Congress: The GMAC Bailout Might Have Been A Bad Idea

After three separate bailouts totaling over $17b, Congress is beginning to wonder if keeping auto-finance giant GMAC alive was worth it. Forbes reports that the Congressional Oversight Panel reckons at least $6.3b of that money could be gone forever, as GMAC flounders towards barely breaking even. And like the rest of the bailouts, the fundamental problem is that the influx of federal cash has allowed GMAC to pretend like it’s not struggling for survival. The panel report [ full document in PDF format here] notes [via Automotive News [sub]]

Treasury’s previous and current support is not underpinned by a mature business plan. Although GMAC and Treasury are working to produce a business plan, Treasury has already been supporting GMAC for over a year despite the plan’s absence. Given industry skepticism about GMAC’s path to profitability and the newness of the non-captive financing company model, it is critical that Treasury be given an opportunity to review concrete plans from GMAC as soon as possible.

Sound familiar?

So why didn’t congress just let GMAC fail? Is it, like so many other financial institutions claim to be, too big to fail? Not exactly, as The Atlantic‘s analysis of the report shows. According to the COP reportTreasury has never argued that GMAC itself was systemically important, although in 2008 some Treasury staff members believed that GMAC’s failure at that time – independent of its effects on the domestic automotive industry – could have thrown an already precarious financial system into further disarray during the depths of the financial crisis.The real issue? Floorplan financing. Had GM and Chrysler not been delicate taxpayer “investments” there would have been a lot less impetus to send billions to GMAC. Strangely, GMAC’s auto-finance business has very nearly returned to profitability, and the COP suggests that GMAC should have had its auto-finance division stripped away from the firm’s other money-losing ventures (and possibly even returned to GM).

Then there are the other issues with GMAC’s bailout: the lack of Treasury conditions, the possible WTO implications, the stress-test failure, the GMAC-unique Capital Assistance Program, and more. As The Atlantic’s Daniel Indiviglio concludes, “for now, it looks like GMAC will continue to enjoy unconditional government support as long as GM does.” Which is problematic in and of itself. As former Car Czar Steve Rattner has graphically illustrated, the GMAC bailout also helps make the GM bailout look better than it might otherwise, when they should in fact be considered one and the same bailout.