OK, so Carlos Ghosn cares about saving GM. Should we?

It’s an excellent question, one that Bill Saporito takes on in the current issue of our magazine. You can read his story, “Is General Motors Worth Saving?” online here. You can also watch Bill talk about his story on MSNBC tomorrow morning at 10:30.

My question, considering the way things have been shaking out in the mortgage market, is whether investors in auto loan securitizations should care. For example, if GM goes bankrupt and the residual value of its cars falls, does that affect the worth of car-loan CDOs? I’m curious because, as we’ve come to learn, as go CDOs, so goes the country.

I called up Carlos Mendez, senior managing director at ICP Capital, an investment management firm that specializes in structured finance, and asked him that question. He explained that the value of auto-loan securitizations depends on car payments, not so much on residual value. Good news.

What might be a problem, though, is the fact that GM services a lot of its own securitizations. It takes a while to move assets between servicers, so if GM were to implode, there’d likely be a spike in defaults during that window where there’s no one calling up borrowers behind on their payments. This is what happened when the mortgage originator New Century Financial went down in a ball of flames.

Now, I’m guessing GM would use bankruptcy to restructure, not to liquidate, but even in that scenario, there could be trouble. The trusts that are responsible for securitizations probably wouldn’t be too hot on a bankrupt company managing its cash flows, and there’s a good chance they’d petition a bankruptcy court judge to switch servicers anyway.

But maybe I’m too far in the weeds.

Before I sign off, though, I do have to tell you one more thing Mendez said. We got to talking about consumer loans in general, and Hank Paulson’s efforts to juice lending, and then he mentioned having spoken to a small bank this morning that had just gotten its TARP funds. “You know what they bought with it?” he said. “Treasuries.”

Barbara!

swedenbear

“…he mentioned having spoken to a small bank this morning that had just gotten its TARP funds. “You know what they bought with it?” he said. “Treasuries.”

This is worth following up on. The cost of TARP money is 5%, and even 30 year Treasuries don’t pay that much. Will they use the Treasuries to collateralize swaps? Is it just a short term parking spot until they employ the money profitably elsewhere (or replace funding from their own hard/expensive to roll-over bonds coming due soon)? Or are they maybe buying those Treasuries after leveraging the TARP money to overcome the 5% cost barrier?

Illuminating the internals of these sorts of decisions would be a real service to the public — maybe to the regulators as well given the degree to which they are guessing what to do.
curmudgeon57

You raise an interesting point here, Barbara. My own thinking was that the government should base its decision on whether or not any prospective bailout has a good chance of resulting in a sustainable business rather than using the mantra of saving jobs (I have serious doubts here). It also goes without saying that current board, executive management, and union leadership have to go, preferably with no parachute. Clearly the culture they created and fostered isn’t sustainable.
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But maybe operational success is neither necessary nor sufficient. Perhaps we have to look at saving the auto makers’ financial model rather than business model.
Ffred

Barbara, you’re my soul sister when it comes to long term gain vs. short term volatility. But help me out here, Justin, ’cause you’re the geek with the graphs. I think Curmudgeon is at least partially correct in his current analysis, but what does it take to convince shareholders that infrastructure rules? Let me see some lines, dude!
bryanfromhouston

Curmudgeon,
I harbor your doubts as well. Right now, the fundamental supply-demand curve for the auto industry is out of whack. Just like in housing, but we didn’t prop up the builders which is a much larger industry. They just laid off workers, reduced capacity and sheltered in place for the economy to recover. Less solvent (sometimes liquid) players went to the courthouse. The reason that we do that is we want to restructure businesses so that they are sustainable. Short-term fixes will no bring about long-term solutions. Now, if we are just buying time, then we need to state so and start moving workers and pension-receiving individuals on down the line to new jobs and the Pension Guaranty Corp. That to me seems like a reasonable compromise.

What do you think Barbara?
Barbara Kiviat

I met with a big-name (but to rename unnamed) investor this morning whose take was that policy makers are completely freaked out by the prospect of a GM bankrutcy because of the unknown unknowns. Who would have guessed that letting Lehman go down would have led to the Reserve Fund breaking the buck, halting redemptions, and sending the signal to the market that even cash-like investments were no longer safe? We know that what happens at GM affects the workforce and the auto suppliers and the Pension Benefit Guaranty Corporation. But what are the third and fourth order effects? That’s the really scary part, especially at a time when investor and consumer psychology is so delicate. Maybe it’s the right thing to let GM fail, but not the right time.
bryanfromhouston

Barbara that sounds like your next print article right there. Why no one wants to discuss the reality that the auto industry is contracting and that the government should manage the downsizing of large corporations, just like AIG, to avoid systemic shock is beyond me? Even my cousins who live in Detroit acknowledge the reality that they can’t continue to get paid if there is not enough demand and the supply will have to be cut.