WL 4824498 (Bankr. S.D.N.Y. Dec. 8, 2009) (online at
www.kccllc.net/documents/0916565/0916565091210000000000003.pdf)
(hereinafter ``Notice of Filing of CIT Reorganization Plan'').
\393\ Notice of Filing of CIT Reorganization Plan, supra note 392,
at 12.
\394\ February Oversight Report, supra note 389, at 184 (citing
Letter from Timothy F. Geithner, secretary of the Treasury, to
Elizabeth Warren, chair, Congressional Oversight Panel (Jan. 13,
2010)).
\395\ CIT Group's Loan Originations declined from $39.6 billion in
2007 to $18.6 billion in 2008. SNL Financial data provided to Panel
staff. Additionally, CIT Group's consumer and small business lending
declined from $4.46 billion in the first quarter of 2007, to $1.99
billion in the third quarter of 2007, to only $127 million in the
second quarter of 2008, and almost zero thereafter. See CIT Group,
Inc., Form 10-Q for the Quarter Ended March 31, 2007, at 30 (May 7,
2007) (online at www.sec.gov/Archives/edgar/data/1171825/
000089109207001797/0000891092-07-001797-index.htm); CIT Group, Inc.,
Form 10-Q for the Quarter Ended September 30, 2007, at 36 (Nov. 6,
2007) (online at www.sec.gov/Archives/edgar/data/1171825/
000089109207004826/0000891092-07-004826-index.htm); CIT Group, Inc.,
Form 10-Q for the Quarter Ended June 30, 2008, at 45 (Aug. 11, 2008)
(online at www.sec.gov/Archives/edgar/data/1171825/000089109208004007/
0000891092-08-004007-index.htm).
---------------------------------------------------------------------------
There are several differences in the economic and
regulatory landscape that may account for the differential
treatment. The primary difference is that GMAC was a stress-
tested bank, and CIT Group was not. Treasury had made a
commitment by including GMAC as one of the 19 financial
institutions included in the SCAP, and pledging TARP funds to
make up for capital deficiency if the institution could not
raise capital in the private market. Because CIT Group had not
been formally designated as crucial to the stability of the
financial system, Treasury made no similar commitment to
address any future capital deficiencies, and therefore its
credibility or commitment was not on the line when it decided
to cut its losses. Second, Treasury deemed GMAC to be essential
to the continuing operation of another recipient of TARP
assistance, GM, which, in turn, Treasury deemed systemically
important. CIT Group did not have a similar role as the primary
provider of credit to any recipient of TARP funds.
Treasury's support of CIT Group may suggest that half-
hearted attempts at saving an institution from insolvency that
lack coordination among regulators--particularly when there are
questions about its long-term business model and capital
structure--may end up to be more costly than a decision to
support an institution fully or allow it to enter bankruptcy.
On the other hand, the GMAC experience underscores the double-
edged nature of regulatory flexibility. By designating GMAC as
crucial for economic stability--and backing such a view with a
commitment to provide support--the federal government believed
that it foreclosed the option to stop funding the institution,
even if the commitment to back GMAC arguably outlasted the
economic justification for maintaining its solvency.
4. Treasury's Explanations for Why Bankruptcy Law Could Not be Used and
Why ResCap Could Not be Abandoned in a Restructuring
GMAC and Treasury maintain that a traditional Chapter 11
filing or a Section 363 \396\ sale was an unrealistic option
for GMAC. In response to Panel questions about the possibility
of placing GMAC into bankruptcy, Treasury provided four reasons
for its belief that bankruptcy was not a viable policy option:
---------------------------------------------------------------------------
\396\ Under Section 363 of the bankruptcy code, a debtor may sell
certain assets from the bankruptcy estate. See September Oversight
Report, supra note 189, at 46-48.
---------------------------------------------------------------------------
Treasury believed that GM was so dependent
on GMAC that if GMAC could not continue financing its
dealers, GM would collapse,\397\ and the amount of
debtor-in-possession (DIP) financing that Treasury
would have needed to provide during a bankruptcy would
have been prohibitively large;
---------------------------------------------------------------------------
\397\ As noted above in Section E.1(a), infra, Treasury maintains
that GMAC's collapse or bankruptcy would have crippled dealer financing
and with it GM and Chrysler. Treasury also maintains that a GMAC
bankruptcy would have harmed Chrysler's efforts to partner with Fiat.
GMAC also maintains that a quick workout in bankruptcy would have
so disrupted its access to the credit markets that, as a finance
company, it would have been unable to either continue to obtain
financing or to refinance its debt, and that the hardship to the
automotive industry and GM's dealers would have been too great. GMAC
and Treasury both stated that bankruptcy is not currently an option
worth considering for the future, as GMAC's $2 billion bond issue on
February 9, 2010, marks it as a company that is not in distress. GMAC
conversations with Panel staff (Feb. 16, 2010); Treasury conversations
with Panel staff (Feb. 18, 2010) (bankruptcy is unnecessary because it
is ``out of line with existing market conditions and the perception of
the company''). Of course, it is also conceivable that the market
perception of GMAC is that Treasury will provide additional funds if
necessary, which undercuts the argument that the market is becoming
more comfortable with GMAC as an independent entity.
---------------------------------------------------------------------------
Treasury believed that Chrysler needed a
source of financing in order to emerge from bankruptcy,
and in the wake of the collapse of Chrysler Financial,
Treasury staff believed that GMAC was essential for
providing financing to Chrysler;
Any prior Treasury investments would have
been wiped out by a bankruptcy filing; and
Treasury believed that having promised in
May to support GMAC in fulfilling its SCAP requirements
if it was unable to meet its capital targets through
private financing, Treasury staff believed that it
could not renege on this promise.\398\
---------------------------------------------------------------------------
\398\ Treasury conversations with Panel staff (Feb. 18, 2010).
---------------------------------------------------------------------------
Treasury staff stated that the combination of these four
factors--rather than any single one--made bankruptcy virtually
impossible.\399\
---------------------------------------------------------------------------
\399\ Treasury conversations with Panel staff (Feb. 18, 2010).
---------------------------------------------------------------------------
Each of the first three of the reasons that Treasury has
offered appears, on its own, not to be totally persuasive. That
GMAC was critical to GM means only that financing would have
needed to continue, not that GMAC could not restructure.
Treasury has provided a range for the DIP financing: $6 billion
per month for the floorplan financing and a total of $10-18
billion, assuming a 60-90 day bankruptcy process,\400\ but up
to $50 billion for both floorplan and consumer financing, and
assuming a bankruptcy process that took closer to six
months.\401\ Even assuming that Treasury's numbers are correct
\402\--and given the range of numbers that Treasury has
offered, this may be a generous assumption--the question is not
just one of size, but also one of risk. A DIP investment might
have been low-risk because floorplan financing is low-risk, so
Treasury might have recouped its DIP investment. Particularly
if the company had been broken up, automotive finance is a
profitable business, and any auto-specific DIP financing could
have been serviced by the floorplan loans and ultimately
refinanced. It is not clear that such loans would have been
likely to be lost. Treasury asserts that the tremendous
uncertainty in the markets at the end of 2008 and the beginning
of 2009 might have rendered ordinarily low-risk loans much
higher-risk once GMAC entered a bankruptcy proceeding. In this
context, Treasury maintains that even if it had provided the
required DIP investment, there is no guarantee that GMAC would
have emerged from the restructuring process.\403\ While the
size of the DIP financing is less important than the riskiness
of the investment, it is impossible to determine with any
certainty whether DIP financing would have been more risky than
Treasury's current investment.
---------------------------------------------------------------------------
\400\ Treasury conversations with Panel staff (Feb. 22, 2010).
\401\ Transcript of COP Hearing on GMAC, supra note 12 (Testimony
of Ron Bloom); Treasury conversations with Panel staff (Mar. 2, 2010).
\402\ Treasury bases these numbers on the amounts that would have
gone into run-off under GMAC's then current credit lines. After a
bankruptcy filing, GMAC would have been unable to draw upon its
existing credit lines and would have required new originations, which
(according to Treasury) would have had to come from the government.
Transcript of COP Hearing on GMAC, supra note 12 (Testimony of Ron
Bloom).
\403\ Treasury conversations with Panel staff (Feb. 22, 2010).
---------------------------------------------------------------------------
As for the Chrysler financing, Treasury had a variety of
options for ensuring that Chrysler had access to financing,
including using DIP financing to keep GMAC's floorplan
operations afloat during a bankruptcy and then using these
operations to finance Chrysler dealers.
With respect to Treasury's concerns about the loss of the
original $6 billion equity investment, unless wiping out
Treasury's prior investments would have been more expensive
over the long-run than the strategy that Treasury actually
pursued, this concern may prove misplaced. Ultimately,
bankruptcy in April 2009 would have wiped out the $6 billion
equity investment, but it also would have significantly reduced
the likelihood that Treasury would have needed to make the $7.5
billion May 2009 investment and, in particular, the $3.8
billion December 2009 investment, the latter of which was
completed largely to deal with the home mortgage lending
portfolio, not the automotive finance operations.\404\
Moreover, such a move even as late as April 2009 might have
resolved the GMAC difficulties and increased the likelihood
that Treasury would have had a clean exit and not continue to
face the risks associated with GMAC's ongoing weakness.
---------------------------------------------------------------------------
\404\ The May 2009 investment, in part, underpinned GMAC's
absorption of the Chrysler Finance business.
---------------------------------------------------------------------------
As for a separate ResCap bankruptcy, in the third-quarter
2009 Form 10-Q and the 2009 Form 10-K, GMAC offered a
particular reason for avoiding the proceeding. GMAC is the
parent of and has financing and hedging arrangements with
ResCap. In the 10-K and the 10-Q, GMAC expressed concern that
in the event of a ResCap bankruptcy, other ResCap creditors
might seek to recharacterize loans from GMAC to ResCap as
equity contributions or otherwise seek equitable subordination
of GMAC's claims against ResCap. Further, GMAC noted that in a
bankruptcy proceeding, ResCap might not be able to repay its
obligations to GMAC, while any GMAC equity in ResCap would
likely be lost. GMAC therefore has concerns that a ResCap
bankruptcy could significantly harm it as ResCap's parent.\405\
In conversations with Panel staff, GMAC also stated that in
evaluating bankruptcy, it consulted with advisors and weighed
ResCap's involvement with GMAC Financial Services; the
disruption a decision to discontinue support would cause for
GMAC's access to the capital markets; interparty agreements;
and the significant volume of servicing ResCap provides for
residential loans and modification assistance.\406\ After
evaluating these factors, GMAC concluded that a separate ResCap
bankruptcy was not in GMAC's best interests, and Treasury
representatives have stated that they view this conclusion as
reasonable.\407\ But ResCap's continued existence threatens
GMAC (as described in greater detail in Section H, below) and
it is difficult to determine whether the choice to keep ResCap
will end up doing more harm in the long run than a choice to
put ResCap through bankruptcy.
---------------------------------------------------------------------------
\405\ GMAC Form 10-Q for Q3 2009, supra note 22, at 8; see also
GMAC Form 10-K for 2009, supra note 12, at 17 (``We have secured
financing arrangements and secured hedging agreements in place with
ResCap. Amounts outstanding under the secured financing and hedging
arrangements fluctuate. If ResCap were to file for bankruptcy, ResCap's
repayments of its financing facilities, including those with us, will
be subject to bankruptcy proceedings and regulations, or ResCap may be
unable to repay its financing facilities. In addition, we could be an
unsecured creditor of ResCap to the extent that the proceeds from the
sale of our collateral are insufficient to repay ResCap's obligations
to us. In addition, it is possible that other ResCap creditors would
seek to recharacterize our loans to ResCap as equity contributions or
to seek equitable subordination of our claims so that the claims of
other creditors would have priority over our claims'').
\406\ GMAC conversations with Panel staff (Mar. 3, 2010).
\407\ Transcript of COP Hearing on GMAC, supra note 12 (Testimony
of Jim Millstein).
---------------------------------------------------------------------------
Treasury has also expressed concern that adding GMAC's
bankruptcy to the landscape in which GM's and Chrysler's
bankruptcies were already in the offing would have magnified
the risks from the GM and Chrysler workouts. According to
Treasury, not only would those complex bankruptcies need to be
successfully prosecuted, but the financing arm would also have
had to be successfully brought through the process, and
bankruptcies of financial institutions are more complex than
those of industrial companies.\408\ Again, however, this line
of argument implies that there was only one way to prosecute a
GMAC bankruptcy and maintain systemic stability. If the
floorplan financing was the key, there might have been ways to
save floorplan financing without saving GMAC. For example,
Treasury could have provided a variety of guarantees to private
parties--perhaps even including GM--to take over the floorplan
financing.\409\ One of the most troubling aspects of Treasury's
discussion of a GMAC bankruptcy is the way in which it elides
the distinction between a need to save the automotive financing
services of GMAC and a need to save GMAC. Even assuming that
the automotive financing was critical, the Panel is not
convinced that GMAC itself needed to survive. Further, saving
GMAC saved ResCap, which has no apparent relevance to
automotive financing and continues to destabilize GMAC. The
Panel remains unconvinced that saving GMAC whole, without
attempting (for example) a Section 363 sale of the automotive
financing business or a separate liquidation of ResCap, will
prove to have been the better decision in the long run.
---------------------------------------------------------------------------
\408\ Transcript of COP Hearing on GMAC, supra note 12 (Testimony
of Jim Millstein).
\409\ While in his hearing, Mr. Bloom noted that a 363 sale of the
auto platform would still have required DIP financing, he did not
disagree with the premise that the action would have created a stronger
company, rather stating that keeping GMAC whole was viewed as the most
prudent decision at the time. Transcript of COP Hearing on GMAC, supra
note 12 (Testimony of Ron Bloom).
---------------------------------------------------------------------------
Of all of the reasons proffered by Treasury, GMAC's
inclusion in the stress tests would appear to be the stronger
reason that Treasury has offered for keeping GMAC out of
bankruptcy early in the process. After setting up stress tests
for the largest BHCs and establishing them with the explicit
promise that the government would serve as a backstop for
tested institutions that could not raise the necessary capital
from private sources, Treasury and the Federal Reserve asserted
that they believed that they could not have allowed a large BHC
to file for bankruptcy.\410\ The Federal Reserve, for its part,
has maintained that the tests were designed to restore
confidence to the nation's banking system through assessing the
capital and capital needs of the largest banks during a period
of great uncertainty, that the banks' safety and soundness was
perceived to be of importance to the broader economy, and that
GMAC was properly included among the stress-tested banks.\411\
Treasury and the Federal Reserve might reasonably have believed
that conducting the assessment and then withholding the
promised support could have cast an ominous shadow over the
government's efforts to combat the financial crisis, especially
initially.
---------------------------------------------------------------------------
\410\ See Section F, infra, for further discussion of the stress
tests. Of course, many entities sought to raise private capital as a
means of repaying the government and exiting TARP.
\411\ Federal Reserve conversations with Panel staff (Feb. 19,
2010).
---------------------------------------------------------------------------
Beyond these reasons, it is possible that any bankruptcy
requiring substantial agreement on the part of the stakeholders
might have been unlikely, and that attempts at a Section 363
sale would have encountered similar difficulties to those that
dogged GMAC's 2008 bond exchange offer.\412\ GMAC's bondholders
were resistant to the exchange, which was instituted to raise
capital for the BHC application, and did not initially tender
the principal amount of bonds necessary for the BHC
conversion.\413\ Ultimately, however, the Federal Reserve
approved GMAC's BHC application despite the shortfall in the
amount of tendered bonds on the grounds that GMAC's capital
ratio was nonetheless adequate.\414\ It is impossible, in
retrospect, to determine what would have happened if GMAC had
continued to press its bondholders in the absence of the
Federal Reserve's intervening BHC application approval.
Although a Section 363 sale might have met with similar
obstacles, it is not clear that this would have been the case.
---------------------------------------------------------------------------
\412\ See Section C.2, infra, for further discussion of the bond
exchange.
\413\ GMAC Announces Results of Exchange Offers, supra note 67.
\414\ Federal Reserve conversations with Panel staff (Feb. 19,
2010).
---------------------------------------------------------------------------
For its part, GMAC stated that it was concerned that any
disruption in its ability to obtain capital at reasonable cost
or any perception of distress would have created a funding void
that, it states, would have been between $50 billion and $60
billion. According to GMAC, it would then have needed DIP
financing at these levels, which only Treasury could have
provided. GMAC also asserts that there are few successful
finance company bankruptcies, and that its advisors estimated
that a bankruptcy process--either Chapter 11 or Section 363--
would have created major disruption for GM's dealers and retail
customers.\415\
---------------------------------------------------------------------------
\415\ GMAC conversations with Panel staff (Mar. 3, 2010).
---------------------------------------------------------------------------
From the vantage point of Treasury's two most recent
investments--May and December 2009--bankruptcy might not have
been a prudent option, although that determination requires a
careful analysis of the anticipated recovery before and after
bankruptcy, as well as of returns on any additional capital
required. Before 2009, however, the landscape was fundamentally
different. A taxpayer who picked up a newspaper and sat down to
breakfast on December 20, 2008 would have read headlines about
the government's decision to provide substantial support to GM
and Chrysler. But as of that date, GMAC had not yet received
approval to become a BHC, the stress tests were two months
away, and Treasury had invested no money in GMAC. Even two
weeks later, bankruptcy should reasonably have remained an
option. Treasury, after all, was already providing GMAC with
liquidity, and could presumably have underpinned a GMAC
workout. Another possibility might have been a U.S. government-
supported sale, such as that which aided JP Morgan in its
purchase of Bear Stearns.\416\ The Panel remains unconvinced
that at that point bankruptcy of either GMAC or ResCap or a
similar restructuring was not a real possibility. It is unclear
whether either was seriously considered at the time.
---------------------------------------------------------------------------
\416\ JPMorgan Chase, JPMorgan Chase and Bear Stearns Announce
Amended Agreement (Mar. 24, 2008) (online at www.jpmorgan.com/cm/
cs?pagename=JPM_redesign/JPM_Content_C/
Generic_Detail_Page_Template&cid=1159339104093&c=JPM_Content_C).
---------------------------------------------------------------------------
What is clear is that policymakers now believe that the
decisions made in December 2008 constrained the options in
2009. For reasons described in greater detail in Section H,
below, this may prove unfortunate. GMAC, and ResCap, are still
struggling with many of the issues that hampered them prior to
Treasury's first intervention, and a bankruptcy restructuring
could have alleviated or perhaps solved some of the problems
facing the entities. Further, a bankruptcy would have solved a
current problem of particular matter to the taxpayers: the
continued claims that GMAC's pre-bailout shareholders can still
make on the company. Treasury and GMAC have provided a variety
of reasons for rejecting bankruptcy and Section 363 sales of
various of GMAC or GMAC assets, but the Panel remains
unconvinced that the consequences of those decisions will not
prove more harmful to the taxpayers in the long run.
F. GMAC and the Stress Tests
The supervisory action, or SCAP, Treasury announced on
February 10, 2009 was intended to address the ongoing economic
crisis by stressing the country's major financial
institutions.\417\ The results of the test were intended to
show either that a BHC was sufficiently capitalized, thus
presumably reassuring the market regarding its stability, or
that a BHC required additional capital. Any BHC requiring
additional capital that could not raise funds privately was
promised the necessary funds from Treasury, assuring that these
BHCs would also be sufficiently capitalized and stable. The
SCAP was thus designed to ensure that the nation's largest
financial institutions would be fully capitalized and that the
market would view them as stable.
---------------------------------------------------------------------------
\417\ The Government Accountability Office (GAO) has begun an audit
of the SCAP as part of its ongoing oversight of TARP.
---------------------------------------------------------------------------
Secretary Geithner described the SCAP in a statement issued
on the day the program was announced:
First, we're going to require banking institutions to
go through a carefully designed comprehensive stress
test, to use the medical term. We want their balance
sheets cleaner, and stronger. And we are going to help
this process by providing a new program of capital
support for those institutions which need it.
* * * * * * *
Those institutions that need additional capital will
be able to access a new funding mechanism that uses
funds from the Treasury as a bridge to private capital.
The capital will come with conditions to help ensure
that every dollar of assistance is used to generate a
level of lending greater than what would have been
possible in the absence of government support. And this
assistance will come with terms that should encourage
the institutions to replace public assistance with
private capital as soon as that is possible.\418\
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\418\ U.S. Department of the Treasury, Secretary Geithner
Introduces Financial Stability Plan (Feb. 10, 2009) (online at
www.financialstability.gov/latest/tg18.html). This announcement was
made in coordination with the Federal Reserve and the FDIC.
A term sheet setting out the conditions upon which funds would
be available from Treasury was published on February 25.\419\
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\419\ U.S. Department of the Treasury, U.S. Treasury Releases Terms
of Capital Assistance Program (Feb. 25, 2009) (online at
www.financialstability.gov/latest/tg40.html).
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The Federal Reserve paper that detailed the design and
implementation of the stress tests also referred to the
availability of funds from Treasury:
The United States Treasury has committed to make
capital available to eligible BHCs through the Capital
Assistance Program as described in the Term Sheet
released on February 25.\420\
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\420\ Board of Governors of the Federal Reserve System, The
Supervisory Capital Assessment Program: Design and Implementation, at 2
(Apr. 24, 2009) (online at www.federalreserve.gov/newsevents/press/
bcreg/bcreg20090424a1.pdf) (hereinafter ``SCAP Design and
Implementation'').
The Federal Reserve performed these ``stress tests'' under the
SCAP on the 19 BHCs with assets above $100 billion, including
GMAC.\421\
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\421\ GMAC converted to a BHC in December 2008. See Section C.2,
infra, describing the timeline of events related to GMAC. According to
the Federal Reserve, the decision to use the category of all BHCs with
assets above $100 billion as the basis for inclusion in the SCAP was
made after GMAC's application for conversion to a BHC was approved. The
decision, however, was based on the fact that the SCAP was intended to
target the financial sector and so using a category that would
encompass the largest BHCs was the most logical choice to the Federal
Reserve. Conference call with Panel staff (Feb. 19, 2010).
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On May 7, 2009, the Federal Reserve released the results of
the stress tests, which showed that ten of the tested banks,
including GMAC, had insufficient tier 1 capital to withstand
the so-called ``more adverse scenario.'' \422\ The more adverse
scenario was designed to model the effects of an even greater
downturn than was being forecast at the time.\423\ These ten
BHCs were given until June to devise a plan for raising the
necessary capital from private sources. If any BHC was not able
to raise this capital by November, TARP funds would be made
available via the CAP. An institution that received funding
under the CAP would be subject to several restrictions,
including restrictions on executive compensation, increased
disclosure requirements, and a requirement that the institution
provide information regarding how it would use the CAP funds to
increase lending.
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\422\ Board of Governors of the Federal Reserve System, The
Supervisory Capital Assessment Program: Overview of Results (May 7,
2009) (online at www.federalreserve.gov/newsevents/press/bcreg/
bcreg20090507a1.pdf). Specifically, the results showed that GMAC
required an additional $11.5 billion in tier 1 capital, $9.1 billion of
which was to be provided in fresh capital. Id. at 26. As discussed in
Section D.2(b), infra, Treasury provided $3.5 billion of this amount to
GMAC in May.
\423\ As noted in the Panel's June 2009 report, the nation's
unemployment figures have already exceeded the assumptions used for the
``more adverse'' scenario. Congressional Oversight Panel, June
Oversight Report: Stress Testing and Shoring Up Bank Capital, at 18
(Jun. 9, 2009) (online at cop.senate.gov/documents/cop-060909-
report.pdf) (hereinafter ``June Oversight Report'').
---------------------------------------------------------------------------
As of November 9, 2009, nine of the ten BHCs identified as
needing additional tier 1 capital had met the requirements
through private investment. GMAC was the only BHC that failed
to raise the necessary capital. In a press release issued that
day, Treasury announced that it would not use the CAP to
provide GMAC with additional capital, but would use the AIFP
instead. While the AIFP places many of the same restrictions on
recipient institutions as the CAP would have placed, noticeably
absent from the AIFP is a requirement that a recipient
institution provide information on how it would use the funds
to increase lending above the levels that would have been
possible absent government support.\424\ GMAC is, however,
required to provide Treasury with monthly reports on its
overall lending activities,\425\ although it is not clear
whether these reports include specific information about how
much lending has increased as a direct result of Treasury's
investments. Moreover, these reports are not publicly
available, despite a provision in the CAP that would have
required such disclosure.\426\ Also absent from the AIFP, but
not from the CAP, is a plan to place all assets into a
trust.\427\
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\424\ Capital Assistance Program, supra note 229.
\425\ Transcript of COP Hearing on GMAC, supra note 12 (Testimony
of Jim Millstein).
\426\ CAP White Paper, supra note 234, at 3.
\427\ CAP White Paper, supra note 234, at 3.
