GMAC Bonds (Smart Notes)

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I hold GMAC Bonds with a 2011 maturity date. Would some one please enlighten me about the possibilites/probabilites of what is going to happen here? I know nothing can be said with certainty, but would is likely to happen.

1. With bankruptcy will my interest payment stop?
2. If the govt gives some sort of bailout, will that likely create a market so I can get out of the bonds? If so, should I?
3. What are the chances that I get my principal or at least some of it, back in 2011?

I have extreme anxiety here because I made the mistake of putting too much of my total net worth in these bonds. Any information would be greatly appreciated.

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Dear Dave, Would your advice be the same for my 82 year-old mother with GMAC Smart Notes Bonds that mature in August, 2... (more)

misssusan (May. 12, 2009 @ 2:13p) |

It seems to me that the date of the maturity is the date when you can get the amount back that you invested. Make sure ... (more)

ohioszo (May. 13, 2009 @ 9:16a) |

Thank you so much for your good advice! Sincerely, Susan

misssusan (May. 13, 2009 @ 11:18p) |

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Harrison0554 said: I hold GMAC Bonds with a 2011 maturity date. Would some one please enlighten me about the possibilites/probabilites of what is going to happen here? I know nothing can be said with certainty, but would is likely to happen.

1. With bankruptcy will my interest payment stop?
2. If the govt gives some sort of bailout, will that likely create a market so I can get out of the bonds? If so, should I?
3. What are the chances that I get my principal or at least some of it, back in 2011?

I have extreme anxiety here because I made the mistake of putting too much of my total net worth in these bonds. Any information would be greatly appreciated.
While I have no help to offer you, I am very interested how you were convinced to make this investment. Was it your own studies? If so, what did you study. Was it because of you work in the industry? Was it an "independent" investment broker?

I am sorry for your loss, but I would really like to try to connect the dots.

He hasn't necessarily lost anything yet. I'm also interested in the process of what happens to these bonds if GM goes bankrupt.

So, rather than make another useless post, I googled it.

Bonds represent debt which a company has agreed to repay with interest. As such, when a company files for federal bankruptcy protection, bondholders have a better chance of getting repaid than stockholders. While bankruptcy laws determine the order of repayment, stockholders, considered owners of the company, have the last claim on assets.

Bonds may continue to trade once a company has filed for bankruptcy under Chapter 11. However, bondholders will stop receiving principal and interest payments, causing a default to occur.


If you are a bondholder, you may receive new stock in exchange for your bonds, new bonds, or a combination of stock and bonds.
The bankruptcy court may determine that stockholders don't get anything because the debtor is insolvent.


From what I can tell, you will probably get X cents on the dollar for your bonds if GM goes bankrupt. That X may be 8 cents or 40 cents... it's hard to tell. It could possibly even be 0.

you will get nothing the employees have the first dibbs on the money for hours work and benefits owed for their labor
you will get nothing zep zero
worthless piece of paper

I said it before and I say it now with 100% certitude that GM/GMAC/Ford bonds will be safe.

GM is not the majority holder of GMAC if I am not mistaken. They own like 49% or something like that.

Harrison0554 said: I hold GMAC Bonds with a 2011 maturity date. Would some one please enlighten me about the possibilites/probabilites of what is going to happen here? I know nothing can be said with certainty, but would is likely to happen.

1. With bankruptcy will my interest payment stop?
2. If the govt gives some sort of bailout, will that likely create a market so I can get out of the bonds? If so, should I?
3. What are the chances that I get my principal or at least some of it, back in 2011?

I have extreme anxiety here because I made the mistake of putting too much of my total net worth in these bonds. Any information would be greatly appreciated.


You should expect the following:
1. Your interest rate payments will definitely stop. You will receive no cash on an ongoing basis while the company is in chapter 11.
2. Depends on the bailout. Most of the financial bailouts have enabled the recipient to continue to exist outside of bankruptcy, which necessitates staying current on debts (interest and principal). GM - and to some extent GMAC - have serious cash flow problems that an government bailout may not be enough to address. GM is currently trying to negotiate with its debtholders and there may be something similar for GMAC. The positive in your case is that the smartnotes were generally sold to retail investors, so there may be an attempt to be more lenient with that class of bondholder. In any case, there will continue to be a market for the bonds, but likely at a Deep Discount to face.
3. Anybody's guess at this point.

These thoughts are based on my experience as a Lehman Brothers bondholder.

Temball said: you will get nothing the employees have the first dibbs on the money for hours work and benefits owed for their labor
you will get nothing zep zero
worthless piece of paper


That's just childish. Why don't you go back to the Webkinz site.

