Not that it makes a whit of a difference, but for the record, the GMAC note exchange program failed rather miserably to reach it goal of converting 75% of its debt to preferred stock. The company announced yesterday that about 59% of the debt had been tendered. Nevertheless, GMAC has attained bank holding company status and a $6 billion aid commitment from the federal government.

It’s interesting now to look back at all of the propaganda that surrounded its application to become a bank holding company and the ostensible critical need to complete the debt for equity swap. Throughout the month of December, both the government and GMAC adopted the posture that without success in retiring its debt, the prospects for approval as a bank holding company were non-existent.

Here is what the Fed had to say on December 24th when it approved, conditionally many thought, the application from GMAC: 

In analyzing financial factors, the Board consistently has considered capital adequacy to be an especially important aspect. The Board has considered GMAC’s successful efforts to raise additional capital and that, as a result, GMAC will be well capitalized on completion of the proposal, as well as commitments GMAC has made to maintain its capital at a high level for a specified time period. In addition, GMAC Bank is currently well capitalized under applicable federal guidelines. GMAC Bank also would be well capitalized on a pro formabasis on consummation of the proposal. The Board has consulted with the FDIC, the primary federal supervisor of GMAC Bank, about the adequacy of the bank’s capital for its current and pro forma operations and the future prospects of GMAC Bank in light of its business plans. Moreover, as noted above, the Board has considered that the Department of the Treasury has taken a number of steps including providing credit to GM, which for some time will continue to be a major business partner of GMAC, in order to help stabilize GM and improve its viability.

The link above will take you to the entire statement by the Fed. The statement quoted above would certainly seem to indicate that the Fed expected the successful completion of the exchange offer. In fact it reads to me as if the approval was conditional upon the completion of the offer. However, if pressed to the wall, I would probably concede that it could be construed differently and in the context of the entire order, valid arguments could be made that the Fed approved the conversion without condition. Hardly a good way to go about its business so far as the Fed is concerned, but that criticism has lots of targets these days.

A GMAC press release on December 10 tells a different story:

Based on the results of the GMAC and ResCapoffers to date, GMAC would not obtain a sufficient amount of total regulatory capital in connection with the GMAC and ResCap offers to meet the requirements set forthby the Federal Reserve for GMAC to become a bank holding company under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). The Federal Reserve has required GMAC to, among other things, achieve a minimum amount of total regulatory capital of $30 billion in connection with its application. In order for such condition to be satisfied, among other things, the estimated overall participation in the offers would be required to be approximately 75% on a pro rata basis. The Federal Reserve has informed GMAC that if GMAC is unable to meet these capital requirements, it will not approve GMAC’s application to become a bank holding company.

That’s pretty unambiguousand seems to indicate that at one point, the Fed had told GMAC get it done or forget about any conversion. So what happened in the meantime that may have altered the Fed’s stance. Well, the Bush Administration on December 19th agreed to substantial loans to GM and Chrysler and five days later the Fed appears to say that they are OK with the possibility that GMAC will successfully recapitalize.

Of course they didn’t pull it off but they still got what they wanted. Why? Probably because the government recognized that an auto company without the means to finance its dealers and customers was not viable. So, in for a penny in for a pound. You have to protect your major investment and in this case the only way to do that was to shore up GMAC. It will probably be years before we know what kind of pressure was exerted on the Fed that caused it to compromise its principles. It’s telling that one member of the Fed’s board actually voted against the approval of bank holding company status. In all likelihood, this will not be the last time that expediency trumps policy as the government digs deeper into the economy.