One of the more subtle parts of the government bailout of GMAC came after the financial arm of the car company, now majority owned by star-crossed hedge fund Cerberus, got its $6 billion in aid.

GMAC had gone to its bondholders and asked them to swap their paper for a combination of equity and cash.

GMAC, a newly-minted commercial bank under the government’s rules that allow financial firms to get federal cash infusions, aimed to get 75% of $38 billion of its debt swapped for ownership in the firm. According to Reuters, "The lender said holders of $21.2 billion of debt will swap their stakes for $15.7 billion of new securities plus cash," thus making the level of participation about 56%.

Those not privy to the negotiations for the debt swap can be sure that there was a great deal of arm-twisting, some of it it probably from the government. It would not look good if private investors repudiated the plan to help GMAC which has been on the brink of insolvency more than once. Its own mortgage business has nearly swamped it.

The failure for the GMAC debt-for-equity swap may foretell what will happen when GM (GM) attempts to do the same thing as part of the restructuring plan mandated by Congress and the Administration.

If GMAC is any indication of the appetite of private money to help troubled companies when they know that the government is standing by with a large check, the future of a partnership of private and public capital to help solve the credit crisis is troubled itself.

Douglas A. McIntyre

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