NightBlogger

A year after HM Revenue & Customs lost 25m people’s personal data it is writing to some taxpayers telling them it will pass on their names and details to a market research company – unless told not to do so before next Tuesday. Accountants expressed incredulity yesterday at the way HMRC is marking the first anniversary of Britain’s biggest-ever data breach, when it admitted it lost Child Benefit disks on November 21, 2007. But HMRC insisted it is acting properly by approaching some of the 44,000 people who took up an “amnesty” for those who had previously failed to declare offshore assets. More

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Fed Defies Transparency Aim in Refusal to Disclose
(Bloomberg) — The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral. Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. Two months later, as the Fed lends far more than that in separate rescue programs that didn’t require approval by Congress, Americans have no idea where their money is going or what securities the banks are pledging in return.

“The collateral is not being adequately disclosed, and that’s a big problem,” said Dan Fuss, vice chairman of Boston- based Loomis Sayles & Co., where he co-manages $17 billion in bonds. “In a liquid market, this wouldn’t matter, but we’re not. The market is very nervous and very thin.” Bloomberg News has requested details of the Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit Nov. 7 seeking to force disclosure. More

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Robert Farago
The Truth About Cars
[The following analysis was sent to TTAC by a New York City bankruptcy lawyer who wishes to remain anonymous. It’s twice as long as our usual editorial, but I think you’ll find it’s well worth your time. Thanks to you-know-who-you-are.] Cerberus Capital, a highly secretive NYC-based vulture investment fund, wants the U.S. government and taxpayers to bailout its failed investment in Chrysler and its failing investment in GMAC. Its partner in this raid on the US Treasury is General Motors, a woefully insolvent automobile manufacturer whose CEO is paid $40k each day. Here’s why a bailout for GM and/or Chrysler is a bad idea.

Background

Cerberus Capital uses hedge funds as the vehicles in which to invest in various companies. Apparently, the hedge fund known as Cerberus Series 4 is the owner of an 80 percent interest in Chrysler and a related fund owns or controls a 51 percent interest in GMAC. Not surprisingly for a company known for its secrecy, Cerberus has not disclosed which entities actually own the interests in Chrysler and GMAC, has not disclosed what fees Cerberus has taken or accrued from its investments, and has not disclosed what severance payments would have to be made if GM actually acquired Chrysler. For example, would Chrysler CEO Bob Nardelli get another big payday if he’s cut loose in a merger? The interrelationships among GMAC, Chrysler Financial, Cerberus and other entities are also a well-kept secret.

Secrecy, Secrecy, Secrecy

Why is everything so secret? What happened to the idea of open government? A few questions come to mind:

1. Exactly what is the Cerberus/GM proposal to borrow $10b from the US Treasury in order to fund a merger, the terms of which are also secret? Is it in writing? Where is a copy? What were the proposed terms that were rejected by the current US Treasury? Is another proposal in the works? How is the $10b going to be repaid by two insolvent auto manufacturers?

2. Which lobbyists represented GM and Cerberus in getting their loan application before the US Treasury? How much were the lobbyists paid? With whom did GM/Cerberus meet? Where are the notes of any meeting or other communications about the loan proposal?

3. What do we know about the financial condition of the proposed borrowers? Where is Chrysler’s current balance sheet and income statement? Surely Chrysler is insolvent on an equitable basis, and probably insolvent on a balance sheet basis. Why is basic financial information not available for public inspection and comment?

4. Where are the financial statements for the Cerberus Series Four hedge fund? US taxpayers are being asked to bailout the failed auto related investments by Cerberus Series Four, while the profitable investments in the same fund are not being shared with taxpayers.

GM is woefully insolvent and should file Chapter 11

5. As of June 30, 2008, GM had total assets of $136b and total liabilities of $191b, a $55b deficiency. Thus, GM is insolvent. How can GM ever repay a $10b bailout, or any bailout for that matter? As of June 30, 2008, its current liabilities were $70b, dwarfing its current assets of $55b. Moreover, we do not know what deals GM has made to stretch/defer repayment of its account payables.

