After spending half a lifetime being eclipsed by his famous father, J. Ezra Merkin is getting his 15 minutes of fame.
Merkin is at the nexus of two big national stories. Not only was he a middleman for Bernard L. Madoff Investment Securities who lost billions of dollars for the investors of Ascot Partners, which he put entirely with Madoff (after taking fees for himself), but he is also the chairman of GMAC Financial Services, which just got a $5 billion infusion from the U.S. Treasury.
Without that shot in the arm, GMAC would likely have faced bankruptcy - and Merkin, who has been hit with a passle of lawsuits from former investors, would be ruined because of his association with Madoff. On Dec. 11, Madoff was arrested and charged with operating a $50-billion Ponzi scheme to defraud investors. Although the involvement of middlemen like Merkin is reportedly being investigated, no one else has been charged.
One might ask why the federal government is rescuing a company that has not yet met the requirements for conversion to a bank holding company and, in addition, is headed by a man accused of financial misconduct in mounting lawsuits.
The answer is that as goes GMAC, so goes General Motors, which holds a 49-percent stake in the company and sells lots of its cars to customers who receive loans from GMAC.
So the deal to “convert” GMAC into a bank is a back-door rescue of the auto industry. On Tuesday, TARP released $5 billion directly to GMAC, and up to $1 billion is due to come from U.S. Treasury via a loan to General Motors so it can channel the money to GMAC.
The fact that Merkin is in the middle appears to make the deal messier, but no less urgent from the perspective of the Treasury Department.
Merkin became the chairman of GMAC as a longtime partner of Cerberus Capital Management, which bought a 51-percent stake in GMAC in 2006. He is also a close friend of Cerberus chief Stephen Feinberg.
But his leadership is expected to end in the near future since Cerberus will reduce its ownership of GMAC to no more than 33% of total equity under the terms of the Treasury Department’s infusion.
Meanwhile, lawsuits against Merkin are piling up.
New York Law School, which lost $3 million investing in the Ascot fund, was the first to bring a class-action lawsuit, charging that he “recklessly or with gross negligence caused and permitted $1.8 billion, virtually the entire investment capital of Ascot” to be handed over to Madoff.
A second class-action lawsuit charges that Merkin “facilitated” the Madoff scandal “recklessly or with gross negligence and/or in breach of fiduciary duties.: That suit was brought by Scott Berrie, another investor in Merkin’s Gabriel Capital Corp.
A third was brought by New York University, which said it lost $24 million through its investment in Ascot Partners. “The Funds ‘feeding’ money to Madoff . . . made a conscious effort to conceal Madoff’s involvement from their own investors,” the NYU lawsuit said. “This concealment was a requirement dictated by Madoff, which was agreed to by Merkin and other ‘feeder’ funds.”
Merkin has denied any wrongdoing, saying he was personally devastated by Madoff’s fraud.
“Mr. Merkin remains committed to obtaining for shareholders the best results possible in the wake of the terrible fraud committed by Bernard Madoff,” said his attorney, Andrew Levander.
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