When is the GM IPO? After the Election (WSJ)

Official White House Briefing: "Fact Sheet on Obama Administration Restructuring of General Motors"

Treasury Provides Further Guidance on GM IPO

AUTOS SEPTEMBER 21, 2010

China's SAIC Expresses Interest in Buying GM Stake


By SHARON TERLEP
DETROIT—Interest by China's biggest auto maker in possibly buying a stake in General Motors Co. this fall raises the dicey issue for the U.S. government over foreign investment in the Detroit company.

SAIC Motor Corp., which has built cars with GM in China since the 1990s, hasn't decided whether to participate in GM's initial public offering but has expressed an interest in doing so, people familiar with the matter said.

GM declined to comment about SAIC. The Chinese auto maker said only that it is closely watching the GM offering. SAIC's interest was first reported by Reuters news service.

The issue of foreign investors buying GM shares in the company's IPO is a thorny one for the U.S. government, which is eager to unload its 61% stake in the auto maker.

The Treasury is likely to seek out large institutional investors to buy blocks of GM stock at a set price. Such "cornerstone" investors typically commit to holding their stock as a show of confidence, which can help draw other investors. In exchange, cornerstone investors sometimes get a favorable deal on the shares. Several U.S. investors have expressed an interest in buying a stake in GM, including potential cornerstone investors, according to a person familiar with the situation.

The larger the group of cornerstone investors, the easier it would be for the Treasury to sell a big chunk of its GM stake in the IPO. GM and the banks underwriting the deal are pushing for the biggest possible investor pool to increase the size of the offering. The IPO will likely involve shares held by the Treasury, a union-managed retiree trust fund and Canadian governments.

But the Treasury also is worried about the political reaction if non-U.S. investors, such as sovereign-wealth funds or a Chinese company, are allowed to acquire a significant stake in GM after U.S. taxpayers spent $50 billion to assist the company through bankruptcy reorganization.

"Critics will publicly blast the Obama administration for using taxpayer money to fund foreign ownership in an American icon," said Morningstar automotive equities analyst David Whiston. Yet restricting foreigners from buying stock in the IPO would be impractical since the shares would be available on the public market, he said.

Indeed, the Treasury, in an effort to maximize the share price and establish a solid shareholder base, said last week that all investors will have access to GM shares. The statement also said, however, that no single investor or group of investors would receive "a disproportionate share or unusual treatment."

GM plans to begin pitching the IPO to investors immediately after the Nov. 2 midterm elections, which could keep the IPO separate from campaign politics. The goal is to conduct the offering before the end of the month. GM Chief Executive Dan Akerson said last week that it will likely take years for the U.S. government to unload its entire stake.

Mr. Akerson, who took over as CEO Sept. 1, has been more pragmatic about the IPO than was his predecessor Edward E. Whitacre Jr., who pushed the Treasury to unload as many shares as possible as quickly as possible. In contrast, Mr. Akerson last week acknowledged the importance of Treasury getting the best possible share price, even if means the government continues to hold some shares for some time.

China's auto market, the world's biggest, is a key source of strength for GM.

The auto maker's sales in China rose 19% in August from a year earlier while the U.S. and European markets struggled. The auto maker's partnership with SAIC has been central to GM's success in China and is expected to continue to play a major role.

Such joint ventures also are an important platform to reaching other fast-growing, emerging markets. GM and SAIC are teaming to expand in India, for example.

Write to Sharon Terlep at sharon.terlep@wsj.com

Alert: Annuities Sold in Banks (NY TImes)

December 10, 2009
A.I.G. Units Omit Name and Excel
By MARY WILLIAMS WALSH

Just months after dropping the telltale “A.I.G.” from its sales brochures, the company has leapfrogged its competitors and reclaimed a title it held for many years before its bailout — the top seller of fixed annuities to bank customers.

People buying the annuities in bank branches may be surprised to know they are signing up with A.I.G. The contracts are being offered under the names of two subsidiaries, Western National Life and First SunAmerica. Until last June, they carried the name of A.I.G. Annuity.

The booming annuity sales are a bright spot for American International Group, which must raise cash to pay back the federal government.

But some competitors and consumer advocates are questioning A.I.G.’s comeback, saying its ability to keep drawing federal money is giving it an unfair advantage just a year after its government rescue.

Often sold as alternatives to certificates of deposit, fixed annuities are insurance contracts that guarantee a set rate of return, unlike variable annuities, whose returns may track the ups and downs of the markets.

