My GMAC Bond Client

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Sep 8, 2008 12:47 pm

Here's an interesting frustrating scenario that walked into the office last week:

- Age 62, retired, recently widowed. 
- Pension Income w/ Widower's benefits: $20,000
- Not collecting SS yet.  Health is covered through employer. 
- No Debts
- 1 Brokerage Account in her name (100% GMAC Bonds)

Client is using the interest-only (12k a year) from this brokerage account to care for her 96 year old mother.  It is 100% GMAC bonds (33% 2019, 33% 2022, 33% 2025).  The basis on the account is about $176,000.  The current value, as of July 31 is $76,000.  The CY is around 17%.  How's that for High Yield? 

Obviously, this is a problem.  GMAC's not doing so hot financially, and there's the possibility they could go under.  I have the feeling she has no idea what's going on, as her deceased husband did everything.

What to do? 
A) Cut the losses, diversify the bond account, and let the money run out in 5-6 years. 
B) Sell half the GMAC bonds, and split the difference.
C) Sell 3/4 of the GMAC bonds...
D) Pray to the gods that GMAC recovers (I don't think this is a great choice). 

What I'm thinking is that you can either have x amount of money for x number of years, or you can risk not having any money in x years. 

Any thoughts on this situation would be greatly appreciated.




Sep 8, 2008 4:37 pm

Me too.  Have a client with a GMAC bond at less than 50% of face value.  I'm facing the same quandary.   The client is using the income from the bond to live on. 

 
1. Hope to hell the bond gets called.....not likely
2. Cut the losses but would have to reinvest into bonds yielding less than the current GMAC bond.
3. Sell half and hope the rest comes back
4. Hope that GM sells the GMAC portion off to another firm and the credit rating comes back.
 
 
Sep 8, 2008 4:46 pm

My guess is that these bonds have an estate feature.  If the mom passed away, the son could redeem the bonds for the face amount.  Have you considered that option?  Have you checked to see that they have estate features?

Sep 8, 2008 5:55 pm

most estate features will only allow so many $ to redeem. So don't count on it.

Sep 8, 2008 6:10 pm

Sorry, it is the client's GMAC bonds, not her elderly mother's.  I edited the post to clarify that.  However, if the elderly mother passed away, I guess she would not need that income -_-.  

Sep 8, 2008 8:44 pm

Help her take the broker that sold the GMAC bonds to her husband, to arbitration. The guy should be shot!


Seems to me you really need to get her out of those bonds. Problem is, there is no where to go with the money. She'll earn 5% at best. Is there any other place for her mother to get the money she needs? Medicaid, etc? Has she exhausted all forms of public assistance? Thats the first question i would ask, but get her out of those bonds, before she dies and her kids (the mothers grandkids) come after you!
Sep 9, 2008 10:53 am

Is she not taking SS by choice?  She's definitely old enough. 


henry is on the right track with the estate feature.  I would guess that if the account is in the client's single name right now it is because it used to be a joint account with her husband.  GMAC bonds allow joint account owners the ability to use the estate feature when one of the owners passes.  Away, not gas. 
 
She can turn the bonds into GMAC for the estate feature.  The info we have on our system says for CUSIPs starting with 3639 and 3704 you can submit $200K per year and that it will take 60-90 days minimum.  I'd expect 90-120 from past experiences.  She continues to get the interest while the bonds await redemption.  It's not a quick fix, but it might be your out.      
Sep 9, 2008 12:32 pm

Space, I just got her statement:

All the cusips start with 3704, and the bonds are held under her family trust, she's the trustee (this makes me a little worried, as I'm not sure how the registration has changed since her's husband's death--changes in registration can void the survivor's option).  I'm going to call my bond department to make sure this can work.  Great suggestion though, thanks so much.   

update I verified that all the cusips have death puts on them, so I'm going to prepare the slew of paperwork required to get this ball rolling.  Thanks again for the advice!

update 2 This made me laugh/cry: Early Retirement Forums

"Hello KB. They look like bonds to me also. And, risk-wise

I see [GMAC bonds] as practically zero. I would not be afraid to commit a huge chunk of my meager pile."

Sep 13, 2008 12:52 am

Space,

So it looks like the GMAC account was once titled under the trust with both names (herself + spouse, co-trustees).  But about 2 months after the spouse died, her old broker sent her paperwork to change the registration to just her name only ttee, under the trust.  The actual trust has yet to be updated (still has both names on it). 

My question: I know that TOD transfers and changing the registration can void the death put...but in this case, do you think that would do it? 

[btw...the lawyer set up an A/B trust, with the GMAC account going to the credit trust (the irrevocable part), and an irrevocable trust would usually void any survivor options I believe, but because she's the trustee, I think she could get the GMAC account back in her trust should there be any problems.  The client has not yet completed dividing up the estate (which is less than 400k, so I really have no idea why an A/B trust was even considered), and I'm going to talk to the lawyer on Monday.  I'm having her meet with her old broker to try to fix this and get the Death put done.

