By on October 16, 2008

GMAC will go bankrupt. The U.S lending giant is cut off from all lending sources. Smart depositors will flee its small bank (relative to GMAC itself). And its majority owner, Cerberus, won’t save it. It’s a pure liquidation play now– with the bank going into FDIC receivership, maybe as soon as this Friday. Whether or not all Hell will break loose is an open question, with many answers…

Let’s start with this: GM’s dealers have been hoodwinked by GM execs. The corporate mothership failed to provide their franchisees with fair warning that GMAC was going to pull the plug on all retail lending– never mind removing itself from the leasing business. Yes, GMAC says it will fund prime customers– with a 700+ FICO. And rates now 75 basis points higher (unless subsidized by GM).

Uh, wait a second – GMAC’s regular lending rates were already non-competitive. Now they’re just stratospheric. And again. that’s for good customers. Non-prime customers– those who buy Aveos, Cobalts, HHRs, G5, G6, entry-level Malibus, Saturns and, well ,mostly everything else GM offers other than Cadillacs, Saabs, and high end big SUVs and Hummers– are now mostly shut out of financing altogether, from any source. If you wonder why car sales are tanking, look no further than the lack of credit availability for this group of buyers.

So GMAC’s out of the market. We know that. GM has even announced an incentive program to spiff dealers who get customers financed with anyone else besides GMAC. Meanwhile, GM still owns 49 percent of a soon-to-be bankrupt GMAC. The only saving grace here: GM’s managers won’t have to blame themselves. If you didn’t know that unloading GMAC was a desperate play for cash/time, and most people don’t, they look smart for unloading half of GMAC to the wizards of Wall Street.

Here’s the crux of the matter. GMAC– formerly known as GM’s captive finance arm– used to gush cash. GM founded the subsidiary in 1919 as a means to finance both dealers and customers, so GM wouldn’t have to rely on finicky banks at the time. GMAC became a model copied by every other automaker of size. The early business model was simple: aggregation of loans written at rates higher than the cost of funding. A basic interest rate spread business. When you start writing billions of dollars of loans, the interest rate spread produces big dollars.

Later, captives found an even cheaper source of funds through securitization of receivables (i.e. bypass the banks and go direct to institutional securities buyers). And if that works for auto loans, it also works for mortgages. Soon enough, GMAC became a huge entity that provided a steady stream of profits and dividends for its owner.

There’s one problem with the model. When the music stops, the gig is over. If GMAC can’t borrow from lenders or sell its securities, it can’t make new loans. In a nutshell, that’s where it’s at today. No one in a sane mindset– given the current credit crisis-– would loan money to this finance company.

Bottom line: GMAC now has $173b of debt against $140b of income producing assets (loans and leases), and some of those assets aren’t worth the paper they’re written on. If GMAC liquidated the loans and leases, it couldn’t pay back all of its debt. If you add GMAC Bank’s $17b in deposits (a liability), the situation only gets worse. No point looking at the rating agencies to tell you there’s a problem here. Good thing the FDIC required higher capital ratios for GMAC Bank; it might survive on its own with its higher quality assets. But everyone else is on their own.

By its own admission in an internal memo to employees this week, GMAC says that it has no access to funding. That means more layoffs. No Christmas bonuses. And probably telegraphing the message that the company could go under. Only the government can rescue GMAC now, adding to that to the pile of bigger rescues going on elsewhere. And any rescue can’t be seen benefiting private equity. So Cerberus will get wiped out. GM will have to write down its investment in GMAC, thus taking another enormous hit to its shaky balance sheet. And there will be further downgrades to its credit rating.

GMAC’s collapse may not be the final death blow for GM, but it’s sure gonna leave a mark. GMAC says they’ll still support wholesale floorplan. But one has to wonder for how long that will last? Given that 80 percent of GM’s dealers use GMAC for floorplan, what happens when that song stops playing? How many dealers will go under? Worse, what will happen to GM itself if even a fraction of its dealers cannot replace GMAC with suitable alternatives? To be continued…

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49 Comments on “Editorial: General Motors Death Watch 203: GMAC Headed for Bankruptcy...”