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The decision not to include the increased lending plan
makes sense to the extent that the AIFP's target is the
automotive industry and not, as with the CAP, the financial
industry. But to the extent that the SCAP was aimed at
stabilizing the financial industry, it is unclear why GMAC
should have been allowed to receive tier 1 capital free of the
strictures that were envisioned as a core component of the
SCAP/CAP process. Each of Treasury's statements about the SCAP
has included a reference to the importance of increasing
lending. Furthermore, while GMAC started as the financial arm
of an automotive company, it has expanded beyond that role to
provide a greater array of financial services, as described in
detail in Section C above. Recent statements by the company
suggest that it intends to continue this expansion into the
future.\428\ Ultimately, GMAC's original and most important
purpose is to provide financing to the automotive sector. In
late 2008 and early 2009, the automotive wholesale and consumer
credit markets, like all credit markets, nearly froze. Interest
rates shot up and approval rates plummeted as lenders became
increasingly cautious and unwilling to part with cash. To the
extent that the SCAP was intended to loosen up the credit
markets, requiring GMAC to provide a plan for increasing
lending would have made sense.
---------------------------------------------------------------------------
\428\ GMAC, Inc., Preliminary 2009 Third Quarter Results, at 22
(Nov. 4, 2009) (online at phx.corporate-ir.net/
External.File?item=UGFyZW50SUQ9MTk0MDJ8Q2hp
bGRJRD0tMXxUeXBlPTM=&t=1) (noting that ``Ally Bank continues to build
brand awareness and retail deposit base'' and identifying goal of
``expand[ing] and diversify[ing]'' revenue opportunities in auto and
mortgage, driving originations'').
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In meetings with Panel staff, Treasury staff have stated
that they used the AIFP instead of the CAP because GMAC was
already part of the AIFP and because it did not make sense to
open the CAP for only one institution when that institution
could receive funding elsewhere (i.e., through the AIFP).\429\
According to Treasury, the CAP's requirement regarding a
lending program was unnecessary for GMAC because GMAC is
already a lending institution. This explanation, however, does
not adequately address the question. In late 2008 and early
2009, the credit markets were all but frozen and nearly all
lending institutions stopped lending. GMAC was and is a part of
those markets and there are no indications that it was not at
least as severely affected by the crisis as other lenders. It
is therefore unclear why GMAC should not be required to provide
a lending plan just as any other BHC that received funding
following the SCAP would have been required to provide.
---------------------------------------------------------------------------
\429\ Treasury meeting with Panel staff (Feb. 2, 2010).
---------------------------------------------------------------------------
More importantly, the lack of public disclosure of GMAC's
lending reports is troubling. This Panel has consistently
requested that Treasury provide more transparency in its
administration of the TARP. In this instance, Treasury appears
to have chosen the program with lower disclosure requirements
in a situation where the more transparent program had been
established as the default selection.
The CAP also contemplated the creation of a trust to hold
the assets purchased through the program while the AIFP does
not. Because GMAC's assets were purchased through the AIFP,
they have not been placed in a trust. Treasury staff, in a
meeting with Panel staff, stated that there was no requirement
under the CAP to place assets in a trust despite the language
in the CAP documents that states: ``any capital investments
made by Treasury under this plan will be placed in a separate
trust set up to manage the government's investments in US
financial institutions.'' \430\
---------------------------------------------------------------------------
\430\ CAP White Paper, supra note 234, at 3.
---------------------------------------------------------------------------
Additionally, Treasury did not provide the full amount to
GMAC that the SCAP indicated that the company would require.
Although the SCAP found that GMAC would require $11.5 billion
in total additional capital, including $9.1 billion in fresh
capital, the total provided by Treasury increased GMAC's tier 1
capital by only $7.3 billion.\431\ Treasury and the Federal
Reserve have both stated that the shift in the size of the
capital buffer required for GMAC occurred because the impact of
the GM bankruptcy on GMAC's operations was less adverse to GMAC
than the assumptions used by the Federal Reserve in the
SCAP.\432\ At the time the stress tests were conducted, the GM
bankruptcy process was not yet complete and, according to
Treasury, three items remained unknown: (1) what the residual
values for GM's assets would be; (2) how GM dealers who had
been rejected would be treated; and (3) what preference GMAC
would receive in the bankruptcy process. When the Federal
Reserve conducted the SCAP, it used very conservative
assumptions for the outcome of these three unknowns.
Ultimately, the real values were less adverse than the Federal
Reserve's assumptions and, in December 2009, GMAC presented
Treasury with a proposed revised plan that would require a
smaller amount of additional tier 1 capital than the May stress
test results required.\433\ Treasury discussed the revised plan
with the Federal Reserve, and the Federal Reserve judged that
the capital buffer requirement for GMAC could be adjusted
downward, although not as far as GMAC had proposed.\434\
Instead of reducing the additional capital needed to the figure
proposed by GMAC, it was reduced to $3.8 billion.
---------------------------------------------------------------------------
\431\ Treasury also provided $4 billion to GMAC related to GMAC's
acquisition of Chrysler Financial, as described in Section D above, for
a total in fresh capital of $13.1 billion.
\432\ Treasury conversations with Panel staff (Feb. 2, 2010);
Federal Reserve conversations with Panel staff (Feb. 19, 2010).
\433\ Treasury conversations with Panel staff (Jan. 29, 2010); GMAC
conversation with Panel staff (Feb. 1, 2010).
\434\ It does not appear that any similar adjustments were made for
any other BHCs tested under the SCAP.
---------------------------------------------------------------------------
None of the other 18 BHCs that participated in the SCAP had
their capital buffer requirements revised after the May 6, 2009
announcement. According to both Treasury and the Federal
Reserve, this is because GMAC was uniquely situated; the
outcome of the GM bankruptcy would have considerable impact on
GMAC's operations and, given the size of GM and the state of
the economy at the time, that outcome was exceedingly difficult
to predict.\435\ Although every BHC that was tested had some
uncertainties for which the Federal Reserve was obliged to
devise assumptions, only for GMAC did the actual numbers
diverge from the assumptions enough to warrant a revision to
the capital buffer.\436\ GMAC's unique position, however, was
never publicly mentioned by Treasury or the Federal Reserve.
---------------------------------------------------------------------------
\435\ Treasury conversations with Panel staff (Feb. 2, 2010);
Federal Reserve conversations with Panel staff (Feb. 19, 2010).
\436\ Treasury conversations with Panel staff (Feb. 2, 2010);
Federal Reserve conversations with Panel staff (Feb. 19, 2010).
---------------------------------------------------------------------------
Although the SCAP was unique in its size, scope, and
visibility, bank supervisors regularly conduct such exercises
on a smaller scale to ensure that BHCs remain healthy and
viable. It is not surprising that, over the course of seven or
more months, the amount of additional capital a BHC requires
might change. Nor does the Panel have an opinion as to whether
GMAC's current capital buffer is sufficient. What is notable to
the Panel, however, is the fact that there appears to have been
a degree of conditionality in the results of the SCAP that was
not communicated to the public. While, for example, the
document issued by the Federal Reserve noted that ``[i]f the
economy recovers more quickly than specified in the more
adverse scenario, firms could find their capital buffers at the
end of 2010 more than sufficient to support their critical
intermediation role and could take actions to reverse their
capital build-up[,]'' \437\ there was no suggestion that the
capital levels might be revised downward at any earlier point.
Announcements regarding the results of the SCAP likewise
included no indication that the results might be subject to
revision at any point or, in particular, that the level
required for one company might be adjusted based solely on
factors relevant to that BHC. It is therefore surprising that
such a revision was apparently available.
---------------------------------------------------------------------------
\437\ SCAP Design and Implementation, supra note 420, at 5.
---------------------------------------------------------------------------
G. GMAC and the AIFP: A More Lenient Approach
As discussed earlier, Treasury maintains that the aid
provided to GMAC was inextricable from the aid provided to the
automotive companies. Like the automotive companies, which
received bridge financing before long-term investment, GMAC
also received successive infusions, the last of which was paid
in December 2009. It is there that the similarities end. For
most other points of comparison, GMAC received very different
treatment from the automotive companies it supports.
1. Due Diligence and Demonstrations of Viability
The first point upon which GMAC's treatment differs from
that of the automotive companies is in the due diligence
Treasury performed, and the requirements it imposed on GMAC.
Unlike the automotive companies, GMAC does not appear to have
been required to demonstrate or disclose anything particularly
rigorous regarding its future plans, viability, or current
stability in order to receive later sums. Given that Treasury's
investment in GMAC is currently larger than its investment in
Chrysler, this omission is, at best, puzzling. GMAC has
explained that prior to the December 2009 infusion, it provided
Treasury and the Federal Reserve with pro forma financial
statements.\438\ The pro-forma financials were, however, a work
in progress, and while GMAC and Treasury discussed and reviewed
the pro-forma financials, Treasury did not otherwise require a
rigorous determination of GMAC's viability prior to delivering
the funds in late December 2009.\439\ Instead, GMAC received
the funds and continued to develop the details of its strategy
over the following quarter. Treasury takes the position that a
diligence process would have added little, given that the funds
were already committed, and that renegotiating the consent
provisions for the entire MCP holdings would permit it to
evaluate GMAC's strategy and viability at any time that GMAC
approached it for a conversion. Whether this substitute for due
diligence will prove relevant to the taxpayer is yet to be
seen; the difference from Treasury's treatment of the
automotive companies is, however, marked.
---------------------------------------------------------------------------
\438\ GMAC conversations with Panel staff (Feb. 1, 2010).
\439\ GMAC conversations with Panel staff (Feb. 1, 2010).
---------------------------------------------------------------------------
The automotive companies were given bridge financing and
funds for current operations, but were required to demonstrate
their continued viability before they could receive longer-term
help. More specifically, the initial loans to the automotive
companies were extended with a requirement that each company
demonstrate the capacity to stabilize and achieve long-term
health.\440\ In announcing the program, then-Secretary Paulson
emphasized the conditionality of the loans, stating that
assistance came with the ``requirement that [the companies]
move quickly to develop and adopt acceptable plans for long
term [sic] viability.'' \441\ Moreover, then-Secretary Paulson
emphasized that the assistance was not intended solely as a
means of preventing ``significant disruption to our economy,''
but was also a critical step toward ``the significant
restructuring necessary to achieve long-term viability.'' \442\
In response to the conditions, in February 2009, both companies
submitted financial viability plans, which the Obama
Administration reviewed critically, requiring Chrysler to
develop a partnership with another automotive company, and
describing GM's forecasts as overly optimistic.\443\ GMAC is
currently at work on a viability plan: this plan, however, was
not a precondition to the government's investments. If any
evaluation of GMAC's viability occurred prior to the commitment
of TARP funds, it has not been disclosed to the public.
---------------------------------------------------------------------------
\440\ White House, Fact Sheet: Financing Assistance to Facilitate
the Restructuring of Auto Manufacturers to Attain Financial Viability
(Dec. 19, 2008) (online at georgewbush-whitehouse.archives.gov/news/
releases/2008/12/20081219-6.html). The loans also imposed conditions
related to operations, expenditures, and reporting.
\441\ Sec. Paulson Statement on the Automotive Industry, supra note
187.
\442\ Sec. Paulson Statement on the Automotive Industry, supra note
187.
\443\ U.S. Department of the Treasury, Chrysler February 17 Plan:
Determination of Viability, at 1 (Mar. 30, 2009) (online at
www.financialstability.gov/docs/AIFP/Chrysler-Viability-
Assessment.pdf); U.S. Department of the Treasury, GM February 17 Plan:
Determination of Viability, at 2 (Mar. 30, 2009) (online at
www.financialstability.gov/docs/AIFP/GM-Viability-
Assessment.pdf).
---------------------------------------------------------------------------
2. Consequences to Shareholders
Yet another distinction between Treasury's treatment of
GMAC and Treasury's approach to the automotive companies lies
in the consequences visited upon the various entities' owners.
Prior to Treasury's intervention, Daimler and Cerberus were the
primary owners of Old Chrysler, with 19.9 percent and 80.1
percent equity, respectively. In the Old Chrysler \444\
liquidation, both were wiped out. Old Chrysler's first-lien
secured lenders, who had $6.9 billion in secured claims from
Old Chrysler, received $2 billion cash in the liquidation.
Other stakeholders similarly found their claims upon Old
Chrysler substantially impaired after the bankruptcy
proceeding. The Old GM shareholders were also wiped out, while
other stakeholders saw substantial obligations owed by Old GM
converted into more uncertain shares in the new GM. The
automotive companies, accordingly, had vastly different
ownership structures after Treasury's intervention than they
did before, and many if not most of the parties involved were
asked to make significant sacrifices in the bankruptcy
proceedings.\445\
---------------------------------------------------------------------------
\444\ For purposes of consistency, Chrysler, in its incarnation
before it entered bankruptcy, is referred to as Old Chrysler, while the
new entity that emerged from the bankruptcy process is referred to as
Chrysler.
\445\ See September Oversight Report, supra note 189, at 23-31.
---------------------------------------------------------------------------
By contrast, GMAC's shareholders have been diluted by
Treasury's entry, but have not been wiped out.\446\ In
reviewing GMAC's BHC application, the Federal Reserve required
GM and Cerberus to reduce their ownership interest in GMAC:
neither GM nor Cerberus could comply with the nonbanking
activities restrictions in the BHCA, and therefore neither
could retain a controlling interest in GMAC once it became a
BHC. The Federal Reserve required GM to reduce its ownership
interest to less than 10 percent of the voting equity in GMAC
and required Cerberus to reduce its aggregate direct and
indirect investments to no greater than 14.9 percent of the
voting and 33 percent of the total equity in GMAC.\447\
Although GM and Cerberus lost control, neither GM nor Cerberus
sacrificed all economic value in the investment. Rather, GM
transferred its remaining equity interest in GMAC to a
trust,\448\ while each Cerberus fund that held interests in
GMAC distributed its excess equity interest in the company to
its respective investors.\449\ While the value of these
investments to either the GM Trust or to the Cerberus investors
is, of course, subject to the vagaries of the market, the
original investors had something to distribute. Neither
original investor was therefore wiped out in the sense that the
Old GM or Old Chrysler shareholders were wiped out in the
bankruptcies. Finally, both GM and Cerberus retained a residual
equity voting interest in GMAC. To the extent that the GMAC
bailout is part of the AIFP, the disparate treatment of the
stakeholders in the process appears to be without any
particular justification. In his speech on the GM
restructuring, President Obama emphasized the principle of
sacrifice: in particular, he observed that the UAW was
receiving cuts in employee compensation and retiree health care
benefits, while shareholders were sacrificing any remaining
value in their shares.\450\ If GMAC is properly part of the
AIFP, it is unclear why no such sacrifices were required of the
GMAC shareholders.
---------------------------------------------------------------------------
\446\ See Sections C.2 and D.2, supra, for a discussion of the
consequences visited upon GMAC's bondholders, board, and management.
The board has turned over completely since before the BHC application,
and the bondholders were required to take a haircut. Management
experienced some, but not overwhelming, turnover.
\447\ Order Approving GMAC's BHC Formation, supra note 58.
\448\ Order Approving GMAC's BHC Formation, supra note 58. The
Trustee of the trust had to be acceptable to the Federal Reserve and
the Treasury, entirely independent of GM, and have sole discretion to
vote and dispose of the GMAC equity interests. As part of the process,
GM was also required to sign a passivity agreement whereby its
representative on the board is only an observer, and does not vote.
March 24 Letter to B. Robbins Kiessling, Esq., supra note 65.
\449\ The Federal Reserve imposed additional requirements on
Cerberus and GM's ability to effect control over GMAC. Among other
things, Cerberus employees and consultants were to cease providing
services to or otherwise functioning as dual employees of GMAC, and
Cerberus was also required to abjure any advisory relationships with
GMAC or any investor regarding the sale of shares or management or
policies of GMAC. Order Approving GMAC's BHC Formation, supra note 58.
\450\ See White House, Remarks by the President on General Motors
Restructuring (June 1, 2009) (online at www.whitehouse.gov/
the_press_office/Remarks-by-the-President-on-General-Motors-
Restructuring/).
---------------------------------------------------------------------------
3. Bankruptcy
Another glaring difference between GMAC and the automotive
companies, and the reason that GMAC's shareholders retain
whatever value is left in their shares, is, of course, that
GMAC never went through bankruptcy. In the abstract, bankruptcy
would have been possible for GMAC. In the absence of market-
specific concerns, the structure and business of GMAC--either
before or after the BHC conversion--would not have presented
any particular obstacles to either a bankruptcy proceeding or,
more likely, a Section 363 sale. The nonbank portions of the
business would have been segregated and placed into the
bankruptcy process, while the bank portions of the business
could either have been kept solvent or placed into receivership
by the FDIC according to its customary processes. The
profitable automotive financing business could have been sold,
perhaps with a government guarantee. In testimony before the
Panel, Treasury representatives cited a variety of concerns
underpinning the decision to keep GMAC out of bankruptcy, from
their belief that adding a GMAC bankruptcy to the GM and
Chrysler bankruptcies would have further destabilized a
precarious situation, to their assertion that the workout would
have required enormous DIP financing, to, ultimately, their
fear that GMAC, as a financial services company, could have
failed to emerge from bankruptcy.\451\ But Treasury and GMAC's
objections, further discussed in Section E.4, could as easily
have applied to the automobile company bankruptcies. After all,
fear that the company would emerge from liquidation crippled,
if at all; substantial need for assistance; and fear of
significant disruption all describe the concerns surrounding
GM's bankruptcy as well. A bankruptcy could have solved a
variety of the problems that face GMAC now, which are discussed
in greater detail in Section H, below: its debt burden, its
exposure to deteriorating mortgages through ResCap, and its
high preferred share ratio and attendant high cost of capital,
among others. In fact, a bankruptcy could have addressed many
of GMAC's problems: it could have wiped out the old equity,
limited losses on housing, haircut the outstanding debt, and
overall put the company on a better path towards the future. A
bankruptcy might have preserved an independent GMAC or sold off
its parts, including the automotive financing business, for
more value. And yet, GMAC and its shareholders were never
subjected to the same risk of total loss, because Treasury
deemed bankruptcy imprudent for GMAC. The Panel has discussed
its objections to Treasury's concerns in Section E, above, and
continues to question whether Treasury was indeed powerless in
the face of the hurdles it described: as the Panel noted in its
September report, a $700 billion fund gives the holder many
options.\452\
---------------------------------------------------------------------------
\451\ Transcript of COP Hearing on GMAC, supra note 12 (Testimony
of Jim Millstein). For a more detailed discussion of Treasury's reasons
for determining that a bankruptcy proceeding was not appropriate for
GMAC, see Section E.4, supra.
\452\ See September Oversight Report, supra note 189, at 3, 86-87
(discussing Treasury as a ``tough negotiator'' when it invested
taxpayer funds in the automotive companies and describing the
imposition of conditions on institutions that receive ``exceptional
assistance'').
---------------------------------------------------------------------------
Fundamentally, these decisions matter not only because they
affect the manner of the taxpayers' investment, but also, and
more importantly, because they affect the taxpayers' potential
for recovery. When the prior shareholders were preserved, with
them were preserved their claims upon GMAC, although it is
Treasury, and not the prior investors, that has kept GMAC
afloat. Treasury has assured the Panel that it would be highly
unlikely for the third-party shareholders to receive a return
if the taxpayers suffered a loss, because Treasury has multiple
mechanisms for protecting the priority of its investment.
First, Treasury has substantial preferred share holdings, which
would be paid before any distributions on the equity of the
other investors. Second, if Treasury converted its preferred
shares, the other shareholders would be diluted beyond their
already substantial dilution. Treasury's MCP have conversion
rights that allow Treasury to convert--and substantially
dilute--other shareholders in the event of certain corporate
actions, and therefore permit Treasury to intervene in GMAC's
efforts to raise capital.\453\ But Treasury has also stated
that the only way to legally wipe out the other shareholders
was through bankruptcy, and this option was rejected: Treasury
may have the power to dilute the other shareholders, but unless
it takes GMAC into bankruptcy, it does not have the power to
eliminate them.\454\ Ultimately, the Panel urges Treasury to
make every effort to bring to fruition its assertion that no
third-party shareholder is likely to receive a return unless
the taxpayers are paid in full.\455\ It would be the height of
impropriety for these shareholders to recover any value in
their investment if the taxpayers were not previously or
simultaneously made whole.
---------------------------------------------------------------------------
\453\ Treasury GMAC Contract, supra note 226, at Schedule A.
\454\ Transcript of COP Hearing on GMAC, supra note 12 (Testimony
of Ron Bloom).
\455\ It would be theoretically possible for a third-party investor
to sell its shares in a private sale. Given Treasury's ability to
dilute the shareholdings, the large number of outstanding preferred
shares, and GMAC's pending debt maturities, however, it is unlikely
that this hypothetical private sale would net very much. Treasury
conversations with Panel staff (Mar. 2, 2010).
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H. Exit Strategy and Expected Returns from the GMAC Investment
1. Treasury's Options for Divesting the GMAC Stake
Treasury currently owns $11.4 billion in MCP, $2.67 billion
in TruPs and 56.3 percent of the common equity of GMAC. For the
purpose of comparison, this is a larger investment than the
$12.8 billion acquisition cost of Treasury's Chrysler
holdings.\456\ In fact, if Treasury converted its preferred
position, it would hold more than 70 percent of the common
equity of GMAC.\457\ And yet, in sharp contrast to its
discussion of the investment in Chrysler, Treasury has provided
the public virtually no information about its intentions with
respect to its future strategy or exit for GMAC. This deprives
the taxpayers of the means to understand the current state of
and future plans for their not insubstantial investment in
GMAC. The Panel has repeatedly called for Treasury to manage
the TARP in a transparent and open fashion.\458\ In its
treatment of GMAC, Treasury has, however, failed to provide the
public with much information.
---------------------------------------------------------------------------
\456\ This figure represents the total amount of funds provided to
Chrysler through the AIFP. See Congressional Oversight Panel, January
Oversight Report: Exiting TARP and Unwinding Its Impact on the
Financial Markets, at 85, 87 (Jan. 13, 2009) (online at cop.senate.gov/
documents/cop-011410-report.pdf) (hereinafter ``January Oversight
Report''). These comparisons should not imply that there is any special
significance that rests upon the size of an investment. Rather, this
report hopes to draw a contrast between the professed rigor and
transparency associated with the investment in the automotive companies
with the more opaque circumstances of the GMAC investment. Chrysler, as
an AIFP participant with a Treasury stake of roughly the same size as
GMAC, is a useful point of comparison. See Congressional Oversight
Panel, January Oversight Report: Exiting TARP and Unwinding Its Impact
on the Financial Markets, at 87 (Jan. 13, 2009) (online at
cop.senate.gov/documents/cop-011410-report.pdf).
\457\ GMAC, Inc., Investor Call to Discuss Key Capital and
Strategic Actions, at 10 (Jan. 5, 2010) (online at www.gmacfs.com/us/
en/about/investor/upcoming_events.html) (hereinafter ``Investor Call to
Discuss Capital and Strategic Actions'').
\458\ The Panel has been consistent in its calls for transparency
in the administration of the TARP, recommending or discussing the need
for transparency in nearly all of its reports. See Congressional
Oversight Panel, April Oversight Report: Assessing Treasury's Strategy:
Six Months of TARP, at 5 (Apr. 7, 2009) (online at cop.senate.gov/
documents/cop-040709-report.pdf); August Oversight Report, supra note
151, at 60; December 2009 Oversight Report, supra note 368, at 95-97;
December Oversight Report, supra note 364, at 5, 16, 19; Congressional
Oversight Panel, February Oversight Report: Valuing Treasury's
Acquisitions, at 3, 12 (Feb. 6, 2009) (online at cop.senate.gov/
documents/cop-020609-report.pdf); Congressional Oversight Panel,
January Oversight Report: Accountability for the Troubled Asset Relief
Program, at 3-4 (Jan. 9, 2009) (online at cop.senate.gov/documents/cop-
010909-report.pdf); January Oversight Report, supra note 456, at 45;
Congressional Oversight Panel, July Oversight Report: TARP Repayments,
Including the Repurchase of Stock Warrants, at 39 (July 10, 2009)
(online at cop.senate.gov/documents/cop-071009-report.pdf); June
Oversight Report, supra note 423, at 5, 49; Congressional Oversight
Panel, November Oversight Report: Guarantees and Contingent Payments in
TARP and Related Programs, at 79, 86 (online at cop.senate.gov/
documents/cop-110609-report.pdf) (hereinafter ``November Oversight
Report''); Congressional Oversight Panel, October Oversight Report: An
Assessment of Foreclosure Mitigation Efforts After Six Months, at 93
(Oct. 9, 2009) (online at cop.senate.gov/documents/cop-100909-
report.pdf); September Oversight Report, supra note 189, at 104-105.
---------------------------------------------------------------------------
As with the automotive companies, Treasury's stake in
GMAC--common, TruPs, and MCP \459\--is fundamentally
illiquid.\460\ Accordingly, Treasury's large common stock
position in GMAC, a non-public company, can be sold only in
private sales unless and until GMAC makes an initial public
offering (IPO). Divesting Treasury's preferred share position
depends on whether Treasury converts the MCP into common stock.
If Treasury converted the MCP, it could sell the resulting
common stock in the market after the eventual IPO, or, less
likely, in a private sale.\461\ Even then, Treasury will be
hampered by the ownership restrictions imposed on holders of
bank stock. As any entity holding 25 percent or more of the
voting stock of a bank or BHC is itself a BHC, Treasury could
transfer its interests in GMAC stock only consistent with the
BHCA, which could further limit its ability to sell its
position.\462\ In any event, consistent with its approach
overall, Treasury's goal is to ``dispose of the government's
interests as soon as practicable consistent with EESA goals.''
