We learned today that GMAC has been looking for a third round of bailout money from the Treasury—and they may have gotten it. The latest news is that the company has just put $2.9 billion of junk bonds (rated by Moody’s “two notches above default”) on the market. However, these bonds are backed by the Federal Deposit Insurance Corporation, thus giving them a triple-A rating. And because of the FDIC backup, these bonds will sell!
This is but the latest in a series of sand-bagging moves on the part of the Feds to make the levee hold. GMAC Financial Services, the lending arm for both GM and Chrysler dealers and customers, is really the lifeline for these companies. The government has already put $12.5 billion (35 percent ownership) into GMAC, which may have become a bottomless pit. Here are the problems, as I interpret them out of one messy situation:
1. The company was made a bank earlier this year so that it could gain access to the FDIC’s loan guarantee program, the one being used for the new bonds issued today. As a bank, it failed the government’s stress test and couldn’t raise investor capital, posting a $3.9 billion second-quarter loss. Treasury concluded “it needed to raise $11.5 billion more in capital by mid-November.”
2. GMAC also operates a mortgage lending business, Residential Capital, which has experienced enormous losses in the housing market. Its commercial successor, Capmark Financial, just filed for bankruptcy. Most of the second-quarter losses came from real estate. GMAC also has an online banking company, Ally Banking (formerly GMAC Bank), which has come under fire for offering very high rates for deposits, since they’re guaranteed by the Feds!
3. These financial tie-ins to the struggling car business and the disastrous real-estate loans are bound to result in collapse—unless Treasury keeps pouring money in. Since GMAC is now the primary financing source for both GM and Chrysler, dealers for Chrysler are in particularly big trouble, according to Freep.
Chrysler Financial, which Treasury has demanded go out of business by the end of 2011, is asserting its first-lien rights on loans to Chrysler dealers. At the same time GMAC, due to its capital shortfall, has asked those same dealers to pay additional collateral on the vehicles they order from Chrysler Group. Many of those dealers borrowed $10 million or more to expand their showrooms, and can’t sell the property for anywhere near what they owe Chrysler Financial.
The true reason for this revolving bailout is that, in a credit economy, somebody has to front the money to buy cars. The banks aren’t doing it, consumers aren’t doing it, so you the taxpayer will have to do it. The craziness is that taxpayers are lending money to themselves in hopes that the industry will finally earn a profit to pay them back.
Is the spiral endless? Are we in a financial Catch-22? Lay your thoughts on us in a comment.