The people who buy them in banks tend to be looking for something safe, but which pays more than a certificate of deposit. Fixed annuity contracts usually run for many years, and even before A.I.G.’s bailout last year, its customers began to have qualms about tying up their money with a company whose future was uncertain.

After the bailout, they accelerated their withdrawals from A.I.G., even if they had to pay a penalty to get their money back. Most new buyers sought out other insurers, like Transamerica and New York Life, which had higher ratings and did not get assistance through the Troubled Asset Relief Program.

But since June, and the name change, the A.I.G. subsidiaries have slogged their way back to the top. In the third quarter, Western National sold more fixed annuities in banks than any other insurer, according to Kehrer-Limra, a research and consulting firm that tracks sales of insurance and investment products in banks.

New York Life, which had claimed the lead in the first half of this year, has now fallen back to third place, and Transamerica is fourth. Other former contenders, like Genworth and MetLife, are not in the top five anymore.

Even though fixed annuities can bring their issuer a lot of cash quickly, like bank deposits, they can also erode an insurer’s capital faster than sales of other types of insurance. That is because they require the company to set aside very large reserves from the outset.

The risks this can pose are not just theoretical. Another A.I.G. subsidiary — one that the Federal Reserve Bank of New York recently took a $9 billion stake in — sold such a large volume of fixed annuities through Japanese banks that it wound up with insufficient capital to support its businesses.

A spokesman for A.I.G., Mark Herr, said the unit, the American Life Insurance Company, had restored its capital by transferring risks “using coinsurance and modified coinsurance,” among other techniques. He said the problem had not recurred since 2007.

In normal times, only well-capitalized insurers tend to promote fixed annuities heavily, to avoid stretching their resources too thin.

But these are not normal times. Western National was one of a dozen A.I.G. insurance subsidiaries whose investment portfolios were dipped into by A.I.G. Securities Lending — an affiliate that pooled more than $80 billion worth of the insurers’ assets and lent them out to banks and Wall Street firms, to use in trading.
The securities lending program imploded. Western National’s share of the losses was $7.9 billion, and the company was recapitalized as part of the federal bailout of A.I.G.

Joseph M. Belth, editor of the Insurance Forum, a consumer-oriented newsletter that tracks the financial strength of insurance companies, said that at the very least, purchasers were entitled to know the extent to which A.I.G., the parent, was standing behind the annuities of its subsidiaries. Only the subsidiaries are monitored to make sure enough money stands behind their promises.

Competitors said they believed Western National was using the new money from the Treasury to finance some of the highest teaser rates in the industry.

“Some insurers are selling annuities at rates that suggest that they are either building more risk into the investment portfolio than might be prudent, or using this as a way of raising cash, perhaps to pay off other obligations,” said Gary E. Wendlandt, the chief investment officer and vice chairman of New York Life.

Judith Alexander, of Beacon Research, which tracks annuity terms, confirmed that Western National was offering some of the higher “bonus rates” on fixed annuities through banks, allowing customers to capture more than 5 percent for one year, but she said it also offered contracts that guaranteed lower rates, in the neighborhood of 2.6 percent, over a longer period.

The chief executive of Western National, Bruce R. Abrams, said customers were opting for the longer terms.

“We’re not selling much bonus-rate product,” he said. “It’s the multiyear guaranteed rate. That’s what the customers are looking for, and that’s what we’re selling them.”

He also cited Western National’s longstanding relationships with banks, which he said allowed the company to negotiate individual terms with banks every week, giving them a high degree of flexibility. For example, he said, if a bank wanted to capture the attention of customers by offering them a higher interest rate than Western National proposed, Western National might arrange for them to do so by offsetting the cost with a smaller commission. The bank would then try to make up the difference on volume.

“That’s unique,” he said. “We’ve been doing that for over 15 years.”

Demand for Build America Bonds (WSJ)

Investors Push to Extend BABs By ANDREW EDWARDS

The Build America Bond program isn't set to expire until the end of 2010, but portfolio managers and other investors in this new class of taxable municipal securities already are arguing to extend it. The reason: The bonds, known as BABs, have done their job. They have helped states, cities and other local government entities tap new capital markets and lower financing costs.

The credit crisis obliterated much of the demand for municipal debt. Money-market funds lost their appetite for variable-rate bonds, and funds that had borrowed heavily to invest in munis disappeared almost entirely.