\463\
---------------------------------------------------------------------------
\459\ TruPs have elements of both common equity and debt, are
senior to all other common equity of GMAC, and have no contractual
restrictions on transfer (other than requirements that certificates
bear certain legends and other similar restrictions set forth in the
Declaration of Trust for the Trust), while MCP, which are convertible
at the Federal Reserve's option, would require conversion before they
can be marketed. See December 2009 Restructuring Announcement, supra
note 214; U.S. Department of the Treasury, Decoder (online at
www.financialstability.gov/roadtostability/decoder.htm) (accessed Mar.
8, 2010); U.S. Department of the Treasury, The Treasury Capital
Assistance Program and the Supervisory Capital Assessment Program,
Joint Statement by Secretary of the Treasury Timothy F. Geithner,
Chairman of the Board of Governors of the Federal Reserve System Ben S.
Bernanke, Chairman of the Federal Deposit Insurance Corporation Sheila
Bair, and Comptroller of the Currency John C. Dugan (May 6, 2009)
(online at www.financialstability.gov/latest/tg91.html); GMAC Inc.,
Summary of Trust Preferred Securities and Warrant Terms (May 21, 2009)
(online at financialstability.gov/docs/AIFP/
Posted%20to%20AIFP%20Website%20-%20GMAC%202009.pdf).
\460\ See GMAC to Expand Retail Auto Financing, supra note 138.
\461\ Transcript of COP Hearing on GMAC, supra note 12 (Testimony
of Ron Bloom and Jim Millstein).
\462\ 12 U.S.C. Sec. 1842(a).
\463\ U.S. Department of the Treasury, Office of Financial
Stability Agency Financial Report: Fiscal Year 2009, at 44 (Dec. 10,
2009) (online at www.treas.gov/press/releases/OSF%20AFR%2009.pdf)
(hereinafter ``OFS Financial Report: Fiscal Year 2009'').
---------------------------------------------------------------------------
Treasury has stated that it intends to sell its interests
in a timely and orderly manner that ``minimizes financial
market and economic impact,'' under what it determines to be
appropriate market conditions.\464\ At the Panel's hearing,
Treasury representatives set forth the steps GMAC would need to
follow in order for Treasury to divest the GMAC investment.
First, GMAC must address its looming maturing debt. Until
GMAC's debt has been refinanced, Treasury does not expect GMAC
to be able to access the equity markets. Once the debt is
refinanced and the GMAC balance sheet has a better liquidity
profile, then an IPO should be possible. Treasury would likely
convert its MCP to common in whole or in part and sell its
shares after the company becomes public.\465\
---------------------------------------------------------------------------
\464\ OFS Financial Report: Fiscal Year 2009, supra note 463, at
40.
\465\ Transcript of COP Hearing on GMAC, supra note 12 (Testimony
of Ron Bloom and Jim Millstein).
---------------------------------------------------------------------------
An IPO strategy hinges on the ability of GMAC to become
profitable. Since a public offering is the primary method for
recovery of taxpayers' money, delays in or hindrances to
accessing the equity capital markets will prolong Treasury's
involvement as a shareholder. This therefore places substantial
weight on GMAC's strategy for becoming profitable, which is
presently a work in progress. At base, GMAC is dependent on
maintaining liquidity in order to sustain the lending flows to
the automotive industry. In this context, GMAC has two primary
obstacles between its current position and the profitability
that would support a potential IPO, both of which relate to
liquidity: it must have unfettered and non-government-sponsored
access to the third-party credit markets, and it must be able
to reduce its cost of capital.\466\ In order to overcome both
roadblocks, it must address its maturing debt; hire good
staff,\467\ support and expand a retail bank, contain a deeply
troubled mortgage subsidiary, convince the credit markets that
its debt is a worthwhile investment and the equity markets that
it has a future as a non-captive finance arm of GM, and engage
in asset securitizations in a tight market. Any one of these
could prove a substantial impediment to a return to
profitability, but to succeed, GMAC must accomplish all of
these goals simultaneously.
---------------------------------------------------------------------------
\466\ The GMAC preferred stock that Treasury holds pays 9 percent
interest. U.S. Department of the Treasury, Treasury Announces
Restructuring of Commitment to GMAC (Dec. 30, 2009) (online at
www.financialstability.gov/latest/pr_1052010.html).
\467\ GMAC is subject to Special Master Feinberg's jurisdiction and
may pay compensation only if it is consistent with the restrictions
imposed on entities that received exceptional financial assistance
under TARP. Among other things, these entities may only pay covered
employees compensation that will not encourage them to take unnecessary
or excessive risks, appropriately allocates its components between
short- and long-term incentives, is comparable to the compensation at
similar entities, and is sufficiently competitive to attract talented
staff. 31 CFR Part 30; see also U.S. Department of the Treasury, TARP
Standards for Compensation and Corporate Governance (June 6, 2010)
(online at www.treas.gov/press/releases/reports/
ec%20ifr%20fr%20web%206.9.09tg164.pdf).
Special Master Feinberg rejected aspects of GMAC's initial
compensation proposal, finding them inconsistent with the regulatory
standards. GMAC was also directed to institute corporate governance
reforms consistent with the Special Master's direction, including
clawbacks, disclosure, and prohibitions on luxury expenditures and tax
gross-ups. See Letter from Kenneth R. Feinberg, special master for TARP
executive compensation, to Al de Molina, chief executive officer, GMAC,
Proposed Compensation Structures for Senior Executive Officers and Most
Highly Compensated Employees (Oct. 22, 2009) (online at www.treas.gov/
press/releases/docs/20091022%20GMAC%20Letter.pdf); Letter from Kenneth
R. Feinberg, special master for TARP executive compensation, to Drema
M. Kalajian, attorney, GMAC, Proposed Compensation Structures for
Certain Executive Officers and Most Highly Compensated Employees (Dec.
11, 2009) (online at www.financialstability.gov/docs/
20091210%20GMAC%20Determination.pdf).
Some entities subject to the compensation restrictions have argued
that they cannot attract or retain the talented and dedicated staff
necessary to help untangle the mess. Bank of America, Corp., Form 10-K
for the Fiscal Year Ended December 31, 2008, at 6 (Feb. 27, 2009)
(online at www.sec.gov/Archives/edgar/data/70858/000119312509041126/
d10k.htm); Citigroup, Form 10-K for the Fiscal Year Ended December 31,
2008, at 49 (Feb, 27, 2009) (online at www.citi.com/citi/fin/data/
k08c.pdf?ieNocache=865).
As long as it is subject to the restrictions, GMAC may believe that
it is similarly hampered. If GMAC cannot assemble the team it needs to
address its many problems, it may also delay its return to solvency.
---------------------------------------------------------------------------
2. GMAC's Current Strategy
The overall likelihood of success of GMAC's current
operations is, like the future of the U.S. automotive industry
generally, uncertain. At a high level, GMAC has stated that it
intends to focus on fulfilling the regulatory requirements of a
BHC, address the issues posed by ResCap, repay the U.S.
government,\468\ and become a multi-brand source of automotive
financing.\469\ Further, in a recent press release, GMAC stated
that it believes that the best way for it to return to
profitability is to focus on its core automotive financing
business.\470\ GMAC is expanding in both the wholesale and the
retail market to obtain funds for its automotive financing.
Underlying any and all discussions of specific strategy,
however, lies GMAC's need to keep access to credit. Whether it
achieves liquidity through taking deposits, access to the
credit markets, or asset securitizations, it must be able to
keep the funds flowing in order to maintain the automotive
finance core.
---------------------------------------------------------------------------
\468\ GMAC, Inc., GMAC Names Michael A. Carpenter Chief Executive
Officer; Will Lead Next Phase Of Renewal (Nov. 16, 2009) (online at
media.gmacfs.com/index.php?s=43&item=374).
\469\ GMAC conversations with Panel staff (Feb. 1, 2010).
\470\ GMAC Announces Capital and Strategic Actions, supra note 248.
---------------------------------------------------------------------------
As noted above, GMAC has multiple impediments to overcoming
its two core obstacles to profitability. At a high level, GMAC
suffers from significant amounts of maturing debt and an
uncertain ability to access the credit markets. In October
2009, GMAC issued $2.9 billion in senior fixed rate notes
pursuant to the TLGP,\471\ but this facility has effectively
expired and is unlikely to be readily available for GMAC for
additional offerings in the future.\472\ GMAC recently offered
$2 billion principal amount of five-year corporate-guaranteed
debt at 8.3 percent in a Rule 144A offering. This offering was
not supported either by the Federal Reserve or the TLGP, and
may therefore represent renewed access to the credit
markets.\473\ The interest rate paid, however, is high and may
prove a significant drag on future profitability. It is also
not clear whether or on what terms this access will continue,
particularly given that GMAC has $24 billion worth of debt
coming due in 2010, $22 billion in 2011, and $13 billion in
2012.\474\ If GMAC is unable to refinance at affordable rates
or has insufficient cash to cover its maturing obligations, it
may face even higher borrowing costs, possibly resulting in
renewed liquidity problems.
---------------------------------------------------------------------------
\471\ GMAC Reports Preliminary Q3 2009 Results, supra note 273.
\472\ Temporary Liquidity Guarantee Program FAQs, supra note 49.
\473\ It is, however, roughly comparable to other offerings: Ford
Motor Credit recently issued $1 billion of five-year senior unsecured
notes at 8.7 percent. Ford Motor Credit, Prospectus Supplement Filed
Pursuant to Rule 424(b)(2) (Sept. 16, 2009) (online at www.sec.gov/
Archives/edgar/data/38009/000095012309043842/k48318b2e424b2.htm).
\474\ GMAC, Inc., Preliminary 2009 Second Quarter Results (Aug. 4,
2009) (online at phx.corporate-ir.net/
External.File?item=UGFyZW50SUQ9MTIwMjN8Q2hpbGRJRD0tMXxUeX
BlPTM=&t=1) (hereinafter ``GMAC Preliminary 2Q 2009 Results'').
---------------------------------------------------------------------------
Another of GMAC's impediments to becoming an attractive
borrower or equity investment is the uncertainty surrounding
the losses at ResCap. Consistent with a focus on its core
automotive business, GMAC has announced its intention to seek
strategic disposition of ResCap, and to that end has
reclassified most of the ResCap assets as ``held for sale''
rather than ``held for investment.'' \475\ According to
Treasury, the losses at ResCap have weighed on GMAC's balance
sheet: not only did ResCap have significant amounts of debt
coming due, but the boundaries of the ResCap losses were
extremely difficult to quantify. To address this problem, as
part of the December capital infusion, GMAC contributed cash to
its banking subsidiary, Ally Bank, in exchange for impaired
subprime assets, which were then contributed to ResCap.\476\
This benefitted Ally Bank while having little functional effect
on ResCap. Ally Bank received more cash and shed impaired
assets,\477\ while ResCap merely added to an already
substantial portfolio of impaired subprime mortgages.\478\
According to Treasury and GMAC, these transactions also had the
effect of signaling the general extent of the ResCap losses to
the market, making the market more willing to lend to GMAC. In
setting clearer bounds to the potential ResCap downside,
Treasury and GMAC also believe that ResCap itself has become a
more attractive acquisition prospect and less of a drag on
GMAC's overall balance sheet. Whatever value remains in
ResCap--and it is unclear whether there is any value in ResCap
at present--Treasury feels that it can be more easily realized
if ResCap's total losses are more transparent.\479\ The success
of this strategy, however, depends on market confidence that
the ResCap losses are in fact bounded and that no further
significant write-downs will be necessary. It is too soon to
determine if this has occurred.
---------------------------------------------------------------------------
\475\ GMAC Announces Capital and Strategic Actions, supra note 248.
\476\ GMAC Announces Capital and Strategic Actions, supra note 248;
see also GMAC, Inc., Form 8-K for the Period Ending December 30, 2009,
at Ex. 99.2 (Jan. 5, 2010) (online at www.sec.gov/Archives/edgar/data/
40729/000119312510001220/0001193125-10-001220-index.htm).
\477\ As a result of these transactions, GMAC recognized a pre-tax
charge of approximately $3.8 billion, with $3.3 billion related to the
mortgage write-downs at ResCap and Ally Bank and $500 million related
to repurchase reserve expense. In addition, ResCap's received
approximately $2.7 billion in additional capital, and Ally Bank
recognized a $1.3 billion pre-tax charge, while being recapitalized
with a $1.3 billion cash infusion from GMAC. See GMAC Announces Capital
and Strategic Actions, supra note 248.
\478\ Treasury conversations with Panel staff (Jan. 5, 2010).
\479\ This may be advantageous from the standpoint of transparency,
although it arguably could also undermine GMAC's (and, thus,
Treasury's) efforts to dispose of these assets for as much as possible.
---------------------------------------------------------------------------
An analysis of GMAC's five-year credit default swap (CDS)
spreads, a market proxy for the perceived risk of an issuer's
default, does not indicate a meaningful improvement in market
sentiment towards GMAC following the company's announcement of
additional Treasury support and strategic actions aimed at
ring-fencing ResCap on December 30, 2009. While swap spreads
initially tightened (improved) on the announcement from 498
basis points to 372 basis points in mid-January, they have
since widened (deteriorated) to prior levels in the weeks
thereafter. Despite initially outperforming FMCC, a strongly-
capitalized competitor without a mortgage overhang, GMAC
spreads have generally performed in line with this competitor.
A comparative analysis of the yield on similar debt for the two
companies is generally consistent with the CDS data, with GMAC
debt narrowing its Yield-To-Worst (YTW) spread vs. FMCC during
this period from 11140 basis points to 1160 basis points,
before widening again to 11130 basis points. However, the
absolute and relative performance of GMAC's CDS spreads and
bond yields clearly indicate that the market had already priced
continued government support for GMAC well before the latest
government assistance.
FIGURE 16: 5-YEAR CDS SPREADS_GMAC vs. FMCC \480\
[GRAPHIC] [TIFF OMITTED] 54875A.010
FIGURE 17: YTW_GMAC vs. FMCC \481\
[GRAPHIC] [TIFF OMITTED] 54875A.029
---------------------------------------------------------------------------
\480\ Bloomberg Data Service.
---------------------------------------------------------------------------
---------------------------------------------------------------------------
\481\ Ford Motor Credit Corp. 8.00% December 15, 2015 maturity and
GMAC 8.00% November 1, 2031 maturity. Bloomberg Data Service.
---------------------------------------------------------------------------
In light of ResCap's muddy but potentially destructive
future, one option for ResCap would be a separate bankruptcy.
GMAC and Treasury have been varied in their discussion of this
possibility. A ResCap bankruptcy was one of the many options
discussed by the GMAC board. In the Form 10-Q for the third
quarter of 2009 and the 10-K for 2009, GMAC expressed concern
that a ResCap bankruptcy proceeding might treat the
relationships between the parent and the subsidiary in a way
that could disadvantage the parent, particularly with respect
to its financing and hedging arrangements with ResCap. GMAC
also expressed concern that the other creditors of ResCap would
ask the bankruptcy court to subordinate amounts owed to GMAC to
their claims.\482\ GMAC has also stated that it consulted with
advisors and weighed ResCap's involvement with GMAC Financial
Services, the disruption a decision to discontinue support
would cause for GMAC's access to the capital markets;
interparty agreements, and the significant volume of servicing
ResCap provides for residential loans and modification
assistance.\483\ Mr. Carpenter has stated that the board has
considered a ResCap bankruptcy as a means of containing the
ResCap losses and has concluded that restructuring and seeking
alternatives other than bankruptcy were best for the
stakeholders, and Treasury representatives have stated that
they view this conclusion as reasonable.\484\ In that context,
Mr. Carpenter said ``we're not going to do anything crazy in
terms of giving value away.'' \485\ The value of ResCap,
however, remains extremely opaque.
---------------------------------------------------------------------------
\482\ GMAC Form 10-Q for Q3 2009, supra note 22, at 8; see also
GMAC Form 10-K for 2009, supra note 12, at 17. See Section E.4., supra,
for additional discussion.
\483\ GMAC conversations with Panel staff (Mar. 3, 2010).
\484\ Transcript of COP Hearing on GMAC, supra note 12 (Testimony
of Jim Millstein).
\485\ Investor Call to Discuss Capital and Strategic Actions, supra
note 457, at 10.
---------------------------------------------------------------------------
ResCap clearly poses a continuing problem for GMAC. In a
recent presentation to investors, a not insubstantial amount of
the discussion focused on the future for ResCap.\486\ GMAC has
stated that it believes that given their current value, the
ResCap assets can be sold in the market. GMAC does not,
however, appear to have any willing buyers at present.
Similarly, GMAC is unable to make any commitment that ResCap
will not need further capital support. Right now, ResCap has no
clear future and no clear strategy for turnaround, although it
has posed and may continue to pose a drain on GMAC's balance
sheet.
---------------------------------------------------------------------------
\486\ Investor Call to Discuss Capital and Strategic Actions, supra
note 457.
---------------------------------------------------------------------------
Yet another variable for GMAC lies in its uncertain ability
to access the ABS market, a substantial source of liquidity.
GMAC has used the TALF to issue ABS and obtain liquidity
through securitizations. The TALF, however, will no longer be
available to automotive finance after March 31, 2010, unless
the Federal Reserve extends the facility.\487\ GMAC believes
that the TALF has been extremely beneficial to unlocking the
securitization market, and is concerned that absent the TALF,
it will lose some access to the ABS markets and with it the
liquidity it needs to rebuild.\488\
---------------------------------------------------------------------------
\487\ Term Asset-Backed Securities Loan Facility: FAQs, supra note
355.
\488\ Although floorplan loans were made eligible for the Small
Business Administration (SBA) loan guarantee program, and that program
therefore seemed like it might provide a source of liquidity for
dealers, the remaining restrictions on the program make it difficult to
do the floorplan lending upon which the automotive industry depends.
First, floorplan loans often have a 100 percent advance, while the
maximum under the SBA program is 90 percent. The maximum loan under the
SBA program is $2 million: the average floorplan loan is $5 million.
Finally, the SBA program is a loan guarantee, not a direct loan
program. Although the guarantee is available, it is a private banking
institution that must itself make the loan, and these credit markets
are still tight. Accordingly, the SBA program is not likely to provide
a significant source of dealer floorplan financing in the future.
---------------------------------------------------------------------------
Ally Bank also provides GMAC with a source of liquidity in
both the retail and wholesale markets. GMAC has stated that it
believes that the credit crisis ended the viability of the
classic wholesale financing model for itself and other
wholesale-funded institutions, and that inflows derived from
the wholesale finance market (such as debt issuances and
securitizations) will likely be insufficient. GMAC's answer to
the problem is to develop a retail bank, Ally Bank, which has
been attempting to provide diversified funding (including
deposits) for the automotive financing unit.\489\ This strategy
has several components. GMAC is simultaneously integrating Ally
Bank with the automotive products side while expanding its
retail products. For example, GMAC is positioning Ally Bank
within the dealer network, using a program called Ally Dealer
Rewards to provide benefits to frequent users of the bank's
automotive financial products.\490\ Ally Bank is also
participating in auto loan securitizations that are backed by
the TALF.\491\ At the same time, however, GMAC is expanding
Ally Bank's retail product portfolio, recently adding interest
checking \492\ as part of its growth strategy for Ally
Bank.\493\
---------------------------------------------------------------------------
\489\ GMAC conversations with Panel staff (Feb. 1, 2010).
\490\ GMAC Reports Preliminary Q3 2009 Results, supra note 273.
\491\ GMAC Reports Preliminary Q3 2009 Results, supra note 273.
\492\ GMAC, Inc., Ally Bank Expands Product Portfolio; Launches
Interest Checking Account (Jan. 20, 2010) (online at media.gmacfs.com/
index.php?s=43&item=381).
\493\ GMAC Preliminary 2Q 2009 Results, supra note 474, at 28.
---------------------------------------------------------------------------
Although GMAC is cutting costs across the organization, its
investment in Ally Bank is staying largely stable. GMAC has
been engaged in an aggressive marketing campaign for Ally Bank.
Among other things, Ally Bank has been attempting to interest
depositors by offering CD rates that are nationally among the
highest available.\494\ This strategy has been politically
contentious regulators view unusually high rates as an
indication of instability. In the summer of 2009, when Ally
Bank's rates were more than double the national average, the
rates prompted a letter of complaint from the American Bankers
Association (ABA) to the FDIC. The ABA letter stated that the
Ally Bank strategy--aggressive courting of deposits and
extremely rapid growth in assets--was risky and required
regulatory supervision. The ABA was particularly incensed by
Ally Bank's strategy in light of the government bailout,
arguing that Ally Bank was shielded from investor and market
influences, and was therefore free to follow risky strategies.
Citing the high interest rates paid by troubled financial
institutions during the banking crisis of the 1980s, the ABA
observed that such high rates and risky behavior can create a
race to the bottom, in which other banks are also forced to
raise their rates above the market rate.\495\ In response, Ally
Bank vigorously contested the ABA's characterization of Ally
Bank as troubled, citing its capitalization ratio and
protesting that its rates were supported by its relationship
with the GM and Chrysler dealership network.\496\ Ally Bank's
arguments, however, did not persuade the FDIC, which sent a
letter conditioning Ally Bank's access to the TLGP on FDIC
review of Ally Bank's CD rates \497\ and later adopted new
regulations setting a variety of standards for the interest
rates permissible for insured depository institutions that are
not well capitalized.\498\ At present, Ally Bank still offers
rates that are among the highest available, although Mr.
Carpenter has said that Ally Bank hopes to move away from
aggressive rates and toward a more traditional banking model,
albeit an online one.\499\ According to one analyst, however,
internet banks do not have a history of success. Among other
things, overhead is high because in the absence of branches the
banks depend on expensive advertising.\500\ In addition, at
present Ally Bank has approximately 10 percent of its deposits
in brokered deposits.\501\ One analyst considers Ally Bank's
proportion of brokered deposits and lack of restrictions on
deposit withdrawals to be a warning sign of bank
instability.\502\ Finally, as the Federal Reserve discontinues
the extraordinary measures it has been using to keep interest
rates low, interest rates are likely to rise and with them Ally
Bank's cost of funds.\503\ Although these shifts will affect
the industry as a whole, Ally Bank already has high deposit
costs and a high proportion of brokered deposits. Some
commentators note Ally Bank's high costs for acquiring and
retaining depositors and low core deposits and liken Ally Bank
to the unstable S&Ls of the 1980s.\504\ Given that Ally Bank's
deposits serve the same purpose for GMAC as commercial
paper,\505\ GMAC instability affects not only GMAC and Ally
Bank and, downstream, GM but also--and this brings to the fore
the moral hazard of using government-insured deposits as the
basis for monoline financing--Ally Bank's depositors.
Ultimately, Ally Bank appears to be both critical to GMAC and
very much a work in progress, and whether it will be a success
remains to be seen.
---------------------------------------------------------------------------
\494\ Bankrate.com, CD Investment Rates (online at
www.bankrate.com/funnel/cd-investments/cd-investment-
results.aspx?local=false&tab=CD&prods=15&ic_id=CR_searchCDNational_cd_1y
rCD_V1) (accessed Mar. 8, 2010).
\495\ Letter from Edward L. Yingling, president, American Bankers
Association, to Sheila Bair, chairman, Federal Deposit Insurance
Corporation (May 27, 2009) (online at www.aba.com/aba/documents/News/
GMACletter52709.pdf).
\496\ Letter from Al de Molina, chief executive officer, GMAC LLC
to Edward L. Yingling, president, American Bankers Association (Jun. 1,
2009) (online at www.ally.com/files/pdf/AllyResponse-060109-
forWeb.pdf).
\497\ Letter from Sandra L. Thompson, director, Federal Deposit
Insurance Corporation, to Alvaro de Molina, chief executive officer,
GMAC LLC, Notice Regarding the Temporary Liquidity Guarantee Program
(June 4, 2009) (online at www.sec.gov/Archives/edgar/data/40729/
000114420409031691/v151811_ex99-1.htm); see also GMAC, LLC, Form 8-K
Dated June 4, 2009 (Jun. 4, 2009) (online at www.sec.gov/Archives/
edgar/data/40729/000114420409031691/v151811_8k.htm).
\498\ Federal Deposit Insurance Corporation, Final Rule: Interest
Rate Restrictions on Insured Depository Institutions That Are Not Well
Capitalized (effective Jan. 1, 2010) (online at www.fdic.gov/news/
board/May29no8.pdf). During this period, Ally Bank made an application
to the Federal Reserve to become regulated by the Federal Reserve
rather than the FDIC. See Federal Reserve Bank of Chicago, Filings
Received During the Week Ending May 16, 2009 (May 16, 2009) (online at
www.federalreserve.gov/releases/h2/20090516/chicago.htm). Ally Bank
subsequently withdrew the application in October 2009. Board of
Governors of the Federal Reserve System, Actions Taken under Delegated
Authority, at 9 (Oct. 31, 2009) (online at www.federalreserve.gov/
Releases/H2/20091031/h2.pdf).
\499\ Investor Call to Discuss Capital and Strategic Actions, supra
note 457, at 11.