Bloomberg had a good article on this a few weeks ago:

Bloomberg article

Nov. 7 (Bloomberg) -- GMAC LLC may leave thousands of individuals on the hook for about $15 billion of junk-rated debt unless the auto and home lender finds a way to pay its bills.
GMAC, the largest lender to car dealers of General Motors Corp., issued more than $25 billion of debt called SmartNotes over the past decade to retail investors. While GMAC has paid off the debts as they matured, five straight unprofitable quarters raised doubt about GMAC's survival, and SmartNotes due in July 2020 have lost about three-quarters of their value.
``An investment like this is totally unsuitable for the retail investor,'' said Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania, who rates GMAC bonds junk, or below investment grade. ``You're selling it to the widows and orphans who think of GMAC as being this strong, long- standing corporation when the reality is far from that.''
GMAC's losses since mid-2007 total $7.9 billion, driven by record home foreclosures and auto sales that GM has called the worst since 1945. Stomaching some of Detroit-based GMAC's deficit are individuals who purchased SmartNotes through brokers at firms including Merrill Lynch & Co., Fidelity Investments and Citigroup Inc.'s Smith Barney unit.
Chuck Woodall, 66, who lives with his wife in Columbus, Ohio, amassed $200,000 of SmartNotes starting eight years ago, and they now equal about 25 percent of his investments. At the time, the securities were rated investment-grade and they paid more interest than government bonds or certificates of deposit. They also were backed by Detroit-based GM, the biggest U.S. automaker.
Safe Ride
Woodall, a former owner of apparel stores and a pet-supply business, holds SmartNotes due in 2018 that he says have lost about 80 percent of their value. He said his Merrill broker told him that in more than 20 years, no client had lost money on bonds.
``He assured me they were safe,'' Woodall said. ``I just wasn't aware enough and didn't have my hand on the pulse.''
GMAC said Nov. 5 its mortgage unit may fail and analysts have questioned the viability of the entire company, which is now 51 percent-owned by New York-based Cerberus Capital Management LP. GM controls the rest.
Of GMAC's $64 billion in debt outstanding at the end of June, about $15 billion was in SmartNotes. They rank equal to senior unsecured debt, which recovers an average of about 40 cents on the dollar in bankruptcy cases, according to Mariarosa Verde, an analyst at Fitch Ratings in New York.
GMAC spokeswoman Gina Proia said the company ``has honored its commitments and intends to continue honoring its commitments to investors.'' She declined to elaborate.
Bonds Drop
SmartNotes maturing in July 2020 fell 6.5 cents on the dollar, or 20 percent, to 26.7 cents at 4 p.m. New York time, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt yields 35.8 percent, or 32 percentage points more than similar-maturity Treasuries, Trace data show.
Brokers traditionally handle the task of determining whether an investment is suitable for a particular investor, depending on factors such as assets, sophistication and tolerance for losses. Merrill spokesman Mark Herr, Steve Austin from Fidelity and Citigroup's Alex Samuelson declined to comment.
SmartNotes were introduced in 1996 by ABN Amro Holding NV's Chicago-based LaSalle Bank, which is now part of Bank of America Corp. in Charlotte, North Carolina. The notes include features designed to appeal to investors seeking interest income -- a concern for older people and retirees.
Prosperous Times
The notes were sold in denominations of $1,000 and offered a ``survivor's option,'' allowing spouses to sell the bonds back to the issuer if the owner dies. The SmartNotes program opened to European investors in 2004.
GMAC and LaSalle said in statements from 1998 through 2003 that the notes were intended for individual investors. Patrick Kelly, a LaSalle managing director, described the buyers in a 2003 interview as ``mom-and-pop investors.''
``If Wal-Mart sold bonds, these would be the bonds they would sell,'' Kelly said.
Back then, SmartNotes may have been safer bets. GMAC debt was rated BBB by Standard & Poor's, GM and GMAC were profitable, and the lender was still a wholly owned unit of the automaker. Sales of GMAC SmartNotes reached $1 billion in 1998, doubled the following year and exceeded $25 billion in 2003, when GMAC was on its way to earning $2.8 billion for the year.
`Gold-Plated'
``GM was considered a can't-miss company,'' said Thomas Smicklas, a retired high school principal and now a homebuilder in Wadsworth, Ohio, who started buying SmartNotes in 2003. Smicklas said he owns about $75,000 of short-term SmartNotes and hasn't lost any money. ``When the GM name is on something, many investors assumed it's gold-plated.''
By 2005, GMAC's debt was reduced to junk -- Moody's Investors Service now rates the firm seven levels below investment grade -- and GMAC continued offering SmartNotes as late as 2007. Today, S&P downgraded GMAC to CCC from B-, citing the lender's ``dire situation.'' Analysts have also raised concerns about the survival of GM, which today reported a $4.2 billion third-quarter operating loss and said it may not have enough cash to make it through the year.
Tom Ricketts helped create SmartNotes at ABN Amro before leaving in 1999 to start Chicago-based Incapital LLC, which earlier this year bought LaSalle's retail bond unit. Ricketts said his firm doesn't issue GMAC notes and sticks with investment-grade bonds. He recommends that individuals who buy them own a wide variety of assets.
Circumstances Change
``When you don't diversify in any portfolio, you expose yourself to risk that you're not getting paid for,'' Ricketts, 43, said in an interview. ``Typically, investment-grade corporate bonds are very good investments.''
GMAC and underwriters of its debt were sued in a 2005 class action that claimed the lender misrepresented SmartNotes in financial statements. A federal judge in eastern Michigan dismissed the case in February 2007, and the plaintiffs are appealing.
``In corporate bonds, time has shown that volatility, credit ratings and potential deterioration in credit means you may own something very different than what you thought you owned,'' said Michael W. Boone, founder of MWBoone & Associates, an investment advisory and money management firm in Bellevue, Washington. Boone said individuals should hold corporate debt only in mutual funds, ``where they have instant diversification and management.''
To contact the reporters on this story: Ari Levy in San Francisco at alevy5@bloomberg.net; David Mildenberg in Charlotte at dmildenberg@bloomberg.net