Municipalities were forced to delay issuing new debt, or to offer unheard-of rates to attract enough individual investors to fund projects. BABs were meant to change that, and they did: New investors have come to the table and tens of billions of dollars in BABs have been issued.

"BABs are a much better foundation for the muni market," said Peter Coffin, president of Breckinridge Capital Advisors, which has $11 billion in municipal bonds under management. "It's a deeper source of demand."

The question is whether they are worth the long-term cost.

The most popular form of BABs pay higher interest rates than tax-exempt muni bonds and recoup 35% of the interest charge from the federal government. So, if a public university sells BABs with an interest rate of 5%, the university ends up paying only 3.25%, with Uncle Sam's subsidy effectively picking up the difference.

This makes BABs attractive to municipalities, which end up with an actual cost of capital even lower than on traditional tax-free muni bonds. The triple-A rated Virginia College Building Authority recently issued tax-free bonds due in 2027 at a par yield of 4.25%, said Ben Landers, head of taxable municipal-bond sales and trading at investment bank Morgan Keegan in Memphis, Tenn. Similar Virginia transportation BABs yield 5.72%, he said, but the actual cost to the state is 3.71%.

"If you're building something it makes sense to go BABs," Mr. Landers said.

However, that subsidy adds up. Assume that BABs yield an average of 5.95%, the average yield on Wells Fargo & Co.'s BAB index at the beginning of November, and that $48.3 billion of BABs have been issued this year. That means, year to date, the federal government has been put on the hook for $1 billion in yearly interest payments, a number that is only going to increase.

Advocates of BABs said that much of that figure is likely to come back in the form of federal taxes. They said these bonds potentially could end up costing the government less than the tax-free alternative if, and it is a big if, the taxable securities don't end up largely overseas or in the hands of nonprofit groups, pension funds and other institutions that aren't taxable to begin with.

Right now, those institutions shun lower-yielding munis because they don't benefit from the tax exemption on interest. They also are the major source of new demand for BABs.

"We really don't have a group of investor that can't buy BABs," Mr. Landers said. "For tax-free bonds, it's a very finite group of people."

BAB supporters argue that it is a more-efficient subsidy. The increased demand eventually will drive down yields, and the savings will be passed on to taxpayers. This is in contrast to the tax-free bonds, where the full benefits, they said, were never priced in.

Public advocates worry that the increased ease in raising capital could be an invitation to spend the easy money less wisely.

"It's an awful lot of money that's being put into the market without more transparency," said Michael Lakosky, at New York University's Institute for Public Knowledge.

Write to Andrew Edwards at andrew.edwards@dowjones.com

the Declining Dollar - Hedge Your Portfolio (Barrons)

Foreign-Reserve Bingo
By ROBERT FLINT
What investors seek as they exit dollar-denominated assets.



INVESTORS OF ALL STRIPES NEED TO BRACE THEMSELVES for a world in which the U.S. dollar no longer plays the dominant role.Although the greenback will remain the currency of choice in trade and finance for many more years, signs have already emerged that changes are under way.

Governments abroad have grown increasingly skeptical about the dollar as a store of value for their national reserves. China, Russia and others have expressed concern about their dollar-denominated holdings because of the budget deficits the U.S. faces in financing bailout and stimulus measures.
Some countries have taken steps to reduce the proportion of their reserves held in dollar-denominated assets by switching to investments that will hold their value as consumer prices rise.
The U.S. decision announced Wednesday to boost sales of Treasury inflation-protected securities, or TIPS, is largely seen as a nod to China, the world's largest holder of U.S. government debt.


The search for alternatives to the greenback, while still in its early stages, will eventually have broad implications. Diversification of foreign-exchange reserves is no longer an issue solely for central banks and monetary authorities.

So where does that leave individual investors? Is there such a thing as a diversification play?

There is, say analysts, but it's more a long-term strategy. The dollar's allure has been tarnished, but any significant shift away from U.S. assets by central banks will take years.

"It won't happen overnight," says Andrew Busch, global foreign-exchange strategist at BMO Capital in Chicago.

There's still no other country or region that can match the liquidity and depth of U.S. capital markets. The dollar will continue to play a key role in the placement of foreign-exchange reserves until a viable alternative emerges. So far, there's been no evidence of any officially sanctioned dumping of the dollar.

One strategy for investors would be to mimic central banks and slowly move more of their holdings into non-dollar-denominated assets. The euro is most obvious option, at least in the short run, says Busch.

