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?