  • avatar
    dwford

    This gives GM’s management cover to go full scale bankruptcy. “It’s not OUR fault, the darn credit market seized up and cut off our access to funds.” They can blame the mess on the bankers instead of their own incompetence.

  • avatar
    OldandSlow

    GM’s market share has declined in the past decade and it needs to reduce the number of dealers it has. Here is their chance.

  • avatar
    John R

    @dwford:

    That would be the smart play. But I still see an opening for a moral hazard.

    If public opinion is convinced that the credit crisis, not GM’s managers, are at fault I feel as if there would be no consensus to “kick the bums out”.

    Bottom line: Wagoner, Lutz, et al need to have been sacked after a thorough C11 cleansing if GM and the other two are to make a come back.

  • avatar
    Redbarchetta

    Why isn’t this a GM Death Watch? I haven’t seen one in a while and this really belongs there since it’s one more nail in their coffin.

    Good write up Ken. Can’t wait for the next part.

  • avatar

    Redbarchetta :

    Point taken. Headline amended.

  • avatar
    Samir

    This is a somber picture painted by Mr. Elias. The depth of the coverage, I find, is what sets TTAC apart from other sites, who overlook the less entertaining absolutely crucial “business” aspect of the auto industry. (Why discuss the destruction of billions in shareholder value when we can cover umpteen special edition Mustangs?)

    Unfortunately for GM, I can’t find anything I disagree with here. GMAC is highly concentrated in a product that is in the doldrums right now (credit) to serve another product whose sales are declining every month (GM cars). Is there any doubt as to where this will end up?

  • avatar
    toxicroach

    Have you considered adding Hyundai/Kia to your stock ticker? I’m thinking that they are worth watching, especially since they seem to really fly under everybody’s radar.

  • avatar
    no_slushbox

    Enough with this sub-prime = cheap car shit. I would not be surprised if the credit scores were higher for people that bought cheap new GM cars than expensive new GM cars.

    Buick probably has the highest FICOs of any GM division.

    In my brief stint as a mortgage broker horrible credit was synonymous with owning an Escalade or Hummer. With the 700 FICO requirement I doubt that GMAC will ever finance another Escalade or Hummer.

    Buying a stripped down Malibu is a sign of financial responsibility, which usually goes along with high credit scores.

  • avatar
    Pch101

    Have you considered adding Hyundai/Kia to your stock ticker?

    In the US, for whatever reason, Hyundai trades in the “pink sheets.” That’s not a normal exchange — that’s usually the place where fly-by-night companies trade. The volumes are low, and shares aren’t nearly as liquid.

  • avatar
    FunkyD

    Follow the floorplan.

    Bill Heard fell within a couple weeks after GMAC pulled its floorplan. If GMAC can’t floorplan its dealers, that will be the sound of the Titanic cracking in half.

  • avatar
    Canucknucklehead

    no_slushbox, you are correct about GMAC financing people who would never be financed. But here in Bolshevikcommieland, our conservative commie (like you have to prove income and all that stuff) lending laws have, mercifully, limited the number of Hummers.

  • avatar
    Jerome10

    A bit off topic (and maybe a good TTAC Question of the Day?….if it already hasn’t been discussed and I missed it)…

    Who at GM should go and who should stay if C11 happens? I bring it up because I believe RW should get the boot (but who’s gonna take his place?), however, I think getting rid of Lutz would be an epic mistake. It’d be curious to hear what the best and brightest have to say.

  • avatar
    Zarba

    If GMAC goes down, GM goes down. Simple as that.

    Thousands of dealers will see their floor plans canceled, and no bank in their right mind would take that risk on. So, the dealers follow suit, going bankrupt themselves.

    At least it solves GM’s overabundance of dealers. Probably not the way they wanted to do this.

    Tragic, simply tragic.

    I’m in banking, and I’ve seen some of the loans GMAC has been underwriting. Very bad stuff. The worst part is that they’ve been underwriting negative equity to move the metal, so there are millions of loans that are underwater, even more so than the simple depreciation of a new car. We’re talking $20-27K loans on cars valued at $12k. $50K loans on ‘Burbans that sell for $20K at auction.

    It’s not just the credit quality of the loans, it’s the underlying autos used as collateral. A Perfect Storm of Not Good.