\500\ Testimony of Christopher Whalen, supra note 345, at 18-19.
\501\ Investor Call to Discuss Capital and Strategic Actions, supra
note 457, at 11. See also Testimony of Christopher Whalen, supra note
345, at 6, 18. Brokered deposits, also known as ``hot money,'' are
large deposits that deposit brokers shop among depository institutions
looking for high rates and are usually viewed as risky for the
depository institution. They are short-term investments, which have
been associated with high rates of bank failures. See Mindy West and
Chris Newbury, Brokered and High-Cost Deposits (Mar. 2009) (online at
www.fdic.gov/regulations/resources/minority/events/interagency2009/
Presentations/Brokered.pdf). See also L.J. Davis, Chronicle of a
Debacle Foretold, Harper's Magazine, at 53-54 (Sept. 1990). GMAC, Inc.,
Preliminary 2009 Fourth Quarter Results, at 25 (Feb. 4, 2010) (online
at phx.corporate-ir.net/
External.File?item=UGFyZW50SUQ9MjkzNTh8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1).
\502\ Investor Call to Discuss Capital and Strategic Actions, supra
note 457, at 11; Testimony of Christopher Whalen, supra note 345, at
18. See also Transcript of COP Hearing on GMAC, supra note 12
(Testimony of Chris Whalen).
\503\ GMAC Form 10-K for 2009, supra note 12, at 17-18 (``Rising
interest rates could increase our cost of funds''). Board of Governors
of the Federal Reserve System, Press Release, Monetary Policy Releases
(Feb. 18, 2010) (online at www.federalreserve.gov/newsevents/press/
monetary/20100218a.htm).
\504\ Testimony of Christopher Whalen, supra note 345, at 6, 18.
\505\ Transcript of COP Hearing on GMAC, supra note 12 (Testimony
of Michael Ward).
---------------------------------------------------------------------------
While Ally Bank's integration with dealers and
securitization participation appears to be consistent with a
focus on the automotive business, the Ally Bank expansion,
while furthering GMAC's efforts to become a deposit-funded
institution, requires a separate set of management skills. GMAC
is aware that its combination of retail online banking and
wholesale automotive financial services is untested but
believes that it offers good value to Ally Bank's customers
while simultaneously involving Ally Bank effectively in the
automotive lending side of the business. As Ally Bank is
currently an important source of GMAC's liquidity, however,
Ally Bank will need to maintain either adequate growth or
adequate deposits to fund the automotive finance business. This
puts pressure on Ally Bank, and it is difficult to predict how
successful the venture is likely to be given the disparate
competencies that the two sides of the business may require.
Finally, GMAC remains substantially tied to the domestic
automotive industry. Ally Bank and GMAC's focus on this
sector--and the continued close relationship between GMAC and
GM--concentrates the risk to GMAC of any decline in the
automotive industry. As discussed in our September and January
Reports, the fate of the domestic automotive industry is not by
any means clear.\506\ GMAC's strategy of focusing on its core
automotive business ties GMAC further into a sector that has
been, at best, unstable. If the automotive industry does not
thrive, GMAC may share its fate.\507\ Further, GMAC's prior
major effort at diversification beyond the automotive industry,
ResCap, was anything but successful in addressing risk. Future
attempts at diversification, if any, might be more successful
but would represent another change in strategy. Overall, GMAC's
dependence on the auto industry may continue to prove
destabilizing.\508\
---------------------------------------------------------------------------
\506\ September Oversight Report, supra note 189, at 79; January
Oversight Report, supra note 456.
\507\ It is also difficult for GMAC to pass too much of its cost of
capital through to the dealerships because it then risks hurting the
franchises and with them its long-term prospects. Accordingly, GMAC is
dependent on reducing its cost of capital. GMAC conversation with Panel
staff (Feb. 16, 2010).
\508\ One analyst went so far as to describe GM and GMAC as ``two
drunks holding each other up at a bar.'' Beyond colorful metaphors, the
dependence between the entities could magnify the possibility of
taxpayer loss. As a depository institution, Ally Bank's cost of capital
is generally low. Its CD rates, as of March 9, 2010, were 1.58 percent
for a 12 month CD, in contrast to GMAC's recent unsecured debt deal,
which has an 8.3 percent coupon. Ally Bank's cheap deposit base aids
GM, but Ally Bank is a source of cheap financing in part because it is
the beneficiary of federal insurance. This is true not only of Ally
Bank, of course, but also of any such depository institution: the
difference is that other depository institutions are much less likely
to concentrate their loans in one industry, and any financing
arrangements are more likely to be or to be perceived as arm's length.
Like GMAC and Ally Bank, JP Morgan's automotive financing is
underpinned by the deposits at Chase. JP Morgan, however, does not have
an historically close, quasi-captive relationship with an OEM. If the
automotive industry suffers another decline such that Ally Bank's
deposits are put at risk and the FDIC is required to aid Ally Bank, the
taxpayers are, in essence, paying twice for the same impaired assets.
---------------------------------------------------------------------------
Over and above these potential obstacles to profitability,
there is another, more fundamental question about GMAC's
future. As a subsidiary, GMAC's interests could be
appropriately subordinated to GM's need to sell cars, if
necessary, but as a separate entity GMAC owes a duty to its own
shareholders, not GM. As discussed above, GMAC's business model
has developed as a hybrid: it is a captive/non-captive
automotive finance company, a bank, and a holder of impaired
mortgage assets. Its status as a separate entity from GM and as
a BHC seems as much a matter of accident as strategy. Its fate,
further, is substantially tied to GM's: as a continued and
significant source of GM's wholesale and retail financing, its
relationship with GM remains, at present, critical to its
success. Even assuming that the issues presented by ResCap are
neutralized, it would not be unreasonable for a potential
equity investor to question whether GMAC's relationship with GM
is designed to serve GM's rather than GMAC's shareholders'
interests. Put another way, an investor could question what
long-term value or viability GMAC offers as long as it is
separate from GM. Although GM may need a source of financing
for cars, it does not necessarily need to look to a separate
bank for its financing. In that context, GMAC's non-captive
status subjects it to greater risk from GM: the relationship
could sour and GMAC could lose its preferred provider role;
GM's sales practices could reduce the residual value of autos
(a risk to which GMAC, as a finance company, may be subject);
and/or GM could, in fact, form its own, new captive finance
company.\509\ In particular, the last point could form a source
of significant instability in the relationship.
---------------------------------------------------------------------------
\509\ The IRA Advisory Service, GMAC & GM: All of the Political
Endgames Lead to Bankruptcy, at 2-3 (Mar. 1, 2010). GM's need for a new
captive finance company has been circulating in analysis for some time.
See, e.g., Automotive News, Editorial (Jan. 12, 2009) (``GM should be
prepared to establish its own captive finance company once GM is
healthy again.''); Poornima Gupta, Autonation Says GM Needs New Captive
Financing (Jan. 9, 2009) (online at uk.reuters.com/article/
idUKN2147448520090121?pageNumber=1&virtualBrandChannel=0) (quoting
AutoNation CEO, Mike Jackson: ``It was a strategic mistake splitting
the finance company from the operating company. . . Somehow, some way
they need their own finance company again'').
---------------------------------------------------------------------------
Some industry analysts believe that for GM itself to be
competitive--and indeed, for GM to have a successful IPO--it
must have its own captive, not a captive/non-captive hybrid
like GMAC.\510\ They say that a captive provides income and
financial flexibility--a dividend stream, earnings, and
consistent financing flow--and that GM will need these
attributes of a captive in order to compete with other
automotive companies such as Ford Motor Company.\511\
Fundamentally, what these analyses emphasize is that the non-
captive public financing company model is fundamentally
untried, and if GM determines that it needs a captive, it could
destabilize the relationship. All of these are risks attendant
upon GMAC's status as a non-captive automotive finance company.
An IPO requires a potential shareholder to believe either that
GMAC's relationship with GM is sufficiently stable to sustain
it as a separate company or that GMAC can expand adequately
(through growth strategies for Ally Bank, Chrysler, other
automotive companies, or otherwise) to handle the risk of a
reduced relationship with GM. The public equity markets have
never had an opportunity to evaluate this question, and their
assessment remains unknown.
---------------------------------------------------------------------------
\510\ Transcript of COP Hearing on GMAC, supra note 12 (Testimony
of Michael Ward).
\511\ Transcript of COP Hearing on GMAC, supra note 12 (Testimony
of Michael Ward); Testimony of Christopher Whalen, supra note 345, at
3-4.
---------------------------------------------------------------------------
The centrality of the GM/GMAC relationship and the oddity
of the non-captive finance company also raise the question
whether it is sensible to consider merging GMAC back into GM.
If GM needs a finance company, and the interests of the finance
company and GM are most clearly aligned when they are part of
the same corporate structure, the market might determine that
the entities should, in fact, be merged. This would require a
number of structural shifts: because of the ownership
restrictions, among other things, GMAC could no longer be a
BHC. The Chrysler dealership funding might not serve GM and
might need to be spun off. The substantial investment in GMAC's
infrastructure, however, and the natural synergies between the
captive and the OEM may cause GM, GMAC, and Treasury (presuming
it is still a majority shareholder in both) to contemplate this
possibility. In a recent investor call, Mr. Carpenter addressed
the possibility of a merger between the two companies.\512\
Stating that there is no current discussion of that
possibility, and without specifically weighing in on the wisdom
of a merger, Mr. Carpenter and Mr. Hull observed that success
for both entities depends on a very close partnership.
---------------------------------------------------------------------------
\512\ GMAC Q4 2009 Earnings Conference Call, supra note 111, at 15.
---------------------------------------------------------------------------
The discussion of a merger is purely hypothetical at this
point, but the investment community is interested in the
possibility. If there is an effort to fold the entities back
into each other, Treasury must walk a difficult line. In a
third-party sale of GMAC, the perception of political
favoritism could be alleviated by the presence of the outside
actor. If Treasury sells GMAC to itself, even if the merger
were instigated by the management of either GM or GMAC based
purely on market factors, Treasury's substantial involvement in
both companies could greatly complicate any merger,
particularly in assigning value to either company. Treasury has
already come under criticism from a number of sources for
perceived favoritism toward one or another party in both the
auto and the GMAC bailouts.\513\ Any merger between these
parties while Treasury is still the majority shareholder of
both would likely be subject to similar criticism--that a party
with political connections is receiving value at the expense of
the taxpayer. To alleviate these concerns, no merger should be
effected without a third-party fairness opinion, and the
taxpayers' claims upon both businesses must survive the merger.
Treasury should under no circumstances be permitted to forgive
or negate any claim of the taxpayers for repayment of the TARP
as a part of the merger. Ultimately, any potential merger would
have to be evaluated not only for synergies between the
businesses but also, and equally importantly, for adequate
return to and protection for the taxpayer, whose substantial
investments have kept both companies afloat.
---------------------------------------------------------------------------
\513\ For examples of such commentary, see, e.g., George F. Will,
End Run on the Treasury (Jan. 8, 2009) (online at
www.washingtonpost.com/wp-dyn/content/article/2009/01/07/
AR2009010702646.html); Richard A. Epstein, The Deadly Sins of the
Chrysler Bankruptcy, Wall Street Journal (May 11, 2009) (online at
www.forbes.com/2009/05/11/chrysler-bankruptcy-mortgage-opinions-
columnists-epstein.html); September Oversight Report, supra note 189,
at 102 (citing criticisms). See also Gallup, Unions Second to Auto
Execs in Bailout Blame Game (Dec. 16, 2008) (online at www.gallup.com/
poll/113431/unions-second-auto-execs-bailout-blame-game.aspx).
---------------------------------------------------------------------------
Last, the question remains whether GMAC could itself go
into the bankruptcy process as a means of restructuring and
recapitalizing. There are no present plans for a GMAC
bankruptcy, and both Treasury and GMAC maintain that GMAC's
current actions--recapitalization of Ally Bank and charges
against assets at ResCap plus a new strategic focus on the
automotive sector--are the appropriate means of returning GMAC
to stability. Treasury stated that GMAC is currently solvent
and cites GMAC's recent debt offering spreads as an event
suggesting that the market believes that the company is on the
right track.\514\ As discussed above, however, GMAC still has a
substantial and looming debt burden, the ResCap ``millstone,''
\515\ a high cost of funds, dependence on an internet bank, and
a reliance on a still uncertain automotive industry. Failure to
address these issues, either singly or in tandem, could put
GMAC back on a path to crisis. In the absence of a general
credit crunch, some of the concerns about stability and
continuity in the automotive industry that Treasury says
animated its initial investment would likely be less important.
According to various analysts, unlike in 2008-2009, other banks
would be more likely to absorb the majority of GMAC's floorplan
lending if GMAC were to become insolvent.\516\ Treasury's
equity position, however, while more valuable as capital to
GMAC, places Treasury and the taxpayers at the bottom of the
bankruptcy heap. This puts Treasury in an unfortunate position:
GMAC is still unstable, with an uncertain path to
profitability, and if it were to become insolvent, other
entities would be more likely to absorb its legacy business--
all at the cost of the taxpayers' investment. Treasury's
initial involvement has narrowed its options, making it
difficult for Treasury to disentangle itself from a weak
institution without risking the loss of its entire investment.
---------------------------------------------------------------------------
\514\ Treasury conversations with Panel staff (Feb. 18, 2010). As
earlier noted, of course, GMAC's current spreads could be as
representative of a company that enjoys an implicit guarantee from
Treasury as they are representative of a company that is on the right
track. In the hearing before the Panel, Mr. Carpenter also stated that
GMAC is solvent. Transcript of COP Hearing on GMAC, supra note 12
(Testimony of Michael Carpenter).
\515\ Investor Call to Discuss Capital and Strategic Actions, supra
note 457, at 8; GMAC conversations with Panel staff (Feb. 16, 2010).
\516\ Analyst conversations with Panel staff (Feb. 17, 2010).
---------------------------------------------------------------------------
3. The Forthcoming Business Plan
According to Treasury, GMAC is still constructing budgets
and a strategy plan, which Treasury and a third-party
investment bank will evaluate. GMAC's specific plan to become
profitable again is therefore still under construction.
Treasury expects the budgets and the strategy plan to be
evaluated by GMAC's Board within the next few months. While
GMAC has explained the broad strokes of its strategy--a
deposit-funded institution with a focus on multi-brand
automotive financing--the specific details and numbers have yet
to be constructed. Until the Board approves the various plans,
therefore, GMAC's precise route to profitability cannot be
concretely evaluated.
This is, by itself, problematic. Treasury's previous and
current support is not underpinned by a mature business plan.
Although GMAC and Treasury are working to produce a business
plan, Treasury has already been supporting GMAC for over a year
despite the plan's absence. Given industry skepticism about
GMAC's path to profitability and the newness of the non-captive
financing company model, it is critical that Treasury be given
an opportunity to review concrete plans from GMAC as soon as
possible.
4. Treasury's Approach to Managing its Shareholder Interests
At present, Treasury, as holder of 56.3 percent of the
voting equity, has the right to name four directors to GMAC's
nine-person board.\517\ After Treasury's majority share,
ownership of GMAC's equity is relatively dispersed: Cerberus
holds the next largest share of the equity, with 14.9 percent,
followed by third-party investors, who collectively hold 12.2
percent, the GM Trust, which holds 9.9 percent, and GM itself,
which holds 6.7 percent.\518\ Although the third-party
investors received their share in distributions from Cerberus,
they are not Cerberus affiliates and will not necessarily act
in concert with Cerberus. GM, for its part, operates according
to a passivity agreement and only has observer status on the
GMAC board. The trustee of the GM Trust has sole discretion to
vote and dispose of the GM ownership interests held in the
trust and must dispose of those interests within three years of
the approval of the BHC application.\519\ Accordingly, other
than Treasury, there is no shareholder whom an outsider would
clearly expect to help set a direction for GMAC. The Panel's
January Report discussed the difficulties that can arise from a
passive majority shareholder, and given Treasury's majority
share, these are as applicable to GMAC as they are to GM.\520\
Although GMAC's Treasury-appointed board members are reported
to be very involved and active, it is not clear whether this is
sufficient to give GMAC adequate direction.
---------------------------------------------------------------------------
\517\ GMAC, LLC, GMAC Financial Services Announces Key Capital and
Liquidity Actions (May 21, 2009) (online at gmacfs.mediaroom.com/
index.php?s=43&item=331%20).
\518\ As part of the conditions to the approval of the BHC
application, none of these third-party investors own, hold, or control
more than 5 percent of the voting shares or 7.5 percent of the total
equity of GMAC. The Federal Reserve describes them as sophisticated
investors who are independent of Cerberus and each other. See Order
Approving GMAC's BHC Formation, supra note 58. As private equity
investors, none of these parties are required to disclose their
identities publicly under applicable law, and Cerberus generally avoids
the spotlight whenever possible. See Letter to Investors, supra note
153, at 6.
\519\ GM's Passivity Agreement serves to alleviate, to a certain
degree, concerns that a power vacuum among GMAC shareholders will
result in GM's exerting undue influence on the board. In addition, the
trustee of the GM Trust must be independent of GM and have sole
discretion to vote and dispose of the ownership interests in the trust.
The Passivity Agreement, however, while it may limit GM's influence on
GMAC's board, does not change the essential commercial relationship
between the two companies. Given GM's critical role for GMAC, GM can
presumably exercise enormous influence on GMAC's direction and
strategy. The governance solution does not address the commercial
dominance. Further, GM has been directed to sell the holdings in the GM
Trust over the course of the three years following the BHC application
approval. See March 24 Letter to B. Robbins Kiessling, Esq., supra note
65. Once GM holds below 10 percent of the voting interests of GMAC, it
would no longer be deemed to be an affiliate, after which time Ally
Bank could increase its levels of funding to GM, thereby increasing
GM's commercial dominance over GMAC. See GMAC Form 10-K for 2009, supra
note 12. Accordingly, even if GM does not have a voice on the board, it
clearly has enormous influence over GMAC.
\520\ Treasury's position is that the government distorts the
market when it takes an activist shareholder role; in response, the
Panel has noted that Treasury may not be able to protect the taxpayers'
investments or effect cultural changes if it is passive. At the same
time, however, it is not clear that the government has any aptitude at
being an activist shareholder, which further complicates the question.
See January Oversight Report, supra note 456.
---------------------------------------------------------------------------
It is unfortunate that Treasury has provided very little
public information about any specific strategy for GMAC because
its approach to GMAC is not identical to its approach to the
automotive companies, despite Treasury's assertion that these
two investments are intertwined. Treasury has stated generally,
and repeatedly, that it has no intention of becoming actively
involved in management.\521\ These very general statements,
however, while providing an overview of Treasury's approach,
have yet to be discussed in the context of GMAC. In December
2009, in an otherwise reasonably comprehensive discussion of
Treasury's approach to the government as shareholder, Assistant
Secretary Allison did not discuss or, indeed, even mention
GMAC.\522\ Given that Treasury owned approximately 35 percent
of the common equity of GMAC at the time, considerably more
than its common equity investments in Chrysler, this omission
is somewhat puzzling.\523\ It is, however, typical. Treasury
has devoted very little of its generalized discussions to GMAC,
even though the concerns that animate Treasury's involvement
with the automotive companies would also seem to affect GMAC.
The paucity of public pronouncements or discussions of GMAC
makes it very difficult for the public to assess Treasury's
approach to the investment. Treasury's current position has not
been provided to the public clearly.\524\
---------------------------------------------------------------------------
\521\ As discussed in the Panel's January report, Treasury is in
most cases firmly committed to its limited role. In its January report,
the Panel also described Treasury's belief that the government, as
shareholder, distorts the market in such a way that the entities in
which it holds investments--and accordingly the taxpayers--will
ultimately reap greater benefit from a passive government shareholder.
The Panel expressed concern that a ``hands off'' approach, however, may
not provide the influence necessary to achieve the cultural changes
most likely to lead to sustained viability for Chrysler and GM, and the
same concerns can easily apply to GMAC. In its January report, however,
the Panel also voiced the contrary concern: that even if a passive
major shareholder might hinder a company, Treasury is at best ill-
suited to perform the role of activist shareholder. See January
Oversight Report, supra note 456, at 94-96. In testimony before the
House Oversight and Government Reform Committee, Secretary Allison also
discussed the major principles guiding Treasury's role as a shareholder
with regard to corporate governance issues. These principles were: (1)
as a reluctant shareholder, Treasury intends to exit its positions as
soon as practicable; (2) Treasury does not intend to be involved in the
day-to-day management of any company; (3) Treasury reserves the right
to set conditions on the receipt of public funds to ensure that
``assistance is deployed in a manner that promotes economic growth and
financial stability and protects taxpayer value''; and (4) Treasury
will exercise its rights as a shareholder in a commercial manner,
voting only on core shareholder matters. See House Oversight and
Government Reform Committee, Subcommittee on Domestic Policy,
Transcript Testimony of Assistant Secretary of the Treasury for
Financial Stability Herbert M. Allison, Jr., The Government As Dominant
Shareholder: How Should the Taxpayers' Ownership Rights Be Exercised?,
111th Cong. (Dec. 17, 2009) (online at oversight.house.gov/
index.php?option=com_content&task=view&id=4722&Itemid=31); House
Oversight and Government Reform Committee, Subcommittee on Domestic
Policy, Written Testimony of Herbert M. Allison, Jr., assistant
secretary of the Treasury for financial stability, The Government As
Dominant Shareholder: How Should the Taxpayers' Ownership Rights Be
Exercised?, 111th Cong. (Dec. 17, 2009) (online at oversight.house.gov/
images/stories/Allison_Testimony_for_Dec-17-09_FINAL_2.pdf)
(hereinafter ``Dec. 17, 2009 Written Testimony of Herb Allison'').
Treasury's approach to GMAC is, as described above, neither
consistently activist nor hands-off. They do not interfere with the
day-to-day operations of GMAC but neither do they stand completely
aside from the material decisions and directions that GMAC may
contemplate.
\522\ Dec. 17, 2009 Written Testimony of Herb Allison, supra note
521.
\523\ The subsequent cash infusion increased Treasury's share in
GMAC to over 50 percent.
\524\ At the Congressional Oversight Panel hearing, Treasury laid
out its GMAC strategy in greater detail than it had previously.
Transcript of COP Hearing on GMAC, supra note 12 (Testimony of Jim
Millstein).
---------------------------------------------------------------------------
In its recent hearing, Mr. Millstein explained: ``We are
taking our oversight responsibilities seriously, we have
frequent contact with the management to evaluate the strategies
they are employing and the results of their operations, but
again, I don't think we're in a position to dictate policy for
them.'' \525\ By contrast, Assistant Secretary Allison's
response to a similar question about Treasury's involvement
with Citigroup management appears to downplay its engagement
with Citigroup. In that instance, Assistant Secretary Allison
responded:
---------------------------------------------------------------------------
\525\ Transcript of COP Hearing on GMAC, supra note 12 (Testimony
of Jim Millstein).
We have contacts with Citi, as we do with many other
banks. We are taking a very limited role as an
investor. We are not getting involved in the day-to-day
management of Citigroup. Instead, we will only be
active as a shareholder in voting for directors and
voting on major corporate events and voting on issuance
of significant new shareholdings and major asset sales,
and changes in bylaws or charter. Other than that, we
intend to act as any public shareholder.\526\
---------------------------------------------------------------------------
\526\ Transcript of COP Hearing on GMAC, supra note 12 (Testimony
of Herbert Allison).
The difference between the two statements (even taking
Citigroup's status as a public company into account) would
imply greater involvement between Treasury and GMAC management
than between Treasury and Citigroup. GMAC similarly states that
while Treasury does not manage the business, the Treasury team
has frequent and substantive meetings and discussions with
GMAC's management and provides advice and guidance on a regular
basis.\527\
---------------------------------------------------------------------------
\527\ GMAC conversations with Panel staff (Feb. 1, 2010).
---------------------------------------------------------------------------
The effects of this advisory strategy on good corporate
governance, however, are mixed. GMAC has the advantage of
advisors at Treasury who can help them navigate the public
perception of proposed actions and private-party advisors to
evaluate their business plan. But, Treasury's engagement with
GMAC is not as apparent to outsiders as a Board decision would
be. By deciding to offer its advice at a management rather than
Board level, Treasury is depriving the market of an opportunity
to evaluate its advice. Clearly, Treasury and GMAC must be able
to discuss business strategy in a non-public forum; the extent
of Treasury's involvement, however, is still not transparent,
and the lack of transparency opens the process, and Treasury,
to accusations of favoritism or other kinds of misfeasance and
raises the possibility of further public suspicion and
mistrust, particularly if GMAC continues to struggle. If
Treasury judges it to be in the best interests of the taxpayer
for it to maintain this advisory role, general and public
information about the types and channels of communication would
be appropriate.
In the past, the Panel has discussed whether Treasury's
equity holdings would be better held in a trust, and Treasury
has provided a variety of answers and explanations as to the
usefulness or appropriateness of a trust.\528\ Treasury has
often expressed concern that its active involvement as a
shareholder could reduce shareholder value: its actions might
be perceived as political, rather than commercial, which would
make other potential investors wary. The combination of the
passive shareholder and the active board, however, means that
perception of Treasury's passivity depends greatly on the
perceived independence of the Treasury-appointed
directors.\529\ Placing the GMAC shares in a trust could help
avoid the perception that the board members are not genuinely
independent. The Panel believes, consistent with past reports,
that Treasury should evaluate whether the GMAC shares should be
held in a trust. Consistent with the Panel's cautions in past
reports, however, establishing a trust does not come without
its own set of concerns. Establishing a trust to hold the
shares might slow Treasury's exit, prolong its involvement in
the market, and make future interventions more palatable, any
or all of which could set an inappropriate precedent. Nor does
a trust automatically ensure the independence of the trustee.