James Trippon, editor of the China Stock Digest, suggests investors can position themselves to benefit from inflation and a declining dollar through commodity-related plays in energy, metals or even foodstuffs. Australia and New Zealand, with commodity-based economies, stand to benefit as the world economy heals and growth speeds up again in China.
Another option would be American depositary receipts of Chinese corporations in the energy, banking or insurance sectors, Trippon says.

For private investors as well as central banks, it amounts to slow and careful diversification away from the dollar. Coping with a less-than-almighty dollar is an unnerving prospect for many Americans, but one they are bound to face.




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How to Create the Next Bull Market ( WSJ Opinion)

OPINION
JULY 15, 2009
The Bernanke Market
We won't get real growth until Congress and Treasury get policy right.

By ANDY KESSLER
I remember once buying the stock of a small company and I couldn't believe my luck. Every time my fund bought more shares the stock would go up. So we bought even more and the stock kept climbing. When we finally built our full position and stopped buying the stock started dropping, ending up at a price below where we started buying it. We were the market.

Just about every policy move to right the U.S. economy after the subprime sinking of the banking system has been a bust. We saved Bear Stearns. We let Lehman Brothers go. We forced Merrill Lynch, Wachovia and Washington Mutual into the hands of others. We took control of Fannie and Freddie and AIG and even own a few car companies, pumping them with high-test transfusions. None of this really helped.

We have a zero interest-rate policy. We guaranteed bank debt. We set up the Troubled Asset Relief Program (TARP) to buy toxic mortgage assets off bank balance sheets. But when banks refused to sell at fire sale prices, we just gave them the money instead. Dumb move. So we set up the Public-Private Investment Program to get private investors to buy these same toxic assets with government leverage, and still there are few sellers. Meanwhile, the $1 trillion federal deficit is crowding out private investment and the porky $787 billion stimulus hasn't translated into growth.

At the end of the day, only one thing has worked -- flooding the market with dollars. By buying U.S. Treasuries and mortgages to increase the monetary base by $1 trillion, Fed Chairman Ben Bernanke didn't put money directly into the stock market but he didn't have to. With nowhere else to go, except maybe commodities, inflows into the stock market have been on a tear. Stock and bond funds saw net inflows of close to $150 billion since January. The dollars he cranked out didn't go into the hard economy, but instead into tradable assets. In other words, Ben Bernanke has been the market.

The good news is that Mr. Bernanke got the major banks, except for Citigroup, recapitalized and with public money. June retail sales rose 0.6%. Housing starts jumped 17% month to month in May and will likely be flat for June. Second quarter GDP may be slightly up. And he was successful in spreading a "green shoots" psychology throughout the media. But the real question is, now what? Government interventions are only meant to light a fire under the real economy and unleash what John Maynard Keynes called our "animal spirits." But government dollars can't sustain growth.
Like it or not, the stock market is bigger than the Federal Reserve and the U.S. Treasury. The stock market anticipates only future profits and prosperity, not government-funded starter fluid. You can only fool it for so long. Unless there are real corporate profits from sustainable economic growth, the stock market is not going to play along. It's the ultimate Enforcer.

In mid-May, Mr. Bernanke's outlook seemed to change. Maybe he didn't approve of the sharp housing rebound -- like we need more houses! Maybe he saw inflation in commodity prices -- oil popping to $72 from $35. Or, more likely, he finally realized that he was the market and took his foot off the money accelerator, as evidenced in the contracting monetary base (see nearby chart). Sure enough, things rolled over -- the market dropped 7.5% from its peak, oil prices dropped almost 17%, and even gold has lost some of its luster. But in July, the Fed started buying again and the market rallied.

Can the U.S. economy stand on its own two feet without Mr. Bernanke's magic dollar dust? Eventually, but apparently not yet. Unemployment stubbornly hit 9.5% in June, according to the Bureau of Labor Statistics. Housing prices are still dropping, albeit at a slower pace, and foreclosures are still rampant.

But I think what really bothers the market is that the structural problems that got us into trouble in the first place still exist. We took the easy way out and, with the help of Treasury Secretary Tim Geithner's loose "stress tests," swept banking problems under the carpet. We waved off mark-to-market accounting and juiced bank stock prices to help them recapitalize, but all those toxic mortgage assets on bank balance sheets are still there as anchors on lending. All the pump priming and stock market flows didn't get rid of them.

