GMAC: Stress Test Biggest Loser

The biggest loser on the stress test was clearly GMAC. It needs to raise $11.5 billion in capital, which is about half of its current equity. Unlike the commercial banks, it has no earnings power — it lost $675 million in the first quarter. Yet per Tim Geithner and Ben Bernanke, none of the banks among the 19 will be allowed to fail.

That would seem to mean that come hell or high water, GMAC will continue to exist, probably due to more government money. Keep in mind that this company wasn’t even a bank until the Fed looked the other way and approved its application for bank holding company status in December. Let’s review a few details.

First, GMAC resembles a bank about as much as I resemble Tom Cruise. It’s a mostly failed subprime mortgage bank and an auto finance company. Several years ago, GM in a fit of sanity sold it to Cerberus which was operating without benefit of firing synapses.

As the financial crisis accelerated, its mortgage portfolio turned toxic and began to poison the entire company. It’s only hope was a federal bailout so it lined up in front of the Fed with its application to become a bank in hand.

Since the government was knee deep in bailing out GM at that time and even they could figure out that they needed someone to keep on financing GM’s cars, the Fed said OK with a condition. Get 75% if your bondholders to convert their debt to equity.

Then began an agonizing series of deadlines for the bondholders to convert. So the company put the creditors on notice that it was convert or BK and the creditors called their bluff. Deadlines came and weren’t met and new ones were established. Then in mid-December the Fed delivered a Christmas present. They approved the BHC application. Later we learned that only 52% of the bondholders ever agreed to the debt for equity swap.

The TARP money flowed in, GMAC became a bank and PIMCO and the rest of the holdouts smiled secure in the knowledge that they were now home free. No one was messing with the creditors of banks, not even the Treasury or Fed.

Fast forward to today. Oh, wait a minute. In the meantime, Chrysler Credit folds and GMAC announces it will take over financing for all Chrysler products as well as GM cars. Now GMAC is the go to guy for the new shareholders of GMAC and Chrysler. Anyway, GMAC is now branded as the worst of the Group of Nineteen and has to come up with capital.

Can it pull it off? Of course not. Who would want anything to do with a company that’s hemorrhaging money, probably still has a boat load of toxic mortgage assets and is going to say how high when either the government or the UAW say jump.

On second thought, sure it can pull it off. GMAC is leading a charmed life. There is one investor that desperately needs them to hang around and they have the ultimate deep pockets. The federal government will dig down again, put some more money on the table and GMAC will be recapitalized. How else are you going to sell green cars to people that don’t want them if you don’t have a finance company to give money away.

So one compromise begets another and another and another. Don’t think for a moment that the recapitalization of GMAC will be the last compromise.

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About Tom Lindmark 401 Articles

I’m not sure that credentials mean much when it comes to writing about things but people seem to want to see them, so briefly here are mine. I have an undergraduate degree in economics from an undistinguished Midwestern university and masters in international business from an equally undistinguished Southwestern University. I spent a number of years working for large banks lending to lots of different industries. For the past few years, I’ve been engaged in real estate finance – primarily for commercial projects. Like a lot of other finance guys, I’m looking for a job at this point in time.

Given all of that, I suggest that you take what I write with the appropriate grain of salt. I try and figure out what’s behind the news but suspect that I’m often delusional. Nevertheless, I keep throwing things out there and occasionally it sticks. I do read the comments that readers leave and to the extent I can reply to them. I also reply to all emails so feel free to contact me if you want to discuss something at more length. Oh, I also have a very thick skin, so if you disagree feel free to say so.

Enjoy what I write and let me know when I’m off base – I probably won’t agree with you but don’t be shy.

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