GM May Return to Captive Finance

By Chris Haak

Back in 2006 when GM sold a 51 percent controlling stake in GMAC to a consortium led by Cerberus Capital Management, many saw it as a sign that the company was desperate to sell any assets that it could to raise cash and hopefully stave off bankruptcy.  The term “crown jewel” was often thrown about when referring to GMAC, since GM’s captive-finance arm had been a steady profit-generating machine for the automaker for years.  In fact, absent GMAC’s contributions, GM’s automotive operations on their own had much trouble standing up.

In the ensuing three years, both GM and GMAC (recently renamed “Ally Financial” in the past week) have both become wards of the Federal government and have received billions of dollars in aid.  The government owns 61 percent of GM and 53.8 percent of Ally Financial.  Chrysler Financial is being wound down, with GMAC (which, for the time being, has kept its name for automobile finance) becoming the de-facto captive finance company for Chrysler dealers as well.

GMAC’s ResCap residential-mortgage subsidiary, which brought in substantial profits during the housing boom, quite nearly killed GMAC itself.  The extent of the problems that still exist in ResCap are still unknown, but are significant.  Several alternatives have been floated as to how GM might get itself a captive finance company again, but none appear to be perfect solutions at this point.

Re-acquisition of GMAC.  GM’s ownership of GMAC is now below 10 percent (down from 49 percent that it had owned prior to its bankruptcy), and GM cannot own more than 10 percent of GMAC without jeopardizing GMAC’s bank holding company status.  That status, granted controversially at the eleventh hour to GMAC, gives the lender access to the Fed’s discount window for cheap funds.  That means that GMAC would have to pay more for the funds that it lends to dealers and consumers, which crimps the lender’s margins.  Ally/GMAC still isn’t exactly the picture of health, and its borrowing costs will reflect that.  GM’s potential control of GMAC would also mean that GMAC again became dependent on GM’s financial health to determine its borrowing costs.  Though GM’s health is improving, it still does not have stellar credit that leads to low-cost funding.

New captive-finance company.  GM could just start its new captive finance company, the same way that it did decades ago when it created GMAC.  The company, however, would literally have to start at square one and acquire property, buildings, systems, people, and more, and build from the ground up.  Since the infrastructure is already in place at GMAC, that seems to be a simpler solution in many regards.  The relationship between GM’s financial health and any new captive-finance arm would continue to be an issue regardless of how GM got back into the captive-finance business.

Another issue is what to do about the relationship that GMAC now has with many Chrysler dealers.  In the first quarter of 2010, GMAC actually financed a greater proportion of Chrysler deals (42 percent) than it did GM deals (34 percent).  Nobody seems to have verbalized a solid alternative for how to handle the Pentastar-shaped elephant in the room.

Driving GM’s objective of getting back into the business of financing its own deals is the notion that controlling the lender would lead to better terms for retail buyers and lessees, which in turn should lead to increased sales.  Ford’s well-regarded CEO, Alan Mulally, has noted on several occasions that he views Ford’s retention of Ford Motor Credit as an important strategic decision that he’s glad the company made.  Most other automakers have their own in-house lending arms, and certainly all automakers doing business in the US who are even close to GM’s size have them (Toyota, Honda, Ford, Nissan, etc.)

Should GM get back into this business, and improve its sales further, the thinking goes that the expected IPO would be more successful, and the government would therefore be able to recover more of its “investment” in the automaker and its former finance arm.