Here Comes Another Bailout

The Wall Street Journal reports that GMAC Financial Services Inc. and the US Treasury Department are in advanced talks to prop up the lender. It will be the third infusion of cash into the troubled financial services company that was granted an exemption and allowed to become a bank holding company so that it could tap into the TARP money.

The U.S. government is likely to inject $2.8 billion to $5.6 billion of capital into the Detroit company, on top of the $12.5 billion that GMAC has received since December 2008, these people said. The latest infusion would come in the form of preferred stock. The government's 35.4% stake in the company could increase if existing shares eventually are converted into common equity.

The willingness by Treasury officials to deepen taxpayer exposure to GMAC reflects the troubled company's importance to the revival of the auto industry. Founded in 1919, GMAC has $181 billion in assets and is a major financier for 15 million borrowers and thousands of General Motors and Chrysler car dealerships in the U.S.

The new capital would help firm up GMAC's balance sheet and solidify its auto-loan business. GMAC provides the vast majority of wholesale financing for GM dealerships across the country, meaning scores of local distributors would be unable to bring new vehicles onto their lots if GMAC were to collapse.

Federal officials also are moving to shore up GMAC's ability to fund its daily operations, with the Federal Deposit Insurance Corp. telling the company Tuesday the agency will guarantee an additional $2.9 billion in debt, according to people familiar with the discussions. The FDIC guarantee will make it easier for the company to sell debt to investors. The FDIC backed $4.5 billion in GMAC-issued debt earlier this year.

Good thing we get equity for all this crap, not sure if that's a financial term or not. The government's current 35.4 percent stake in GMAC is the result of the Obama Administration's restructuring of the auto industry earlier this year. While GMAC was long General Motors' financing arm, in 2006 GM sold a majority stake to private-equity firm Cerberus Capital Management. Cerberus is a value shop. They look for undervalued companies and hope to turn them around. They are finance professionals. They knew the risk and yet we are paying the price. In effect, a bailout of GMAC is a bailout of Cerberus.

Meanwhile, GMAC's market share in the auto financing market has fallen sharply during the crisis as its cash available for lending declined. Increasingly banks like JP Morgan Chase and Wachovia are making inroads winning market share. GMAC had 3 percent of the auto financing market in the first six months of the year, down by almost half in the same period a year ago, according to Experian Automotive.

Tags: Financial Bailouts, GMAC, TARP, US Economy (all tags)

Comments

6 Comments

I am sorry

But my outrage of the day has been consumed by this:


Home Buyer Tax Credit Revision

by CalculatedRisk on 10/28/2009 05:54:00 PM

From Bloomberg: Senate Said to Revise Plan to Extend, Expand Homebuyer Credit (ht Anthony)

The article states the plan might still change .

The details:
# Income eligibility for home buyers increases to $125,000 for individuals and $225,000 for couples.
# The tax credit for first-time home buyers (anyone who has not owned in the last 3 years) will be the lesser of $8,000 or 10% of the purchase price.
# For move-up buyers - "who have lived in their current home for at least five years" - the credit would be limited to $6,500.
# The credit runs from Dec. 1, 2009 to April 30, 2010, with an additional 60 day period to close escrow. (So end of April to sign contract, end of June to close escrow)

The key change from yesterday is the increase in income limits for first-time home buyers (and somewhat minor changes to the size of the tax credit).

I will consider your GMAC bailout for my outrage tomorrow...

by Ravi Verma 2009-10-28 02:12PM | 0 recs
Re: I am sorry

Just curious, but why are you outraged?  To me, this one made sense.  Just speaking from personal experience, my partner and I bought our first home less than a year ago-- a foreclosure in pretty rough shape-- in part thanks to the tax credit.  (We fell under the 2008 iteration, which was less a tax credit than an interest free loan).  Since then, we've pumped thousands of dollars and hundreds of hours into the house-- it's been a true pleasure.  I have several friends who have done the same.  The tax credit is a very big incentive, and it's enough to convince people (like me) who have been cautious spenders for a long time (and still are) to wade into the housing market.  Frankly, I think the economy would be in far worse shape right now without the homebuyer tax credit and all of the resultant spending that derives from that.

by dvk 2009-10-28 03:26PM | 0 recs
Read CalculatedRisk

for a cogent argument.

The gist is that it is economically very stupid (and probably politically popular) thing to do.

If an ET hands out $8k checks to everyone who bought a house, then the prices of homes would go up by nearly $8k (a little bit less because more homes would come on the market), but not increase the number of transactions.

I think the Feds should have learnt by now that artificially propping up the housing market is not the smartest thing in the world...

by Ravi Verma 2009-10-28 03:58PM | 0 recs
Re: Here Comes Another Bailout

If it's called a bailout I am reflexively against it!!

by Steve M 2009-10-28 03:36PM | 0 recs
Re: will the meeting come to order?

Greetings, fellow stockholders!

Ticker GKM
Range 17.15 - 17.75
52 week 3.40 - 18.37
Open 17.25
Vol / Avg. 64,640.00/21,000.00
Mkt cap 633.75M

Not sure if they still pay a dividend, but they are near the top of their run. A better time to bail them out would have been almost exactly a year ago. Under 4 bucks then, over 17 now.

by QTG 2009-10-28 04:03PM | 0 recs
Re: Here Comes Another Bailout

Isnt it interesting Lieberman is not screaming his opposition now. I would think this would be a much worse waste of public money than health care.

by Pravin 2009-10-28 07:03PM | 0 recs

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