6. Is Chrysler in any better shape than GM? Probably not, but without a current balance sheet the definitive answer is a secret.

7. Assuming Chrysler is insolvent (liabilities exceed assets), then the equity interest of Cerberus and Daimler (the 20 percent equity owner) are worthless and these entities are not even entitled to a seat at the merger negotiating table. The real economic owners of Chrysler are its creditors and employees, who are also in the dark about the proposed US treasury bailout.

Who really benefits from a GM/Cerberus/Chrysler merger?

8. The US taxpayers can’t benefit since there is no repayment plan. Not surprisingly, Cerberus and its hedge fund are back door beneficiaries, because the 51 percent Cerberus ownership interest in GMAC will increase in value if GM and GMAC survive. Chrysler is a lost cause, but with the value of the Cerberus investment in GMAC also plummeting, Cerberus is trying to prop-up GMAC by helping GM survive. Is Cerberus pledging its equity interest in GMAC to the US Treasury as security for a government loan to GM? Why not? Is GM pledging its 49 percent equity interest in GMAC to secure repayment of any loan by the US Treasury? More secrets kept from the public.

9. The self-dealing by Cerberus extends to wanting to cherry-pick the Chrysler assets and keep the auto financing arm for itself. What is the value of the Chrysler auto financing business, and why should Cerberus benefit?

10. GMAC had negative net income of $3b for the first 6 months of 2008. GM’s ownership interest in GMAC was impaired by at least $2.7b during the same six month period, meaning that Cerberus Series Four hedge fund had suffered a similar loss in value in its investment in GMAC. Why should taxpayers bailout the millionaire investors in the Cerberus hedge funds?

More secrecy and lack of disclosure

11. Does GM plan to make any payments to GMAC, payments that directly benefit Cerberus? As vehicle residual values decrease, GM is obligated to make payments to GMAC under “residual support and risk sharing” agreements. On August 6, 2008, GM paid GMAC/Cerberus $646m, money which could have been used by GM to fund its ongoing operations and its obligations to employees.

12. Should any taxpayer money be used to fund payments to GMAC/Cerberus, whether that money is used directly or indirectly? How much, if anything is Cerberus investing in new money to prop up its investment in GMAC? If it is not investing in Chrysler or GMAC we can reasonably conclude that its analysis shows that the investment is a bad one. What’s bad for Cerberus is bad for the US Treasury.

Although it appears that the Cerberus Series Four has money available to make follow-on investments, it makes no sense to throw good money after bad if you can lobby the US Treasury to make the bad investment for you. A related question is whether the Cerberus equity interests in GMAC are going to be used as collateral for the loans that will be used (albeit indirectly) to bailout GMAC. Why should equity bear none of the risk but get all of the benefit?

More non-disclosure

13. What is Cerberus ResCap Financing LLC and who has seen its financial statements or the agreements relating to the $3.5b secured loan facility? How is this secured loan impacted by the bailout of Cerberus/GM/Chrysler?

Deepening insolvency is likely

14. GM’s current insolvency and continuing losses will trigger additional liabilities, and make it doubtful that GM will be able to make payments promised to employees and former employees or perform its labor agreements. GM’s worsening financial condition also deepens its losses from its derivative contracts. How would a GM/Cerberus Chrysler merger affect these liabilities? Will any government loans be used to reduce the $30b of GM accounts payable, or, in the event of a merger, to pay down Chrysler accounts payable in some still unknown amount? Sadly, we don’t even know what Cerberus proposed as the use of funds and we have no idea how Cerberus will benefit since we have no financial information on Chrysler or Cerberus.

15. As GM and Chrysler idle plants and facilities, more employees are laid off the employee related liabilities of GM/Chrysler will increase by hundreds of millions. Since GM and Chrysler are insolvent, who will pay these increased costs? Can any of these costs be avoided in a Chapter 11 case of Chrysler or GM?