Any trust should include curbs on hiring and firing, methods of
addressing conflicts of interest (including fee income), and
other obligations for the trustee (such as ``noisy withdrawal''
if the trustee resigns) to ensure that the shares in a trust
are, in fact, isolated from the political process.
---------------------------------------------------------------------------
\528\ See January Oversight Report, supra note 456, at 96.
\529\ After Sarbanes-Oxley (SOX), the independence of directors is
determined with reference to a variety of sources, including SOX and
various exchange listing standards. Factors include, generally
speaking, compensation or employment by the issuer or auditor of the
issuer; material relationships with vendors or customers or associated
charities; and family relationships with any of the foregoing that
could compromise independence. See generally Bruce F. Dravis, The Role
of Independent Directors after Sarbanes-Oxley (2007). The directors
whom Treasury has named to the GMAC board are Robert Blakely and Kim
Fennebresque, neither of whom appear to have material relationships
with Treasury, although Mr. Blakely was the former executive vice
president and chief financial officer of Fannie Mae. See GMAC, Inc.,
Governance (online at media.gmacfs.com/index.php?s=52) (accessed Mar.
8, 2010). These same sorts of metrics would need to be considered for
any trustee appointed to manage a trust with Treasury's shares.
---------------------------------------------------------------------------
5. Evaluating the Investment: Current and Required Value
Treasury's recent financial statements do not break out the
value of its GMAC stake. The value of its AIFP investment,
overall, is estimated at $42.3 billion as of September 30,
2009, on an outstanding balance of $73.8 billion.\530\ The GMAC
portion of this stake comprises $11.4 billion in MCP, $2.67
billion in TruPs, and 56.3 percent of the common equity.\531\
These numbers represent the outstanding balance, however, and
not the present value, for which there are no separate numbers.
Based in part on this calculation, and according to Treasury,
the total common equity of GMAC needs to be worth approximately
$6.9 billion for the taxpayer to be made whole. According to
GMAC, its total equity at December 31, 2009, was $20.8 billion,
down from $24.9 billion at September 30, 2009.\532\ Book value,
however, differs from market value, and as GMAC is not publicly
traded, there is no way to establish the market value for
GMAC's equity. Analysis of whether and when the value of GMAC's
common equity will be sufficient to repay the taxpayer,
however, awaits evaluation of the forthcoming budgets and
strategy plan.
---------------------------------------------------------------------------
\530\ OFS Financial Report: Fiscal Year 2009, supra note 463, at
17.
\531\ As of January 31, 2010, GMAC had made $854.8 million in
dividend payments associated with the funds it received under the AIFP.
U.S. Department of the Treasury, Cumulative Dividends and Interest
Report as of January 31, 2010 (Feb. 19, 2010) (online at
www.financialstability.gov/docs/dividends-interest-reports/
January%202010_Dividends%20and%20Interest%20Report.pdf) (hereinafter
``OFS Cumulative Dividends Report as of January 31, 2010'').
\532\ GMAC Reports Preliminary Q4 and Full-Year 2009 Results, supra
note 127.
---------------------------------------------------------------------------
In Section 123 of EESA, Congress required that both the OMB
and the Congressional Budget Office (CBO) calculate the budget
costs of the TARP transactions under the procedures of the
Federal Credit Reform Act of 1990, while using discount rates
reflecting market risk rather than simply the government's cost
of funds.\533\ These subsidy rates, which represent an estimate
of the investment that will not be recouped by the federal
government, incorporate assumptions concerning the timing of
cash flows (mainly principal and interest or dividend payments)
as well as defaults on, or (partial) losses of, the amounts
invested.
---------------------------------------------------------------------------
\533\ EESA Sec. 123(a).
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The OMB and CBO valuations of the taxpayer subsidy rate in
the automotive industry have produced varying results, owing
primarily to the availability of disaggregated data to reflect
GMAC specific investments. As noted, the government has
expended $17.2 billion in government assistance to GMAC through
year-end 2009, of which $16.3 billion was equity or equity-
related funding.\534\ OMB has calculated a subsidy rate of 39
percent for the government's equity assistance to GMAC,
reflecting an estimated subsidy cost, or loss to the
government, of $6.3 billion on the $16.3 billion in government
equity purchases from GMAC.\535\ The CBO currently does not
disaggregate subsidy estimates by specific institutions,
publishing instead an overall subsidy rate for all TARP
automotive industry support programs.\536\ The CBO cites an
estimated cost of $47 billion on the $79 billion in aggregate
assistance--a 59 percent subsidy rate--to GMAC, GM, Chrysler,
Chrysler Financial, and various auto suppliers as of mid-
December 2009 (note that CBO figures exclude $3.8 billion in
additional assistance to GMAC on December 30, 2009).
Accordingly, it is impossible to infer from this estimate if
the implied GMAC subsidy is greater or less than the overall 59
percent rate calculated by the CBO for all the automotive firms
receiving TARP funding.
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\534\ The balance of this assistance was a loan made to GM in
conjunction with GMAC's rights offering following its conversion into a
BHC, which was later converted by Treasury into $884 million in GMAC
equity. Treasury Transactions Report, supra note 264.
\535\ See Office of Management & Budget, Analytical Perspectives:
Budget of the U.S. Government, Fiscal Year 2011, at 40 (online at
www.whitehouse.gov/omb/budget/fy2011/assets/spec.pdf) (hereinafter
``OMB Analytical Perspectives: FY2011 Budget'').
\536\ See Congressional Budget Office, The Budget and Economic
Outlook: Fiscal Years 2010 to 2020, at 13 (Jan. 2010) (online at
www.cbo.gov/ftpdocs/108xx/doc10871/01-26-Outlook.pdf).
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It is important to note that these subsidy rate estimates
are inherently uncertain, particularly given the limitations of
fundamental analysis once a company receives government
support. The CBO and OMB estimates rely on objective data
points that reflect market prices assigned to key securities
instruments (bond yields, discount rates, etc.)--the prices of
which are often impacted by government support for a particular
company or sector. This is certainly the case after the
government steps in, as market rates--particularly on debt
instruments--are skewed to reflect this presumed halo and its
beneficial impact on creditors (as illustrated above in the
comparison of GMAC vs. FMCC). Note that Standard & Poor's and
other rating agencies have cited this implicit guarantee in
justifying higher credit ratings than a company would otherwise
merit absent government involvement or--in the case of
systemically important financial institutions--the prospect of
government support should the company run into trouble in a
crisis.
All else equal--as incremental Treasury support was
required to offset the worsening outlook for the ResCap
portfolio--Treasury's series of investments in GMAC served to
progressively increase the value of the company. After taking
an initial equity stake, Treasury was put into a position where
its interests as an equity holder might have increased its
reluctance to put GMAC into bankruptcy.
I. Conclusion and Recommendations
Treasury has asserted, and a broad range of industry
experts consulted by the Panel have agreed, that support to
GMAC was necessary in order to support the automotive industry
and protect the investment made by Treasury in GM and
Chrysler.\537\ The Panel takes no view on whether GM and
Chrysler should have been rescued in the first place and
similarly takes no view as to the rescue of GMAC. It is clear,
however, that credit is a crucial element of the automotive
industry, that GMAC played a dominant role in providing that
credit, especially for GM vehicles and especially for dealers'
floorplan financing, and that alternative sources of credit
were increasingly unavailable as the financial crisis deepened.
Whether GMAC's role was truly indispensable to the survival of
GM and Chrysler, or whether other lenders in the industry could
eventually have stepped in (or been encouraged to step in, with
short-term government guarantees or other incentives) to fill
the breach if GMAC had not been supported, is ultimately
unknowable.
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\537\ September Oversight Report, supra note 189, at 3.
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Treasury also asserts that once the government had
announced in public statements that it would provide capital to
the stress tested banks that were unable to raise it privately,
it had to carry through on those statements. There is ample
precedent in the history of the TARP for changes in strategy--
such as the switch in primary TARP strategy from asset purchase
to capital injection--and changes in execution--such as the
switch from use of CAP funds for GMAC to AIFP funds. There is,
however, no precedent in the TARP for the government of the
United States specifically stating that it would make funds
available to identified recipients on an unconditional basis
and then not carrying through with that funding. Treasury's
position is that to have done so would not only have adversely
affected GMAC itself and the parties doing business with it who
relied on the government's statement, but might have had a
broader and negative effect both on other institutions
dependent upon government support and on the financial markets.
It may be possible to criticize the design of the stress tests
and the inclusion of GMAC in those tests (and given GMAC's
unique status and relationship to the automobile companies that
were at the time entering the bankruptcy process, the Panel
believes there are serious questions raised by such inclusion),
but the fact is that once GMAC was included in those stress
tests, Treasury believed that it was necessary for GMAC to
receive funds in the amount of the capital buffer established
by the supervisors. The result, however, is that it might
appear that good money was being thrown after bad.
The establishment of that capital buffer throws some
interesting light on the conduct of the stress tests. From the
point of view of reducing the amount of money to be invested by
the taxpayer in a company with an uncertain future, it is all
to the good that the Federal Reserve reduced the required
capital buffer. The fact that there was an element of
conditionality to its calculation, however, was never made
clear when the stress tests were held. The Federal Reserve did
publish the first quarter adjustments that were taken into
account in calculating the buffer, some of which related to
transactions not yet consummated, but never explicitly spelled
out whether and how further adjustments would be made for those
BHCs that had still not raised capital by November 2009.
GMAC was included in the stress tests as a result of its
becoming a BHC in December 2008. The Federal Reserve has very
broad discretion in deciding whether to approve BHC
applications, and there is no indication that this discretion
was abused in this instance, although clearly the non-unanimous
decision was made in light of, and may have been influenced by,
the exigent circumstances existing at the time. The decision
was, however, crucial to GMAC's subsequent inclusion in the
stress tests and the Treasury funding commitments that resulted
and to GMAC's access to government assistance under programs
such as the TGLP. Possibly even more important was the signal
to the markets that BHC approval constituted, in light of
uncertainty in the markets, that GMAC would be able to
restructure its capital to meet the Federal Reserve's
regulatory capital requirements. The supervisors' decision
proved decisive in several ways to GMAC's fate, underscoring
the extent to which some aspects of the resolution of the
financial crisis have been dependent upon the trust placed in
the supervisors.
In some ways, GMAC seems to have been treated more
favorably than other companies in comparable circumstances. For
example, GM and Chrysler were forced into bankruptcy, their
shareholders wiped out, and many of their debt holders forced
to take losses. They emerged from bankruptcy, however, with
cleaner balance sheets and limited liabilities. GMAC was not
required to liquidate, and its shareholders continue to hold a
small equity interest. The Panel repeatedly requested
assurances from witnesses that no third-party shareholder would
receive a return unless the taxpayers were made whole, but the
fact remains that the only way to ensure that result would have
been through a bankruptcy. Although Treasury and GMAC have
detailed the factors that may have complicated the use of
bankruptcy, the fact remains that by avoiding restructuring,
GMAC continues to bear the ``millstone'' of ResCap. The Panel
remains unconvinced that in 2008 or very early 2009 bankruptcy
or a similar restructuring, including a sale of the automotive
financing business, was not a real possibility; nor has the
Panel been convinced that even now a GMAC or ResCap bankruptcy
or sale of the automotive financing is impossible. In either
case, these actions require analysis of the facts and
circumstances, a cost-benefit analysis comparing recovery
before and after bankruptcy or sale, and an analysis of any
additional TARP contributions that may be required. The extent
to which bankruptcy was seriously considered at the time is
unclear. What is clear is that policymakers now believe that
the decisions made in December 2008 constrained the options in
2009. By decreasing the viability of a GMAC bankruptcy, these
constraints may have resulted in a less-viable company, greater
risk to public dollars, and troubling moral hazard concerns.
Even if the automotive industry needed a financing source, and
even if GMAC was the most likely candidate, it does not
necessarily follow that Treasury's particular treatment of the
GMAC stakeholders was the most advantageous or even the most
cost-effective means of addressing the need for automotive
finance.
By reason of Treasury's using AIFP as opposed to CAP funds,
GMAC is not subject to the same level of requirements as to
disclosure of the use of funds. For the same reason, Treasury
is not required to hold the GMAC shares in trust. In other
ways, GMAC is less well treated than other TARP recipients: the
terms of the MCP provide conversion rights that are more to
Treasury's advantage than other TARP securities, for example. A
couple of major shifts in approach, such as the change from CAP
to AIFP, were made in the course of dealing with GMAC, which
may be due to the change in administrations between the first
intervention and the final funding. Since Treasury's efforts to
explain what it was doing with GMAC and why have been
unsuccessful, some of Treasury's actions give the impression of
a somewhat ad hoc approach.
Other aspects of the support of GMAC raise additional
questions. As discussed in more detail in Section E, support to
GMAC may amount to support to GM and Chrysler and triggers
questions of compliance with trade and competition laws in many
jurisdictions. The Panel takes no position on this issue.
Questions are also raised by the amount and nature of the
compensation of GMAC's executives, issues which the Panel will
pursue further.
At the date of this report, it is unclear whether the U.S.
taxpayer will recoup the investments made in GMAC. The total
amount at stake in GMAC itself is $17.2 billion. There is still
no viable business plan. As GMAC's business plan is still a
work in progress, the immediate future of the company, and
therefore the investment, remains opaque, and as discussed
above, the OMB currently estimates a loss of at least $6.3
billion of that amount. Mr. Bloom asserts that ``I don't think
as a practical matter, the [old shareholders] are getting
anything out of this thing if the government doesn't get its
money back.'' GMAC's CEO also testified that GMAC is unlikely
to require additional capital from the Treasury. Even if these
assertions prove to be true, since the businesses and future
prosperity of GM and Chrysler are so closely interconnected
with that of GMAC, it makes sense to view the three companies
as a package of support totaling $78.2 billion. The support
provided to GMAC amounted to further assistance to GM and
Chrysler, and the success of the support to GMAC can only be
evaluated as part of the AIFP. Until all three companies repay
the taxpayer, the government cannot really be said to have
exited its investment in GMAC.
It is not just GMAC's own future that is uncertain. The
intervention of the U.S. government into the automotive
industry and its sources of financing has increased the near-
monopoly position held by GMAC with respect to floorplan
financing, and Treasury has not indicated how it plans to
promote competition in this industry.
GMAC joins the small group of companies with large
government stakes and is subject to the corporate governance
guidelines announced by Treasury that govern its relations with
those groups. Treasury appears to be largely consistent with
its other holdings in its ``hands-off'' approach to management,
but as the Panel has noted before, this results in a potential
governance vacuum, with smaller shareholders having
disproportionate power. The impact of this approach is
particularly noticeable in this case, where GMAC may play a
significant part in GM's hoped-for recovery and where GM still
owns substantial portions of GMAC, albeit in part through a
trust. With both GM and GMAC majority-owned by Treasury and
subject to its hands-off policy, the potential for a governance
vacuum is amplified. This means that the parties who wish to
operate GMAC in GM's interests become proportionately more
powerful, inasmuch as GM has extraordinary commercial influence
over GMAC, and there may not be countervailing pressure from
involved shareholders. The Panel has previously suggested that
Treasury consider placing certain of its holdings in a trust
that would be more hands-on. Questions are also raised by the
amount and nature of the compensation of GMAC's executives,
issues which the Panel will pursue further.
The Panel makes the following recommendations:
The experience with GMAC reinforces the imperative
that any future TARP support that might be given to any entity
be subject to more stringent criteria and due diligence to
establish that it will become a profitable concern, capable of
recouping the taxpayers' investment.
In the hearing held by the Panel, Mr. Bloom agreed
that GMAC will most likely not require any additional taxpayer
funding. The Panel expects Treasury to remain consistent on
this point. Treasury must make it clear to markets and
counterparties that GMAC is exposed to market forces and that
government support will eventually end.
Treasury should insist that GMAC produce a viable
business plan showing a path toward profitability and a
resolution of the problems caused by ResCap.
Treasury should formulate, and clearly articulate,
a near-term exit strategy with respect to GMAC and articulate
how that exit will or should be coordinated with exit from
Treasury's holdings in GM and Chrysler.
Any future use of TARP funds for any entity must
be made subject to more stringent ``use of funds'' disclosure
requirements. Treasury should work through the directors it has
appointed to impose these requirements on GMAC now.
To preserve market discipline and protect taxpayer
interests, Treasury should go to greater lengths to explain its
approach to the treatment of legacy shareholders, in
conjunction with both initial and ongoing government
assistance.
Treasury should consider whether it is in the
taxpayers' interest to consider promoting a merger with GM, as
opposed to letting the companies decide whether to do so. This
does not fall within day-to-day management and promoting this
or similar alternatives would be consistent with what a private
investor would do. The Panel would expect any such action to be
premised on rigorous analysis and valuation by outside experts.
Treasury should not forgive any taxpayer claim to repayment of
TARP funds, commit or guarantee additional taxpayer funds, or
assume any liabilities in the process.
Treasury should periodically disclose its estimate
of the overall subsidy or loss rate, as well as the subsidy
amount, for each company receiving assistance from the AIFP so
long as these companies have separate legal status.
Viewed from the vantage point of March 2010, or even
December 2009, the decision to rescue GMAC is one of the more
baffling decisions made under the TARP. A company that
apparently posed no systemic risk to the financial system, that
did not seem to be too big to fail, too interconnected to fail,
or indeed, of any systemic significance, was assisted to the
extent of a total of $17.2 billion of taxpayers' money and
became one of the five largest wards of state. The decision to
save GMAC was not, however, a December 2009 decision. It was
made in the turbulent early months of 2009 as an intrinsic part
both of the rescue of GM and Chrysler and of the stress tests,
and can only be understood in that context. Within that
context, Treasury's objectives become clearer, and within that
context, it is also clear that there are lessons to be learned.
SECTION TWO: ADDITIONAL VIEWS
A. J. Mark McWatters and Paul S. Atkins
We concur with the issuance of the March report and offer
the additional observations noted below. We appreciate the
spirit with which the Panel and the staff approached this
complex issue and incorporated suggestions offered during the
drafting process.
As of today, the American taxpayers have involuntarily
invested approximately $17.2 billion in GMAC.\538\ Since the
CBO has assigned a 59 percent subsidy rate to the various auto-
related bailouts--including GMAC--as of mid-December 2009,\539\
it is not unreasonable to assume that the taxpayers will lose
approximately $10 billion \540\ of the $17.2 billion of TARP
funds allocated to GMAC.\541\
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\538\ The taxpayers have been forced to bail out GMAC on three
separate occasions over the past fifteen months. In December 2008,
Treasury allocated $5.0 billion of TARP funds to GMAC. Unfortunately,
in May 2009, Treasury committed the taxpayers to pay another $7.5
billion of TARP proceeds. In December 2009, Treasury committed the
taxpayers yet again to pay another $3.8 billion of TARP funds to GMAC.
Additionally, a loan in the amount of $884 million to GM was converted
into GMAC shares in May 2009.
\539\ See Congressional Budget Office, The Budget and Economic
Outlook: Fiscal Years 2010 to 2020, at 13 (Jan. 2010) (online at
www.cbo.gov/ftpdocs/108xx/doc10871/01-26-Outlook.pdf).
\540\ This figure is derived by using the $17.2 billion aggregate
TARP allocation to GMAC and multiplying it by the CBO subsidy rate of
59 percent for the auto related bailouts. Since the CBO subsidy rate
applies to all of the auto industry bailouts, including the automakers
Chrysler and GM as well as GMAC, the actual subsidy rate for GMAC may
rise above or fall below 59 percent. The OMB has assigned a subsidy
rate of 39 percent to the government's equity investment ($16.3
billion) in GMAC. OMB Analytical Perspectives: FY2011 Budget, supra
note 535, at 40.
\541\ As a comparison, for fiscal year 2011 the National Institutes
of Health (NIH) have requested $765 million for breast cancer research.
See U.S. Department of Health and Human Services, National Institutes
of Health, Estimates of Funding for Various Research, Condition and
Disease Categories (RCDC) (Feb. 1, 2010) (online at report.nih.gov/
rcdc/categories/). The latest Nimitz-class aircraft carrier, the USS
George H. W. Bush, cost approximately $4.5 billion. See U.S. Navy,
Official Website of USS George H.W. Bush (CVN 77), Information about
the Ship (online at up-www01.ffc.navy.mil/cvn77/static/aboutus/
aboutship.html) (accessed Mar. 10, 2010). Thus the question, is the
loss of $10 billion from the GMAC bailout worth 13 years of breast
cancer research, or two Nimitz-class aircraft carriers with $1 billion
left over?
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In making its assessment of whether to subsidize GMAC with
taxpayer-funded TARP resources, Treasury was charged with
carrying the burden regarding the three fundamental issues
analyzed immediately below. We question why Treasury has
allocated any TARP funds to GMAC because Treasury has not
demonstrated in a satisfactory manner its case with respect to
any of these issues.
First, prior to committing taxpayer resources to GMAC,
Treasury should have demonstrated that no other group of new or
existing financial institutions could reasonably fill the void
upon the liquidation of GMAC. Treasury and GMAC have attempted
to justify GMAC's systemic importance based upon the ``special
relationships'' that exist between GMAC and its dealer network
and the ``unique IT system'' employed by GMAC to monitor its
extensions of credit. Many successful business enterprises rely
upon these sorts of factors. It is unclear why GMAC merits more
than $17 billion of taxpayer funds based upon its ``special
relationships'' or ``unique IT systems.'' It appears
problematic to argue that GMAC--and GMAC alone--is capable of
financing a floor plan for a Chrysler or GM dealer.
It is not unreasonable to anticipate that other financial
institutions and private equity firms would welcome the
opportunity to extend credit to the retail customers and
dealers of Chrysler and GM and to securitize the instruments
received in such transactions.\542\ During the dark days of
late 2008 and early 2009, Treasury could have encouraged other
market participants to enter GMAC's auto finance business by
providing short-term guarantees of their financings as well as
other credit support. The government could also have encouraged
one or more of these market participants to purchase GMAC's
auto finance business and retain the services of its employees.
The government may have needed to provide short-term financing
to fund the acquisition, but it seems reasonable to conclude
that the cost of such financing to the taxpayers would have
equaled much less than the $17 billion ultimately advanced to
GMAC under TARP. Since GMAC's auto finance business is
profitable, the taxpayers would have been subject to far less
risk than they currently carry under the bailout as actually
implemented.
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\542\ This analysis is based upon the assumption that GMAC's
business model is not premised upon charging retail customers above-
market rates of interest so as to subsidize the below-market rates it
charges the dealers.
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Even if GMAC--and GMAC alone--possessed the expertise
necessary to conduct an auto finance business, why does the
United States government continue to sanction and subsidize
such concentration instead of encouraging healthy competition
from other private sector financial institutions and firms
seeking to enter the market? \543\ Although the bailout of GMAC
was in part premised upon the overwhelming market dominance of
GMAC's floorplan business, it does not appear that Treasury has
taken any action to break up this concentration and foster
competition from other market participants with established
expertise in the floorplan business. Instead, Treasury has
perpetuated GMAC's floorplan market share by providing the
company with access to unlimited TARP funds in the name of not
reneging on an informal Treasury commitment. By funneling the
floorplan business of Chrysler and GM through the narrow--yet
virtually exclusive--financing conduit of GMAC, Treasury has
left Chrysler and GM susceptible to any future mismanagement of
GMAC and raised the possibility that the taxpayers will yet
again be called upon to rescue GMAC.
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\543\ By contrast, in early February the Administration announced
that it plans to end the Ares I program and outsource low earth orbit
rocket launches to a group of private sector aerospace companies. See
Kenneth Chang, Obama Calls for End of NASA's Moon Program, New York
Times (Feb. 1, 2010) (online at www.nytimes.com/2010/02/02/science/
02nasa.html?scp=1&sq=constellation%20nasa&st=cse). If private sector
participants are lined up to bid for the right to design and launch
rockets, there must be at least a few financial institutions that are
prepared to finance retail customers and dealers of Chrysler and GM.
---------------------------------------------------------------------------
Of course, both Chrysler and GM might ultimately benefit
from controlling its own well-managed financing subsidiary, as
other vehicle manufacturers do. While such subsidiaries often
control a substantial share of their parent's financing needs,
they infrequently venture into other high-risk and non-
complementary business operations that they are incapable of
properly managing--such as ResCap or, perhaps, Ally Bank--the
failure of which could undermine the viability of their vehicle
financing operations, as ResCap did for GMAC. For these
reasons, it is possible that Chrysler and GM may undertake to
form a limited liability special purpose entity to acquire the
auto finance business of GMAC (without, most likely, any of the
operations of the failed ResCap). It is also possible that
Chrysler and GM may seek to form their own independent
financing subsidiaries to compete with the auto finance
business of GMAC.\544\ The occurrence of either event may
materially influence how and when the taxpayers are repaid
their TARP advances to GMAC.