Hats off to Mr. Bernanke for getting the worst behind us. He'll be pressured politically to keep pumping out dollars, but he should resist the urge. The stock market will ignore his dollars if it doesn't believe they'll turn into real profits. Green jobs and government health-care clerks do not make a productive, sustainable economy. That can only come from innovative companies with access to growth capital. The stock market won't turn bullish until it sees that type of economy.
Again, when it's clear that you are the market you have to stop buying and begin tackling the hard stuff. By not restructuring banks, by not getting bad loans off bank balance sheets, by not standing up to the massive increases in government debt crowding out private capital, the Fed and Treasury are holding back real economic growth.
Mr. Kessler, a former hedge-fund manager, is the author of "How We Got Here" (Collins, 2005).

A Good Time to Hold Bonds (NY Times)

April 6, 2009
Breakingviews.com
Good Time to Be a Bondholder

Bank bondholders around the world can probably breathe a sigh of relief. Ever since Lehman Brothers went bankrupt, leaving bondholders with losses estimated at north of $100 billion, they have lived in fear of another wipeout.

For example, Citigroup’s subordinated debt issues — whose claims would rank below those of more senior lenders in a bankruptcy — trade as low as about two-thirds of face value. But further pain is unlikely because the Group of 20 leaders seem determined to bail out bondholders if needed.

The G-20 hasn’t spelled this out. But it’s implied in a paper drawn up by the finance ministers. The authorities fear the effects of more bank debt defaults. In particular, they worry that such defaults could undermine the solvency of insurerss, which are big owners of subordinated bank debt.

The G-20 finance ministers last month said shareholders should be allowed to suffer when banks are bailed out. But they pointedly omitted any reference to bondholders.

Theoretically, the G-20 could still impose pain on bondholders. But several government officials said there was no appetite for this after the damage from Lehman, and to a lesser extent, the failures at Washington Mutual and Bradford & Bingley of Britain.

But doesn’t this make a joke of the whole bank capital regime? For years, banks have been issuing subordinated bonds and bond-stock hybrids with the idea that such instruments can, to varying extents, count as part of their capital cushions. If governments aren’t going to let bondholders suffer any losses in a crisis, then subordinated debt at least shouldn’t go toward risk capital.

The authorities do understand that banks can’t be allowed to have it both ways. That’s why subordinated debt is unlikely to count as capital in the future.

Again, the G-20 hasn’t quite said this. But the small print of the group’s communiqué last week did say that the “quality of capital should be enhanced.” One of the officials said it’s likely that only common and preferred shares would make the grade.

So subordinated debt most likely won’t be so useful for banks. But bondholders can probably count themselves lucky.

HUGO DIXON and JOHN FOLEY

For more independent financial commentary and analysis, visit www.breakingviews.com.

Citi Preferreds-government suspends some dividends - Reuters

Citi dividend decision may roil bank funding
Tue Mar 3, 2009 3:46pm GMT
By Karen Brettell - Analysis

NEW YORK (Reuters) - Citigroup's decision to halt dividend payments on some of its preferred shares may be the final blow for certain bank preferred stocks and may further dry up the willingness of private investors to buy other bank securities.

The government on Friday boosted its equity stake in Citigroup to as much as 36 percent and the bank said it will suspend dividends on some preferred and common stock and convert up to $25 billion in preferred shares to common stock as part of the agreement.

"While the dividend suspension was largely priced into current spreads, the announcement is a watershed event," and will likely dry up the ability to sell similar securities in the primary market, said Ricardo Kleinbaum, trading sector specialist at BNP Paribas in New York.

Investors will be concerned that the government may intervene in other banks, such as Bank of America (BAC.N: Quote, Profile, Research) and Wells Fargo & Co (WFC.N: Quote, Profile, Research), which have borrowed from the Troubled Asset Relief Program, and this will have a similarly negative impact on these types of preferred shares, he said.

Citigroup's dividend suspension affected its traditional preferred shares, but the bank will continue to pay dividends on its trust preferred shares, which rose on the announcement.

Credit ratings on the negatively affected Citigroup preferred securities were slashed to levels only slightly above default by all three major rating agencies on Friday.

"We believe there is a risk that Citi's future access to the capital markets could be impaired by this action," Standard & Poor's said in a statement.

"More broadly, we are also concerned that Citi's action could mark a tipping point for the financial institutions sector, and serve as a visible precedent for other companies considering a similar course of action," the rating agency added.

The intervention may also set a precedent for international banks to follow, said BNP's Kleinbaum.