Thanks tarcapone but that hurt my eyes. Here it is reformatted:




Nov. 7 (Bloomberg) --


GMAC LLC may leave thousands of individuals on the hook for about $15 billion of junk-rated debt unless the auto and home lender finds a way to pay its bills. GMAC, the largest lender to car dealers of General Motors Corp., issued more than $25 billion of debt called SmartNotes over the past decade to retail investors. While GMAC has paid off the debts as they matured, five straight unprofitable quarters raised doubt about GMAC's survival, and SmartNotes due in July 2020 have lost about three-quarters of their value.

``An investment like this is totally unsuitable for the retail investor,'' said Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania, who rates GMAC bonds junk, or below investment grade. ``You're selling it to the widows and orphans who think of GMAC as being this strong, long- standing corporation when the reality is far from that.'' GMAC's losses since mid-2007 total $7.9 billion, driven by record home foreclosures and auto sales that GM has called the worst since 1945. Stomaching some of Detroit-based GMAC's deficit are individuals who purchased SmartNotes through brokers at firms including Merrill Lynch & Co., Fidelity Investments and Citigroup Inc.'s Smith Barney unit.


Chuck Woodall, 66, who lives with his wife in Columbus, Ohio, amassed $200,000 of SmartNotes starting eight years ago, and they now equal about 25 percent of his investments. At the time, the securities were rated investment-grade and they paid more interest than government bonds or certificates of deposit. They also were backed by Detroit-based GM, the biggest U.S. automaker.


Safe Ride

Woodall, a former owner of apparel stores and a pet-supply business, holds SmartNotes due in 2018 that he says have lost about 80 percent of their value. He said his Merrill broker told him that in more than 20 years, no client had lost money on bonds. ``He assured me they were safe,'' Woodall said. ``I just wasn't aware enough and didn't have my hand on the pulse.''


GMAC said Nov. 5 its mortgage unit may fail and analysts have questioned the viability of the entire company, which is now 51 percent-owned by New York-based Cerberus Capital Management LP. GM controls the rest. Of GMAC's $64 billion in debt outstanding at the end of June, about $15 billion was in SmartNotes. They rank equal to senior unsecured debt, which recovers an average of about 40 cents on the dollar in bankruptcy cases, according to Mariarosa Verde, an analyst at Fitch Ratings in New York.


GMAC spokeswoman Gina Proia said the company ``has honored its commitments and intends to continue honoring its commitments to investors.'' She declined to elaborate.


Bonds Drop

SmartNotes maturing in July 2020 fell 6.5 cents on the dollar, or 20 percent, to 26.7 cents at 4 p.m. New York time, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt yields 35.8 percent, or 32 percentage points more than similar-maturity Treasuries, Trace data show.
Brokers traditionally handle the task of determining whether an investment is suitable for a particular investor, depending on factors such as assets, sophistication and tolerance for losses. Merrill spokesman Mark Herr, Steve Austin from Fidelity and Citigroup's Alex Samuelson declined to comment.


