GMAC stays mum on debt swap

By BREE FOWLER , 12.29.08, 02:39 PM EST

The financing arm of General Motors Corp. remained silent Monday on whether it had raised enough capital to become a bank-holding company and eligible for access to billions in federal bailout money.

Analysts have speculated that if GMAC (nyse: GJM - news - people ) Financial Services LLC doesn't obtain financial help it would have to file for bankruptcy protection or shut down, which would be a serious blow to parent GM's own chances for survival.

GMAC had received the Federal Reserve's approval to become a bank holding company last week, but the approval was contingent on the auto and home loan provider raising at least $30 billion in regulatory capital. The company had been attempting to raise the needed funds through a complicated debt-for-equity exchange that expired at 11:59 p.m. EST Friday.

In an e-mail Monday, GMAC spokeswoman Gina Proia said GMAC still had no news to announce regarding the debt swap. That came after Saturday e-mails that did not provide any specifics but said that GMAC planned to announce the results of the debt swap soon.

"The offer did expire yesterday at 11:59 p.m. as planned. We have not yet issued final results but intend to in the near term. I have no further comment on the exchange until then," Proia wrote Saturday.

Becoming a bank-holding company would both qualify GMAC to access the government's bank rescue funds and support GMAC loans to car buyers and GM dealerships. GM owns 49 percent of GMAC.

The Federal Reserve apparently needed to see that bondholders were willing to inject more capital into GMAC. The bondholders needed reassurance that the Fed would approve GMAC's application to qualify for federal aid.

If the financing company fails to become a bank holding company, it could mean severe consequences for automaker GM.

General Motors (nyse: GM - news - people )' ownership of GMAC has kept the finance arm lending to dealers and car buyers, even as credit from traditional banks has dried up. If GMAC goes under, other institutions aren't likely to step in to replace the credit lost by GM's dealers and customers.

The Fed's action Wednesday came as GMAC was struggling to get bondholders to convert 75 percent of their debt into equity of the company. It's been nearly two weeks since GMAC has released any information about the amount of participation so far.

As of Dec. 17, only about 16.9 billion, or 58 percent, of its GMAC notes had been tendered, along with about $3.5 billion, or 38 percent, of the notes issued by its Residential Capital LLC mortgage business.

GMAC's goal is to reach $30 billion in capital, the majority of which would come from the exchange of debt. Another part of the equity requirement included a demand from the Fed that $2 billion of the total come from new equity. So far, GMAC has received a commitment of $750 million from GM and private-equity firm Cerberus Capital Management, which owns the majority stake in GMAC.

It's unclear whether that funding would come from the $17.4 billion in bridge loans the U.S. Treasury granted GM and Chrysler LLC - which is owned by Cerberus_ earlier this month.

Some of the rescue money will be available this month and next - $9.4 billion for GM and $4 billion for Chrysler, which have said they could be facing bankruptcy soon without government help. GM is set to receive the remaining $4 billion in loans after more money is released from the financial rescue account.

It was unclear Monday exactly when the Treasury Department planned to release the first set of loans.

"We're making good progress finalizing the automaker loans and are committed to closing them on a timeline that will meet their individual near term funding needs," Treasury spokeswoman Brookly McLaughlin said in a statement.

GMAC has not said publicly how much it was requesting from the $700 billion bank bailout fund. CreditSights analyst Richard Hoffman estimated in a research note Friday that GMAC "could have applied for up to about $6.3 billion."

The Fed order says GM will reduce its stake to less than 10 percent of the voting and total equity interest of GMAC. GM's remaining equity interest in GMAC will be transferred to an independent government-accepted trustee who must dispose of the equity held in the trust within three years of the trust's creation.

Cerberus, which led an investment group that bought a 51 percent stake in GMAC from the automaker for $14 billion in 2006, will reduce its stake in GMAC to no more than 33 percent of total equity.

In afternoon trading, GM shares fell 27 cents, or 7.4 percent, to $3.39.

Associated Press Economics Writer Christopher S. Rugaber in Washington contributed to this report.