  • avatar
    burntorangeboy

    Very concerning to many employees,. Anyone with insight please elaborate. would this be a reorganization or total liquidation. The results would be far reaching as stated not only employees,dealers,gm and the suppliers.

  • avatar
    burntorangeboy

    A good marriage gone bad. What a great relationship for 87 years. A captive finance to floorplan and move vehicles through the system. The core business was understood and protected. Then in the early 90′s we began to lose our way. Pressure from GM to supply ‘x’ amount of dollars to the bottom line became increasingly difficult but we always managed. Then the smoke and mirrors tactics under the Eric Feldstein regime began to take root. ResCap,GMAC Ins. We veterans saw this coming although not nearly to this extent. We lost our way and got away from our core business. Time and time again as history has shown before, this leads to trouble. When GM sold 51% I stated it would be like a friendly divorce to begin with but would eventually turn nasty. Once that sell took place ‘Captive” went by the way side. It was strictly profit driven period. Dealers were told it would be seamless. Many saw the light and moved on however; many put their trust in the organization which was only the same in name not in ownership or loyalty . The concern for the dealer was not the priority, profit was. I can only hope this BK talk does not come to fruition and is a ploy to leverage an unknown position by Cerberus. However, if they file employees by the droves with no vested interest will bail leaving billions of receivables both wholesale and retail to be managed by only a few. It’s not a good proposition any way you look at it.

  • avatar
    cdotson

    While I’m by no means a GM fanboy I can’t help but see a depraved glimmer of positive outcome.

    Wouldn’t a GMAC floorplan failure and the resulting flood of dealership closures be a good way to right-size the dealer network? I suppose this assumes that many of the dealer victims would close rather than enter bankruptcy protection (not sure how that would affect franchise status).

    Jerome I’m with you, I think RW all but has the cross-hairs tattooed on his backside. I too think that canning Lutz at this point (while it seems would please many folks here) wouldn’t help. The problem with auto companies is their lack of focus on product. Lutz is a product person who I think “gets” what kind of cars should be made. He may even have the bravado to whip middle management into pulling those products off with a shred of purpose still intact. I just think he should stick to saying exactly what he thinks and eliminate the confusion he creates when he tries to tote the beancounters’ line (like pretending the Volt is going to be a market success).

  • avatar
    ihatetrees

    Worse, what will happen to GM itself if even a fraction of its dealers cannot replace GMAC with suitable alternatives? To be continued…

    Overabundance of GM Dealer Problem solved.

    Great piece. TTAC is on it with GMAC. I’m surprised they’re in so much trouble.

    In a similar tragic vein: Any news about Delphi?

  • avatar
    Richard Chen

    Bailout talk from Blogging Stocks:

    Unfortunately, the U.S. government is going to have to take a role in the car lending crisis along with all of its other bailouts. If GM cannot sell cars due to customer credit concerns, its cash balance could shrink ever faster than it already is. GM might have to get a multi-billion loan from the Fed.

  • avatar
    indi500fan

    @ihatetrees:
    “Any news about Delphi?”

    I know they marked their 3rd anniv of the Chap 11 on Oct 8. Since the Apaloosa money never came, they are in limbo as far as completing the reorg.

  • avatar
    dwford

    This could actually turn out to have a silver lining for GM if a ton of dealers fold. I bet they would hope most of them are BPG.

  • avatar
    gamper

    A GMAC bankruptcy seems a definite possibility. Perhaps it is a flight to quality lending that is long overdue. I am not in finance, but that seems to be the right move given the root cause of the current financial crisis.

    Also, perhaps such credit score standards is what was necessary to secure financing for floorplans but at the expense of the consumer. That also seems logical to sustain sales outlets first.

    In any event, an end game seems to be nearing. This GMAC buisness may simply be brinksmanship between GM and Cerberus in a stalemate for full ownership of GMAC and/or Chrysler merger deal.

    That leads to the real question, there is a lot going down right now, a GMAC liquidation and or reorginazation would seem to signal the entire house of cards falling. A Chrysler deal may be done before a GM reorginazion under chapter 11 in an effort to fully raid Chrysler for anything of value prior to dumping all the liabilities.