16. Should taxpayer money be used, directly or indirectly, to pay GM and Chrysler obligations that are coming due while these entities are unable to pay from their own assets. Surely not, but what is being proposed, and who will benefit if GM debt is redeemed at par by vulture investors that bought the debt at pennies on the dollar? A related question: will any Cerberus entities benefit from government funded redemptions of auto maker debt? Is it possible that Cerberus is trading in credit default swaps and actually benefiting from the difficulties of Chrysler, GM and GMAC? Yet more items of non-disclosure on a long list of secret items.

Conclusion

17. GM, GMAC and Chrysler are not credit worthy and are unable to borrow money on any basis, secured or unsecured.

What’s Good for GM/Chrysler is a Chapter 11 Filing

18. GM needs to be restructured, which means it must change the terms of its legal obligations to suppliers, bondholders and employees. The only vehicle to accomplish the needed changes is Chapter 11, which lets GM reject unfavorable contracts, renegotiate its debt obligations, defer interest and principal payments and gives it time to fix its business. Without a chapter 11 filing a government infusion of $10b cash will be gone in six months when GM uses the money in 2009 to pay bondholders and employees billions of dollars, payments which do nothing to help GM survive.

19. Chrysler, the stepchild of a distressed debt vulture fund, is also a prime candidate for Chapter 11. But Chrysler should be liquidated, not reorganized. A liquidating Chapter 11 case, expressly permitted by the Bankruptcy Code, can be used to keep Chrysler operating while its divisions are sold. With adequate Chapter 11 funding line workers can keep their jobs and benefits, and non-essential executives can be fired at minimal cost to the Chapter 11 debtor, known as the debtor-in-possession. Trade creditors will continue to ship to Chrysler because their post-petition claims will have a priority in payment. Chapter 11 also lets the Bankruptcy Judge appoint an examiner to conduct an investigation into the financial affairs of Chrysler and its equity owners, and to sue to recover any improper payments. Chapter 11 will also make it clear to Daimler and Cerberus that their investment is worthless and they will not be able to use their position of control to improperly benefit.

20. Cerberus should acknowledge the financial reality and either file a Chapter 11 case for Chrysler or have a federal receiver appointed so that the value of the Chrysler assets can be maximized in an orderly sale procedure. The US government should fund the Chapter 11 case and keep Chrysler operating by giving Chrysler a debtor-in-possession loan having seniority over all other liabilities of Chrysler, thereby assuring taxpayers that the money will be repaid out of the proceeds of asset sales. The US could also give a senior secured loan to GM to help GM acquire assets from Chrysler, but this would require the cooperation of bondholders, cooperation not likely to be forthcoming. On the other hand, if GM is in Chapter 11 then the government could refinance the GM operations without fear that taxpayer money would be diverted to pay existing creditors.

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The Truth About Mortgage.com
American taxpayers are apparently stuck paying the tab for a pricey golf getaway for a number of Fannie Mae executives, according to a report from a CBS affiliate in Dallas. CBS 11 reported that just three weeks after the federal government bailed out Fannie Mae, a handful of execs took to the greens at Cowboys Golf Course, racking up $6,279.26 in the process. The cost of the golf and “mango towel service” was $3,316, the buffet food $1,700, and bar tab $555, which included nearly 50 cans or bottles of domestic beer (at least they didn’t go after the imports). North Texas Congressional Representative Jeb Hensarling was outraged by the news, saying, “I’m not even sure what mango towel service is, but I know the taxpayers of Dallas County and America shouldn’t have to be paying for it.”

Fannie Mae spokeswoman Amy Bonitatibus released a statement, explaining the meeting had been scheduled in January and was aimed at addressing housing market issues. The mortgage financier has since “ceased all similar activities” and regrets not doing so in the above outing. Fannie Mae’s seriously delinquent rate (loans three or more months past due or in foreclosure) rose 12 basis points to 1.57 percent in August, more than double the 0.71 percent rate seen a year earlier. Earlier this year, Countrywide came under fire for planning a number of ritzy junkets, including a ski trip in Colorado that was ultimately cancelled.

