Congressional Panel Calls for GMAC Breakup
By Chris Haak
The Congressional Oversight Panel, created by Congress to oversee the Treasury’s spending of Troubled Asset Relief Program (TARP) money, said late last week that GMAC could have been required to undergo a quick-rinse bankruptcy similar to what GM and Chrysler did last year. Bankruptcy would have allowed GMAC to shed itself of the millstone of its troubled non-core ResCap division, which continues to lose considerable amounts of money thanks to bad mortgages that it assumed during the real estate boom years.
The panel, chaired by Elizabeth Warren – an attorney and Harvard law professor – also criticized Treasury for not requiring GMAC to have a viable business plan in place going forward, despite receiving its first bailout money more than a year ago. To date, GMAC has received more than $17 billion USD from the US government to prop up the company’s finances. Both Treasury and the company assert that it is now solvent and will not require any additional bailout funds, but the Office of Management of Budget estimates that the government will never recover $6.3 billion USD of the money given to GMAC.
GMAC hopes to hold an IPO sometime in the next two years to raise capital, to hopefully (in the company’s words) repay the government, depending upon capital markets conditions. But in the company’s current state, with losses in ResCap likely to continue to dwarf any kind of positive momentum that its core dealer floorplan and retail auto finance business is able to generate. The notion of a GMAC IPO in the company’s current state reminds one of Vonage’s spectacularly awful IPO, where shares lost 30% of their IPO price in their first week, thanks to that company’s rising costs and money-losing track record. Sound familiar?
Another idea that has been floated about regarding GMAC is just giving it back to GM. GM, as you may recall, sold a 51 percent controlling stake in its finance arm – at the time considered its crown jewel before ResCap imploded with the rest of the subprime mortgage market – to Cerberus Capital Management in 2006 for just over $7 billion. Ever heard of those Cerberus guys before?
Anyway, the giant government bailout funds have dwarfed Cerberus’ investment in GMAC, so that the hedge fund now holds 14.9 percent of GMAC, and the US government owns 56.3 percent. So, Uncle Sam’s “investment” in GMAC as a percent of the lender’s value is not far from the percent of GM that the government owns. Would a recombined GM-GMAC put both companies in a better position to repay more of the government’s bailout money, assuming that Treasury and GMAC management are able to finally arrive at an exit strategy to get Treasury out of the auto-finance business.
Were GMAC to shed itself of ResCap, either via a bankruptcy of GMAC itself, of ResCap alone, or some other action, the auto financing business is finally turning a corner and landing on more solid ground. It lost $19 million on auto financing in 2009, down from a loss of $216 million in 2008. Should GMAC wind up under GM’s wing again, that begs the question of what would happen to the Chrysler dealers who were shifted from Chrysler Financial over to GMAC last year as their quasi-captive finance company? (Chrysler Financial is basically in the process of winding down its operations, which should be complete by the end of 2011).
Greg Gardner of the Detroit Free Press wrote a fairly comprehensive look at the GMAC situation that was published over the weekend. It’s worth a read if the subject is of interest, whether it be from a position of concern about whether the government will get its money back, or whether you’re concerned about Chrysler’s prospects. Gardner’s bottom line is that ResCap will be difficult to dispose of, but GMAC has to do something to get rid of it. It will be interesting to see how GMAC is pulled from various directions – GM, Chrysler, Congress, Treasury, and others – and how well it will be able to manage itself out of the current crisis it’s in.
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