    The one missing piece is Chrysler Financial. A wholly owned GMAC may allow Cerberus to consolidate all the toxic paper in one entitiy, the survinving entity would come out clean and be a profitable lending arm to a reorganized GM sans Chrysler. Hmmmmm. The possibilities.

  • avatar
    burntorangeboy

    Gamper said “This GMAC buisness may simply be brinksmanship between GM and Cerberus in a stalemate for full ownership of GMAC and/or Chrysler merger deal.”

    I think you’ve hit the nail on the head…whoever blinks first loses. Wouldn’t you like to be a fly on the wall during those negotiations.

  • avatar
    motownr

    The consensus of the hedge fund guys I speak with is that the government is going to be forced to intervene and prop up GMAC and possibly Ford Motor Credit.

    The TARP gives the Treasury wide leeway to intervene if the failure of any institution poses a threat to the well-being of the financial system.

    The systemic failure of the domestic auto finance industry could be argued to meet this standard.

    The process of bailing out GMAC would probably entail buying the bad paper and simultaneously injecting new capital into the firm via a preferred share structure. Cerberus/GM would take their beating via the dilution/interest, but GMAC would continue to exist with the government as a major shareholder.

  • avatar
    toxicroach

    It’ll rightsize the dealer network alright. It’ll also flood the market with bargain basement fire sale deals on a huge portion of the current inventory as it gets auctioned off.

    I’m guessing GMs remaining dealers will have a hard time selling anything when used car dealers are picking up brand new cars at auction for 20% of dealer invoice.

    Nice time to be a used car dealer though.

    Vicious cycle guys; bankruptcy and a bailout or death. Only two realistic options at this point.

    Let’s merge with Chrysler, in exchange they won’t cut our cash off!

    It’s like Hitler at the end of WW2; increasingly fanciful plans to turn back events, desperate ploys and plots to evade the inevitable. The only choice between death now and postponing it a few more days.

  • avatar
    motownr

    Actually, it’s a lousy time to be any kind of retailer.

    Used car traffic has also slowed dramatically as consumers of all kinds tighten their belts. The shoppers we see frequently see are cut off from any kind of credit due to existing negative equity and impaired credit scores.

    It’s a double whammy in that lenders are not only lending to fewer potential customers, but also lending less on the deals they are willing to finance.

    Smart lending, bad for business regardless of what you sell.

  • avatar
    indi500fan

    “I’m guessing GMs remaining dealers will have a hard time selling anything when used car dealers are picking up brand new cars at auction for 20% of dealer invoice.”

    Is there anything that prevents the used car department of a new car dealer from bidding on these? Aren’t a large portion of used cars sold by new car franchises?

  • avatar
    burntorangeboy

    I Don’t suppose former Secretary John Snow is steering this ship for Cerberus…what a liason to have with the federal government. They may pull this off yet..making their return that is.

  • avatar
    burntorangeboy

    indi500fan :

    That would not be practical however,depending on state franchise laws you could see many of these vehicles go on GMAC’s Smartauction a phenomenal website (and very profitable by the way) and opened to non affiliated licensed used car dealerships or possibly individuals. The factory has really tightened up with what they will buy back versus in the past when they were partnered with GMAC they offered some flexibility which in itself will lend to this glut.

  • avatar
    toxicroach

    Yeah I suppose the surviving GM dealers could theoretically buy up the dead dealers inventory, but then where do they get the cash to do that? Or the parking space to plant there massive inventory? They are going to be stretching to get a floorplan with someone else too.

    Basically the situation is so bad that the silver lining has its very own dark cloud.

  • avatar
    SavvyMan

    GMAC and a Chevy dealer in California conspired to and did cheat me in 1971. Several years later I learned of a class action lawsuit on this issue but unfortunately the statute of limitations had expired for me.

    Since then I have avoided buying anything with “GM” associated with it, including its vehicles. It is not nice to cheat your customers as some have a LONG memory.

    Just Google “gmac class action lawsuit” for just a small portion of GMAC’s recent treatment of its customers. I don’t feel sorry for them one bit.