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\544\ GM may welcome the opportunity to establish its own financing
subsidiary if it determines that (1) its common equity in GMAC will be
wiped out if the taxpayers suffer the loss of any GMAC allocated TARP
funds and (2) the expansion of Ally Bank is inconsistent with GMAC's
maintenance of a robust auto finance business. On the other hand, GMAC
remits royalties and fees to GM pursuant to a services arrangement.
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Second, if Treasury carries the burden on the first issue,
Treasury must next demonstrate that it had no viable choice but
to bail-out ResCap--the entity through which GMAC made ill-
conceived bets in the residential mortgage and subprime housing
markets--in hopes of saving GMAC's auto finance business.\545\
In satisfying this burden, Treasury should show that no viable
approach existed under the U.S. bankruptcy code or otherwise to
extricate GMAC's auto finance business from the taint of its
insolvent mortgage finance business other than through the
expenditure of over $17 billion of hard-earned taxpayer-funded
resources.
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\545\ It appears that GMAC operates three businesses--a retail auto
finance and dealer floor planning business, an insurance business and a
mortgage finance business. The first business provides financing to
retail purchasers of Chrysler and GM vehicles as well as to the dealers
themselves. The second underwrites insurance. The third business placed
huge un-hedged bets in the residential mortgage and subprime housing
markets that blew up and drove GMAC into insolvency.
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GMAC could have, for example, sold its auto finance
business for fair market value to a third party outside of
bankruptcy (and avoided a fraudulent conveyance/transfer claim)
or sold its auto finance business to a third party under
Section 363 in a bankruptcy proceeding.\546\ If GMAC's auto
finance business is truly viable and profitable, it is not
unreasonable to expect that other financial institutions and
private equity firms would welcome the opportunity to acquire
the business with its captive group of customers and
monopolistic market power in the Chrysler and GM dealer
floorplan business. GMAC also could have simply sold its auto
finance business at fair market value to a third party outside
of bankruptcy.\547\ The government may have had little choice
in late 2008 and early 2009 but to assist the purchaser of the
auto finance business by providing DIP financing or other
credit support, but, as noted above, the subsidy rate on the
use of TARP funds would have been most likely materially lower
since GMAC's auto finance business operates as a profitable
going concern and no TARP funds would have been allocated to
ResCap. Once the markets stabilized, the auto finance business
(as a separate entity under new ownership and management)
should have been able to refinance the government-funded bridge
facility (with government-sponsored guarantees if absolutely
necessary) and the taxpayers would have been repaid in full in
cash. Following the transfer of the auto finance business, GMAC
could have been reorganized by private market participants (if
any were interested) or, most likely, liquidated without the
expenditure of any TARP funds.
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\546\ As noted in the Panel's report, the structuring, negotiating,
and closing of the disposition of GMAC's auto finance business within
or outside bankruptcy present an array of daunting business and legal
issues. Prior to any such disposition, Treasury should conduct a
thorough due diligence investigation including: (1) a careful analysis
of the relevant facts and circumstances, (2) a cost benefit analysis
comparing recovery pre- and post-bankruptcy, and (3) an analysis of any
additional TARP contributions required pre- and post-bankruptcy. GMAC's
status as a BHC only adds another layer of complexity. Nevertheless, we
remain unconvinced that Treasury could not have structured the bailout
of GMAC's auto finance business in a much more taxpayer-friendly
manner.
\547\ If GMAC pursues the sale of its auto finance business or any
other division or subsidiary or the merger of GMAC or any of its
subsidiaries, Treasury should ascertain that the transaction is
structured in a manner that is the most advantageous for the taxpayers
and that no TARP funds are forgiven or subordinated.
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If the bailout of GMAC was premised on the necessity of
saving the company's auto finance business, why was Treasury
not capable of doing just that? Why was even one dollar of TARP
funds allocated to ResCap? Why was ResCap not left for
liquidation? If the automakers Chrysler and GM were capable of
surviving bankruptcy proceedings, why was GMAC not similarly
restructured? It is beyond disappointing that the taxpayers
have been forced to squander many billions of dollars.
Third, even if GMAC carries the burden on both issues,
Treasury must also demonstrate why GMAC was too big or too
interconnected with the financial system and the overall
economy to fail and why GMAC merited such unprecedented largess
when so many other American businesses and families are
suffering from the worst economic downturn in several
generations. It appears quite unlikely that the failure of GMAC
would have led directly to the collapse of the American
financial system.
Treasury has also justified its bailout of GMAC based upon
its undertaking to provide each of the 19 stress-tested
financial institutions with TARP funds to the extent they were
not able to raise capital in the private markets. We do not
agree with this simplistic ``our word is our bond''
justification for the bailout. Treasury seems to argue that
once a financial institution has joined (or was drafted into or
was specifically selected for inclusion in) the ``elite 19,''
then the United States government had a duty (or some kind of
moral obligation or patriotic commitment) to bail it out
whatever the cost. It is regrettable for Treasury to assert
that it was somehow duty bound to hand a blank check to GMAC.
Treasury was required to exercise proper judgment and conduct a
thorough due diligence analysis with respect to its investment
of taxpayer-sourced TARP funds and not simply throw $17 billion
at a problem in hopes that it would go away. The financial
markets do not expect the government to act in an irrational or
profligate manner, and any such reaction only creates enhanced
moral hazard risks and all but codifies GMAC's implicit
guarantee from the United States government. The taxpayers also
understand the ``don't throw good money after bad'' mantra and
expect the government to allocate their tax dollars
accordingly. In addition, it is not entirely clear why GMAC--a
non-systemically significant financial institution--was
included in the list of stress-tested financial institutions
other than, perhaps, to afford the company an explicit
guarantee under the TARP program of its seemingly unlimited
capital deficiencies. Such circular reasoning offers little in
the way of meaningful insight.
Other significant issues have arisen with respect to the
bailout of GMAC, including, without limitation, the following:
1. It remains unclear how GMAC has used the $17 billion of
TARP funds. The company has not provided any meaningful
publicly available analysis of how it has employed such
taxpayer resources or why it may not be able to repay all of
such funds. It would be helpful for the taxpayers to receive a
detailed ``uses of TARP funds'' statement from GMAC with an
emphasis on those payments made to persons and entities that
are not obligated to reimburse GMAC. In other words, if the
taxpayers stand to lose up to $10 billion on their allocation
of TARP funds to GMAC, it is absolutely critical for GMAC to
disclose in a prompt, thorough, and public manner specifically
where the money went and why it was so allocated.\548\
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\548\ GMAC should not respond with the statement that ``money is
fungible.'' Money is also limited and, without the allocation of $17
billion of TARP funds, GMAC would have no doubt failed.
---------------------------------------------------------------------------
2. It appears that some (and quite possibly a substantial
part) of GMAC's TARP funds were allocated to ResCap to bail out
its risky and ill-considered bets in the residential mortgage
and subprime markets. Notwithstanding these allocations, we
remain concerned as to whether Treasury and GMAC have truly
stemmed the tide of losses at ResCap. The taxpayers have
received only modest disclosure regarding the operations of and
prospects for ResCap including, without limitation, the amount
of ResCap originated mortgage loans that Fannie Mae, Freddie
Mac, and other purchasers and guarantors are requiring ResCap
to repurchase, and whether ResCap will require additional
taxpayer-sourced TARP funds and, if so, why, how much, and
when? Why ResCap might have merited even one dollar of TARP
funds remains entirely murky.
3. Many questions remain unanswered with respect to Ally
Bank. For example, has GMAC allocated taxpayer-sourced TARP
funds to Ally Bank? If so, why has Treasury committed the
taxpayers to underwrite yet another financial institution,
particularly one with an unproven business model? Is Ally Bank
using TARP funds to pay above-market rates of interest on its
retail accounts that it has aggressively advertised over the
past few months, or does its implicit guarantee from Treasury
enable it to fund these above-market rates? If so, how does
Ally Bank plan to pay these rates after the TARP spigot is shut
off? If Ally Bank fails to pay the above-market rates of
interest and its deposit base deteriorates, how will GMAC
finance its floorplan business? How much, if any, of the
projected $10 billion loss of TARP funds allocated to GMAC is
attributable to Ally Bank and its payment of above-market rates
of interest? If the answer is one dollar or more, why has
Treasury committed the taxpayers to subsidize these rates?
4. It was recently announced that the CEO of GMAC will
receive a total annual compensation package of $9.5 million,
which consists of cash and deferred and restricted stock.\549\
Although some have focused on the amount of the compensation,
more significant from the taxpayers' perspective is the
structure of the compensation package and the consequent
incentives that may skew decision-making towards particular
outcomes, such as building the company, when dissolution and
sale might be best.
---------------------------------------------------------------------------
\549\ The bulk of the CEO's compensation is structured as deferred
or restricted stock with a cash salary of $950,000. While a stock grant
may have appeared attractive to the Special Master, the incentives
inherent in a stock grant could cause the CEO to consider actions that
may not necessarily be in the best interests of the taxpayers. With a
large stock award in GMAC, the CEO may have little interest in pursuing
a bankruptcy of GMAC or selling the ``crown jewel'' auto finance
business (to GM and Chrysler among others) and liquidating ResCap. All
of these actions could diminish the value of GMAC stock and Mr.
Carpenter's stock award. Instead, the CEO appears inclined to pursue a
growth strategy at GMAC with Ally Bank. Perhaps it would have been best
simply to pay the CEO a higher cash compensation amount so as
potentially not to influence his management decisions. It is
unfortunate that such an approach might not have been acceptable to the
Special Master.
---------------------------------------------------------------------------
5. Even though the taxpayers stand to lose up to $10
billion on the allocation of TARP funds to GMAC, the pre-
bailout common shareholders of GMAC may nevertheless profit
from their investment in the company. The Panel has made clear
that if the taxpayers lose one dollar of TARP funds, the pre-
bailout common shareholders should be wiped out and receive no
return. Representatives from Treasury appear quite sensitive
(if not defensive) regarding this issue. We call upon Treasury
to issue a formal legal opinion describing the extent to which
pre-bailout common shareholders may profit if the taxpayers
lose. Treasury has put the taxpayers in an awkward position of
suffering a substantial loss but the pre-bailout common
shareholders are not wiped out.
6. It is regrettable that the bailouts of GMAC, Chrysler,
and GM could raise subsidy issues under WTO rules. As noted in
the Panel's report, in September 2009, the People's Republic of
China launched a countervailing duty investigation into the
assistance given Chrysler and GM where, among other items, the
Chinese automotive industry cited aid to GMAC in its complaint.
It is possible that other jurisdictions may raise similar
claims with the WTO. Treasury should thoughtfully analyze these
and other trade related issues before allocating TARP funds to
any entity.\550\
---------------------------------------------------------------------------
\550\ This paragraph is not intended to constitute a legal or other
analysis regarding the merits of any action brought under WTO or
similar rules by the People's Republic of China or any other
jurisdiction or entity regarding the allocation of TARP funds to or any
other action taken by the U.S. government with respect to GMAC,
Chrysler, or GM.
SECTION THREE: CORRESPONDENCE WITH TREASURY UPDATE
Secretary of the Treasury Timothy Geithner sent a letter to
Chair Elizabeth Warren on February 16, 2010,\551\ in response
to a series of questions presented by the Panel regarding
Treasury's role, under EESA, in setting executive compensation
and corporate governance standards for TARP recipients and
regarding the authority of the Special Master for TARP
Executive Compensation.
---------------------------------------------------------------------------
\551\ See Appendix I of this report, infra.
SECTION FOUR: TARP UPDATES SINCE LAST REPORT
A. TARP Repayments
As of March 5, 2010, Treasury received $8.2 billion in CPP
repayments from six institutions during February and March. Of
this total, $7.6 billion was repaid by PNC Financial Services
Group. A total of 66 banks have fully repaid their preferred
stock TARP investments provided under the CPP to date. Treasury
has also liquidated the warrants it holds in 44 of these 66
banks.
B. CPP Warrant Dispositions
As part of its investment in senior preferred stock of
certain banks under the CPP, Treasury received warrants to
purchase shares of common stock or other securities in those
institutions. During February, two institutions repurchased
their warrants from Treasury for a total of $691,000. Also, on
March 1, 2010, Treasury announced that it would offer the Bank
of America warrants it received at auction. Treasury announced
that gross proceeds from this offering were $1.57 billion.
Including this sale, Treasury has received $5.59 billion from
the disposition of CPP warrants.
C. CPP Monthly Lending Report
Treasury's Monthly Lending and Intermediation Snapshot
tracks loan originations and average loan balances for the 22
largest recipients of CPP funds across a variety of categories,
ranging from mortgage loans to commercial real estate to credit
card lines. As of the December reporting period, this survey no
longer includes data from the ten institutions that repaid the
funds they received in June 2009. Furthermore, CIT did not
report its lending activity this month due to that
institution's ongoing bankruptcy proceedings. Therefore, the
Monthly Lending and Intermediation Snapshot now measures only
eleven institutions and no longer provides a complete basis of
comparison for lending by these institutions since EESA was
enacted.
Of the eleven institutions that participated in the survey,
new loan origination increased nearly 13 percent in December
for a total of $178 billion during December. Survey respondents
highlighted a number of economic areas that showed market
improvement in December including leasing, business banking and
mergers and acquisitions. The survey noted the continuing lack
of demand for new commercial real estate loans. Furthermore,
respondents cited seasonality in commercial real estate for the
57 percent increase in commercial real estate renewals.
D. Term Asset-Backed Securities Loan Facility
At the February 17, 2010 facility, investors requested $1.3
billion in loans for legacy commercial mortgage-backed
securities (CMBS), of which $1.1 billion settled. By way of
comparison, investors requested $1.5 billion in loans for
legacy CMBS, of which $1.3 billion settled, at the January
facility. Investors did not request any loans for new CMBS in
February. The only request for new CMBS loans during TALF's
operation was for $72.2 million at the November facility.
The New York Fed's March 4, 2010 facility was a non-CMBS
facility, offering loans to support the issuance of ABS
collateralized by loans in the credit card, equipment,
floorplan, premium financing, small business, and student loan
sectors. In total, $4.1 billion in loans were requested at this
facility. There were no requests at this facility for auto or
servicing advance loans. At the February 5, 2010 facility, $974
million of the $987 million in requested loans settled.
E. Help for Hardest Hit Housing Markets
On February 19, 2010, President Obama announced Help for
Hardest Hit Housing Markets (4HM). This initiative will use
$1.5 billion of the $50 billion in TARP funds allocated to
foreclosure mitigation in order to assist the five states with
the highest home price declines stemming from the foreclosure
crisis: Nevada, California, Florida, Arizona and Michigan.
These states have all experienced home price declines greater
than 20 percent. The funds will go directly to the Housing
Finance Agencies (HFAs) of the participating states for
programs that may include foreclosure mitigation efforts for
unemployed borrowers, borrowers owing more than their home is
worth, or borrowers facing challenges arising from second
liens. The funds will be divided among the five eligible states
by a formula based on home price declines and unemployment.
State HFAs must submit a proposal for their specific program
designs, allowing the local agencies to tailor programs to the
local needs.\552\
---------------------------------------------------------------------------
\552\ The White House, President Obama Announces Help for Hardest
Hit Housing Markets (Feb. 19, 2010) (online at www.whitehouse.gov/the-
press-office/president-obama-announces-help-hardest-hit-housing-
markets) (hereinafter ``President Announces Help for Housing
Markets'').
---------------------------------------------------------------------------
F. Metrics
Each month, the Panel's report highlights a number of
metrics that the Panel and others, including Treasury, the
Government Accountability Office (GAO), the Special Inspector
General for the Troubled Asset Relief Program (SIGTARP), and
the Financial Stability Oversight Board, consider useful in
assessing the effectiveness of the Administration's efforts to
restore financial stability and accomplish the goals of EESA.
This section discusses changes that have occurred in several
indicators since the release of the Panel's February report.
Interest Rate Spreads. Interest rate spreads have
continued to tighten since the Panel's February report, further
reflecting signs of economic stability. The TED spread, which
measures the difference between 3 Month LIBOR and the 3 Month
Treasury Bill yield, is used as a measure of the availability
of liquidity in the market. As of March 1, 2010, the TED spread
was 12 basis points, an 89 percent decrease since the enactment
of EESA. The interest rate spread for AA asset-backed
commercial paper, which is considered mid-investment grade, has
decreased by nearly 13 percent since the Panel's January
report. This measure is at its lowest level since July 2007.
FIGURE 18: INTEREST RATE SPREADS
----------------------------------------------------------------------------------------------------------------
Current Spread (as of Percent Change Since
Indicator 3/1/10) Last Report (1/29/10)
----------------------------------------------------------------------------------------------------------------
TED spread 553 (in basis points).............................. 12 (29.4)
Conventional mortgage rate spread 554......................... 1.36 3.03
Overnight AA asset-backed commercial paper interest rate 0.11 (12.5)
spread 555...................................................
Overnight A2/P2 nonfinancial commercial paper interest rate 0.12 10.7
spread 556...................................................
----------------------------------------------------------------------------------------------------------------
\553\ TED Spread, SNL Financial.
\554\ Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.15: Selected
Interest Rates: Historical Data (Instrument: Conventional Mortgages, Frequency: Weekly) (online at
www.federalreserve.gov/releases/h15/data/Weekly_Thursday_/H15_MORTG_NA.txt) (accessed Mar. 1, 2010); Board of
Governors of the Federal Reserve System, Federal Reserve Statistical Release H.15: Selected Interest Rates:
Historical Data (Instrument: U.S. Government Securities/Treasury Constant Maturities/Nominal 10-Year,
Frequency: Weekly) (online at www.federalreserve.gov/releases/h15/data/Weekly_Friday_/H15_TCMNOM_Y10.txt)
(accessed Mar. 1, 2010).
\555\ Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release: Commercial Paper
Rates and Outstandings: Data Download Program (Instrument: AA Asset-Backed Discount Rate, Frequency: Daily)
(online at www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (hereinafter ``Federal Reserve Statistical
Release: Commercial Paper'') (accessed Mar. 4, 2010); Board of Governors of the Federal Reserve System,
Federal Reserve Statistical Release: Commercial Paper Rates and Outstandings: Data Download Program
(Instrument: AA Nonfinancial Discount Rate, Frequency: Daily) (online at www.federalreserve.gov/DataDownload/
Choose.aspx?rel=CP) (accessed Mar. 1, 2010). In order to provide a more complete comparison, this metric
utilizes a five day average of the interest rate spread for the last five days of the month.
\556\ Federal Reserve Statistical Release: Commercial Paper, supra note 555 (accessed Mar. 4, 2010). In order to
provide a more complete comparison, this metric utilizes a five day average of the interest rate spread for
the last five days of the month.
Housing Indicators. Foreclosure filings decreased
by 9.7 percent from November to December, and are 13 percent
above the October 2008 level. The S&P/Case-Shiller Composite 20
Index increased slightly in December, whereas another index
that measures home prices, the FHFA House Price Index,
decreased by nearly 2 percent in December.
FIGURE 19: HOUSING INDICATORS
----------------------------------------------------------------------------------------------------------------
Percent Change
from Data Percent Change
Indicator Most Recent Available at Since October
Monthly Data Time of Last 2008
Report
----------------------------------------------------------------------------------------------------------------
Monthly foreclosure filings \557\...................... 315,716 (9.7) 13
Housing prices--S&P/Case-Shiller Composite 20 Index 145.9 .32 (6.8)
\558\.................................................
FHFA Housing Price Index \559\......................... 196.1 (1.6) (3.3)
----------------------------------------------------------------------------------------------------------------
\557\ RealtyTrac, Foreclosure Activity Press Releases (online at www.realtytrac.com//ContentManagement/
PressRelease.aspx) (hereinafter ``RealtyTrac Foreclosure Activity Press Releases'') (accessed Mar. 1, 2010).
Most recent data available for January 2010.
\558\ Standard & Poor's, S&P/Case-Shiller Home Price Indices (Instrument: Seasonally Adjusted Composite 20
Index) (online at www. standard andpoors.com/prot/servlet/Blob Server?blobheadername3=MDT-Type&blobcol=
urldata&blobtable=Mungo Blobs&blobheadervalue2=inline%3B+filename% 3DSA_CSHome Price_History_022330.xls
&blobheadername2=Content-Disposition&blobheader value1=application%2Fexcel &blobkey= id&blob
headername1=content-type &blobwhere= 1243656054400&blob headervalue3=UTF-8) (accessed Mar. 4, 2010)
(hereinafter ``S&P/Case-Shiller Home Price Indices''). Most recent data available for December 2009.
\559\ Federal Housing Finance Agency, U.S. and Census Division Monthly Purchase Only Index (Instrument: USA,
Seasonally Adjusted) (online at www.fhfa.gov/webfiles/15428/Monthly Index_Jan1991_to_Latest.xls) (accessed
Mar. 4, 2010). Most recent data available for December 2009.
FIGURE 20: FORECLOSURE FILINGS AS COMPARED TO THE CASE-SHILLER 20 CITY
HOME PRICE INDEX (AS OF DECEMBER 2009) \560\
---------------------------------------------------------------------------
\560\ RealtyTrac Foreclosure Activity Press Releases, supra note
557 (accessed Jan. 27, 2010); S&P/Case-Shiller Home Price Indices,
supra note 558. Most recent data available is for December 2009.
[GRAPHIC] [TIFF OMITTED] 54875A.011
Bank Conditions. Data appear to show that
commercial banks across the country are still being affected by
the economic downturn and troubled loans. Figure 21 shows the
percentage of net loan charge-offs has continued to increase
since the crisis began. This percentage consists of the total
number of charge-offs by domestic commercial banks over the
total amount of commercial loans. This percentage, 2.2 as of
the third quarter of 2009, has nearly tripled since EESA was
enacted. U.S. commercial banks are also negatively affected by
loans that are sliding toward default. Nonperforming commercial
loans are loans that bank officials classify as 90-days or more
past due or nonaccrual. Figure 22 shows nonperforming
commercial loans as a percentage of total commercial loans.
This ratio was 3.6 at the end of the third quarter of 2009,
more than three times its level in October 2008.
FIGURE 21: COMMERCIAL NET LOAN CHARGE-OFFS PERCENTAGE (AS OF Q3 2009)
\561\
[GRAPHIC] [TIFF OMITTED] 54875A.012
---------------------------------------------------------------------------
\561\ Federal Reserve Bank of St. Louis, Condition of
Banking:Commercial Net Loan Charge-offs (online at
research.stlouisfed.org/fred2/ series/NCOCMC?cid=93) (accessed Mar. 4,
2010).
FIGURE 22: NONPERFORMING LOANS AS A PERCENTAGE OF TOTAL LOANS (AS OF Q3
2009) \562\
[GRAPHIC] [TIFF OMITTED] 54875A.013
Consumer Confidence. There are mixed signs
emerging regarding consumer confidence. The University of
Michigan's Consumer Sentiment Index is based on a minimum of
500 telephone interviews and contains roughly 50 core
questions.\563\ The Consumer Sentiment Index rose 10 percent in
January.\564\ Another gauge of consumer attitudes is the
Consumer Confidence Index. This index is administered by The
Conference Board and is based off of a representative sample of
5,000 homes.\565\ This measure decreased 18 percent February.
The Conference Board notes that a component of the survey, the
Present Situation Index, was at its lowest level since February
1983.\566\ Both indices have increased significantly since EESA
was enacted. As Figure 23 illustrates, the Consumer Sentiment
Index has increased nearly 30 percent, while the Consumer
Confidence Index is up 18 percent, since October 2008.
---------------------------------------------------------------------------
\562\ Federal Reserve Bank of St. Louis, Condition of
Banking:Nonperforming Commercial Loans (online at
research.stlouisfed.org/fred2/series/ NPCMCM/downloaddata?cid=93)
(accessed Mar. 4, 2010).
\563\ University of Michigan, Survey of Consumers (online at
www.sca.isr.umich.edu/documents.php?c=i) (accessed Mar. 9, 2010).
\564\ Federal Reserve Bank of St. Louis, University of Michigan:
Consumer Sentiment (online at research.stlouisfed.org/fred2/series/
UMCSENT/) (hereinafter ``University of Michigan: Consumer Sentiment'')
(accessed Mar. 3, 2010).
\565\ The Conference Board, The Conference Board Consumer
Confidence Index Declines Sharply (Feb. 23, 2010) (online at
www.conference-board.org/economics/ConsumerConfidence.cfm) (hereinafter
``Conference Board Consumer Confidence Index'').
\566\ Conference Board Consumer Confidence Index, supra note 565.
---------------------------------------------------------------------------
FIGURE 23: CONSUMER ATTITUDES \567\
[GRAPHIC] [TIFF OMITTED] 54875A.014
---------------------------------------------------------------------------
\567\ University of Michigan: Consumer Sentiment, supra note 564;
Bloomberg Data.
---------------------------------------------------------------------------
G. Financial Update
Each month, the Panel summarizes the resources that the
federal government has committed to economic stabilization. The
following financial update provides: (1) an updated accounting
of the TARP, including a tally of dividend income, repayments,
and warrant dispositions that the program has received as of
February 25, 2010; and (2) an updated accounting of the full
federal resource commitment as of February 25, 2010.
