The Zombie Connection

Goverment Motors?

Bloomberg.com is reporting that GM is unlikely to survive the government’s latest requests and will head towards bankruptcy.  This begs the question:  Why have we poured so much money into what most folks thought was a lost cause anyway?  My first response to that would be to point to the timing of requests which occurred around election time.  No Republican or Democratic Pol in their right mind would want to irritate the huge number of states that will be impacted by the fall of GM.  The second reason is one that is just becoming obvious with the Obama approach.  It appears the administration is much more concerned about the impact on the investment banking sector and AIG than with GM.

There’s some very interesting relationships in these deals.  First, take a look at Seven Things You Should Know about the next GM CEO at Business Insider.

So who is this Fritz guy? Here are seven things you should know.

• He’s a native of Detriot, born there in 1958.
• University of Michigan, 1980. Harvard Business School, 1984.
• Started at GM the year he got his MBA, in the Treasurer’s office.
• Came up through GMAC, eventually becoming the head of mortgage finance.
• He has run GM’s Latin American, Africa and Middle East division, as well as the Asia Pacific and European units.
• Became vice chairman and chief financial officer in January, 2006.
• Became president and chief operating officer in March, 2008.

Now isn’t that red point interesting?   (Thanks to Jonas8 for this.) Let’s look at a few other interesting things.    GMAC is owned by Cerberus who acquired 51 percent of GMAC from General Motors in 2006 for $7.4 billion.  You may also know that Cerberus owns 80+% of Chrysler. Cerberus is having its own interest issues like this:

Embattled Cerberus Capital Management, a private-equity firm named for the mythological three-headed dog that guards the gates of Hades, has been overwhelmed by clients seeking to withdraw money from its $2 billion hedge fund, Cerberus Partners.

Website FINAlternatives said that fund investors representing 17 percent of the assets wanted to withdraw their money in December, the most recent month for which statistics are available. Now, with Cerberus’s investments in Chrysler and GMAC going bad and unemployed investors needing to tap more funds, that figure may be heading higher.

Just look at this Wiki list of what things they also own:

• Real Estate – Through investment affiliate Cerberus Real Estate, the company has been making direct equity, mezzanine, first mortgage, distressed and special situation investments in all asset types. It also controls Miami Beach-based LNR Property, a large real estate development and investment firm through subsidiary Riley Property. Cerberus also controls Kyo-ya, a Japan based group of entities that owns several Starwood managed assets in California, Hawaii and Florida.
• Government Services (Military, Energy, and Food & Drug) – owns IAP Worldwide Services, which bought Johnson Controls‘ World Services division in February 2005, and Netco Government Services.

• Financial Services – General Motors sold a 51% stake in its GMAC finance unit to an investor group led by Cerberus Capital Management in November 2006. GM expected to receive $14 billion over the next three years from the sale of General Motors Acceptance Corp. In December 2006, Cerberus acquired the Austrian bank BAWAG P.S.K. for a reported EUR3.2 billion. In August 2007, Cerberus announced that it was closing one of their mortgage companies, Aegis Mortgage. It owns half of a 9.9 % share (5%) with the Gabriel Group in Bank Leumi

I want to jump on over to something BostomBoomer sent me this morning at the Market Ticker by Karl Denninger.  Just start connecting the dots here and start with an earlier piece here.  This is the line that starts connecting ALL these little dots.

And then there’s the nearly $1 trillion in CDS that will trigger.  There is no accurate way to know what the net exposure is on those, but I’d take the “over” on $100 billion, focused in you-know-where.

CDS would be Credit Default Swaps.  Yup, those would be those toxic assets that are still sitting out there in banks and most likely AIG.  So, who exactly are we worried about here?  GM?  GM’s stock holders?  GM’s auto workers?  GM’s retirees?  If you’re any where as pessimistic as I am about this, you’re going to say, I bet it’s the bondholders and the holders of the CDS based on GM.  DING!  Let’s go a little bit further into that Denninger thread.

The government has provided a history now that says that if you are a holder of CDS written by AIG, you will get 100 cents on the dollar, even if the notes don’t default.  In addition that 100 cents is above what you would normally get even if there IS a default, because normally you have to tender the defaulted bond or the payout is limited by the recovery, and recovery on a defaulted bond is almost never zero.

So in this case the winning play, if you’re a big bondholder, is to tell GM to suck eggs; you’ll get paid 100 cents on your CDS even though AIG has no money, because the taxpayer will make you whole on those CDS, even if the bonds have a recovery in bankruptcy.

In other words you could conceivably get more than 100 cents if you hold those bonds – so long as you also hold a CDS as a hedge.

It must be nice to be able to screw the taxpayer for more than a 100% payout, right?

The bondholders “committee” is all made up of big players who presumably are hedged, ergo, this has to be assumed to be part of their “thought process” – if not the controlling factor.

Small bondholders on the other hand (who have no hedge, unless they were smart enough to buy lots of PUTs a few months ago) are just going to get plain old-fashioned screwed.

Since the only way GM survives is for it to get the bondholder committee to agree to restructuring it therefore follows that the only way this can happen is if the administration (and Fed!) makes very clear that all funding to AIG has been cut off and therefore no further “pass through” payments will (or can) occur.

That is, The Obama Administration has to bankrupt AIG to save GM, or we will instead see the banks again rip off the American Taxpayer through yet another “passthrough” CDS payout stream AND GM will go bankrupt.

Get ready America – you’re about to get it in BOTH holes this time.

This is analysis and deduction based on the available and public facts – I have no proof – but I’ll bet this is exactly how this deal will go down, and why.

PS: Every firm in America that has a significant amount of CDS outstanding is potentially subject to this same attack.  It’s all very nice that our government is permitting banks to rob the citizens like this, isn’t it?

So, let’s see. Cerebus, through its financial holdings gets TARP money.  Cerebus through its Chrysler holdings gets cheap government loans.  AIG and all those investment banks holding those swaps get taxpayer money.  GM’s getting cheap loans and has bonds that have been securitized into CDS.  I’m with Denninger on this one.

Oh, and just in case you’re not seeing a lot of stuff on Cerebus, let’s try these little tidbits:

On October 19, 2006, John W. Snow, President George W. Bush‘s second United States Secretary of the Treasury, was named chairman of Cerberus.

J. Ezra Merkin is a partner in Cerberus. Merkin invested his funds into Cerberus and its portfolio companies. His Gabriel fund invested $79 million in Chrysler, $66 million in GMAC and $67 million in Cerberus partnerships, according to year-end statements. The Gabriel Fund was a feeder fund for Bernard L. Madoff Investment Securities LLC.^[3]

Japanese bank, Aozora, a Cerberus company lost $ 137 million to Bernard L. Madoff Investment Securities LLC. Aozora was part of the investment group that acquired 51 percent of GMAC from General Motors.

I’m just hoping some one in the MSM can pick up on this and go after it.  If not that, then Cuomo needs to get a forensic accountant and go after it all.  This just doesn’t look right to me AT ALL.

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