Copyright 2008 Associated Press. All rights reserved. This material may not be published broadcast, rewritten, or

The U.S. economy isn't feeling the holiday cheer this year, as sluggish growth and the prolonged housing crisis fail to let up.

The rate of existing home sales plunged a record 8.6% in November, with falling prices faring no better, a real estate trade group said Tuesday.

The report is a blow to the Federal Reserve and Treasury Department, which have been acting aggressively to bring down mortgage rates and revive the U.S. housing market. Thus far, the effort has yielded mixed results at best, and the Census Bureau and realtors' figures are expected to reflect more of the same: declining sales.

Meanwhile, the National Association of Realtors said the median home price fell 13.2% on an annual basis, down for a fifth straight month to $181,300. It was the largest drop since the current data series began in 1968 and probably the largest since the Great Depression, said Lawrence Yun, the chief economist for the National Association of Realtors.

The pace of sales fell to a 4.49-million-unit annual rate. Economists polled by Reuters were expecting home resales to set a 4.90-million pace. October's figure was revised downward to 4.91 million, from 4.98 million.

"The quickly deteriorating conditions in the job market, stock market and consumer confidence in October and November have knocked down home sales to another level," Yun said.

The Reuters/University of Michigan Surveys of Consumers said its final index reading of confidence for December rose to 60.1, from November's 55.3. Don't get too excited, though: The report noted that, absent the gain due to unusually steep pre-holiday price discounts, the sentiment index would be virtually unchanged.

Japan's central bank concluded Friday that near-zero interest rates would not be enough to stimulate lending and has taken the extra step of buying corporate debt as well. But the measures are unlikely to bring the yen down from decade highs, a problem which continues to batter Japanese exporters. The central bank also made clear that for all its pro-activeness, Western economies would need to improve to brighten Japan's fortunes.

Following in the footsteps of the U.S. Federal Reserve, the Bank of Japan cut its key overnight lending rate to 0.1%, from 0.3%, in a 7-1 board vote. It also said it would temporarily buy commercial paper, or short-term corporate bonds, but did not specify how big the program would be or how long it would last.

The additional measures "were necessary for the effects of extremely low policy interest rates to prevail in financial markets and corporate financing," the Bank of Japan said in a statement.

Though the scale of the program is unclear, buying corporate debt "is quite significant because it's the most aggressive we've seen from the Bank of Japan in terms of readiness to take riskier assets," said Tokyo-based Macquarie economist Richard Jerram. Japanese companies are not as strapped for funds as those in the U.S. but the commercial paper market has struggled in the last two months, and any measures to boost liquidity are welcome, he added.

The government will also buy up to 20.0 trillion yen ($223.7 billion) in shares from banks, which have suffered heavy portfolio losses as the Japanese stock market has lost over 40.0% this year. The program is intended to ease banks' sensitivity to the stock market.

But for all these measures, the health of Japan's economy next year depends on Western economies, whose recessions have battered exports and made overseas lending tight. "Uncertainty in the outlook for the economy to return to a sustainable growth path with price stability has increased," the central bank's statement read. "Much depends on financial conditions in the United States and Europe as well as developments in overseas economies."

It is unlikely that Friday's measures will be enough to keep down the yen, whose 25.0% surge this year to a 13-year high against the dollar has eroded companies' overseas earnings. After the Fed cut rates to 0.25% this week, the yen had been a higher-yielding currency than the dollar because Japan's key rate of 0.3% had been higher than the Fed's benchmark rate for the first time in nearly 15 years.

Though the dollar's plunge below the psychologically significant 90-yen level "has provoked speculation that FX intervention is imminent," "we do not expect a return to the 2001-04 policy of rapid reserve accumulation in order to resist yen appreciation," Merrill Lynch currency strategist Daniel Tenengauzer wrote in a Friday research note. He predicted that the yen would retain its strength over the next six months and then start weakening in late 2009, as an unwinding of the carry trade faded.

The central bank said Friday that it would also increase monthly purchases of government bonds, to 1.4 trillion yen ($15.6 billion), from 1.2 trillion yen ($13.5 billion), in the first increase since 2002.