SmartNotes were introduced in 1996 by ABN Amro Holding NV's Chicago-based LaSalle Bank, which is now part of Bank of America Corp. in Charlotte, North Carolina. The notes include features designed to appeal to investors seeking interest income -- a concern for older people and retirees.


Prosperous Times

The notes were sold in denominations of $1,000 and offered a ``survivor's option,'' allowing spouses to sell the bonds back to the issuer if the owner dies. The SmartNotes program opened to European investors in 2004. GMAC and LaSalle said in statements from 1998 through 2003 that the notes were intended for individual investors. Patrick Kelly, a LaSalle managing director, described the buyers in a 2003 interview as ``mom-and-pop investors.''


``If Wal-Mart sold bonds, these would be the bonds they would sell,'' Kelly said. Back then, SmartNotes may have been safer bets. GMAC debt was rated BBB by Standard & Poor's, GM and GMAC were profitable, and the lender was still a wholly owned unit of the automaker. Sales of GMAC SmartNotes reached $1 billion in 1998, doubled the following year and exceeded $25 billion in 2003, when GMAC was on its way to earning $2.8 billion for the year.


`Gold-Plated'

``GM was considered a can't-miss company,'' said Thomas Smicklas, a retired high school principal and now a homebuilder in Wadsworth, Ohio, who started buying SmartNotes in 2003. Smicklas said he owns about $75,000 of short-term SmartNotes and hasn't lost any money. ``When the GM name is on something, many investors assumed it's gold-plated.'' By 2005, GMAC's debt was reduced to junk -- Moody's Investors Service now rates the firm seven levels below investment grade -- and GMAC continued offering SmartNotes as late as 2007. Today, S&P downgraded GMAC to CCC from B-, citing the lender's ``dire situation.'' Analysts have also raised concerns about the survival of GM, which today reported a $4.2 billion third-quarter operating loss and said it may not have enough cash to make it through the year.


Tom Ricketts helped create SmartNotes at ABN Amro before leaving in 1999 to start Chicago-based Incapital LLC, which earlier this year bought LaSalle's retail bond unit. Ricketts said his firm doesn't issue GMAC notes and sticks with investment-grade bonds. He recommends that individuals who buy them own a wide variety of assets.
Circumstances Change ``When you don't diversify in any portfolio, you expose yourself to risk that you're not getting paid for,'' Ricketts, 43, said in an interview. ``Typically, investment-grade corporate bonds are very good investments.''


GMAC and underwriters of its debt were sued in a 2005 class action that claimed the lender misrepresented SmartNotes in financial statements. A federal judge in eastern Michigan dismissed the case in February 2007, and the plaintiffs are appealing. ``In corporate bonds, time has shown that volatility, credit ratings and potential deterioration in credit means you may own something very different than what you thought you owned,'' said Michael W. Boone, founder of MWBoone & Associates, an investment advisory and money management firm in Bellevue, Washington. Boone said individuals should hold corporate debt only in mutual funds, ``where they have instant diversification and management.''

"Distressed debt investor" Martin Whitman (Third Avenue Value Fund) invested a couple of months
ago in senior debt of GMAC. Reading his 'letter to shareholder' (with regard to GMAC) might be of some consolation for you....

To answer:
.........I am very interested how you were convinced to make this investment. Was it your own studies? If so, what did you study. Was it because of you work in the industry? Was it an "independent" investment broker? I am sorry for your loss, but I would really like to try to connect the dots.

Reply:
GMAC Bonds were originally rated many steps above investment grade paper (with BBB being the lowest & AAA being the highest). Most GMAC bonds were sold as "Smart Notes" and recommended by Banks to Brokerage Firms as a safe investment, and these bonds were directly pointed to the retired folks and the average retail investor. At the time most of those Bonds were issued 10 years ago and longer, GMAC & GM were in good standings. GMAC's problem arose when the Housing Market collapsed, and it poured Billions (Quarter after Quarter) trying to save ResCap (a subsidiary of GMAC)(as did GM). Had they allowed ResCap to go under, GMAC would not have been in the position as it is today. Not knowing exact liability ResCap had on GMAC its difficult to determine the exact damage on GMAC, but GMAC certainly would not have been in as bad of a position as it is today. Their hope was the Housing meltdown would be softer than it turned out to be.

