GMAC In Peril

Robert Farago
by Robert Farago
gmac in peril

Earlier today, I wrote an editorial about the U.S. Treasury Department’s plan to “sell” Chrysler Financial to former GM captive lender GMAC. Motive: Chrysler could continue to function (under union control, no less). The lender could keep lending money to ChryCo dealers to buy ChryCo cars. Means: what are you kidding? Your tax money. Opportunity: none. Well, legally. Legally, a Chrysler Financial–GMAC merger would imperil the bank, in direct contradiction of FDIC rules. Of course, the fact that GMAC is a bank in the first place is a violation of federal rules. OK, not technically. Technically, the Fed bent the rules for GMAC to qualify for bank status at the 11th hour, behind closed doors, screwing over recalcitrant debt holders but good. So anyway, I called the ChryCo Financial–GMAC merger a clusterfuck. (I know: I should stop sugar coating my analysis.) Turns out I had no idea how bad things are over at GMAC. But CNNMoney does . . .

GMAC lends to GM dealers who typically use these funds to stockpile new vehicles on their showroom floors. The lender had $24.13 billion of such loans on its books in 2008. GMAC earned revenues of $1.4 billion last year on these type of loans to dealers.

Guess what? It’s not 2008 anymore. At the end of that particular year, the feds bailed out GMAC to the tune of $6 billion. Anyone think that GMAC’s business has improved since then? Well exactly. And business is about to get a LOT worse.

Two words: dealer cull. When GM jettisons 40 percent of its dealer network, the move may well send GMAC into the kind of death spiral that took out a Kennedy.

A concern is that shuttering dealerships in a hurried fashion could leave GMAC stuck with unsold inventory if the lender is forced to repossess vehicles when dealers can’t pay up. In such an instance, GMAC may have little choice but to auction off the cars, driving down their prices. Lower prices, in turn, would drive down values of GMAC’s existing books of loans and leases.

This “will have a very negative impact,” says [Fitch Ratings’ Christopher] Wolfe.

Minus the British understatement, GMAC is up excrement creek and the paddle business is about to disappear. So combining one loser (Chrysler Financial) with another even larger loser (GMAC) is a great idea—just as long as taxpayers shore-up both institutions with, I dunno, $10 billion? $20 billion?

Now here’s the really scary bit: if the Treasury dragoons Chrysler Financial and GMAC into a marriage of convenience (on some bizarre level), why not do the same thing for Chrysler and GM?

The feds are set to own a majority stake in GM, and the unions will control Chrysler. As soon as Chrysler heads the wrong way, which it will, the unions will happily trade their big slice of a small pie for a big slice of a big pie. American Leyland. Ya think?

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  • KalapanaBlack KalapanaBlack on Apr 29, 2009
    superbadd75 : April 29th, 2009 at 8:14 am I guess I don’t understand how the loans to dealers work, but if GMAC pulls a dealer’s floorplan and consequently the cars along with it, can those cars not be sold at other dealers as new? They are all untitled cars, so why couldn’t GM just send them elsewhere? There is going to be a huge production cut this summer, they may need to move some cars around anyway, right? Why would this kill GMAC? I obviously don't know the timeline on this, but the fear is that if 40% of GM dealers go away, ~40% of the unsold but produced cars (of which GM has millions) aren't going to have space to sit. Thus, an immediate inventory clearance auction to get rid of the cars there's no room for. Then, the rest happens (lower residuals, lower value for existing loans on comparable cars, etc.). Just think of a sudden flood of millions of cars being pulled off former dealer lots and having to be stored somewhere by GMAC. There absolutely will not be enough room in the already inventory-packed remaining 60% of GM's lots.

  • Carguy100 Carguy100 on Apr 29, 2009

    When a dealership is closed, the manufacturer repurchases the new inventory from the floorplan source and redistributes it to other dealerships. The bank is left to dispose of used cars and new cars that for whatever reason are not taken by the manufacturer. I'm guessing that someone was thinking about the redistribution issue when GM announced that they were cutting 190,000 units from the Q3 production schedule. How many of the remaining GM dealerships floorplan with GMAC? How about most of them. Therefore, most of the redistributed cars will end up back on GMAC floorplan at a different dealership. GMAC probably won't get hurt too bad, at least in the short term.

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