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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.12 Comments on “Samir Syed’s Guide to the RESCAP/GMAC Crisis...”
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Wow, GM did something smart. Cerberus appears to be in a waste removal business.
Hmmm… I’m wondering just how “FULL” the financial disclosures were that GM gave Cerberus when making this deal. Is it just coincidence that GM unloaded what was one of the few brighter spots on their financial record just before it turned into a turd?
I would have to say that, at the time, none of the people in the business saw the credit crunch coming. At least they pretended not to. Of course, lots of people were talking about California bringing down the whole real nation’s real estate with foreclosures, but in reality, Cali has not yet been the biggest problem. It seems that stupid loans were popping up all over, not just in Cali.
Wolven : “Hmmm… I’m wondering just how “FULL” the financial disclosures were that GM gave Cerberus when making this deal.”
And how thorough was Cerberus’ “due diligence” research to guard against buying a pig in a poke.
So Moody starts downgrading RESCAP/GMAC now after the horse has left the barn. Where were they when all these companies were making stupid loans and calling them good business. This isn’t just a problem with GMAC/RESCAP, the entire US financial industry has been up to serious no good and now the US is going to pay for this for at least the next 5 years.
Interesting that these two corporations will be taking it up their shorts together. Can’t say that I care for either one of these companies. GM represents what has been wrong with Detroit for many decades. And Cerberus just seems like a bunch of money hungry turnaround artists. Couldn’t happen to a more deserving bunch of characters.
From Deep Throat:
“A Rescap filing does not necessarily mean GMAC goes down the tubes. Rescap has been set up all along as its own entity with its own borrowing capacity, etc.
The real problem: a C11 filing by Rescap would force GMAC to reduce its own net worth and hence trigger additional problems, thus leading it into bk.
That’s why it’s a mystery why Cerberus allowed GMAC to invest further into Rescap. But then the funding also means GM has to reduce its ownership stake in GMAC. Hence GM wanted GMAC to keep Rescap afloat.”
This is what happens when Beancounters go bad.
I simply have to begin wondering how much collusion there is in smoke-filled back-rooms, over all of this mess. Perhaps Cerberus will end up buying up what’s left of a post Chapter 11 GM and folding it into what’s left of a post Chapter 11 Chrysler…
Alternately, the much simpler explanation is that the greedy buggers are getting just what they deserve, and that includes GM and Cerberus.
Downside to that possibility is that the US economy and possibly the world economy will take a swoon, too. In real terms, if things follow along the lines of the last depression, a 75% REDUCTION in automobile sales and a 40% or higher national unemployment rate, bank closures, etc., would be more than a disaster.
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.