By on April 28, 2009

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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9 Comments on “GMAC In Peril...”


  • avatar
    windswords

    “American Leyland. Ya think?”

    Nope. Not me. If FIAT gets involved, no way. If no FIAT? Maybe. But just maybe.

  • avatar
    lw

    Unless the Federal government starts a program of going to every GM and Chrysler dealership on a daily basis and buying as many cars as it takes for the entire dealer->manufacture->supplier chain profitable, it all unravels.

    I heard people today that were ticked off that the UAW will have such a large stake in these companies. I find that funny.

    You want to understand what the task force is doing?

    Go get a turd.. a nice big turd.. Put it on your kitchen table, get the whole family together and start slicing it up. See who wants the largest slice.

  • avatar
    cardeveloper

    lw,

    Love the turd quote

  • avatar
    amadorgmowner

    GMAC going broke because GM cuts more dealers? I thought GMAC was doing that for GM (although both companies continue to lie through their teeth about this). GMAC cut off my local GM dealer and GM didn’t lift a finger to help a dealer who sold over one million cars for them since 1975. These bastards get federal bailouts, rules broken in the dark of night and then screw rural mom and pop dealers out of business. PTFOA should tell GMAC, etc. they are on their own. If you fail, even though they are a “bank” (illegal), there will be no more bailouts. GM and GMAC have made it very clear to those of us in rural areas who, I guess, are stupid enough to continue to purchase GM cars and trucks, that they don’t want our business anymore. I wonder if GMAC will negotiate a lower residual price on my leased 2007 GMC Yukon XL Denali if I threaten to give it back to them as I am thinking of doing in August? Maybe I should just give it back to them and let them just eat the loss. They probably deserve it.

  • avatar
    menno

    Yes, family owned dealerships with (once upon a time) plenty of employees – i.e. “small business America” – is the enemy of this administration, but only because this administration makes them so. It all fits.

    The big-wig folks get bailed out with OUR money, the small-businessmen/women and guy/gal on the street not only get to PAY but don’t get to PLAY (with bail-out money).

    Rule of unintended consequences: SOME of these dealers are going to go away with “just a bit of a chip on their shoulder” and when – not if – the Chinese and Indian car companies start asking for dealers to take on their cars, some – not all – of these ex-mom & pop operations will have been able to carry on with used cars for awhile and will most GLADLY try to absolutely screw over GM and Chrysler over this deal. Especially if the Chinese and Indian companies start working smarter and putting assembly plants within NAFTA (which I understand several of them are either now doing – in Mexico, of course – or planning to do). Actually I understand the Indians are looking to put up plants IN AMERICA.

    They say paybacks are a BITCH.

  • avatar
    superbadd75

    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?

  • avatar
    Kurt.

    GMAC merging with Chrysler Financial? Who cares! That is like saying Dodge will merge with Jeep. Both are owned by Cerberus. Let Cerberus polish that turd, cut it up for their feast THEN let the gov step in with a new gov backed bank to help the surviving dealers fill their lots.

    I have no simpathy for Cerberus or it’s backers and do not want to see ANY tax money going to shore up its coffers.

  • avatar
    KalapanaBlack

    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.

  • avatar
    carguy100

    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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