1. The TARP
a. Costs: Expenditures and Commitments
Treasury has committed or is currently committed to spend
$520.3 billion of TARP funds through an array of programs used
to purchase preferred shares in financial institutions, offer
loans to small businesses and automotive companies, and
leverage Federal Reserve loans for facilities designed to
restart secondary securitization markets.\568\ Of this total,
$290.5 billion is currently outstanding under the $698.7
billion limit for TARP expenditures set by EESA, leaving $408.2
billion available for fulfillment of anticipated funding levels
of existing programs and for funding new programs and
initiatives. The $290.5 billion includes purchases of preferred
and common shares, warrants and/or debt obligations under the
CPP, AIGIP/SSFI Program, PPIP, and AIFP; and a $20 billion loan
to TALF LLC, the special purpose vehicle (SPV) used to
guarantee Federal Reserve TALF loans.\569\ Additionally,
Treasury has allocated $36.9 billion to the Home Affordable
Modification Program, out of a projected total program level of
$48.5 billion.
---------------------------------------------------------------------------
\568\ EESA, as amended by the Helping Families Save Their Homes Act
of 2009, limits Treasury to $698.7 billion in purchasing authority
outstanding at any one time as calculated by the sum of the purchases
prices of all troubled assets held by Treasury. Pub. L. No. 110-343,
Sec. 115(a)-(b); Helping Families Save Their Homes Act of 2009, Pub. L.
No. 111-22, Sec. 402(f) (reducing by $1.26 billion the authority for
the TARP originally set under EESA at $700 billion).
\569\ Treasury Transactions Report, supra note 264.
---------------------------------------------------------------------------
b. Income: Dividends, Interest Payments, CPP Repayments,
and Warrant Sales
As of February 25, 2009, a total of 65 institutions have
completely repurchased their CPP preferred shares. Of these
institutions, 39 have repurchased their warrants for common
shares that Treasury received in conjunction with its preferred
stock investments; Treasury sold the warrants for common shares
for three other institutions at auction.\570\ Treasury received
$7.9 billion in repayments from six CPP participants during
February. The largest repayment was the $7.6 billion repaid by
PNC Financial Services Group. Treasury also accounted for
losses under the CPP for two of the three bankrupt institutions
participating in the program: CIT Group and Pacific Coast
National Bancorp. These two institutions received a total of
$2.3 billion in funds under the CPP.\571\ In addition, Treasury
receives dividend payments on the preferred shares that it
holds, usually five percent per annum for the first five years
and nine percent per annum thereafter.\572\ Net of these losses
under the CPP, Treasury has received approximately $18.8
billion in income from warrant repurchases, dividends, interest
payments, and other considerations deriving from TARP
investments,\573\ and another $1.2 billion in participation
fees from its Guarantee Program for Money Market Funds.\574\
---------------------------------------------------------------------------
\570\ Treasury Transactions Report, supra note 264.
\571\ Treasury Transactions Report, supra note 264.
\572\ See, e.g., U.S. Department of the Treasury, Securities
Purchase Agreement: Standard Terms (online at
www.financialstability.gov/docs/CPP/spa.pdf) (accessed Mar. 4, 2010).
\573\ Treasury Transactions Report, supra note 264; U.S. Department
of the Treasury, Cumulative Dividends and Interest Report as of
December 31, 2009 (Jan. 20, 2010) (online at
www.financialstability.gov/docs/dividends-interest-reports/
December%202009%20Dividends%20and%20Interest%20Report.pdf); Treasury
Transactions Report, supra note 264.
\574\ For CPP investments in privately-held institutions, Treasury
received warrants to purchase additional preferred shares. This option
was excercised immediately and, as of February 25, 2010, six privately
held institutions redeemed the additional preferred shares associated
with the warrants provided to Treasury. U.S. Department of the
Treasury, Treasury Announces Expiration of Guarantee Program for Money
Market Funds (Sept. 18, 2009) (online at www.treasury.gov/press/
releases/tg293.htm).
---------------------------------------------------------------------------
c. TARP Accounting
FIGURE 24: TARP ACCOUNTING (AS OF FEBRUARY 25, 2010) \575\
[Dollars in billions]
----------------------------------------------------------------------------------------------------------------
Total
Anticipated Repayments/ Funding Funding
TARP Initiative Funding Actual Funding Reduced Outstanding Available
Exposure
----------------------------------------------------------------------------------------------------------------
Capital Purchase Program (CPP) $204.9 $204.9 $129.8 \577\ $75.1 $0
\576\..........................
Targeted Investment Program 40.0 40.0 40 0 0
(TIP) \578\....................
AIG Investment Program (AIGIP)/ 69.8 \579\ 46.9 0 46.9 22.9
Systemically Significant
Failing Institutions Program
(SSFI).........................
Automobile Industry Financing 81.3 81.3 3.2 78.2 0
Program (AIFP).................
Asset Guarantee Program (AGP) 5.0 5.0 \581\ 5.0 0 0
\580\..........................
Capital Assistance Program (CAP) 0 0 0 0 0
\582\..........................
Term Asset-Backed Securities 20.0 20.0 0 20.0 0
Lending Facility (TALF)........
Public-Private Investment 30.0 30.0 0 30.0 0
Partnership (PPIP) \583\.......
Auto Supplier Support Program \584\ 3.5 3.5 0 3.5 0
(ASSP).........................
Unlocking SBA Lending........... 15.0 0 0 0 15.0
Home Affordable Modification \585\ 48.5 \586\ 36.9 0 36.9 11.6
Program (HAMP).................
Community Development Capital \587\ 0.78 0 0 0 0.78
Initiative (CDCI)..............
Help for Hardest Hit Housing 1.5 0 0 0 1.5
Markets (4HM) \588\............
Total Committed................. 520.3 468.5 -- 290.5 51.8
Total Uncommitted............... 178.4 N/A 178.0 N/A \589\ 356.4
-------------------------------------------------------------------------------
Total....................... $698.7 $468.5 $178.0 $290.5 $408.2
----------------------------------------------------------------------------------------------------------------
\575\ Treasury Transactions Report, supra note 264.
\576\ As of December 31, 2009, the CPP was closed. U.S. Department of the Treasury, FAQ on Capital Purchase
Program Deadline (online at www.financialstability.gov/docs/
FAQ%20on%20Capital%20Purchase%20Program%20Deadline.pdf).
\577\ Treasury classified the investments it made in two institutions, CIT Group ($2.3 billion) and Pacific
Coast National Bancorp ($4.1 million), as losses on the Transactions Report. Therefore Treasury's net current
CPP investment is $72.7 billion due to the $2.3 billion in losses thus far. Treasury Transactions Report,
supra note 264.
\578\ Both Bank of America and Citigroup repaid the $20 billion in assistance each institution received under
the TIP on December 9 and December 23, 2009, respectively. Therefore the Panel accounts for these funds as
repaid and uncommitted. U.S. Department of the Treasury, Treasury Receives $45 Billion in Repayments from
Wells Fargo and Citigroup (Dec. 23, 2009) (online at www.treas.gov/press/releases/20091229716198713.htm)
(hereinafter ``Treasury Receives $45 Billion from Wells Fargo and Citigroup'').
\579\ Data provided by Treasury in response to a Panel request. AIG has completely utilized the $40 billion made
available on November 25, 2008 and has drawn-down $5.3 billion of the $29.8 billion made available on April
17, 2009. This figure also reflects $1.6 billion in accumulated but unpaid dividends owed by AIG to Treasury
due to the restructuring of Treasury's investment from cumulative preferred shares to non-cumulative shares.
Treasury Transactions Report, supra note 264.
\580\ Treasury, the Federal Reserve, and the Federal Deposit Insurance Company terminated the asset guarantee
with Citigroup on December 23, 2009. The agreement was terminated with no losses to Treasury's $5 billion
second-loss portion of the guarantee. Citigroup did not repay any funds directly, but instead terminated
Treasury's outstanding exposure on its $5 billion second-loss position. As a result, the $5 billion is now
counted as available. Treasury Receives $45 Billion from Wells Fargo and Citigroup, supra note 578.
\581\ Although this $5 billion is no longer exposed as part of the AGP and is accounted for as available,
Treasury did not receive a repayment in the same sense as with other investments. Treasury did receive other
income as consideration for the guarantee, which is not a repayment and is accounted for in Figure 25.
\582\ On November 9, 2009, Treasury announced the closing of this program and that only one institution, GMAC,
was in need of further capital from Treasury. GMAC received an additional $3.8 billion in capital through the
AIFP on December 30, 2009. Treasury Announcement Regarding the CAP, supra note 240; Treasury Transactions
Report, supra note 264.
\583\ On January 29, 2010, Treasury released its first quarterly report on the Legacy Securities Public-Private
Investment Program. As of that date, the total value of assets held by the PPIP managers was $3.4 billion. Of
this total, 87 percent was non-agency Residential Mortgage-Backed Securities and the remaining 13 percent was
Commercial Mortgage-Backed Securities. U.S. Department of the Treasury, Legacy Securities Public-Private
Investment Program (Jan. 29, 2010) (online at www.financialstability.gov/docs/External%20Report%20-%2012-
09%20FINAL.pdf).
\584\ On July 8, 2009, Treasury lowered the total commitment amount for the program from $5 billion to $3.5
billion. This action reduced GM's portion from $3.5 billion to $2.5 billion and Chrysler's portion from $1.5
billion to $1 billion. GM Supplier Receivables LLC, the special purpose vehicle created to administer this
program for GM suppliers, has made $240 million in partial repayments. This was a partial repayment of funds
that were drawn down and did not reduce Treasury's $3.5 billion in total exposure under the ASSP. Treasury
Transactions Report, supra note 264.
\585\ In information provided to TARP oversight bodies, Treasury has stated that the $1.5 billion for the newly
created ``Help for Hardest Hit Housing Markets'' will be taken from the $50 billion in TARP funding committed
to foreclosure mitigation.
\586\ This figure reflects the total of all the caps set on payments to each mortgage servicer and not the
disbursed amount of funds for successful modifications. Treasury Transactions Report, supra note 264. In
response to a Panel inquiry, Treasury disclosed that, as of January 10, 2010, $32 million in funds had been
disbursed under the HAMP.
\587\ On February 3, 2010, the Administration announced a new initiative under TARP to provide low-cost
financing for Community Development Financial Institutions (CDFIs). Under this program, CDFIs are eligible for
capital investments at a 2 percent dividend rate as compared to the 5 percent dividend rate under the CPP. In
response to a Panel request, Treasury stated that it projects the CDCI program to utilize $780.2 million; U.S
Department of the Treasury, Community Development Capital Initiative (Feb. 18, 2010) (online at
www.financialstability.gov/roadtostability/comdev.html).
\588\ On February 19, 2010, President Obama announced 4HM, a plan to use $1.5 billion of the $50 billion in TARP
funds allocated to HAMP to assist the five states with the highest home price declines stemming from the
foreclosure crisis: Nevada, California, Florida, Arizona, and Michigan. President Announces Help for Housing
Markets, supra note 552. For further discussion of this initiative, see Section Four of this report.
\589\ This figure is the sum of the uncommitted funds remaining under the $698.7 billion cap ($178.4 billion)
and the repayments ($178 billion).
FIGURE 25: TARP PROFIT AND LOSS
[Dollars in millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Dividends \590\ Interest \591\ Warrant Other Losses \592\
TARP Initiative (as of 1/31/ (as of 1/31/ Repurchases Proceeds (as as of 2/25/ Total
10) 10) (as of 3/4/10) of 2/25/10) 10
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total....................................................... $12,502 $478 $5,587 $2,531 ($2,334) $18,764
CPP......................................................... 8,283 18 \593\ 5,572 -- (2,334) 11,539
TIP......................................................... 3,004 N/A 0 -- 3,004
AIFP........................................................ 936 443 15 -- 1,394
ASSP........................................................ N/A 13 N/A -- 13
AGP......................................................... 277 N/A 0 \594\ 2,234 2,511
PPIP........................................................ 2 4 N/A 21 27
Bank of America Guarantee................................... -- -- -- \595\276 ............ 276
--------------------------------------------------------------------------------------------------------------------------------------------------------
\590\ OFS Cumulative Dividends Report as of January 31, 2010, supra note 531.
\591\ OFS Cumulative Dividends Report as of January 31, 2010, supra note 531.
\592\ Treasury classified the investments it made in two institutions, CIT Group ($2.3 billion) and Pacific Coast National Bancorp ($4.1 million), as
losses on the Transactions Report. A third institution, UCBH Holdings, Inc., received $299 million in TARP funds and is currently in bankruptcy
proceedings. Treasury Transactions Report, supra note 264.
\593\ This figure is comprised of the $4.03 billion in proceeds from warrant dispositions as of February 25, 2010, and the $1.54 billion in funds from
the auction of Bank of America warrants completed on March 4, 2010. Treasury Transactions Report, supra note 264; U.S. Department of the Treasury,
Treasury Department Announces Public Offerings of Warrants to Purchase Common Stock of Bank of America Corporation (Mar. 4, 2010) (online at
www.financialstability.gov/latest/pr_03042010.html).
\594\ Treasury received $4.03 billion in Citigroup preferred stock and warrants as a fee for taking a second-loss position up to $5 billion on a $301
billion pool of ring-fenced Citigroup assets as part of the AGP; Treasury exchanged these preferred stocks for TruPs in June 2009. Following the early
termination of the guarantee, Treasury cancelled $1.8 billion of the TruPs, leaving Treasury with a $2.23 billion investment in Citigroup TruPs in
exchange for the guarantee. At the end of Citigroup's participation in the FDIC's TLGP, the FDIC may transfer $800 million of $3.02 billion in
Citigroup Trust Preferred Securities it received in consideration for its role in the AGP to the Treasury. Treasury Transactions Report, supra note
264.
\595\ Although Treasury, the Federal Reserve, and the FDIC negotiated with Bank of America regarding a similar guarantee, the parties never reached an
agreement. In September 2009, Bank of America agreed to pay each of the prospective guarantors a fee as though the guarantee had been in place during
the negotiations. This agreement resulted in payments of $276 million to Treasury, $57 million to the Federal Reserve, and $92 million to the FDIC.
U.S. Department of the Treasury, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Bank of America
Corporation, Termination Agreement, at 1-2 (Sept. 21, 2009) (online at www.financialstability.gov/docs/AGP/BofA%20-%20Termination%20Agreement%20-
%20executed.pdf).
d. Rate of Return
As of March 4, 2010, the average internal rate of return
for all financial institutions that participated in the CPP and
fully repaid the U.S. government (including preferred shares,
dividends, and warrants) is 10.6 percent. The internal rate of
return is the annualized effective compounded return rate that
can be earned on invested capital.
e. TARP Warrant Disposition
FIGURE 26: WARRANT REPURCHASES FOR FINANCIAL INSTITUTIONS WHO HAVE FULLY REPAID CPP FUNDS AS OF MARCH 4, 2010
--------------------------------------------------------------------------------------------------------------------------------------------------------
Panel's Best
Investment Warrant Warrant Valuation Price/ IRR
Institution Date QEO Repurchase Repurchase/Sale Estimate at Estimate (Percent)
Date Amount Repurchase Date Ratio
--------------------------------------------------------------------------------------------------------------------------------------------------------
Old National Bancorp.................................... 12/12/2008 No 5/8/2009 1,200,000 2,150,000 0.5581 9.30
Iberiabank Corporation.................................. 12/5/2008 Yes 5/20/2009 1,200,000 2,010,000 0.5970 9.40
Firstmerit Corporation.................................. 1/9/2009 No 5/27/2009 5,025,000 4,260,000 1.1796 20.30
Sun Bancorp, Inc........................................ 1/9/2009 No 5/27/2009 2,100,000 5,580,000 0.3763 15.30
Independent Bank Corp................................... 1/9/2009 No 5/27/2009 2,200,000 3,870,000 0.5685 15.60
Alliance Financial Corporation.......................... 12/19/2008 No 6/17/2009 900,000 1,580,000 0.5696 13.80
First Niagara Financial Group........................... 11/21/2008 Yes 6/24/2009 2,700,000 3,050,000 0.8852 8.00
Berkshire Hills Bancorp, Inc............................ 12/19/2008 No 6/24/2009 1,040,000 1,620,000 0.6420 11.30
Somerset Hills Bancorp.................................. 1/16/2009 No 6/24/2009 275,000 580,000 0.4741 16.60
SCBT Financial Corporation.............................. 1/16/2009 No 6/24/2009 1,400,000 2,290,000 0.6114 11.70
HF Financial Corp....................................... 11/21/2008 No 6/30/2009 650,000 1,240,000 0.5242 10.10
State Street............................................ 10/28/2008 Yes 7/8/2009 60,000,000 54,200,000 1.1070 9.90
U.S. Bancorp............................................ 11/14/2008 No 7/15/2009 139,000,000 135,100,000 1.0289 8.70
The Goldman Sachs Group, Inc............................ 10/28/2008 No 7/22/2009 1,100,000,000 1,128,400,000 0.9748 22.80
BB&T Corp............................................... 11/14/2008 No 7/22/2009 67,010,402 68,200,000 0.9826 8.70
American Express Company................................ 1/9/2009 No 7/29/2009 340,000,000 391,200,000 0.8691 29.50
Bank of New York Mellon Corp............................ 10/28/2008 No 8/5/2009 136,000,000 155,700,000 0.8735 12.30
Morgan Stanley.......................................... 10/28/2008 No 8/12/2009 950,000,000 1,039,800,000 0.9136 20.20
Northern Trust Corporation.............................. 11/14/2008 No 8/26/2009 87,000,000 89,800,000 0.9688 14.50
Old Line Bancshares Inc................................. 12/5/2008 No 9/2/2009 225,000 500,000 0.4500 10.40
Bancorp Rhode Island, Inc............................... 12/19/2008 No 9/30/2009 1,400,000 1,400,000 1.0000 12.60
Centerstate Banks of Florida Inc........................ 11/21/2008 No 10/28/2009 212,000 220,000 0.9636 5.90
Manhattan Bancorp....................................... 12/5/2008 No 10/14/2009 63,364 140,000 0.4526 9.80
Bank of Ozarks.......................................... 12/12/2008 No 11/24/2009 2,650,000 3,500,000 0.7571 9.00
Capital One Financial................................... 11/14/2008 No 12/3/2009 148,731,030 232,000,000 0.6411 12.00
JP Morgan Chase & Co.................................... 10/28/2008 No 12/10/2009 950,318,243 1,006,587,697 0.9441 10.90
TCF Financial Corp...................................... 1/16/2009 No 12/16/2009 9,599,964 11,825,830 0.8118 11.00
LSB Corporation......................................... 12/12/2008 No 12/16/2009 560,000 535,202 1.0463 9.00
Wainwright Bank & Trust Company......................... 12/19/2008 No 12/16/2009 568,700 1,071,494 0.5308 7.80
Wesbanco Bank, Inc...................................... 12/5/2008 No 12/23/2009 950,000 2,387,617 0.3979 6.70
Union Bankshares Corporation............................ 12/19/2008 Yes 12/23/2009 450,000 1,130,418 0.3981 5.80
Trustmark Corporation................................... 11/21/2008 No 12/30/2009 10,000,000 11,573,699 0.8640 9.40
Flushing Financial Corporation.......................... 12/19/2008 Yes 12/30/2009 900,000 2,861,919 0.3145 6.50
OceanFirst Financial Corporation........................ 1/16/2009 Yes 2/3/2010 430,797 279,359 1.5421 6.20
Monarch Financial Holdings, Inc......................... 12/19/2008 Yes 2/10/2010 260,000 623,434 0.4170 6.70
Bank of America......................................... 59610/28/ No 3/3/2010 1,542,717,553 1,006,416,684 1.5329 6.50
2008
5971/9/2009
5981/14/
2009
-------------------------------------------------------------
Total............................................... ........... ...... ........... $5,567,737,053 $5,373,683,352 1.0361 10.60
--------------------------------------------------------------------------------------------------------------------------------------------------------
\596\ Investment date for Bank of America in CPP.
\597\ Investment date for Merrill Lynch in CPP.
\598\ Investment date for Bank of America in TIP.
FIGURE 27: WARRANT VALUATION OF REMAINING WARRANTS
[Dollars in millions]
----------------------------------------------------------------------------------------------------------------
Warrant Valuation
-----------------------------------------------
Low Estimate High Estimate Best Estimate
----------------------------------------------------------------------------------------------------------------
Stress Test Financial Institutions with Warrants Outstanding:
Wells Fargo & Company....................................... $511.52 $2,184.69 $668.21
Citigroup, Inc.............................................. 17.33 660.59 144.36
The PNC Financial Services Group, Inc....................... 116.03 402.14 183.17
SunTrust Banks, Inc......................................... 20.53 278.35 95.02
Regions Financial Corporation............................... 15.30 166.93 69.56
Fifth Third Bancorp......................................... 122.37 385.90 179.47
Hartford Financial Services Group, Inc...................... 812.43 1,017.87 812.43
KeyCorp..................................................... 20.31 164.16 60.62307167
All Other Banks with Outstanding Warrants................... 874.40 2,711.59 1,671.03
-----------------------------------------------
Total................................................... $2,510.23 $7,972.22 $3,883.87
----------------------------------------------------------------------------------------------------------------
2. Other Financial Stability Efforts
Federal Reserve, FDIC, and Other Programs
In addition to the direct expenditures Treasury has
undertaken through the TARP, the federal government has engaged
in a much broader program directed at stabilizing the U.S.
financial system. Many of these initiatives explicitly augment
funds allocated by Treasury under specific TARP initiatives,
such as FDIC and Federal Reserve asset guarantees for
Citigroup, or operate in tandem with Treasury programs, such as
the interaction between the PPIP and the TALF. Other programs,
like the Federal Reserve's extension of credit through its
section 13(3) facilities and SPVs and the FDIC's TLGP, operate
independently of the TARP.
Figure 28 below reflects the changing mix of Federal
Reserve investments. As the liquidity facilities established to
face the crisis have been wound down, the Federal Reserve has
expanded its facilities for purchasing mortgage related
securities. The Federal Reserve announced that it intends to
purchase $175 billion of federal agency debt securities and
$1.25 trillion of agency mortgage-backed securities.\599\ As of
February 25, 2010, $166 billion of federal agency (government-
sponsored enterprise) debt securities and $1 trillion of agency
mortgage-backed securities have been purchased. The Federal
Reserve has announced that these purchases will be completed by
April 2010.\600\ These purchases are in addition to the $214.4
billion in GSE MBS Treasury purchased under the GSE Mortgage-
Backed Securities Purchase Program prior to the program's
closing on December 31, 2009.\601\
---------------------------------------------------------------------------
\599\ Board of Governors of the Federal Reserve System, Minutes of
the Federal Open Market Committee, at 10 (Dec. 15-16, 2009) (online at
www.federalreserve.gov/newsevents/press/monetary/
fomcminutes20091216.pdf) (``[T]he Federal Reserve is in the process of
purchasing $1.25 trillion of agency mortgage-backed securities and
about $175 billion of agency debt'').
\600\ Board of Governors of the Federal Reserve System, FOMC
Statement (Dec. 16, 2009) (online at www.federalreserve.gov/newsevents/
press/monetary/20091216a.htm) (``In order to promote a smooth
transition in markets, the Committee is gradually slowing the pace of
these purchases, and it anticipates that these transactions will be
executed by the end of the first quarter of 2010''); Board of Governors
of the Federal Reserve System, Factors Affecting Reserve Balances (Mar.
4, 2010) (online at www.federalreserve.gov/Releases/H41/Current/).
\601\ Treasury received $36 billion in principal and interest
payments from these securities. U.S. Department of the Treasury, 2009
Financial Report of the United States Government, at vii (updated Mar.
4, 2010) (online at www.fms.treas.gov/fr/09frusg/09frusg.pdf).
---------------------------------------------------------------------------
FIGURE 28: OTHER FEDERAL GOVERNMENT FINANCIAL STABILITY EFFORTS (AS OF
FEBRUARY 24, 2010) \602\
[GRAPHIC] [TIFF OMITTED] 54875A.015
---------------------------------------------------------------------------
\602\ Federal Reserve Liquidity Facilities include: Primary credit,
Secondary credit, Central Bank Liquidity Swaps, Primary dealer and
other broker-dealer credit, Asset-Backed Commercial Paper Money Market
Mutual Fund Liquidity Facility, Net portfolio holdings of CPFF,
Seasonal credit, Term auction credit, Term Asset-Backed Securities Loan
Facility. Federal Reserve Mortgage Related Facilities include: Federal
agency debt securities and Mortgage-backed securities held by the
Federal Reserve. Institution Specific Facilities include: Credit
extended to American International Group, Inc., and the net portfolio
holdings of Maiden Lanes I, II, and III. Board of Governors of the
Federal Reserve System, Factors Affecting Reserve Balances (H.4.1)
(online at www.federalreserve.gov/datadownload/Choose.aspx?rel=H41)
(accessed Mar. 4, 2010). For related presentations of Federal Reserve
data, see Board of Governors of the Federal Reserve System, Federal
Reserve System Monthly Report on Credit and Liquidity Programs and the
Balance Sheet, at 2 (Feb. 2010) (online at www.federalreserve.gov/
monetarypolicy/files/monthlyclbsreport201002.pdf). The TLGP figure
reflects the monthly amount of debt outstanding under the program.
