GM's GMAC Cash Cow Moos No More: Loses -$2.5b

by Robert Farago

Published: July 31st, 2008

gm s gmac cash cow moos no more loses 2 5b

At one point, GMAC was the tail that wagged the dog. The captive finance company dumped billions in profit into GM's corporate coffers. As the American automaker's decline gathered pace, GM CEO Rick Wagoner sold 51 percent of GMAC to Cerberus (current owners of Chrysler). The finance company immediately hit the rocks. Today, the gash in the hull widened. GMAC reported a net loss of $2.48b. In the second quarter. "A soft economic environment and continued volatility in the mortgage and credit markets have significantly affected results," GMAC Chief Executive Alvaro de Molina told Reuters. "Higher fuel prices and weaker consumer credit prove to be headwinds." That's a bit like calling a tornado a light breeze. We repeat: GMAC's NA leasing is heading for termination. The results included a $716m write-down of vehicle leases. And… "GMAC said it ended June with about $18 billion of SUV and truck leases in those countries on its books, out of a total $32.8 billion of leases." Expect GM to have to write-off at least three billion of lost residual values on those leases [blog coming] when it reports its financial results on, of course, Friday. Oh and ResCap, GMAC's mortgage arm, lost $1.86b in its seventh straight unprofitable quarter. If ResCap fails, it's all over bar the filing. Whether GM would be dragged under is an open question. Dark days.

Robert Farago

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4 of 23 comments

EJ_San_Fran on Jul 31, 2008

A few more quotes from the linked article: "GM's net loss may end up being 50 percent bigger than Ford's $8.7 billion shortfall, he said." "GMAC Chief Financial Officer Robert Hull today said the lender's residual losses average $11,000 a vehicle for GM models. " The Titanic is swirling down the vortex.

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Pch101 on Jul 31, 2008
But why did Cerberus buy the time bomb that GM wanted to unload? I’ve read that Feinberg was concerned about the risk, but was evidently reassured by his staff enough for the deal to go through. Fair point. I'll take a wild-bass guess as to some of the reasons: The grunt analysts who do the number crunching are naive and greedy. The greed motivates them to say yes as often as possible, as they wish to get paid. You don't get paid as a dealmaker if you don't make deals. This one seemed too good to pass up; the size of it would pay big transaction fees up front. The naivete comes from age. Most of the guys doing the low-level crunching are new MBA's (early 30's) who oversee Ivy League and top school undergrads who haven't yet gone to business school (early to mid 20's.) These people have drunk the free-markets-always-uptrend Kool Aid and have never experienced recessions as adults. They have no personal experience with the cyclical nature of markets or how leverage creates bigger valleys, and not just bigger peaks. These are the people making most of the recommendations. The older guys don't care, and are quick to make excuses for how things have supposedly changed. (They call these "new paradigms." My advice to you: Never trust anyone who tries to explain irrational behavior with a new found paradigm.) They seem to ignore the fact that human nature doesn't change, no matter how many computers or car leases or cell phones that people have compared to their forebearers. Good stories are better than bad stories, so why not just tell a good story? When it goes bad, we'll just blame the rating agencies and those who prepared the due diligence reports. That's why we hired them: to endorse our stupid deals when times are good, and to blame them for the blessing when times are bad.

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Areitu on Jul 31, 2008

Detroit-Iron : If I recall, Ditech is an arm of GMAC. If GM had seen the meltdown coming, Cerebus should have seen it too and had the good sense not to buy it at an inflated price.

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Joeaverage on Jul 31, 2008

The Castile of Gonzalez de Cellorigo = Atlas Shrugged

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