An article by Dennis Berman in today’s Wall Street Journal notes that GMAC has had to offer only 2.2% to raise debt now that the FDIC has given it TLGP access. In sharp contrast, Ford had to pay 8% on a comparable issue.
In November, I argued that the TLGP would adversely select troubled institutions, and the GMAC case is proof positive. With the massive subsidies provided to GM through this program – let alone those granted by the FRB and TARP – GMAC is cleaning Ford’s clock, weakening a company that has – despite the odds – built cars Americans still want to buy and managed its staggering debt load without crushing the corporation.
What’s Ford to do? Coming close to the brink must clearly be tempting since, were Ford to do so, the Administration would be hard-pressed to deny it the back-stops granted to GM and Chrysler buyers, dealers and new investors. For Ford’s current investors, this brinkmanship will of course be frightening, but it could be the only way to protect their interests. Strange, is it not?
Ford is not the only entity challenged by bank regulators’ openness to those in need. One condition Treasury and the Fed have put on banks hoping to repay TARP is that they foreswear the TLGP. This means that, starting next week, the healthiest banks will go head-to-head with weaker banks and non-banks (remember that GE is the biggest TLGP beneficiary). This will push up healthy-bank funding costs. Doubt about this was sadly settled last year, when the TLGP hit Fannie, Freddie and the FHLBs hard. The GSEs saw their funding costs spike sky-high even though they were under the Treasury’s wing. We know the TLGP is set to expire in October, but six months is a long time to wait and there’s of course no guarantee the TLGP will end as promised.
As a result, the more the TLGP helps GMAC and firms like it, the bigger the drag on healthy institutions, the longer the recovery and the more fragile the system remains. Getting banks out of TARP and the TLGP is good, but not when the government gives away with one hand that which it is taking back with the other.