GM to seek direct loan from Federal Reserve

Discussion in 'Stocks' started by The Kin, Oct 13, 2008.


    GM Likely to Seek Direct Loan From Fed

    General Motors is likely to hit up the Fed for a loan.

    With these readers:

    Or copy the rss link:

    CASH-STRAPPED GENERAL MOTORS, WHOSE SHARES FELL last week to an almost 60-year low, appears likely to seek a loan from the Federal Reserve's discount window. The Fed already is buying shorter-term commercial paper from corporations. Discount-window loans would have a longer maturity.

    Barron's has learned of the auto maker's expected request from two persons with first-hand knowledge of the situation. GM wouldn't discuss what it termed "a rumor." The Fed also wouldn't comment. But the central bank would be under tremendous pressure to accede to such a request from a centerpiece of Industrial America, after having aided bankers, insurers and investment bankers, even though a "yes" would open the door to similar entreaties from other corporations.

    General Motors (ticker: GM), according to one source, has been thinking about asking the Fed for a loan since September, when it drew down $3.5 billion of a conventional $4.5 billion secured revolving credit line. Last week, its stock sank on concern about its shrinking reserves, exacerbated by the maelstrom that sucked down stock prices around the globe. How much the car producer would seek is unknown, but it needs $5 billion to meet its goal of completing a $15 billion liquidity program, much of which actually is coming from cost cuts.

    Under the law, GM would pay a rate of interest that is higher than the top one charged to banks for cash advances. The Fed can lend to GM without demanding collateral if it gets the votes of five of its board members.

    Here is the wording from the Fed's Discount Window Website ( "In unusual and exigent circumstances, the Board of Governors may authorize a Reserve Bank to provide emergency credit to individuals, partnerships, and corporations that are not depository institutions."

    Reserve Banks currently do not establish an interest rate for emergency credit, but Regulation A specifies that such a rate would be above the highest rate in effect for advances to depository institutions. It adds: "Such lending may occur only when, in the judgment of the Reserve Bank, credit is not available from other sources and failure to provide credit would adversely affect the economy. When not secured by U.S. government or agency securities, loans of this type would require the affirmative vote of at least five members of the Board of Governors of the Federal Reserve System. (If fewer than five but at least two Board members are available, the available members may approve an extension of emergency credit by unanimous vote, subject to the conditions set forth in section 11(r)(2) of the Federal Reserve Act.)"

    Emergency-credit loans haven't been made since the mid-1930s. But GM's request would likely be noncontroversial on Capitol Hill because unusual and exigent conditions certainly do exist. In addition, with the Fed already accepting commercial paper from major corporations, making longer-term loans is the next logical step.

    In any event, there was a colloquy during the debate on the $700 billion economic bailout plan on allowing the Treasury and the Fed to purchase student loans and car loans to get credit flowing again to the consumer. Congress also approved $25 billion in loans to American auto makers to help them retool to produce hybrid cars and other advanced vehicles, part of a strategy to end U.S. dependence on oil from foreign despots.

    TO HELP LIQUEFY THE CREDIT MARKETS, Treasury Secretary Henry Paulson has cut more corporate taxes in the past month than most right-wing presidents have managed to trim in a year.

    As the Washington Post first noted, Paulson amended section 382H of the Internal Revenue Code to increase the amount of losses that a purchaser can deduct against future income when it buys a troubled bank. The change was made two days after Citigroup (C) penned a deal with Wachovia (WB), a shotgun marriage arranged by Sheila Bair, chairman of the Federal Deposit Insurance Corp.

    The tax change is thought to be an impetus behind the bid by Wells Fargo (WFC) to snatch Wachovia away from Citigroup at the steps of the altar. Tax guru Robert Willens says Wells would save about $74 billion in taxes, post-change, versus $20 billion under the old law.

    We have been told by several people that Wells Fargo had been agitating for the change, but the bank won't comment. The Treasury Department says that the change had been "in the works for weeks" before Wachovia's problems turned urgent.

    Paulson's other tax changes include a temporary easing of rules on access to corporate funds transferred home from foreign accounts, plus an increase in the tax losses that Fannie Mae (FNM), Freddie Mac (FRE) and AIG (AIG) can carry forward, which should boost the value of Uncle Sam's stake in these companies. Chalk up one for the taxpayers
  2. pitz


    Oh boy... Public lending to private sector organizations that have consistently shown a pattern of destruction of capital?

    This can't end well...
  3. Are you kidding? Stocks are soaring!! :D

    It's either going to work well or it's end end of the world as we know it.
  4. pitz


    Sure stocks can soar, but will the purchasing power in physical goods and services increase with your soaring stocks?
  5. Shh! Don't tell Bernanke. Just get long commodities, the things that can't be manipulated.
  6. m22au


    gold is the currency that you know won't be printed to guarantee deposits of insolvent banks.

    These deposit guarantees are getting ridiculous.

    In the words of Mish,

    Notice the discrepancy between the length of guarantees and the scrutiny over them. Also note that the UK has upped the guarantee ante to include mortgages. Wonderful.

    Notice how the length and scope of the guarantees is creeping up. It started with 1-2 years, went to 3 years, and now the EU is proposing guarantees for up to 5 years and that "no financial institution of systemic importance" can be allowed to fail.

    Hells bells, why pussyfoot around with this stuff? Let's just have every country guarantee everything forever. And if it comes to that (which it rapidly seems to be doing), one must stop and think about the value of those guarantees.

    Let's step back for a moment and consider the share price of Ambac, a company in the guarantee business.

    Ambac (ABK) is in the guarantee business. It kept guaranteeing more and more and more stuff and profits soared. All it took to collapse Ambak was sinking asset prices.

    One quick look at the above chart shows that the market now thinks Ambac's guarantee is worthless. There are a number of other guarantee companies whose guarantee is equally worthless, most notably MBIA (MBI).

    It is a waste of money buying guarantees from companies that offer a snowball's chance in hell of honoring those guarantees when times are bad. In good times guarantees are not needed, in bad times the claims cannot be paid.

    Of course governments have something that insurers don't. That something is a printing press. However, there is theory and there is practice. There is a price to pay for those government guarantees. We have already seen the complete collapse of Iceland's currency.

    Blanket guarantees of everything will eventually end in a collapse of some major country or some major currency, the breakup of the EU, or a global depression of some sort, perhaps all of the above.

    All those government guarantees, just like the guarantees of Ambac and MBIA , are totally worthless, just in different ways.

  7. MattF


    Well, then you just guarantee the guarantee....:cool:
  8. Humpy


    What a damn cheek !!

    The top executives have been ripping off the company for years with their huge wages and their performance has been woeful !!

    Shoddy overpriced products.

    If they were decent people they would resign and pay back the billions they didn't deserve !!

    The prime example of modern USA
  9. Really what's needed is for all these senior executives of bailout companies to chip in with 50% of their net worth. If they are not prepared to do that then they clearly have no faith in the viability of the company so they have to clear their desk.