  • avatar
    John Horner

    Do you suppose the FDIC will engineer a merger of GMAC into another less sick bank while the taxpayers pick up the losses? This is what has been done with other recent bank failures.

    Strange times.

  • avatar
    Pch101

    Do you suppose the FDIC will engineer a merger of GMAC into another less sick bank while the taxpayers pick up the losses?

    That is exactly what I’d bet my money on, except the losses will go to the shareholders, which in this case means GM and Cerberus. GM stock will take a hit as a result.

  • avatar
    John Horner

    “That is exactly what I’d bet my money on, except the losses will go to the shareholders, which in this case means GM and Cerberus. GM stock will take a hit as a result.”

    In recent deals the shareholders have lost everything (or nearly so) they had invested plus the FDIC has been picking up bad debts held by the defunct banks.

    13 US banks have gone under so far this year per:

    http://www.time.com/time/business/article/0,8599,1849481,00.html?imw=Y

  • avatar
    jg1708

    Does Elias just have a hunch that GMAC is filing for bankruptcy or is his assertion based upon information from credible sources? If its the latter, he should cite to the source.

  • avatar
    Pch101

    In recent deals the shareholders have lost everything (or nearly so) they had invested plus the FDIC has been picking up bad debts held by the defunct banks.

    It’s probably not quite the same situation. In the case of the banks, their failure would force the FDIC to payout on all of the deposit insurance. By absorbing some of the losses, the FDIC should be reducing its costs because those losses are probably far less than what it would cost to cover the insured deposits.

    There is a GMAC Bank, but I don’t think that it’s very big. Hopefully, the assets could be sold off to someone else, with the liabilities left in the hollowed-out company that is then put into bankruptcy.

    I don’t know how it’s structured, but hopefully, the bank component is solvent and could be neatly separated from the lending side. The office space landlords, computer leasing guys, office supply vendors and the rest will be stuck fighting over the little pieces that remain.

  • avatar
    Pch101

    I take that back. GMAC has $17 billion in deposits and has been making an effort to increase that. Ouch.

  • avatar
    uidiots

    Knowing that this website could summarily deactivate my ID and erase my blog entry to all the informational gathering soles out there, I’ll be very respectful and leave you with the opinion of uidiots.

    As someone mentioned, the author doesn’t cite a credible reference and in review – another author on this website said the same thing a few months back. I guess if you predict the future repeatedly that you might look like a genius when you get one right.

    Obtaining the information on the assets and liabilities of a PUBLICLY traded company is easy via the SEC. But how does the author know the exact assets and liabilities of a non-traded company such as GMAC?

    I’m sure glad you guys informed us of this pending gloom (again) and that you have so many hits on your articles compared to other business data sources like CNN, Bloomberg, or WSJ.

  • avatar
    Pch101

    But how does the author know the exact assets and liabilities of a non-traded company such as GMAC?

    None of that is a secret.

    http://www.sec.gov/Archives/edgar/data/40729/000095013708010406/k34241e10vq.htm

  • avatar
    uidiots

    Good Job Pch101!

    As stated in your link, assets of $227B versus liabilities of $215B equals a $12B net worth.

    And from the authors’ report:

    Bottom line: GMAC now has $173b of debt against $140b of income producing assets.

    So where’s the validation of that debt number? Where did the author get that number?

    While the out may be the “incoming producing assets” and what is considered as incoming producing, there is a significant change in the stated debt between the actual data and the article.

    That is a $45 billion dollar net worth swing that didn’t just fly under the radar of all the other news wire sources in the past quarter. Come on folks, wouldn’t this story be right behind AIG on the news wires?

    To take such a hit on the asset side of the balance sheet then you are talking about $142 BILLION in income producing assets that would have to have a default rate of what, around 30%? There isn’t a report of 30% delinquency on any finance company today (yet?).

    So what’s the source of the data?

    Look at the data folks. There is $26 billion in cash and equivalents and investment securities. There are other true values on the assets side. Actaul loan losses would be so high that almost half of those servicable loans would have to be delinquent.

    Bankruptcy means that you can’t pay and your assets are worthless. Creditors don’t force you into bankruptcy when you have good servicable loans. And nothing out there shows that much of a dollar loss on the loan portfolio.

