GMAC Financial Services can ill afford to be distracted by the Bernard Madoff scandal now that it touches its chairman -- J. Ezra Merkin. The timing couldn't be worse, as the financing arm of General Motors ( GM) is finding it impossible to drum up investor interest in its $38 billion bond swap and is rapidly running out of cash. Merkin must step down to avoid the inevitable conflicts of prioritizing his time when GMAC needs everyone solely focused on its survival. This has is not been a great week for GMAC to say the least. On Tuesday, the New York Law School announced it was suing Merkin and his investment partnership Ascot Partners LP for investing with Madoff, a Wall Street money manager last week charged with running a giant Ponzi scheme and allegedly losing some $50 billion of investor money. Merkin, in a personal and fund management capacity at Ascot, invested and lost heavily in the Madoff funds. This news followed Monday's announcement from GM that it was agreeing to postpone payment by GMAC for up to $1.5 billion in vehicles due to be delivered to dealers by year-end. The move highlights the lack of cash at GMAC. To top it off, GMAC announced late last night said it was "extending the early delivery time of the GMAC and ResCap offers in response to requests received from investors and their securities custodians." Incredibly, this is the fifth such extension GMAC has made in its bid to raise $38 billion in additional capital by swapping bonds for preferred shares and cash.
It is not unusual for GM to pump up the volume at a year-end in order to realize as much profit as possible from its production. (GM records a sale of an auto at the point of invoice to GMAC.) However, what is unusual is that GMAC -- widely considered the stronger company financially -- has had GM postpone the required payment date. This is not the normal GM interest-free support that allows the dealers to maintain inventory at no cost for a period of time, this is cash that's not being received by GM. It's cash that GM, according to the submissions to Congress, simply does not have. Does this indicate that GM is actually in a better financial state than GMAC? Could it be that some institutional bond holders believe this and would prefer to take their chances in a potential bankruptcy holding the bonds rather than swapping into preferred shares that have a much lower chance of receiving payment? Potentially, this is indicative of GM's confidence in a bailout from President Bush resolving its immediate cash problems. Clearly, with the fifth extension of the deadline to bondholders, and the tone of the press release from GMAC, it is desperate to give as much time as it possibly can for commitments to exchange to come through. GMAC cannot survive without cash. Cerberus and its partners are unable or unwilling to commit more cash to GMAC without a guarantee of survival in the form of funds from the Troubled Asset Relief Program (TARP), which will not be provided unless GMAC can meet the Fed capital requirements t become a bank holding company.
The GMAC statement says "significant additional participation will be necessary to attain the estimated overall participation -- required to satisfy the condition for a minimum amount of regulatory capital in connection with GMAC's application to become a bank holding company." That "significant additional participation" means around $4.9 billion. Andrew Levander, a lawyer for Merkin, according to a report on JewKey.com, said: "Mr. Merkin and his family are personally among the largest victims of the massive crime confessed by Bernard L. Madoff. Like the other victims and the entire financial community, Mr. Merkin is shocked by these events. He intends to defend this lawsuit vigorously while seeking redress for himself and his investors from whomever perpetrated this fraud." For Merkin to "vigorously" defend himself and his fund against the lawsuits he now faces personally and professionally in the form of Ascot, he clearly cannot continue in his current position as chairman of the struggling GMAC. It is not fair to him, his investors, or to GM and GMAC as the corporations struggle to survive. Calls to GMAC requesting comment were not returned.