The GMAC Game of Chicken

The NYT does a good job today of explaining what's going on at GMAC, although it doesn't quantify the haircut that the company is asking bondholders to accept; my commenters put it in the 10% range, which seems roughly right. If GMAC can convert 10% of its debt into equity, that should be more than enough to become well-capitalized enough to become a bank.

But the key player here is Cerberus, which owns 51% of GMAC, and whose equity stake in the lender would likely be wiped out were GMAC to declare bankruptcy; "industry experts" are quoted in the article as saying that a bankruptcy filing could come as soon as this month if neither bondholders nor shareholders recapitalize the company.

So what we have is a game of chicken. Neither bondholders nor shareholders are likely to be well served by a bankruptcy; both would be better off recapitalizing the company now, either through a debt haircut or through a cash injection. But the shareholders want the bondholders to step up (hence the tender offer), while the bondholders reckon there's no way the majority shareholder will simply let GMAC fail:

Some bondholders see the bankruptcy threat as a bluff. Pimco, the giant money manager in California, is one bondholder that is unconvinced that Cerberus would actually push GMAC into bankruptcy, according to people close to the matter.

Cerberus has been consistently high-handed and opaque in its dealings not only with bondholders but also with Congress; it's an understandable tactic for a relatively secretive private-equity fund, but one which has clearly backfired in recent weeks. Now, it's crunch time. Either Cerberus really engages GMAC's bondholders (and it's probably too late for that at this point), or else it will be forced to choose between throwing good money after bad, on the one hand, or seeing a major portfolio company fail, on the other.