Ezra Merkin future at GMAC up in Air - Ascot Partners

GMAC’s Future as Bank May Not Include Ezra Merkin as Chairman

By Ari Levy

Jan. 7 (Bloomberg) -- J. Ezra Merkin, whose hedge funds lost billions of dollars on investments with Bernard Madoff, may have to relinquish his post as chairman of GMAC LLC after the lender was bailed out by the federal government.

To become a bank holding company and gain eligibility for federal funds, Detroit-based GMAC was required to form a new seven-member board led by an independent chairman, according to a Jan. 2 regulatory filing. That disqualifies Merkin, who was appointed to the position of non-executive chairman two years ago by then-majority-owner Cerberus Capital Management LP.

Merkin, 55, presided over $7.9 billion of losses at GMAC during five quarters caused by defaults on subprime mortgages and a collapse in auto sales. He closed his $1.5 billion Gabriel Capital LP last month after disclosing losses tied to Madoff, who allegedly ran a $50 billion Ponzi scheme. Gabriel and two other Merkin funds, Ascot Partners LP and Ariel Fund Ltd., face lawsuits for investing with Madoff.

“Given the fact that GMAC is in dire need of management attention, a distracted chairman is probably not the wisest choice,” said Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania. Merkin’s time “is going to be absorbed over the next six months in addressing the vast losses that his investors have realized as a result of the Madoff scandal.”

GMAC’s representative on the board will be Chief Executive Officer Al de Molina, and Cerberus will also have one member, according to the filing. Two directors will be named by a trust that’s being formed to take control of most of General Motors Corp.’s stake in GMAC.

New Board

“Our board will be reconstituted in the coming months based on the new ownership structure,” GMAC spokeswoman Gina Proia said in an interview on Jan. 5. She declined to comment on Merkin’s status. The board will be retooled within 90 days, she said.

Calls placed to Merkin at home and to his lawyer, Andrew Levander, weren’t returned. Spokesman Andy Merrill wasn’t available for comment.

Cerberus, which owned 51 percent of GMAC, and GM, which controlled the rest, were required to divest most of their ownership as part of an agreement with the Federal Reserve on Dec. 24 that allowed GMAC to convert into a bank.

The remaining three members of the new board including the chairman will be independent of GMAC and jointly appointed by the other four directors, according to the filing.

GMAC ran short of cash last year after record defaults on subprime mortgages, which are made to homebuyers with the worst records, and plunging sales at GM. The finance company was shut out of credit markets and had to limit lending only to people with the best repayment histories.

Federal Stake

The Treasury said Dec. 29 it will take a $5 billion stake in GMAC and lend $1 billion to GM that will be invested in the lending unit to boost its capital. GM immediately began offering five-year, no-interest loans to revive sales. GMAC was responsible for financing about 35 percent of the automaker’s retail customers in 2007.

Merkin was blamed by New York University for at least $24 million in losses after his Ariel fund allegedly invested with Bernard L. Madoff Investment Securities LLC and didn’t inform the school, according to a Dec. 23 legal complaint. NYU is the biggest private U.S. university by enrollment. Other investors who claim they were hurt by Merkin’s investments with Madoff include Yeshiva University, which lost $110 million, and New York Law School.

Merkin has denied any wrongdoing. He resigned as a Yeshiva trustee and as its investment committee chairman on Dec. 12.

GMAC’s 6.75 percent notes due in 2014 fell 0.5 cent on the dollar to 70 cents, according to Trace, the Financial Industry Regulatory Authority’s debt-pricing service. The bonds have jumped 89 percent since the company gained bank status and now yield 14.48 percent.

To contact the reporter on this story: Ari Levy in San Francisco at alevy5@bloomberg.net

Last Updated: January 7, 2009 00:00 EST