Either way, it seems like her lawyer and previous broker really complicated what looks to be a simple life, and what should have been a simple divying up of the estate. 

Sep 13, 2008 7:33 pm

If any owner of the account passes, the bonds can be put back to GMAC, providing that GMAC has not already redeemed the max for that QTR.  If max is already reached, GMAC will just make you wait in line until the next period starts.  200k is the max option per owner to put back to GMAC. No holding period for GMAC bonds before death occurs on these since they are all intermediate term bonds.  Actually, any bonds issued after 2005 have a stipulation that the owner has to live for 6 months before they can use the estate option.  That is a great current yield on the bonds if you buy them at the current price. But the client probably bought them at or near par making THEIR yield arond 7-7.5%.  I agree with the arbitration that Sports suggested, but only if the bonds were bought after GM & GMAC were cut to junk and the orders were marked solicited. 

Sep 13, 2008 7:45 pm

If these bonds were moved from one account to another if one of the owners has passed, the survivor option can still be exercised.  The bonds will have to be moved back to the original account and the paperwork can be submitted.  I just did this recently on a jont account when the husband passed and the bond was overlooked as far as the survivor option.  I moved it back to the original account and got back face value on the 15th of the next month.

Sep 13, 2008 11:48 pm

Thanks bud, that's good to know. 

And as far as arbitration, it sounds like these bonds were bought way back in 2002, 2003 at the latest, when things were still in good standing, with the yields around 6.5-7.5.  But, it was the entirety of her husband's money (he didn't have any qualified money, for whatever reason).  Would you advise any of your clients to put the entirety of their money in a single bond? 

Sep 14, 2008 9:25 am

Only if I wanted to screw up my U-4 and my livelyhood.

Aug 31, 2010 11:19 am

well said meili

Aug 31, 2010 12:09 pm

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[/quote]

You exactly my client! Initial order of 10,000 each, but where can you deliver?? Upon deposit, of generosity, how is delivered, and when/why? Let's make a deal!

Aug 31, 2010 5:54 pm

The troll brought this thread back to life. So let's talk about it.

With the benefit of 20/20 hindsight, was selling GMAC at the bottom good advice or bad?

Aug 31, 2010 6:12 pm

[quote=gvf]Space,

So it looks like the GMAC account was once titled under the trust with both names (herself + spouse, co-trustees).  But about 2 months after the spouse died, her old broker sent her paperwork to change the registration to just her name only ttee, under the trust.  The actual trust has yet to be updated (still has both names on it). 

My question: I know that TOD transfers and changing the registration can void the death put...but in this case, do you think that would do it? 

[btw...the lawyer set up an A/B trust, with the GMAC account going to the credit trust (the irrevocable part), and an irrevocable trust would usually void any survivor options I believe, but because she's the trustee, I think she could get the GMAC account back in her trust should there be any problems.  The client has not yet completed dividing up the estate (which is less than 400k, so I really have no idea why an A/B trust was even considered), and I'm going to talk to the lawyer on Monday.  I'm having her meet with her old broker to try to fix this and get the Death put done.

Either way, it seems like her lawyer and previous broker really complicated what looks to be a simple life, and what should have been a simple divying up of the estate. 
[/quote]

The old broker is obviously a poor excuse for an advisor!  He didn't bother to put in the death puts knowing she had so much exposure to the bonds.  If you are able to get the death puts paid off, I am sure she will be a very happy camper and you can help her reinvest the proceeds properly.  If it get denied for some reason, the other broker has some liability.

Sep 1, 2010 10:38 am

legend, you are responding to a 2 year old post. What happened and why is water over the dam. However, we can now discuss the value of advice to sell GMAC at the low and lock in substancially lower income. Massive loss plus low income caused by do gooder advisors either trying to do the right thing or trying to avoid a lawsuit and thus cause irrepairable damage to the client.

Opinions?

Sep 1, 2010 11:14 am

Bondguy,

When a company's continued existence depends on large (and largely unpopular) political initiatives doesn't it become a question of whether risk of total ruin is so great that a cut-loss/cut-income strategy becomes a lot more desirable?

Sep 1, 2010 9:13 pm

[quote=BondGuy]

legend, you are responding to a 2 year old post. What happened and why is water over the dam. However, we can now discuss the value of advice to sell GMAC at the low and lock in substancially lower income. Massive loss plus low income caused by do gooder advisors either trying to do the right thing or trying to avoid a lawsuit and thus cause irrepairable damage to the client.

Opinions?

[/quote]

I didn't sell any clients GMAC bonds during the lows.  I have had some sell them now that the spreads are much tighter.