Financial stocks helped New York's stock indexes edge higher at the open Tuesday, despite a multibillion-dollar loss from a Wall Street heavyweight. Meanwhile, consumer prices tumbled, according to government data, and new housing construction hit record lows.

All of the morning's news comes as the Federal Reserve wraps up its two-day monetary policy meeting, which is expected to conclude with another cut to benchmark interest rates. The fed funds rate currently stands at 1.0%, but the expected cut to 0.5% would be little more than a formality, since the effective fed funds rate has been trading below that level since mid-October. The central bank's statement will be closely watched for hints toward the Fed's next move, and perhaps a further expansion of its balance sheet through purchases of Treasury bonds or agency debt.

Before the Fed took center stage, Goldman Sachs (nyse: GS - news - people ) made the morning's biggest headlines, recording the first red ink in its 10-year history as a publicly traded company. The firm booked a loss of $4.97 a share, or $2.1 billion, as revenues tumbled across most of its businesses. The news did little to shake investors' faith though, as Goldman shares started the day up $3.00, or 4.5%, to $69.46. Rival Morgan Stanley (nyse: MS - news - people ), which reports fourth-quarter results Wednesday, tacked on 47 cents, or 3.5%, to $14.11.

Shortly after the open, the Dow Jones industrial average gained 55 points, or 0.6%, to 8,619. The Standard & Poor's 500 added 9 points, or 1.1%, to 878, and the Nasdaq was up 21 points, or 1.4%, to 1,529. Volumes were light as investors treaded water before the Fed's statement.

The Labor Department said its Consumer Price Index came in at -1.7% for November, thanks in large part to cheaper oil prices. Excluding fuel and energy costs, the index was unchanged from the month before. The inflation gauge has cooled considerably since the summer, when record fuel costs sent the reading on a dizzying rise. (See "Consumer Prices Take A Dive.")

Crude oil was up 33 cents Tuesday, but still trading at just $44.84 a barrel. United States Oil Fund (nyse: USO - news - people ), an exchange-traded vehicle that tracks crude and other products, gained 84 cents, or 2.3%, to $37.68 early in the session. (See "OPEC: All Eyes On Russia.")

On the housing front, the Commerce Department recorded 625,000 housing starts in November, down 18.9% from the October estimate, and off 47.0% from November 2007. New building permits were at 616,000, down 48.1% from the year before, while housing completions were just below 1.1 million, 22.8% below the year-prior figure. But the drop in starts can be taken as a blessing in disguise, since the glut of inventory that home builders face will be helped by fewer new homes on the market.

U.S. households, hit by declining home values and stock market losses, have cut back on their debt levels for the first time on record as loans remain scarce amid what appears to be a deepening recession.

The Federal Reserve on Thursday released it latest quarterly look at consumer and business finances showing that households reduced their debt levels by 0.8 percent at an annual rate in the July-September period, the first drop on records that go back more than 50 years.

The decline in household debt levels is evidence of the severe credit squeeze that is occurring as banks, saddled by billions of dollars of losses in mortgage debt, have tightened lending standards and made it harder for people to get loans.

Mortgage debt fell at an annual rate of 2.4 percent in the third quarter, the largest decline on record. Mortgage debt had fallen at an annual rate of 0.1 percent in the second quarter. Those two quarterly declines are the first such drops in the Fed survey that dates back to 1952.

In past periods of tight credit, mortgage and total household debt have never declined, although the debt growth usually slowed.

The Fed report also showed that households' net worth fell by 4.7 percent in the third quarter to $56.5 trillion, reflecting the hit Americans are taking as the value of their homes and investments decline.

The drop in household net worth - total assets such as homes and checking accounts minus liabilities like mortgages and credit-card debt - marked the fourth straight quarterly decline since total family net worth hit an all-time high of $63.6 trillion in the July-September quarter of 2007.

Applications for mortgage refinancing tripled in early December on news that the Federal Reserve will buy up to $600 billion of mortgage debt. BusinessWeek's personal finance editor Lauren Young spoke to mortgage guru Keith Gumbinger of HSH Associates, a financial publisher, about the current refinancing climate.