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WASHINGTON (Reuters) - Treasury Secretary Henry Paulson said Sunday that foreign banks will be able to unload bad financial assets under a $700 billion U.S. proposal aimed at restoring order during a devastating financial crisis. More

U.S. Taxpayers to Bail Out Foreign Debt Holders, Too?
PAUL JACKSON
Source: Housingwire.com
A fact sheet released by Treasury officials Saturday evening, meant to answer questions about the most ambitious financial markets intervention in our nation’s history, has instead provided a rallying point for those who say the Paulson plan is a bad idea.

In particular, a section of the fact sheet suggests that U.S. taxpayers may be on the hook for the bailout of foreign corporations as well as those in the U.S. — a significant change from the language sent to Congress in the Treasury’s original proposal. The finance and economics blog Calculated Risk was first to notice the shift in language, which has sent a chill through many market sources that spoke with HW Sunday morning.

“Participating financial institutions must have significant operations in the U.S., unless the Secretary makes a determination, in consultation with the Chairman of the Federal Reserve, that broader eligibility is necessary to effectively stabilize financial markets,” read the fact sheet. See the full Treasury fact sheet.

That statement is in direct contradiction to the language in the Treasury’s original proposal, which read: “The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.”

In other words, the bailout would now extend beyond financial institutions headquartered in the U.S. to any company with “significant operations in the U.S.” Without a definition of what “significant” is; and that vague standard could be undone, too, if agreed upon by the Treasury secretary and chairman of the Fed.

Paulson defended the decision to expand the proposed Act’s reach on television Sunday morning, according to a Reuters report.

“If a financial institution has business operations in the United States, hires people in the United States, if they are clogged with illiquid assets, they have the same impact on the American people as any other institution,” Paulson is quoted as saying.

It’s worth noting that the Act gives Paulson and the next Treasury secretary the right to decisions that are “non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”

In other words: absolute power, without the checks and balances that have long defined the American system of government. That left those alraedy uneasy with the plan firmly against it, among the sources that HW spoke with.

“The Treasury can spend taxpayer dollars to bailout any corporation it wants, here or abroad, without any check or balances,” said one source, a fund manager that requested anonymity. “It doesn’t pass the smell test for me.”

Other sources suggested that expanding the reach to foreign corporations signaled a realization of the depth of the problem, but were concerned that officials may yet be underestimating the size of the mess.

“I’d have to question if the U.S. government is large enough to tackle a global financial problem of this magnitude,” said the source, a senior banking executive that commented under condition of anonymity. “We’re not really sure where the pricing floor for some assets is, and if you multiply that across global financial markets, it’s certain to be a very large number.”

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Michael Behn, a former federal prosecutor, said, “The pharmacies nationwide had a pill flipping scheme.” Behn helped expose how Walgreens exploited a Medicaid loophole. To save taxpayer dollars, Medicaid limits how much it pays for popular forms of drugs. But it doesn’t bother to set price-ceilings on rarely-used versions.

Take generic Zantac, or ranitidine, for example. The antacid is a huge seller in tablet form. Medicaid limits payment to 34 cents apiece. The same drug as capsules has no price-ceiling because it was so rarely-prescribed. Medicaid pays $1.25 each. Walgreens figured it could pocket millions by switching patients from tablets to capsules. More

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PHUONG CAT LE
Why haven’t I received my tax rebate?
There could be a number of reasons why taxpayers haven’t received their stimulus checks yet, or won’t get any or the maximum amount…if taxpayers owe any federal debts, child support, student loans or other obligations, all or part of their tax rebate could be applied to those debts. The IRS will send a letter explaining why and how much of their rebates are withheld.

Taxpayers who filed joint returns also have learned that they won’t get a rebate if their spouses didn’t have a valid Social Security number. Congress had intended to exclude illegal immigrants from the rebates, but left out thousands of others, including U.S. service members married to foreigners. More

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