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Keep Bailing: GMAC Needs More of YOUR Money

Posted by Larry Doyle on October 27, 2009 8:33 PM |

Turning the corner? No more bailouts? You didn’t actually believe the wizards in Washington, did you? Why?

GMAC is back in line for another injection of YOUR money. Recall that GMAC was bailed out initially during the government takeover of GM. GMAC was then spun off in order for Uncle Sam to effectively provide taxpayer funded consumer auto loans and mortgages.

GMAC is not a public entity and thus not currently able to hoodwink investors and raise equity capital. What’s a cash strapped entity to do? Let’s play some more of that ‘bailout bonanza.’ The Wall Street Journal just reported on this developing story and writes, GMAC Asks for Fresh Lifeline:

In a stark reminder of how some battered financial firms remain dependent on government lifelines, GMAC Financial Services Inc. and the Treasury Department are in advanced talks to prop up the lender with its third helping of taxpayer money, people familiar with the matter said.

The U.S. government is likely to inject $2.8 billion to $5.6 billion of capital into the Detroit company, on top of the $12.5 billion that GMAC has received since December 2008, these people said. The latest infusion would come in the form of preferred stock. The government’s 34% stake in the company could increase if existing shares eventually are converted into common equity.

The willingness by Treasury officials to deepen taxpayer exposure to GMAC reflects the troubled company’s importance to the revival of the auto industry. Founded in 1919, GMAC has $181 billion in assets and is a major financing provider on car purchases from General Motors Co. and Chrysler LLC. The new capital would help firm up GMAC’s balance sheet and solidify its auto-loan business.

[Helping Hand]

Federal officials also are moving to shore up GMAC’s ability to fund its daily operations, with the Federal Deposit Insurance Corp. telling the company Tuesday the agency will guarantee an additional $2.9 billion in debt, according to people familiar with the discussions. The FDIC guarantee will make it easier for the company to sell debt to investors. The FDIC backed $4.5 billion in GMAC-issued debt earlier this year.

The FDIC approval came just four days before the expiration of the regulator’s program that guarantees debt issued by certain banks. It ended months of tense negotiations between GMAC and regulators. Without a deal, the company would have been forced to further reduce its lending volume. New-car loans by the company tumbled 55% to $5.6 billion in the second quarter from a year earlier.

Given these developments with GMAC, why are we allowing Barney Frank and friends to pander to the American public about how plans are being developed to wind down firms rather than bailing them out?

I would recommend we eat our loss on the money already injected in GMAC. Wind it down and let the free market work.

Rest assured, any new money injected in GMAC is nothing more than ‘good money after bad.’

LD

  • Larry –

    I think this also shows that the banking system is still not healthy at all. The major banks are only posting positive numbers from trading, and a lot of that is because they are borrowing money for free from the Fed and then trading with that free borrowed money. They are losing huge money (with the losses continuing to get worse) on their traditional banking business (loans). Here are two blog editorials this morning from separate people that both talk about a possible second banking system collapse, and that it may be sooner than we think.

    Let’s look at the 4 major banks – Citigroup, BofA, Wells Fargo, JP Morgan. No one can make a strong case to me that Citigroup and BofA are healthy financial insitutions. I think both of those banks have serious problems, especially Citigroup, which unfortunately is the biggest of the 4 and probably in the worst shape of the 4. You have reported on Wells Fargo’s problems. As for JP Morgan, the first of these 2 articles goes into great detail about JP Morgan and their huge exposure to derivatives. They actually have more exposure to derivatives than any of the other 3 major banks. How much more money will the Federal Reserve and Treasury be willing to put into these banks to keep them alive and backstop them? Here are the two articles:

    http://www.zerohedge.com/article/next-step-bank-implosion-cycle

    http://www.rickackerman.com/2009/10/is-mood-shifting-back-to-crisis/#more-11157

    Matt

    • Larry Doyle

      Matt,

      Thanks for sharing these great links. Let’s not forget that none other than the IMF has forecast global banking losses from this crisis. The initial forecast of losses totalled $4.1 TRILLION. That forecast was revised a few weeks back to $3.4 TRILLION. The system has recognized approximately 50% of those losses.

      Global governments have done the following:

      1. flushed the system with cash
      2. allowed banks to ‘cook their books’ with rigged accounting
      3. allowed banks to pay bonuses like it was 2006-2007

      No wonder why consumers are so ticked off.

      The fact is there are still upwards of $2 TRILLION in losses on the books and NO BANKER is disputing that.

      Against that reality, the economic analysis and market commentaries are largely noise.

      Thanks for the prompt.






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