How easy is it to refinance now?
You generally need to have an equity stake of at least 20% in your home. In the most challenged markets, you need much more. You don't need a flawless credit record, but you need a credit score of 720 to access the lowest interest rates. You must fully document income and assets, which is very different from a couple of years ago. Back then, you could walk into a lender merely breathing and they would say, "Great, here is your loan." Your debt loads relative to income have to be smaller now. At the height of the boom, those ratios—which include housing payments and other debts longer than 10 months—were as high as 55%. Now, you can't have a debt ratio higher than 43%.

Is there relief in sight for borrowers who want to refinance jumbo adjustable-rate mortgages but have been shut out of the market?
People got paranoid about adjustable-rate jumbo mortgages&mortgages that exceed $417,000&about a year ago. So many people have them, and there were worries people wouldn't be able to cover mortgage payments if they reset at higher rates. But now there has been a 180-degree turnaround. The rates on adjustable-rate jumbo mortgages are actually lower than fixed-rate jumbo mortgages. For example, the popular 5/1 jumbo adjustable-rate, which has an initial interest rate for five years and then resets annually, is 6.72%. The traditional 30-year fixed rate is 7.49%. So even if you want to get out of a jumbo adjustable-rate mortgage into a fixed-rate mortgage, now is not the best time to refinance. Ride it out, and you will probably save a few bucks if rates go lower.

Have closing costs shifted, too?
The costs haven't changed too much, but you might find the appraisal for your home will come in below what you are expecting. If you wish to challenge it, your lender may let you get a second opinion, but you will have to pay for it.

Considering that so many lenders have gone out of business, how do you work the system to your advantage?
Some lenders are more capital impaired than others, and their rates may be higher. My advice is to look across your marketplace, and leave yourself a sufficient amount of time to shop around. If you've worked with a mortgage broker in the past, keep in mind that mortgage brokers rely heavily on wholesale lenders [such as major banks and specialty finance companies], and those lenders have basically shut their doors and gone away. As a result, there are fewer funding sources for brokers. If you have a mortgage broker you trust, certainly engage them.

Mortgage rates have already fallen. Should homeowners wait for a new government program to push rates even lower?
If we crack 5%&mdashwhich would be a 50-year historic low—and stay there long enough, there are many millions of mortgages that can be refinanced profitably. But the lenders' staffs are already very thin. If you have a target interest rate in your head, shop around now for a mortgage lender who will hold onto your application so the paperwork is ready to go if rates fall.

Worker productivity slowed in the summer while wage pressures increased, but both developments were better than expected and are unlikely to raise inflation alarms at the Federal Reserve.

The Labor Department reported Wednesday that productivity, the key ingredient for rising living standards, rose at an annual rate of 1.3 percent in the July-September quarter. That's down from the 3.6 percent growth rate in the second quarter, but slightly higher than the 1.1 percent increase initially reported a month ago and better than the 0.9 percent rise economists expected.

Wage pressures, as measured by unit labor costs, rose at an annual rate of 2.8 percent, after having declined at a 2.6 percent rate in the second quarter. The rate of increase in the third quarter was the biggest jump since a 4.5 percent rate in the fourth quarter of last year, but was below the 3.6 percent advance originally reported and that economists expected.

The Fed closely monitors developments in productivity and wages to see if inflation is getting out of hand. But the central bank was likely to view the recent developments as temporary and not long-run trends.

Analysts had expected a big downward revision in productivity given the fact that overall output, as measured by the gross domestic product, was revised to show a decline of 0.5 percent at an annual rate, a bigger drop than the 0.3 percent decrease that was originally reported.

Still, the 1.3 percent rise in productivity was the weakest showing since a 0.8 percent rise in the fourth quarter of 2007.

While rising wages and benefits are good for workers, if those gains outstrip increases in productivity it can create serious inflation problems as businesses are forced to boost the cost of their products to cover the higher wage demands.

The Federal Reserve is extending the life of key programs aimed at busting through credit clogs and restoring stability to financial markets.

The Fed says the programs, originally slated to last through Jan. 30, will be extended through April 30.

The Fed's emergency lending facility for investment firms is covered by the decision. Another program that lets financial institutions temporarily swap risky investments, such as shunned mortgages, for super-safe Treasury securities also is covered.

