PIMCO Plays Chicken with Treasury

December 26, 2008 11:14am by Barry Ritholtz

A friend Andrew, all around big firm Analyst, writes:

“Correct me if I’m wrong, but didn’t PIMCO just win another game of chicken with the authorities when it refused to tender its GMAC debt for restructuring? Didn’t that effectively force the Fed to use clause 13(3) to save GMAC?

As I understand it, a debt restructuring would have smoothed GMAC’s conversion into a bank holding company, but PIMCO balked and didn’t tender because a restructuring also meant big losses for PIMCO. I don’t believe Tarp funds are senior to any existing GMAC debt, so GMAC debt will probably rally now that it got Bank Holding Company status without the restructuring…I’m not a bond guy but I think that’s how it’ll work…meaning PIMCO wins again at the expense of the taxpayer.

By the way, from the Treasury website regarding Tarp injections:

The senior preferred shares will qualify as Tier 1 capital and will rank senior to common stock and pari passu, which is at an equal level in the capital structure, with existing preferred shares, other than preferred shares which by their terms rank junior to any other existing preferred shares.

So I don’t see how GMAC debt doesn’t rally at least initially on that (benefitting PIMCO), since it must be senior to preferred stock. A Tarp injection would increase its tier 1 capital without endangering the claims of the debt holders.

I should mention that [Hedge Fund Manager X] just sent me a research note that, although it doesn’t go into the PIMCO involvement, does cast doubt on GMAC’s fate, with or without Tarp support. Might want to ask him about that (I can’t forward it to you myself under penalty of death!) ”

See also:
Pimco Said to Balk at GMAC Debt Swap
Dealbook, DECEMBER 19, 2008, 7:32 AM
http://dealbook.blogs.nytimes.com/2008/12/19/pimco-said-to-balk-at-gmac-debt-swap/

GMAC Swap Remains Short of Goal as Pimco Holds Out
Caroline Salas
Bloomberg, Dec. 18 2008
http://www.bloomberg.com/apps/news?pid=20601103&sid=adlTWMv.To_U&

Pimco snubs GMAC debt offer; bank bid may fail-WSJ
Dec 19, 2008 2:01am EST
http://www.reuters.com/article/privateEquity/idUSBNG40247620081219

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