When we first heard that GM was eying a return to in-house financing, our first reaction was to worry that
the potential for falling back into old bad habits can’t be ignored.
Clearly our concern wasn’t wasted, as the AP [via Google] reports that The General’s major motivation for considering re-creating a captive lender is to chase subprime business its current major lender won’t touch. And considering that that lender is GM’s bailed-out former captive finance lender GMAC (now Ally Financial), which was badly burned by subprime mortgages, it’s not surprising that GM is frustrated by GMAC’s tentative approach. But should The General charge into the low-standard lending sectors where Ally fears to tread?
One of the things that we do not wish under any circumstance is to have an uncompetitive relationship vis-À-vis GM
That would certainly be the case if GM bought up its recently-bailed-out former captive finance arm, GMAC (now known as Ally Financial). Chrysler relies on GMAC for leasing and loans just as much as GM does at the moment, so an Ally buyout would create major long-term problems. But even if GM created a new finance arm, Chrysler doesn’t seem to think that it will be able to survive without forming its own in-house finance department. Which would then compete with GM and Ally, to say nothing of the industry’s other finance competitors. But is the rush to captive finance going to be good for anyone?
Three years after spinning off GMAC, with which it pioneered captive auto financing, General Motors may be considering a return to in-house finance. Bloomberg BusinessWeek reports that:
GM may buy back the GMAC business, start a new finance unit or form a partnership with banks and other lenders, said the people, who asked not to be identified because details are private. Chief Executive Officer Ed Whitacre wants to form an in-house lender before selling shares in GM as soon as the fourth quarter, one person said.
GMAC has received $17.2b in TARP aid, but recently announced a$172m Q1 profit despite concern over its bailout in congress. GM’s previous experience with in-house lending has been decidedly mixed: though GMAC was long a cash-cow for the automaker, the easy financing cashflow is said to have enabled a culture of apathy towards product development. When the credit market collapsed, GMAC went down like a ton of bricks… and would have taken GM (even further) down with it, had Rick Wagoner not spun it off and sold it to keep the lights on a little longer. In the short term, a captive finance unit might help a GM IPO, but the potential for falling back into old bad habits can’t be ignored.
Perhaps the most fundamental challenge facing bailed-out financial and auto firms is convincing consumers to leave aside their anti-bailout prejudices and start buying their products. For GM, the first step in this process was as simple as repaying a loan and airing a “Mission Accomplished” advertisement that did everything but show Ed Whitacre landing on an aircraft carrier. For GM’s former captive finance arm, GMAC, escaping the stain of the bailout is a more prosaic matter. Having already launched an online consumer-oriented banking arm by the name of “Ally Bank,” the finance company is adopting the innocuous Ally moniker for its entire business, reports the Detroit News. (Read More…)
In their latest report, the Congressional Oversight Panel suggested that GM’s formerly captive finance arm GMAC shouldn’t have been split from the automaker it still supports. If this led you to believe that GM would take the troubled finance firm back under its corporate wing, you have another thought coming. The WSJ [sub] reports that
The idea appealed to GM, in part because auto maker would have more control over lending practices. GMAC’s move in 2008 to dramatically restrict leasing amid the U.S. financial crisis helped trigger the spiral that sent GM into bankruptcy the last year… But taking over GMAC would have many complications. GM sold a majority stake in GMAC in 2006 as a way to buck up the auto maker’s credit standing and its access to capital. As it turned out, GM still remains largely cut off from the markets.
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.
Having recently posted a nearly $5b loss, bailed-out auto finance giant GMAC says it needs more help from automakers to remain competitive. Automotive News [sub] reports that GMAC CEO Mike Carpenter told reporters that “the success of GMAC Financial Services hinges on more loan and lease subsidies from General Motors Co. and Chrysler Group,” and that “GMAC requires additional marketing funds from the automakers to provide competitive loans and leases to the GM and Chrysler dealer networks.” GMAC’s Chrysler business has nearly doubled in the last quarter of 2009, now providing about 26 percent of Chrysler’s retail financing and about 30 percent of GM’s.
The TARP bailout of GM finance partner GMAC is being criticized by a congressional oversight panel [full report in PDF format here], reports the Detroit Free Press. The panel alleges that the Treasury
has not yet articulated a specific and convincing reason to support the company… It has never stated that a GMAC failure would result in substantial negative consequences for the national economy. If Treasury has made such a determination, then it should say so publicly.
The underlying cause of GMAC’s failure was no different than so many other American financial institutions: giant bets on risky mortgages at the height of a real estate bubble. And though that error alone would have qualified GMAC for a bailout rescue along with the other failed banks, The WSJ reports that the ongoing support for GMAC is “reflects the troubled company’s importance to the revival of the auto industry.” And man, it had better be important. The GMAC bailout has been one of our least-favorite of the season, rewarding poor practices in auto and mortgage lending, and exposing taxpayers to inordinate risk. But, as TTAC warned back in the pre-bailout days, once the camel gets a nose into the tent, good luck getting it out. And so, GMAC will be receiving another $3.8b in TARP support, on top of the $12.5b it has already received. As a result, the US taxpayer’s stake in GMAC is expected to rise above the current 35 percent stake, just in time for more write-downs planned for the next week. The cash injection is said to prime GMAC for a profitable Q1 2010, erasing some giant losses in the bank’s ResCap mortgage unit. And of course the move will help GMAC continue to underwrite the leases that Chrysler and GM so desperately need, but can’t afford due to plummeting resales. GMAC’s bailout often doesn’t get marked up in the auto industry bailout tally, but at over $16b so far, it’s one of the crucial pieces keeping the zombie automakers shambling along. Now, about repayment…
Well, we’ve been here before… about this time last year, to be exact. The Freep reports that Chrysler, which had to quit leasing for much of last year due to falling resale values and the credit crunch, is reinstating subsidized leasing for its 26,000 qualifying retirees. Under the terms of the plan, retirees could lease up to two 2010 Chrysler, Dodge or Jeep products with no down payment and free scheduled maintenance. The 36-month leases run from December 9 through June 30, 2010. According to the Freep, retirees will pay $100 per month less on average than Chrysler employees who have access to two-year leases. GMAC, which is financing the leases, is set to receive another government bailout of “less than” $5.6b on top of the $13.5b it has already received from the TARP program.