"The Citi action opens the door for governments to look to preferred investors to sacrifice dividends in order to share losses," he said. "Thus, it would seem that institutions with higher government ownership are more vulnerable."

When Fannie Mae (FNM.N: Quote, Profile, Research) and Freddie Mac (FRE.N: Quote, Profile, Research) were nationalized last year their preferred shares lost almost all of their value.

Moody's Investors Service and Fitch Ratings also both cut American International Group's (AIG.N: Quote, Profile, Research) trust preferred shares and subordinated debt into junk territory on Monday.

AIG was given access to up to $30 billion of capital in a new government bailout on Monday, at the same time as the insurer posted a record $61.7 billion quarterly loss.

Bank subordinated debt has also come under pressure as investors worry that payments on the bonds, which sit above a company's preferred shares but below its senior debt, may also be halted if bank liquidity woes persist.

The potential for the government to make loans to a company that is more senior to its other existing debt is also weighing on investors minds.

"The concern right now on banks is capital structure related," said John Atkins, credit analyst at IDEAglobal in New York. "I think everybody is worried about getting bumped down the food chain in a recovery event."

As investors take fresh losses to bank securities, financial companies are increasingly at the mercy of government programs for their funding.

Banks are able to sell bonds guaranteed by the Federal Deposit Insurance Corp (FDIC) as part of the Temporary Liquidity Guarantee Program (TLGP).

"The only way banks can continue to roll debt maturities is through the FDIC program," Atkins said.

(Editing by Kenneth Barry)


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GM and Chrysler Plan Due on Feb 17 (Assoc Press)

Chrysler, GM race clock to finish viability plans

The Associated Press
Monday, February 2, 2009
DETROIT: With just 15 days before a critical deadline to justify their government loans, General Motors Corp. and Chrysler LLC are trying to pull together restructuring plans that prove they can become viable again.

But as GM's board meets Monday and Tuesday to discuss its plan and other issues, several industry analysts and lawmakers are wondering if the automakers have enough time to negotiate such complex plans before Feb. 17, when they're required to submit at least the basics.

Both automakers have had to take billions in government loans to stay in business in the midst of the worst U.S. auto sales slump in 26 years. Under the loan terms, the companies must negotiate concessions from labor unions, bondholders and others, with a so-called "car czar" appointed by President Barack Obama to oversee the changes.

But Obama, who has been in office only two weeks, has yet to appoint such a czar. Because some of the loan terms imposed by the Bush administration are being disputed by the United Auto Workers union, both companies are in the position of having to meet loan terms that are still uncertain.

"Without knowing who's in charge and without knowing what approach the Obama administration is going to take, it does complicate the negotiating process that's going on," said Martin Zimmerman, a professor of business administration at the University of Michigan who specializes in government regulation and the auto industry.

Executives from both companies have said they can meet the deadline, but UAW President Ron Gettelfinger has said he doesn't think they have enough time. Gettelfinger has said he will approach the Obama administration about changing some of the loan terms, which he believes unfairly single out workers.

U.S. Sen. Debbie Stabenow, a Michigan Democrat, said Monday an extension of the deadline is an option. She said she hasn't been told when Obama will name a czar or how the administration will go about restructuring the industry.

"At this point, I don't think they have clearly defined exactly what this is going to look like. I'm strongly encouraging them to make sure there are advisers working with them who understand this industry," she said.

Government officials have contacted the Center for Automotive Research in Ann Arbor for information on the industry, said David Cole, the center's chairman.

"They are asking the right questions. That is really key," he said.

Cole, who declined to identify the officials, also wonders if the administration will have to extend the deadline, which is followed by a March 31 deadline to have the final plans in place.

"They've got a pretty fast clock on this," he said. "I think they realize how high the stakes are here, in terms of the potential impact on the overall economy."

Chrysler received $4 billion and expects to get another $3 billion after it shows the government its plan to become viable. GM has received $9.4 billion and expects to get $4 billion more when it files its plan.

Under the loan terms issued last year by the Bush administration, the companies must show an ability to repay the government loans and to achieve "positive net present value," which means that the present value of a company's expected net cash flows exceeds the initial investment in the company.

Both companies were in danger of running out of cash late last year, making the loans necessary for their survival.

The loan terms also set "restructuring targets" that include swapping a portion of the companies' bond debt for equity, as well as reducing labor costs so they are equal to the costs of Nissan Motor Co., Toyota Motor Corp. and Honda Motor Co. at their U.S. factories.

