As the new administration makes a critical decision about the future of General Motors Corporation,. it is very important to remember that GMAC and General Motors Corporation are separate and distinct entities with different ownership. Cerberus Capital a very big hedge fund, owns half of GMAC, and General Motors owns the rest.
GMAC has been "saved". GMAC’s institutional bondholders took different bonds and gave equity to the company. This meet the government's requirements for capital levels at banks, allowing GMAC to become a bank. GMAC now has FDIC insured deposits and can issue government guaranteed bonds just like Morgan Stanley, Citicorp and Goldman. GMAC earned $1.8 billion in 2008 and has an “unqualified letter” from its accountants. This means they do not fear for it to continue to be a going concern.
General Motors Corporation, on the other hand, is in big trouble. Losing billions, with sales down over 50%, its accountants issued a letter that they believe it may not be able to continue as a "going concern".
This is why GMAC bonds are currently at a much higher in price than GM bonds. We believe that investors who can bear the reasonable risk should continue to hold GMAC bonds, with the view they are likely to pay interest and principal when due unless there are many more catastrophic changes in our economy. GMAC now has $20 billion in equity, and could most likely go into a “runoff” and still pay off its debt obligations. GMAC bonds are offered as low as 24.
GM bonds should be held for a completely different reason. These bonds are now so low-priced that by holding them through a possible bankruptcy or reorganization may return a higher result than selling them under current conditions. GM bonds are being bid as low as 12.
The balance sheet and income statement for GMAC from their 2008 10K is now available along with the unqualified opinion on GMAC of Deloitte & Touche LLP. Contact info@coreportfolio for information.
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