Copyright 2008 Associated Press. All rights reserved. This material may not be published broadcast, rewritten, or redistributed

The president-elect introduces his economy squad. They'll be busy. Here's where to start.

Missing from the list: New Mexico Gov. Bill Richardson, who was reportedly offered the position of secretary of commerce; University of Chicago economist Austan Goolsbee, who is expected to take a slot on the Council of Economic Advisers; and Congressional Budget Office Director Peter Orszag, who has reportedly been selected as director of the president's Office of Management and Budget.

"I've sought leaders who could offer both sound judgment and fresh thinking, both a depth of experience and a wealth of bold new ideas," Obama said in a Chicago press conference. The president-elect said that all of these nominees "share my fundamental belief that we cannot have a thriving Wall Street while Main Street suffers." (Full Text: Obama's Economic Team Announcement)

Despite the impressive credentials of this group, what is more important is what they will do with the economic hand they have been dealt. Late Sunday, Uncle Sam agreed to lend troubled Citigroup (nyse: C - news - people ) an additional $20 billion from its bailout purse and to backstop $306 billion of the firm's troubled loans and securities.

Meanwhile, last week, the heads of General Motors (nyse: GM - news - people ), Chrysler and Ford Motor (nyse: F - news - people ) returned to Detroit, discouraged that they were unable to convince Congress (at least for now) of the need to direct $25 billion in bailout money their way. Aside from a late afternoon rally Friday on the news of Geithner's appointment, equity markets continue to plunge.

Obama at least has seized the moment. Over the weekend, he announced broad plans for a two-year economic stimulus plan that would create 2.5 million jobs. Initial analyses put the price tag anywhere between $500 billion and $700 billion, dwarfing the $150 billion stimulus proposal he put forth on the campaign trail.

 

The Federal Reserve said today it is establishing a special fund to lend money directly to businesses so they have adequate cash to operate, a major move by the central bank to ensure that "main street" companies are not crippled by the financial crisis gripping Wall Street and other money centers around the world.

Under the new program, the Fed will buy up commercial paper, the short-term debt that large companies across the country use to fund their day-to-day operations. That puts the Fed in the unprecedented position of, in effect, funding individual companies by buying their debt.

The "Commercial Paper Funding Facility" will be a special entity, funded by both the Fed and the Treasury Department, that will purchase three-month notes issued by corporations. It will include debt backed by specific assets, but also will make unsecured loans. Entities that sell unsecured debt to the new entity will have to pay a fee to account for the higher risk.

After a day of sharp losses, Wall Street market futures turned higher on hopes that the Fed announcement will help ease a credit crisis in which banks and financial firms have become hesitant to lend, and companies have worried about raising the money needed to pay their bills.

Problems in the commercial paper market have been one of the most direct ways in which the financial crisis has threatened to affect the nuts and bolts economy.

With financial markets in near-meltdown, governments around the world have been scrambling to find new ways to infuse vast amounts of cash into banks and even directly to companies to help resuscitate the global financial system.

The Fed yesterday said it would push $900 billion into the U.S. banking system, a six-fold increase in its program of lending money to banks.

The measures followed similar efforts by other central banks and governments around the world over the weekend and yesterday to get financial institutions to stop hoarding money and start lending to one another and to their customers.

It wasn't enough. Stock markets began a steep tumble in Asia, where most national markets were down considerably, and then declines accelerated in Europe on fears of new bank failures. The French stock index tumbled 9 percent, the German index dropped 7 percent and the British benchmark index fell nearly 8 percent. Russia was off nearly 20 percent.

In the United States, the Dow Jones industrial average fell 3.6 percent, closing below the 10,000 level for the first time since 2004. It had been down nearly twice that at one point before staging a late rally.

With the financial crisis now engulfing most of the developed world, a meeting scheduled for later this week in Washington of the International Monetary Fund and World Bank will probably turn into a summit that could provide a forum for coordinated action.

But there was little sign of coordination among European leaders, who could not agree over the weekend on a common approach to the crisis and who yesterday bickered over what sorts of protections they would offer investors and institutions.