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Save GM? OK . . . Save GMAC? What’s Up With That?

Posted by Larry Doyle on May 12, 2009 1:57 PM |

Does Uncle Sam really need to take a greater equity stake in auto and housing finance? Doesn’t our exposure to Freddie and Fannie along with our soon to be equity stakes in Chrysler and GM provide us enough exposure? Why does Uncle Sam need to own a non-systemic risk housing and auto finance company?

Our economy has been faced with massive systemic risks within certain companies – Fannie Mae, Freddie Mac, AIG, and Citigroup. Similarly, the Obama administration views our domestic automotive industry as critical to a healthy, vibrant, growing industrial base within the United States. While the futures of these aformentioned industries and companies can be hotly debated, an entity such as GMAC (General Motors Acceptance Corporation) does not present systemic risk.

Who wins with Uncle Sam taking ownership of GMAC? Obviously the employees of GMAC, entities that have outstanding exposure to the company, and consumers who will receive below market financing. Who loses? The competition. Regrettably, the tried and true principle of healthy competition has taken a back seat in our Uncle Sam economy.

Ford Motor won the battle of the Big 3. In this case, though, to the victors do not go the spoils. Ford Motor Company deserves huge praise. Ford recognized the changing business model of the domestic automotive industry in advance, addressed its finances and adapted its business model. Today they are expected to issue 3 million new shares of stock. I hope the sale exceeds expectations and they gain huge market share.

The WSJ highlights the fact that in the brave new world of the Uncle Sam economy, Uncle Sam’s money management enterprise will have major equity stakes in Freddie Mac, Fannie Mae, AIG, Citigroup, and soon GMAC. Get Ready:You Will Own GMAC, Too.

GMAC differs from other companies under the government thumb because it isn’t too big to fail. So the government doesn’t need to save GMAC to safeguard the financial system.

Instead, GMAC must be saved, the argument goes, to revive the auto industry and consumer economy. The details of that approach are strikingly scarce. In fact, nearly everything about GMAC — its mission, board, and future ties to government — is unknown. As Winston Churchill might put it, GMAC is a financial black hole stuffed into a governance black box.

These details matter. The Treasury is in the middle of a plan to turn privately held GMAC into a new über auto-lender, financed with taxpayer dollars and likely falling under taxpayer control. This has the potential to spark unintended consequences across the auto and banking markets, similar to the quasigovernmental meddlings of Fannie and Freddie.

Would this government-sanctioned company have an unfair funding advantage against Ford Motor’s Ford Motor Credit, for instance? Would it be willing to do the politically unpalatable work of cutting credit to certain car dealers? What happens if Congress starts mandating low-cost auto loans?

How many diligent, determined, and patriotic individuals are there in our country today questioning how and why their work ethic and competitiveness have been devalued by Uncle Sam’s entrance into an entity such as GMAC? It is naive to think that the playing field can remain anything close to level in auto and housing finance going forward. How does one compete with Uncle Sam’s ability to finance itself? Where’s Congress on this topic?

Oddly, Congress and the rest of the country seem to have grown numb to the bailouts. Not once has GMAC been discussed substantively in a congressional hearing.

The next time President Obama opines that he wants to promote private enterprise and that he does not want to be in the housing and auto finance businesses, let’s ask him about G-M-A-C!!


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