Federal Deposit Insurance Corporation, Monthly Reports on Debt Issuance
Under the Temporary Liquidity Guarantee Program (Dec. 2008-Dec. 2009)
(online at www.fdic.gov/regulations/resources/TLGP/reports.html). The
total for TALF has been reduced by $20 billion throughout this exhibit
in order to reflect Treasury's $20 billion first-loss position under
the terms of this program. U.S. Department of the Treasury, MBS
Purchase Program: Portfolio by Month (online at
www.financialstability.gov/docs/
Feb%202010%20Portfolio%20by%20month.xls) (accessed Mar. 4, 2010).
---------------------------------------------------------------------------
3. Total Financial Stability Resources (as of December 31, 2009)
Beginning in its April 2009 report, the Panel broadly
classified the resources that the federal government has
devoted to stabilizing the economy through myriad new programs
and initiatives as outlays, loans, or guarantees. Although the
Panel calculates the total value of these resources at nearly
$3 trillion, this would translate into the ultimate ``cost'' of
the stabilization effort only if: (1) assets do not appreciate;
(2) no dividends are received, no warrants are exercised, and
no TARP funds are repaid; (3) all loans default and are written
off; and (4) all guarantees are exercised and subsequently
written off.
With respect to the FDIC and Federal Reserve programs, the
risk of loss varies significantly across the programs
considered here, as do the mechanisms providing protection for
the taxpayer against such risk. As discussed in the Panel's
November report, the FDIC assesses a premium of up to 100 basis
points on TLGP debt guarantees.\603\ In contrast, the Federal
Reserve's liquidity programs are generally available only to
borrowers with good credit, and the loans are over-
collateralized and with recourse to other assets of the
borrower. If the assets securing a Federal Reserve loan realize
a decline in value greater than the ``haircut,'' the Federal
Reserve is able to demand more collateral from the borrower.
Similarly, should a borrower default on a recourse loan, the
Federal Reserve can turn to the borrower's other assets to make
the Federal Reserve whole. In this way, the risk to the
taxpayer on recourse loans only materializes if the borrower
enters bankruptcy. The only loan currently ``underwater''--
where the outstanding principal amount exceeds the current
market value of the collateral--is the loan to Maiden Lane LLC,
which was formed to purchase certain Bear Stearns assets.
---------------------------------------------------------------------------
\603\ November Oversight Report, supra note 458, at 36.
FIGURE 29: FEDERAL GOVERNMENT FINANCIAL STABILITY EFFORT (AS OF FEBRUARY 25, 2010)
[Dollars in billions]
----------------------------------------------------------------------------------------------------------------
Treasury Federal
Program (TARP) Reserve FDIC Total
----------------------------------------------------------------------------------------------------------------
Total........................................... $698.7 $1,555.2 $646.4 $2,900.3
Outlays i................................... 278.9 1,198.7 69.4 1,547
Loans....................................... 43.5 356.5 0 400
Guarantees ii............................... 20 0 577 597
Uncommitted TARP Funds...................... 356.3 0 0 356.3
AIG............................................. 69.8 67.6 0 137.4
Outlays..................................... iii 69.8 0 0 69.8
Loans....................................... 0 iv 67.6 0 67.6
Guarantees.................................. 0 0 0 0
Citigroup....................................... 25 0 0 25
Outlays..................................... v 25 0 0 25
Loans....................................... 0 0 0 0
Guarantees.................................. 0 0 0 0
Capital Purchase Program (Other)................ 50.1 0 0 50.1
Outlays..................................... vi 50.1 0 0 50.1
Loans....................................... 0 0 0 0
Guarantees.................................. 0 0 0 0
Capital Assistance Program...................... N/A 0 0 vii N/A
TALF............................................ 20 180 0 200
Outlays..................................... 0 0 0 0
Loans....................................... 0 ix 180 0 180
Guarantees.................................. viii 20 0 0 20
PPIP (Loans) x.................................. 0 0 0 0
Outlays..................................... 0 0 0 0
Loans....................................... 0 0 0 0
Guarantees.................................. 0 0 0 0
PPIP (Securities)............................... xi30 0 0 30
Outlays..................................... 10 0 0 10
Loans....................................... 20 0 0 20
Guarantees.................................. 0 0 0 0
Home Affordable Modification Program............ 48.5 0 0 xiii 48.5
Outlays..................................... xii 48.5 0 0 48.5
Loans....................................... 0 0 0 0
Guarantees.................................. 0 0 0 0
Automotive Industry Financing Program........... xiv 78.2 0 0 78.2
Outlays..................................... 59 0 0 59
Loans....................................... 19.2 0 0 19.2
Guarantees.................................. 0 0 0 0
Auto Supplier Support Program................... 3.5 0 0 .5
Outlays..................................... 0 0 0 0
Loans....................................... xv 3.5 0 0 3.5
Guarantees.................................. 0 0 0 0
Unlocking SBA Lending........................... xvi 15 0 0 15
Outlays..................................... 15 0 0 15
Loans....................................... 0 0 0 0
Guarantees.................................. 0 0 0 0
Community Development Capital Initiative........ 0.78 0 0 0.78
Outlays..................................... 0 0 0 0
Loans....................................... .78 0 0 .78
Guarantees.................................. 0 0 0 0
Help for Hardest Hit Housing Markets............ 1.5 0 0 1.5
Outlays..................................... 1.5 0 0 1.5
Loans....................................... 0 0 0 0
Guarantees.................................. 0 0 0 0
Temporary Liquidity Guarantee Program........... 0 0 577 577
Outlays..................................... 0 0 0 0
Loans....................................... 0 0 0 0
Guarantees.................................. 0 0 xvii 577 577
Deposit Insurance Fund.......................... 0 0 69.4 69/4
Outlays..................................... 0 0 xviii 69.4 69.4
Loans....................................... 0 0 0 0
Guarantees.................................. 0 0 0 0
Other Federal Reserve Credit Expansion.......... 0 1,307.6 0 1,307.6
Outlays..................................... 0 xix 1,198.7 0 1,198.7
Loans....................................... 0 xx 108.9 0 108.9
Guarantees.................................. 0 0 0 0
Uncommitted TARP Funds.......................... 356.3 0 0 356.3
----------------------------------------------------------------------------------------------------------------
i The term ``outlays'' is used here to describe the use of Treasury funds under the TARP, which are broadly
classifiable as purchases of debt or equity securities (e.g., debentures, preferred stock, exercised warrants,
etc.). The outlays figures are based on: (1) Treasury's actual reported expenditures; and (2) Treasury's
anticipated funding levels as estimated by a variety of sources, including Treasury pronouncements and GAO
estimates. Anticipated funding levels are set at Treasury's discretion, have changed from initial
announcements, and are subject to further change. Outlays used here represent investment and asset purchases
and commitments to make investments and asset purchases and are not the same as budget outlays, which under
section 123 of EESA are recorded on a ``credit reform'' basis.
ii Although many of the guarantees may never be exercised or exercised only partially, the guarantee figures
included here represent the federal government's greatest possible financial exposure.
iii This number includes investments under the AIGIP/SSFI Program: a $40 billion investment made on November 25,
2008, and a $30 billion investment committed on April 17, 2009 (less a reduction of $165 million representing
bonuses paid to AIG Financial Products employees). As of January 5, 2010, AIG had utilized $45.3 billion of
the available $69.8 billion under the AIGIP/SSFI and owed $1.6 billion in unpaid dividends. This information
was provided by Treasury in response to a Panel inquiry.
iv This number represents the full $35 billion that is available to AIG through its revolving credit facility
with the Federal Reserve ($25.5 billion had been drawn down as of February 25, 2010) and the outstanding
principal of the loans extended to the Maiden Lane II and III SPVs to buy AIG assets (as of February 25, 2010,
$15.2 billion and $17.4 billion respectively). Income from the purchased assets is used to pay down the loans
to the SPVs, reducing the taxpayers' exposure to losses over time. Board of Governors of the Federal Reserve
System, Federal Reserve System Monthly Report on Credit and Liquidity Programs and the Balance Sheet, at 17
(Oct. 2009) (online at www.federalreserve.gov/monetarypolicy/files/monthlyclbsreport200910.pdf). On December
1, 2009, AIG entered into an agreement with FRBNY to reduce the debt AIG owes the FRBNY by $25 billion. In
exchange, FRBNY received preferred equity interests in two AIG subsidiaries. This also reduced the debt
ceiling on the loan facility from $60 billion to $35 billion. American International Group, AIG Closes Two
Transactions That Reduce Debt AIG Owes Federal Reserve Bank of New York by $25 billion (Dec. 1, 2009) (online
at phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MjE4ODl8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1).
v As of February 4, 2009, the U.S. Treasury held $25 billion of Citigroup common stock under the CPP. U.S.
Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period Ending February 25,
2010 (Mar. 4, 2010) (online at www.financialstability.gov/docs/transaction-reports/3-1-
10%20Transactions%20Report%20as%20of%202-25-10.pdf).
vi This figure represents the $204.9 billion Treasury has disbursed under the CPP, minus the $25 billion
investment in Citigroup ($25 billion) identified above, and the $129.8 billion in repayments that are
reflected as available TARP funds. This figure does not account for future repayments of CPP investments, nor
does it account for dividend payments from CPP investments. U.S. Department of the Treasury, Troubled Asset
Relief Program Transactions Report for Period Ending February 25, 2010 (Mar. 4, 2010) (online at
www.financialstability.gov/docs/transaction-reports/3-1-10%20Transactions%20Report%20as%20of%202-25-10.pdf).
vii On November 9, 2009, Treasury announced the closing of the CAP and that only one institution, GMAC, was in
need of further capital from Treasury. GMAC, however, received further funding through the AIFP, therefore the
Panel considers CAP unused and closed. U.S. Department of the Treasury, Treasury Announcement Regarding the
Capital Assistance Program (Nov. 9, 2009) (online at www.financialstability.gov/latest/tg_11092009.html).
viii This figure represents a $20 billion allocation to the TALF SPV on March 3, 2009. However, as of February
25, 2010, TALF LLC had drawn only $103 million of the available $20 billion. Board of Governors of the Federal
Reserve System, Factors Affecting Reserve Balances (H.4.1) (Jan. 28, 2010) (online at www.federalreserve.gov/
Releases/H41/Current/); U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for
Period Ending February 25, 2010 (Mar. 4, 2010) (online at www.financialstability.gov/docs/transaction-reports/
3-1-10%20Transactions%20Report%20as%20of%202-25-10.pdf). As of January 28, 2010, investors had requested a
total of $68 billion in TALF loans ($11.9 billion in CMBS and $56 billion in non-CMBS) and $66 billion in TALF
loans had been settled ($11 billion in CMBS and $55 billion in non-CMBS). Federal Reserve Bank of New York,
Term Asset-Backed Securities Loan Facility: CMBS (accessed Mar. 4, 2010) (online at www.newyorkfed.org/markets/
CMBS_recent_operations.html); Federal Reserve Bank of New York, Term Asset-Backed Securities Loan Facility:
non- CMBS (accessed Mar. 4, 2010) (online at www.newyorkfed.org/markets/talf_operations.html).
ix This number is derived from the unofficial 1:10 ratio of the value of Treasury loan guarantees to the value
of Federal Reserve loans under the TALF. U.S. Department of the Treasury, Fact Sheet: Financial Stability Plan
(Feb.10, 2009) (online at www.financialstability.gov/docs/fact-sheet.pdf) (describing the initial $20 billion
Treasury contribution tied to $200 billion in Federal Reserve loans and announcing potential expansion to a
$100 billion Treasury contribution tied to $1 trillion in Federal Reserve loans). Because Treasury is
responsible for reimbursing the Federal Reserve Board for $20 billion of losses on its $200 billion in loans,
the Federal Reserve Board's maximum potential exposure under the TALF is $180 billion.
x It is unlikely that resources will be expended under the PPIP Legacy Loans Program in its original design as a
joint Treasury-FDIC program to purchase troubled assets from solvent banks. See also Federal Deposit Insurance
Corporation, FDIC Statement on the Status of the Legacy Loans Program (June 3, 2009) (online at www.fdic.gov/
news/news/press/2009/pr09084.html) and Federal Deposit Insurance Corporation, Legacy Loans Program--Test of
Funding Mechanism (July 31, 2009) (online at www.fdic.gov/news/news/press/2009/pr09131.html). The sales
described in these statements do not involve any Treasury participation, and FDIC activity is accounted for
here as a component of the FDIC's Deposit Insurance Fund outlays.
xi As of February 25, 2010, Treasury reported commitments of $19.9 billion in loans and $9.9 billion in
membership interest associated with the program. On January 4, 2010, the Treasury and one of the nine fund
managers, TCW Senior Management Securities Fund, L.P., entered into a ``Winding-Up and Liquidation
Agreement.'' U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period
Ending February 25, 2010 (Mar. 4, 2010) (online at www.financialstability.gov/docs/transaction-reports/3-1-
10%20Transactions%20Report%20as%20of%202-2-10.pdf).
xii Of the $50 billion in announced TARP funding for this program, $36.9 billion has been allocated as of
February 4, 2010. However, as of January 2010, only $32 million in non-GSE payments have been disbursed under
HAMP. Disbursement information provided in response to Panel inquiry on February 4, 2010; U.S. Department of
the Treasury, Troubled Asset Relief Program Transactions Report for Period Ending February 25, 2010 (Mar. 4,
2010) (online at www.financialstability.gov/docs/transaction-reports/3-1-
10%20Transactions%20Report%20as%20of%202-2-10.pdf).
xiii Fannie Mae and Freddie Mac, government-sponsored entities (GSEs) that were placed in conservatorship of the
Federal Housing Finance Housing Agency on September 7, 2009, will also contribute up to $25 billion to the
Making Home Affordable Program, of which the HAMP is a key component. U.S. Department of the Treasury, Making
Home Affordable: Updated Detailed Program Description (Mar. 4, 2009) (online at www.treas.gov/press/releases/
reports/housing-fact-sheet.pdf).
xiv See U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period Ending
February 25, 2010 (Mar. 4, 2010) (online at www.financialstability.gov/docs/transaction-reports/3-1-
10%20Transactions%20Report%20as%20of%202-25-10.pdf). A substantial portion of the total $81 billion in loans
extended under the AIFP have since been converted to common equity and preferred shares in restructured
companies. $19.2 billion has been retained as first lien debt (with $6.7 billion committed to GM, $12.5
billion to Chrysler). This figure ($78.2 billion) represents Treasury's current obligation under the AIFP
after repayments.
xv See U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period Ending
February 25, 2010 (Mar. 4, 2010) (online at www.financialstability.gov/docs/transaction-reports/3-1-
10%20Transactions%20Report%20as%20of%202-25-10.pdf).
xvi U.S. Department of Treasury, Fact Sheet: Unlocking Credit for Small Businesses (Oct. 19, 2009) (online at
www.financialstability.gov/roadtostability/unlockingCreditforSmallBusinesses.html) (``Jumpstart Credit Markets
For Small Businesses By Purchasing Up to $15 Billion in Securities'').
xvii This figure represents the current maximum aggregate debt guarantees that could be made under the program,
which is a function of the number and size of individual financial institutions participating. Of debt subject
to the guarantee, $309 billion is currently outstanding, which represents about 54 percent of the current cap.
Federal Deposit Insurance Corporation, Monthly Reports on Debt Issuance Under the Temporary Liquidity
Guarantee Program: Debt Issuance Under Guarantee Program (Dec. 31, 2009) (online at www.fdic.gov/regulations/
resources/tlgp/total_issuance12-09.html) (updated Feb. 4, 2010). The FDIC has collected $10.4 billion in fees
and surcharges from this program since its inception in the fourth quarter of 2008. Federal Deposit Insurance
Corporation, Monthly Reports on Debt Issuance Under the Temporary Liquidity Guarantee Program (Nov. 30, 2009)
(online at www.fdic.gov/regulations/resources/TLGP/fees.html) (updated Feb. 4, 2010).
xviii This figure represents the FDIC's provision for losses to its deposit insurance fund attributable to bank
failures in the third and fourth quarters of 2008 and the first, second and third quarters of 2009. Federal
Deposit Insurance Corporation, Chief Financial Officer's (CFO) Report to the Board: DIF Income Statement
(Fourth Quarter 2008) (online at www.fdic.gov/about/strategic/corporate/cfo_report_4qtr_08/income.html);
Federal Deposit Insurance Corporation, Chief Financial Officer's (CFO) Report to the Board: DIF Income
Statement (Third Quarter 2008) (online at www.fdic.gov/about/strategic/corporate/cfo_report_3rdqtr_08/
income.html); Federal Deposit Insurance Corporation, Chief Financial Officer's (CFO) Report to the Board: DIF
Income Statement (First Quarter 2009) (online at www.fdic.gov/about/strategic/corporate/cfo_report_1stqtr_09/
income.html); Federal Deposit Insurance Corporation, Chief Financial Officer's (CFO) Report to the Board: DIF
Income Statement (Second Quarter 2009) (online at www.fdic.gov/about/strategic/corporate/cfo_report_2ndqtr_09/
income.html); Federal Deposit Insurance Corporation, Chief Financial Officer's (CFO) Report to the Board: DIF
Income Statement (Third Quarter 2009) (online at www.fdic.gov/about/strategic/corporate/cfo_report_3rdqtr_09/
income.html). This figure includes the FDIC's estimates of its future losses under loss-sharing agreements
that it has entered into with banks acquiring assets of insolvent banks during these five quarters. Under a
loss-sharing agreement, as a condition of an acquiring bank's agreement to purchase the assets of an insolvent
bank, the FDIC typically agrees to cover 80 percent of an acquiring bank's future losses on an initial portion
of these assets and 95 percent of losses of another portion of assets. See, e.g., Federal Deposit Insurance
Corporation, Purchase and Assumption Agreement Among FDIC, Receiver of Guaranty Bank, Austin, Texas, FDIC and
Compass Bank at 65-66 (Aug. 21, 2009) (online at www.fdic.gov/bank/individual/failed/guaranty-
tx_p_and_a_w_addendum.pdf). In information provided to Panel staff, the FDIC disclosed that there were
approximately $132 billion in assets covered under loss-sharing agreements as of December 18, 2009.
Furthermore, the FDIC estimates the total cost of a payout under these agreements to be $59.3 billion. Since
there is a published loss estimate for these agreements, the Panel continues to reflect them as outlays rather
than as guarantees.
xix Outlays are comprised of the Federal Reserve Mortgage Related Facilities. The Federal Reserve balance sheet
accounts for these facilities under Federal agency debt securities and mortgage-backed securities held by the
Federal Reserve. Board of Governors of the Federal Reserve System, Factors Affecting Reserve Balances (H.4.1)
(online at www.federalreserve.gov/datadownload/Choose.aspx?rel=H41) (accessed Mar. 4, 2010). Although the
Federal Reserve does not employ the outlays, loans and guarantees classification, its accounting clearly
separates its mortgage-related purchasing programs from its liquidity programs. See Board of Governors of the
Federal Reserve, Credit and Liquidity Programs and the Balance Sheet, at 2 (Nov. 2009) (online at
www.federalreserve.gov/monetarypolicy/files/monthlyclbsreport200911.pdf).
On September 7, 2008, the Treasury Department announced the GSE Mortgage Backed Securities Purchase Program
(Treasury MBS Purchase Program). The Housing and Economic Recovery Act of 2008 provided Treasury the authority
to purchase Government Sponsored Enterprise (GSE) MBS. Under this program, Treasury purchased approximately
$214.4 billion in GSE MBS before the program ended on December 31, 2009. Treasury received $36 billion in
principal and interest payments from these securities. U.S. Department of the Treasury, Fact Sheet: GSE
Mortgage Backed Securities Purchase Program (Sept. 7, 2008) (online at www.mbaa.org/files/ResourceCenter/GSE/
TreasuryFactSheetonGSEMBSPurchaseProgram.pdf); U.S. Department of the Treasury, 2009 Financial Report of the
United States Government, at vii (updated Mar. 4, 2010) (online at www.fms.treas.gov/fr/09frusg/09frusg.pdf).
xx Federal Reserve Liquidity Facilities classified in this table as loans include: Primary credit, Secondary
credit, Central bank liquidity swaps, Primary dealer and other broker-dealer credit, Asset-Backed Commercial
Paper Money Market Mutual Fund Liquidity Facility, Net portfolio holdings of Commercial Paper Funding Facility
LLC, Seasonal credit, Term auction credit, Term Asset-Backed Securities Loan Facility, and loans outstanding
to Bear Stearns (Maiden Lane I LLC). Board of Governors of the Federal Reserve System, Factors Affecting
Reserve Balances (H.4.1) (online at www.federalreserve.gov/datadownload/Choose.aspx?rel=H41) (accessed Feb. 4,
2010).
SECTION FIVE: OVERSIGHT ACTIVITIES
The Congressional Oversight Panel was established as part
of EESA and formed on November 26, 2008. Since then, the Panel
has produced fifteen oversight reports, as well as a special
report on regulatory reform, issued on January 29, 2009, and a
special report on farm credit, issued on July 21, 2009. Since
the release of the Panel's February oversight report, which
assessed Treasury's strategy for addressing issues in
commercial real estate markets across the country, the
following developments pertaining to the Panel's oversight of
the TARP took place:
The Panel held a hearing in Washington, DC on
February 25, 2010, discussing the government assistance
provided to GMAC under the TARP, the government's strategy for
managing and ultimately divesting its 56.3 percent ownership
stake in the company, and the company's plans to return to
profitability and return the taxpayers' investment in it. The
Panel heard testimony from senior Treasury officials and GMAC
executives, including its CEO Michael Carpenter, as well as
independent industry analysts.
The Panel held a hearing in Washington, DC on
March 4, 2010, to discuss the exceptional government assistance
provided to Citigroup under three separate programs: the
Capital Purchase Program, the Targeted Investment Program, and
the Asset Guarantee Program. The Panel heard testimony from
Assistant Secretary of the Treasury for Financial Stability
Herbert M. Allison, Jr. and Citigroup CEO Vikram Pandit.
Video recordings of the hearings, the written testimony
from the hearing witnesses, and Panel Members' opening
statements all can be found online at http://cop.senate.gov/
hearings.
Upcoming Reports and Hearings
The Panel will release its next oversight report in April.
The report will address ongoing efforts under the TARP to
mitigate home foreclosures.
SECTION SIX: ABOUT THE CONGRESSIONAL OVERSIGHT PANEL
In response to the escalating financial crisis, on October
3, 2008, Congress provided Treasury with the authority to spend
$700 billion to stabilize the U.S. economy, preserve home
ownership, and promote economic growth. Congress created the
Office of Financial Stability (OFS) within Treasury to
implement the Troubled Asset Relief Program. At the same time,
Congress created the Congressional Oversight Panel to ``review
the current state of financial markets and the regulatory
system.'' The Panel is empowered to hold hearings, review
official data, and write reports on actions taken by Treasury
and financial institutions and their effect on the economy.
Through regular reports, the Panel must oversee Treasury's
actions, assess the impact of spending to stabilize the
economy, evaluate market transparency, ensure effective
foreclosure mitigation efforts, and guarantee that Treasury's
actions are in the best interests of the American people. In
addition, Congress instructed the Panel to produce a special
report on regulatory reform that analyzes ``the current state
of the regulatory system and its effectiveness at overseeing
the participants in the financial system and protecting
consumers.'' The Panel issued this report in January 2009.
Congress subsequently expanded the Panel's mandate by directing
it to produce a special report on the availability of credit in
the agricultural sector. The report was issued on July 21,
2009.
On November 14, 2008, Senate Majority Leader Harry Reid and
the Speaker of the House Nancy Pelosi appointed Richard H.
Neiman, Superintendent of Banks for the State of New York,
Damon Silvers, Director of Policy and Special Counsel of the
American Federation of Labor and Congress of Industrial
Organizations (AFL-CIO), and Elizabeth Warren, Leo Gottlieb
Professor of Law at Harvard Law School, to the Panel. With the
appointment on November 19, 2008, of Congressman Jeb Hensarling
to the Panel by House Minority Leader John Boehner, the Panel
had a quorum and met for the first time on November 26, 2008,
electing Professor Warren as its chair. On December 16, 2008,
Senate Minority Leader Mitch McConnell named Senator John E.
Sununu to the Panel. Effective August 10, 2009, Senator Sununu
resigned from the Panel, and on August 20, 2009, Senator
McConnell announced the appointment of Paul Atkins, former
Commissioner of the U.S. Securities and Exchange Commission, to
fill the vacant seat. Effective December 9, 2009, Congressman
Jeb Hensarling resigned from the Panel and House Minority
Leader John Boehner announced the appointment of J. Mark
McWatters to fill the vacant seat.
ACKNOWLEDGEMENTS
The Panel wishes to acknowledge 13 industry experts/
analysts and 11 academics and industry participants who were
willing to share their insight.
APPENDIX I: LETTER FROM SECRETARY TIMOTHY GEITHNER TO CHAIR ELIZABETH
WARREN, RE: RESPONSE TO QUESTIONS ON EXECUTIVE COMPENSATION, DATED
FEBRUARY 16, 2010
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