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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All the talk about evil intention ignores the basic life principle, "when you hear hoofbeats, think horses, not zebras". I have seen many corporations fail, and in almost all cases the reason was much simpler - incompetence. Mind numbing incompetence, in fact. Just because you're at the top, doesn't mean you are any better or smarter than an average Joe Schmoe. Go ahead, look around you and look through any industry you want. How many executive-level figures do you see that impress you? Most of those folks got there for political reasons (friends, groups, etc), not because they were incredibly smart. Once you become a member of the magic circle, you can be the biggest idiot in the world, and you will be just moving from one mess to another (many created by yourself), each time collecting enormous bonuses. So, it's a pity that many good people will utlimately lose their jobs over this. Rest assured, folks responsible for those deals will not suffer financially. They will likely collect huge bonuses and then huge salaries elsewhere.
I haven't seen much discussion of other side of this crisis. Mortgage lenders were negligent in allowing subprime borrowers to bite off more than they could chew, but they were also much worse than that. When you look up the typical selling point for ARMs they say that 'the ARM loan rate is based on the prime rate, which is unlikely to change drastically. In most years you will find yourself paying less than you would with a fixed rate loan.' Search ARM FAQ's on google. Then they raised rates to over 12 percent, jumping several percent every 6 months and pricing people out of their homes. Borrowers face the blame for taking a loan they couldn't afford, but in many cases banks used outright deception to sell loans.
I don't think the biggest part of the problem is ARMs it's the explosion of interest only loans over the last several years. People banking on the fact that home prices would skyrocket forever. And the wonderful greed factor from all sides: lenders, real estate agents and consumers thinking they could make a quick buck. It's amazing how stupid people can be with their most expensive purchase and how crooked the industry has been. Greed and stupidity will be the downfall of this country.
Would someone explain all this to me? What is ResCap? Who owns ResCap? Is ResCap part of the GM Acceptance Corporation? GM sold GMAC to Cerberus just before the credit problems started - this I understand. How do problems at ResCap hurt GM dealers? Do GM dealers use ResCap or GMAC to borrow money to buy cars for their lots? (What you are calling wholesale.) If ResCap is broke does this explain why GM dealers can't borrow money from ResCap? Can GM dealers borrow from some other sources? If ResCap is broke does this have any effect on customers wanting to buy GM cars? Do other brand dealers use ResCap or GMAC? Thank you for filling in the background details.