At one point, GMAC was the tail that wagged the dog. The captive finance company dumped billions in profit into GM's corporate coffers. As the American automaker's decline gathered pace, GM CEO Rick Wagoner sold 51 percent of GMAC to Cerberus (current owners of Chrysler). The finance company immediately hit the rocks. Today, the gash in the hull widened. GMAC reported a net loss of $2.48b. In the second quarter. "A soft economic environment and continued volatility in the mortgage and credit markets have significantly affected results," GMAC Chief Executive Alvaro de Molina told Reuters. "Higher fuel prices and weaker consumer credit prove to be headwinds." That's a bit like calling a tornado a light breeze. We repeat: GMAC's NA leasing is heading for termination. The results included a $716m write-down of vehicle leases. And… "GMAC said it ended June with about $18 billion of SUV and truck leases in those countries on its books, out of a total $32.8 billion of leases." Expect GM to have to write-off at least three billion of lost residual values on those leases [blog coming] when it reports its financial results on, of course, Friday. Oh and ResCap, GMAC's mortgage arm, lost $1.86b in its seventh straight unprofitable quarter. If ResCap fails, it's all over bar the filing. Whether GM would be dragged under is an open question. Dark days.
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‘GM’s GMAC Cash Cow Moos No More’…
Whoever’s writing TTAC headlines is on fire!
Mr. Wagoner deserves a lot of criticism, but let’s face it, selling this thing was a smart move. Must give credit where it’s due.
PCH – I was thinking the same thing – this is one of the better moves he made, although holding 49% of it still hurts the bottom line…but not as bad as if they still held all 100% of it.
Even a stopped clock is right twice a day.
Mr. Wagoner has relieved GM’s balance sheet of TENS OF BILLIONS of dollars worth of once-profitable assets, in an effort to prop-up GM’s balance sheet and stave off the inevitable. You call that a victory?
Seriously, how did Wagoner convince Feinberg GMAC was a good buy?
Mr. Wagoner has relieved GM’s balance sheet of TENS OF BILLIONS of dollars worth of once-profitable assets, in an effort to prop-up GM’s balance sheet and stave off the inevitable. You call that a victory?
Nope. For the most part, he sucks.
Still, he was smart to unload this thing onto an innocent, unsuspecting fund. (He must have had enough dog treats to feed all three heads.)
In order to be fair and balanced, perhaps I should have mentioned is that he is also ultimately responsible for creating the lending policies that would have turned it into a dog with so many fleas. Loose lending standards helped to create interim profits that supported GM and its stock price during the post 9/11 era.
Apparently, he knew what he had (and didn’t have), because he didn’t hesitate to dump it before the mortgage meltdown became the main headline. I guess that you could liken it to the guy who drove his car off of the cliff, but had the good sense to leap out of it before it launched.
My memory is that GM dumped GMAC because they were desperate for cash rather than because they saw the real estate meltdown. I also remember a statement from Henderson a few months ago that they did not see the meltdown coming. Just dumb luck I think. But not nearly enough.
My memory is that GM dumped GMAC because they were desperate for cash rather than because they saw the real estate meltdown. I also remember a statement from Henderson a few months ago that they did not see the meltdown coming.
I personally think that’s a lie. These guys all saw it coming, but the fees were too good to be true and they figured that the feds would bail out the mortgage markets when they finally began to hit bottom. (As you can see, that’s exactly what’s happening now, because the economy can’t afford this level of failure.)
The GM guys can’t possibly say in public that they knew it was coming because they could face possible litigation from Cerberus and because it would beg the question of how GMAC got to be that bad in the first place.
GM isn’t alone here, the entire lending industry is pretending that this is all unforeseen circumstances, so that they can blame the rating agencies and everyone but themselves and get bailed out without more public controversy. They may be greedy and they may not always be the best of managers, but they ain’t stupid.
