Samir Syed's Guide to the RESCAP/GMAC Crisis
MarketWatch reports that Moody's has downgraded debt issued by GMAC and GMAC's mortgage division, ResCap. "Operating weakness at ResCap poses risks to GMAC's capital position and liquidity that exceed previous estimates." In other words, ResCap, an aggressive mortgage lender during the credit boom, faces a serious cash crunch as more and more Americans default on mortgages. In fact, parent GMAC had to top-up ResCap's coffers by $2b in 2007 just to meet ResCap's debt covenants, which require net worth of $5.4b at end of each quarter. [NB: When just under 40 percent of your net worth comes from last-minute capital injections, "operating weakness" is putting it mildly.] As ResCap's parent, GMAC cash outlays to ResCap to stave off Chapter 11 put a strain on GMAC's declining cash position. The outlook is so bad that Moody's declared "ratings remain on review for a further downgrade." Amazingly, GMAC, now controlled by Cerberus (owners of Chrysler) may discontinue financing its non-performing subsidiary. This skin-saving maneuver would sink GMAC, leaving debtors holding the hot potato. The irony: General Motors emerged as the [short-term] winner by offloading GMAC to Cerberus right before the onset of the credit crisis, during a time in which ResCap was considered the crown jewel in GMAC's portfolio. That jewel is now a lump of coal.
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