GM said it had identified most of its bondholders, a large undertaking as holders can be large entities or single individuals. Getting two-thirds of bondholders to agree to an exchange will be difficult, analysts say.

One of GM's largest bondholders — Pacific Investment Management Co. — last month removed itself from a committee representing company bondholders.

"PIMCO could be sending a clear message to GM and the existing committee that there needs to be more done on behalf of bondholders, or they could be holding onto these bonds because the government is going to have to bail (GM) out anyway," said Kip Penniman, a corporate bonds analyst with KDP Investment Advisors in Montpelier, Vermont, which has a "hold" rating on GM bonds. "They're attempting to leverage their position up. GM is going to have to bring something very attractive."

He said PIMCO's participation, or lack thereof, would likely influence other bondholders to take GM's offer or sit on the sidelines.

"It is a massive coordination problem. There are other elements of the plan," said Gregg Lemos-Stein, credit analyst for Standard & Poor's. "If one piece of the puzzle holds out, it could hold up the entire viability plan."

GM also is starting to lobby for tax relief, fearing that it could owe at least $7 billion if it swaps bond debt for equity. Stabenow said she and others were seeking an administrative or legislative fix.

"We can't place GM in a position in the middle of everything else with a $7 billion to $10 billion liability as a result of this loan," she said.

Fannie Mae Lawsuit (from WSJ)

OCTOBER 18, 2008 Fannie Suit Vexes Regulator, May Pay Shareholders
By APARAJITA SAHA-BUBNAArticle
Comments
more in Politics & Campaign »NEW YORK -- Fannie Mae shareholders, battered by the federal takeover of the mortgage finance giant, may yet have checks coming their way.
A class-action lawsuit alleging securities fraud by the company could yield a hefty payment to shareholders. That suit, now in U.S. District Court in Washington, puts the regulator running the company in an awkward position.
A similar securities-fraud case against Freddie Mac was settled in April 2006 for $410 million. At the time, the settlement was the eighth-largest in a securities-fraud case in U.S. history.
But since the Fannie suit was filed, the government in early September seized control of Fannie and Freddie, citing the risk that growing losses on mortgage defaults would wipe out their capital. The government's control of Fannie puts taxpayers potentially on the hook for hundreds of millions of dollars in damages stemming from the lawsuit.
Moreover, Exhibit A in the suit is a highly critical report about Fannie, written a few years ago by the regulator that now runs the company. A vigorous defense on Fannie's part would require rebutting the agency's own report. An acknowledgment of the report's veracity could mean admitting wrongdoing and an even bigger payout. "The regulator is between a rock and a hard place," said Tom Ajamie, a securities lawyer at Ajamie LLP in Houston. Mr. Ajamie isn't involved with the Fannie case.
The Federal Housing Finance Agency, Fannie and Freddie's regulator, is the new, more powerful incarnation of the companies' former overseer, the Office of Federal Housing Enterprise Oversight. James Lockhart, who oversaw Ofheo, is the director of the new agency.
The regulator grabbed control of the two companies -- the main providers of funding for U.S. home mortgages -- under a legal process known as conservatorship last month. Under the takeover, in which the government can buy nearly 80% of both companies at a nominal price, shareholders have suffered crushing losses. Fannie and Freddie shares have lost more than 95% of their value this year.
Former Ohio Attorney General Jim Petro filed a class-action securities-fraud lawsuit against Fannie and its top executives in November 2004, accusing the company of manipulating its accounting to artificially inflate its stock price. The lawsuit is filed on behalf of the Ohio Public Employees Retirement System, State Teachers Retirement System of Ohio and other investors who bought or sold Fannie shares from April 2001 through December 2004. This period may be extended to investors who bought or sold Fannie shares to September 2005 or even February 2006.
On average, affected Freddie shareholders got back about $1.20 per share minus litigation-related expenses. While any Fannie award is likely to be different in size than the Freddie award, it is noteworthy that the $1.20 award now exceeds the current stock price of Fannie, which early Friday afternoon was trading at $1, up 1%.
A so-called status conference, or a progress report, on the Fannie case is being held Oct. 20.
The regulator's 340-page report found Fannie's board and management responsible for a corporate culture that allowed managers to manipulate accounting in order to alter earnings and trigger millions of dollars in bonuses. Former executives have denied that they sought to inflate their bonuses through improper accounting.
"The image of Fannie Mae as one of the lowest-risk and 'best-in-class' institutions was a facade," Mr. Lockhart said in a statement related to the report in May 2006. "Our examination found an environment where the ends justified the means."
The regulator's predicament may work to the advantage of shareholders, securities lawyer Mr. Ajamie said. "The report so strongly describes the misbehavior and supports the case. It's hard to get a better piece of evidence than this," he said. "A settlement would be the best resolution."
Write to Aparajita Saha-Bubna at Aparajita.Saha-Bubna@dowjones.com