The exchange of bonds for cash or both Bonds & Preferred, will help GMAC meet federal requirements to become a Bank Holding Company, but the exchange itself does not guarantee that it will become a Bank Holding Company. Without the exchange (with a Dec 18th deadline) GMACS chances of survival is slim. If Congress helps GM, GM in turn may help GMAC because GM's existence in itself are also dependent upon GMAC.
GM's distress is not only affecting the USA but the world auto market, just as GMAC will affect the Global employment market (with i.e. Australian government stepping into the picture). Honda President and Susuki President weighing in, in the hope both GM and GMAC will be helped. The ripple effect will affect everyone, whether you like it or not.

I think GM will survive and he will be ok with these bonds. GMAC will also get a bailout. At this point letting GM collapse and haveing all big 3 in chpt 11 could have a devastaging affect. We all know Obama wants them to survive. Get real people

Rob

The Feds aren't going to let the auto companies go under. Congressional leaders have already said that several times. It's just a matter of working out the details. So you will get get your money back, IMHO.


Slugabed said: GMAC Puts Individuals After Institutions

I'm wondering how they can subordinate this debt (paging geo123...) when a quick glance at the smartnotes prospectus 1) seems to clearly state that the notes are unsecured, unsubordinated, and rank equally and ratably with all other unsecured debt and 2) seems to have a negative pledge (with four exceptions: 1-export financing, 2-pledging foreign receivables, 3-existing liens, and 4-extensions of 1-3).

link

My in-laws own GMAC smart notes that mature in 08/15/2016. They have lost 70% of there value. I am trying to convince them to sell them since they have improved in value since the bail out.

I was wondering if anyone understood the situation in terms of GMAC Financial services becoming a Bank Holding Company? What their relationship to GMAC bank is? And most importantly, where are Smartnote holders of bonds extending out another 10 years, today Feb 2009 in terms of risk of default?

Things are changing rapidly with GM which has really disassociated itself from a close relationship with GMAC. I think GMAC will survive as a bank and financial institute unless its taken over by the FDIC and in that case probably the notes might be worthless. GMAC seems to be taking a more aggessive stance in trying to get investor CD money and trying to make good loans so its my opinion that if you have short term SmartNotes due this year you might make it out of this investment....Longer term, its impossible to make any comment due to the flux of the present situation.....seems were heading into a DEPRESSION and nobody knows how to stop it or what institutions will survive or go...MarvinMBA

Thank you very much for your ray of hope reply. We have smart notes maturing in September 09 and were wondering whether we should sell now or wait until September. You do remember that fiver years ago, this was rate AAA (for what it's worth). Our broker has "offered" to buy this deeply discount - 15% of its current value. I think we'll just keep our fingers crossed until September.
Thanks again

Good Idea. Brokers get you coming and going anyway.

Good Idea. Brokers get you coming and going anyway.

GMAC is totally independent from GM, a bankruptcy at GM does not mean a GMAC bankruptcy,recently GMAC was granted bank holding company status by the US government making it able to get TARP funding. I have GMAC bond with a 2015 maturity and I'm holding on to mine. As a part of the restructuring effort for the auto industry GMAC was named as a strategic Company vital to the health of the US auto industry. Also S& P recently upgraded these bonds to CCC from a C rating. While some risk exists I feel that GMAC will emerge from its current difficulties and the bonds will be safe. Better to sit on them than take the loss at this point.

my mother in law died march 15 09, her estate turned in her $90,000 worth of gmac smart notes april 1 for full face value death benefit. will gm honor this

schockor said: my mother in law died march 15 09, her estate turned in her $90,000 worth of gmac smart notes april 1 for full face value death benefit. will gm honor this

Yes she will because FWF knows the terms of her note.

If the bonds had the estate feature, the estate should receive the par value of the bonds. Purchasing highly discounted bonds with the estate feature for elderly folks is actually a good estate planning tool. You need to make sure though the bond issuer is not likely to default prior to the death of the purchaser.

I would greatly appreciate your kind advice and good counsel... My 82 year-old mother has GMAC Smart Notes Bonds that mature in about 3 mos. - in August, 2009. Should she hold or sell now? (Will GMAC still be around in August?) Thank you! Susan

---

Dear Dave, Would your advice be the same for my 82 year-old mother with GMAC Smart Notes Bonds that mature in August, 2009 - about 3 months from now? Would you recommend she sell now or hold? Thank you!!!! Susan

It seems to me that the date of the maturity is the date when you can get the amount back that you invested. Make sure that she sees her broker, and, he may call her ... check for the time limits: (If the smart note is in her name or her husband's ... within a year of the death is the contact time for turning it into cash, with the estate feature.) Perhaps, as Charles Schwab site suggests, go into another investment with that money. I have no idea what you would get with a reinvestment in the same smart note.

Thank you so much for your good advice! Sincerely, Susan



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