UPDATE: GMAC, Key For Auto Indus, May Cost Taxpayers A Bundle
October 08 2009 - 7:42PM
Dow Jones News
A word of advice for U.S. taxpayers looking to recover their
$12.5 billion investment in GMAC Inc.: Don't hold your breath.
For GMAC, the continuing torrent of red ink at its battered
mortgage unit means more funds will likely have to be deployed to
cushion against future losses. These funds could otherwise have
been used by GMAC to increase its diminished lending business and
return to profitability, which, in turn, would put the company on
the path to repaying federal funds.
In fact, the government may have to plow billions more into GMAC
as it nears a Nov. 9 deadline to raise capital in accordance with
the government-conducted stress tests earlier this year.
"It is questionable whether taxpayers will get a full return of
their GMAC investment," said Mark Wasden, an analyst at Moody's
Investors Service.
While some of the government's bailout investments have turned a
profit - as well as preventing a collapse of the financial system -
others are much more questionable. More than 30 banks aren't paying
dividends on their government-owned preferred stock, for instance,
and American International Group Inc. (AIG) will likely struggle to
repay its government bailout.
But GMAC is in a special position as a company that may get more
help than it can repay. The auto lender is vital to federal efforts
to resuscitate ailing auto makers General Motors Co. (GM) and
Chrysler Group LLC. GMAC provides loans to auto dealers that use
the funds to stockpile their inventory of new vehicles. It also
lends to consumers buying these vehicles.
"We have taken a series of actions to strengthen the business
and will continue to take necessary steps to improve the
performance of the company," said Gina Proia, a GMAC spokeswoman.
"GMAC fully intends to repay the TARP investment over time and has
made all scheduled dividend payments since accepting the
funds."
GMAC was granted bank holding company status in December. This
status gave it access to the Treasury Department's Troubled Asset
Relief Program, or TARP, and also access to federal programs aimed
at helping financial companies raise cheap debt in a frozen credit
market.
The Treasury said in May it would swap $884 million of its
existing preferred-stock investment in GMAC for common stock,
giving the U.S. government a 35.4% equity stake in the lender. This
stake could increase to more than 50% if GMAC, amid potential
mounting losses and meager capital levels, further converted the
government's investments into common equity.
Despite the help from taxpayers, GMAC is struggling to return to
profitability as it takes hit after hit on its mortgage unit,
Residential Capital LLC. ResCap, one of the largest lenders to
borrowers with shaky credit, is still reeling from its souring
mortgages.
ResCap reported a loss of $841 million for the second quarter,
its 11th consecutive quarterly loss. But excluding gains stemming
from its debt being forgiven by GMAC, ResCap's loss totaled $1.7
billion. In the same quarter, GMAC's credit loss provisions jumped
50% from a year earlier to $1.16 billion.
For 2008 and 2007, ResCap's net loss totaled a staggering $9.9
billion. GMAC also plowed in $6 billion of capital, which included
forgiving ResCap debt, during those two years. Propping its
mortgage unit delays GMAC's return to profitability, which, in
turn, renders uncertain the lender's ability to repay federal
funds.
In addition, GMAC has to raise $5.6 billion by Nov. 9 to satisfy
the requirements of the government-conducted stress tests earlier
this year. GMAC could raise this capital by issuing new equity,
divesting its businesses or asking for additional federal help.
"If GMAC wants to raise outside capital, it will have to be
profitable," said Christopher Wolfe, an analyst at Fitch Ratings.
It "can't get there overnight."
Also, the extent of the government's investments could
discourage external investors from helping with the capital
raising.
"The [Federal Reserve] has helped us a great deal already,"
Robert Hull, GMAC's chief financial officer, said in an interview
in August. "If and when the time comes where we need more capital,
we will explore a variety of avenues, including the Fed."
-By Aparajita Saha-Bubna, Dow Jones Newswires; 617-654-6729;
aparajita.saha-bubna@dowjones.com