What Happened Last Week? from Randall Forsyth at Barron's

Home > Markets > Markets Page > Current Yield
MONDAY, SEPTEMBER 22, 2008
CURRENT YIELD



Credit Where Credit Is Due
By RANDALL W. FORSYTH

When credit collapses, nothing else can stand.


CREDIT COUNTS. IF YOU don't believe it now, you never will.

While multi-hundred-point gyrations in the Dow grabbed the media headlines, credit borrowing and lending -- the basic functions of finance, on which the real economy of producing, buying and selling depend to function from day to day -- came close to breaking down.

Nothing compares with what's happened in the past fortnight.

The government bailout of Fannie Mae and Freddie Mac, as announced Sunday, Sept. 7, was no surprise. It had been foretold on another balmy Sunday evening in mid-July, and became inevitable as the government-sponsored enterprises' ability to finance themselves was called into question.

But the Treasury bailout of Fannie and Freddie failed to stop the downward spiral. The following Sunday, Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke declined to help fund a takeover of Lehman Brothers, as the central bank had done with JPMorgan Chase's acquisition of Bear Stearns in March. Lehman was left with no choice but to file for bankruptcy the following day.

Faced with the possibility it could meet a similar fate, Merrill Lynch rushed to merge with Bank of America. The Thundering Herd had always been fiercely independent, unlike Lehman or Morgan Stanley. (Remember their respective divorces from American Express and Dean Witter?) But getting $29 a share was a lot better than the $10 Bear got, and the zip Lehman received. Yet the prospect of failure by American International Group posed a bigger risk. AIG has a monstrous $1 trillion balance sheet and its "tentacles" were everywhere, as New York Gov. David Paterson characterized the reach of the nation's largest insurer.

Tuesday afternoon, the Federal Open Market Committee opted to hold its key target rate for federal funds unchanged, at 2%, confounding expectations of a cut by Fed watchers and the futures market. The reasoning would become apparent that evening. The central bank decided to provide a massive $85 billion loan to AIG at stringent terms, and an equity stake of 79.9%, the same as Treasury got for bailing out Fannie and Freddie.

But even that didn't calm the markets. Strains worsened after a major money market fund "broke the buck" -- that is, saw its share price fall below the sacrosanct $1.00-a-share level -- and suspended redemptions.

This was the result of unintended (but foreseeable) consequences. The money fund held Lehman paper, which it wrote down to zero, knocking its NAV to 97 cents. Holders, who had assumed they would always get a dollar out for every dollar they put in, bolted for the exits. This was especially the case of institutional money funds, which yanked $173 billion out in the week ended Wednesday, most of it that day. Instead, these investors fled for the safety of T-bills, sending their yields to virtually nil.

The tide ultimately was turned Thursday afternoon, after news reports indicated Washington was cooking up a massive scheme: A plan recalling the Resolution Trust Corp., which worked out the savings-and-loan failures of the late 1980s and 1990s, was in the works.

By Friday morning, it was official. Treasury Secretary Paulson announced that the plan would involve "hundreds of billions" of taxpayers' dollars to buy up bad assets.

In addition, the Treasury would provide insurance for money funds analogous to FDIC backing for bank deposits. That was aimed at stopping the modern-day bank run on the money funds and thus alleviating the strains on the money market. The Fed, for its part, also instituted an array of new lending facilities to stop the crunch. And, the SEC called a halt to short sales of financial stocks. That came in reaction to the wholesale selling of icons such as Goldman Sachs and Morgan Stanley. But their credit default swaps-derivatives insuring the credits of the investment banks-cratered to levels that implied imminent bankruptcy. Sellers of credit protection hedged their position by shorting the stock. The resulting plunge in the stock further tightened the credit vise.

The government's actions does help address the liquidity crisis, for now. Stocks soared Thursday and Friday, and the strains in money markets eased. But the crux of the crisis remains. Lenders can't lend while they're laden with underwater, illiquid assets and can't raise capital.

The government may have put out the fire. The rebuilding lies ahead.