    Remember that many of those loans are at GM subvented retail rates such as 0% on high quality customers.

    I’m not saying the economic picture is pretty in any industry lately, but this one has many stretches.

  • avatar
    RogerB34

    Number 3 consumer debt risk is vehicle installment payments. 36 percent of all families had a mean debt of $13,000. Federal Reserve study 2004. Separately, average auto installment loan first 3 Q 2008 was $25,500 with a loan to value of 95 percent. Optimists believe a recession is at hand. You ain’t seen nothin yet!

  • avatar
    50merc

    Does anyone know the book value at which GM carries its interest in GMAC? I’m wondering if they’ve already written it down (or even off completely) since GMAC’s viability has been in doubt for some time.

  • avatar
    obbop

    Maybe GM should get rid of the dealership system and just sell its output on ebay.

  • avatar
    Pch101

    The interpretation provided a few posts above me of the current business is just a tad optimistic.

    First, look at operations. The business is losing revenue. You can expect it to lose more as car sales fall, home sales stay low and delinquencies rise. So we’re off to a bad start.

    Next, consider the loss reserves. They are most likely inadequate. Much of what sits on GMAC’s books are mortgages, not just car loans. It wouldn’t be a stretch to double the existing loss reserve, and you can bet that when GMAC gets a real audit at the end of the year (these quarterly statements are not audited) that the accountants will pump up the loss reserve amount.

    Let’s also note that over $2 billion in GMAC’s assets is a note owed to it by GM. I wouldn’t count on collecting that, if I were you.

    The problem being addressed in the article is that GMAC now has no sources of new lending capital. That has been reported elsewhere in the media and makes perfect sense, in light of the credit crunch and the company’s poor rating.

    The company currently has a B- rating from S&P. Even worse, it has been widely reported that this rating is likely to be downgraded further.

    A quick look suggests that the current yield on GMAC corporate bonds is in the 11% range. Yes, Virginia, that is a high interest rate, one that reflects the high likelihood of default. With a ratings downgrade, that rate will probably increase again. In a market that is running scared, you have to wonder whether there would even be enough buyers at any price if GMAC sold new bonds.

    So it’s no surprise that GMAC has little to loan out — they can’t borrow anything, nor can they charge as much as they’d have to pay in interest to their corporate lenders. They can only loan just enough that they can from sources such as the Fed funds window, net operating cash flows and bank deposits.

    It’s no wonder that they’ve raised their minimum FICO requirement — they don’t have much money to lend out in the first place, and they want to minimize the extent to which their loss reserve will have to be increased.

    A lender that can’t raise capital is in very deep something or another. That capital is what allows them to stay in business. All of the recent news about the liquidity should make it clear to everyone now that lenders that can’t get funds are going to fail.

    Unfortunately, a lot of GM’s cash on hand really comes from bank deposits. That means much of the the current cash that GMAC holds is effectively insured by the FDIC. If GMAC hits a wall, the government is going to have play clean up.

    That’s why John Horner’s comment above makes sense, too. The only way for the government to avoid paying full price for this collapsing company is to find a buyer for it.

    This is no time for cheerleading. While I wouldn’t expect a sale and bankruptcy today, this may well happen sooner than later. The government likes to do this stuff over the weekend, so read your headlines on late Sunday nights if you want to get a jump on the week.

  • avatar
    Morea

    Is there any news on the SEC probe of General Motors’ books? Can we trust any numbers coming out of GM?

    My (uneducated!) guess is that if GM has the SEC hoodwinked it a good bet the public has no idea what their financials really are.

  • avatar
    pgreenberg

    interesting

  • avatar
    Jimal

    Correct me if I’m wrong, but wasn’t this editorial originally titled “GMAC Will File for Bankruptcy Tomorrow”? I don’t see that headline anywhere on TTAC now, but it was prominent Thursday.

  • avatar

    Jimal:

    You’re wrong. The original title was GMAC May File for Bankruptcy Tomorrow.

    I changed it at the author’s request.

  • avatar
    Jimal

    Robert,
    While I was off by one word (that admittedly changes the context slightly) I wasn’t completly off my rocker. Thanks for the clarification.


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