By on July 26, 2008

It\'s all fun and games until someone has to pony-up a bil. (courtesy GM's 10k filing… "Under the residual support program, the customers’ contractual residual value is adjusted above GMAC’s standard residual values. We reimburse GMAC to the extent that sales proceeds are less than the customers’ contractual residual value, limited to GMAC’s standard residual value. As it relates to U.S. lease originations and U.S. balloon retail contract originations occurring after April 30, 2006 that GMAC retained after the consummation of the GMAC sale, we agreed to begin payment of the present value of the expected residual support owed to GMAC at the time of contract origination as opposed to after contract termination when the related used vehicle is sold. The residual support amount owed to GMAC is adjusted as the contracts terminate and, in cases where the estimate is adjusted, we may be obligated to pay each other the difference. As of December 31, 2007 and 2006, the maximum additional amount that could be paid by us under the U.S. residual support program was $1.1 billion and $276 million, respectively… We will also pay GMAC a quarterly leasing payment in connection with the agreement beginning in the first quarter of 2009 and ending in the fourth quarter of 2014. At December 31, 2007 and 2006, the maximum amount guaranteed under the U.S. risk sharing arrangement was $1.1 billion and $339 million, respectively. The maximum amount would only be paid in the unlikely event that the proceeds from all outstanding lease vehicles would be lower than GMAC’s standard residual rates, subject to the limitation. As of December 31, 2007 and 2006, we had a total reserve recorded on our consolidated balance sheet of $144 million and $50 million, respectively, based on our estimated future payments to GMAC associated with the maximum amount guaranteed under the U.S. risk sharing arrangement."

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12 Comments on “GM On The Hook for $1b+ in GMAC Lease Losses...”

  • avatar

    My brain aches.

  • avatar

    Whats a billion here, billion there.

  • avatar

    I believe that’s a set of Ford keys pictured.

    And, I concur with baaron. All that fancy financial talk gives me the vapors.

  • avatar
    Dave M.

    Seriously. I dropped my MBA after one class. One. Micro, macro, who the hell cares? Glad there are people like RF who cheerily try to explain it to us morans.

  • avatar

    I particularly liked the following :

    we may be obligated to pay each other the difference.
    Huh !

    Lewis Black would really go off on that like he did here : —

    As far as Evolution is concerned George bush says ” The Jury. Is still out ! ”

    Where is that Jury ? Tennessee ??


  • avatar

    Its standard procedure every manufacturer assumes a portion of the residual risk from the captive finance arm.

    Lets not forget that a lease is a powerful marketing tool, a subsidised lease rate is even more powerful, and a lease with subsidised rates and fictitious residuals (supported by the manufacturer) moves iron.

    Every manufacturer and captive finance use the same playbook.

  • avatar

    Whomever wrote this missed an opportunity to be a ghost writer for a political candidate. Whatever the news, it can’t be good for GM.

  • avatar
    johnny ro

    What it really means is that GM does not sell a car when it leases it through GMAC to some sad ass driver, just as the driver does not buy it when he leases it.

    Its a rental scheme.

    GM rents the car out for a few years then sells it to second hand market.

    GM retains risk of the value of the cars dropping, although the renter is on the hook for damage to the car, just like if it was an apartment.

    This is true even though GM sold part of GMAC to Cerberus.

    The cash moving back and forth to GMAC are trueups for the fleet at the date in question. $1 billion paid to GMAC is inventory markdown below what GM planned on at inception of lease.

    I have not read GM financials, but would not be surprised if accounting rules allow them to show they do not own these cars during the lease, because “consolidation” and “lease accounting” rules are as bad as anything in the world of GAAP.

    (I am not saying I am smarter than FASB or could do a better job at writing accounting rules)

  • avatar

    Big surprise. They leased the cars with an artificially high residual. That is the only way they could get people to drive one home.

  • avatar

    johnny ro
    What it really means is that GM does not sell a car when it leases it through GMAC to some sad ass driver, just as the driver does not buy it when he leases it.

    No, but you can sure as hell expect that car to show up in that month’s “sales” figures. Which is probably why GM’s quarterly reports talk about “deliveries” rather than “sales.”

  • avatar

    I am awestruck by the beauty of the gal in the pic offering me the keys to her apartment.

    Eevn with the center-of-focus upon the keys her beauty is awe-inspiring.

    “Mom… look what followed me home!!!! Can I keep it!!!!!” (wishful thinking).

  • avatar

    I agree with obbop – that girl is drop dead gorgeous. I can remember when I used to chase women like her but with age I cannot for the life of me remember what I did when I caight up with them

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