This whole credit problem is so much bigger than GMAC or Cerberus or Citigroup — it’s the entire world. It has alot to do with financially-irresponsible consumers, and a race to the bottom in extending credit. A big problem is that we let rating agencies and lenders take enormous risks on folks with bad credit. Since bankers tend to be sheep, it spirals out of control, and it then affects everyone. And then there are bailouts. Yet, where are the bailouts for people who did not make poor economic choices, or take on unmanageable massive debt on the irrational belief that our houses will increase in value forever?
detroit1701: “where are the bailouts for people who did not make poor economic choices…?”
They’re coming. To help the grasshoppers, gummint must obtain resources from the ants. So Washington will grab a big scoop, and start bailing assets out of the pockets of the prudent and thrifty. Some of this bailing is easy to see: higher taxes. The rest occurs stealthily, through inflation that lightens debt burdens, and laws and regulations that produce short-term benefits for the few and the long-term cost to all.
My question of the day:
What color crayon was used to draft the due dilegence on GMAC’s lease residual exposure for Cerberus?
That “headwind” word again. Really doesn’t matter why they sold GMAC, the fact apparently remains that GMAC won’t be pumping billions into the GM coffers again. One more nail in the coffin.
A big problem is that we let rating agencies and lenders take enormous risks on folks with bad credit.
The media has missed the story with this mortgage crisis. As TTAC continually has shown, the mainstream sources usually just scratch the surface and miss the big picture, and it takes the focused independents to get to the heart of the matter.
This is not a subprime problem, but a matter of extending too much credit to all classes of borrowers. When borrowers have no skin in the game, it’s a matter of time before they fail to pay, particularly when a shrinking economy and falling values rip off of them whatever skin they had left.
Saying that subprimes are the problem is a bit like saying that C students get worse grades than A students. What the media has missed is that the problem isn’t with the C students getting C grades but with the fact that everyone pretended that the C students would get B+’s and that the presence of A students would fix what was fundamentally wrong with the school.
If you want to stop future mortgage meltdowns, then you need to require high down payments and ban variable payment and adjustable interest rate debt. But nobody wants to do that because that takes away from banking profits.
Given that the US makes too little to export, the government is highly motivated to use service businesses such as investment and mortgage banking to create economic growth. The subprimes were just kibble for the dog, but it was always a dog.
The United States has replaced wealth building industries with borrowing.
In 1980, we were by far the largest creditor nation in the world – larger than all the other creditor nations combined.
Today we are the largest debtor nation by far, and not only borrowing from the Communists, but from those that support terrorism.
The medicine will come eventually – the longer it is put off, the worse it will be.
Mooo (BANG!)
“Gee, boss, what’re we gonna do for profits now?”
“Profits? We don’t need no stinkin’ profits!”
I thought that the reason that GM sold 51% of GMAC (other than money) was so that they would have access to cheap credit even if GM was not in the best financial condition because they are not the majority owner of GMAC? I thought it was discussed here at TTAC?
Pch101,
Great analysis on the current mortgage crisis.
I can tell you that it is different now. I got a call the other day to assist in tracking down a payment on a bad check from a customer (I work for a major retailer). The customer needed confirmation from our outsourced collection agency that she had paid the check so she could get it off her credit report. The reason? She was trying to buy a house and they wouldn’t approve the mortgage. THE AMOUNT OF THE CHECK WAS $52.
That guy who was always complaining about losing another loan to DiTech really dodged a bullet.
I personally think that’s a lie. These guys all saw it coming, but the fees were too good to be true and they figured that the feds would bail out the mortgage markets when they finally began to hit bottom.
Most of the time I think this too. But why did Cerberus buy the time bomb that GM wanted to unload? I’ve read that Feinberg was concerned about the risk, but was evidently reassured by his staff enough for the deal to go through. One thing to keep in mind is that, for them, it’s just a game of monopoly. It isn’t real (their) money, and they’ll be fine no matter how it turns out.
Here’s an interesting perspective that is entirely believable. Makes me want to load up on Bank of America.
http://articles.moneycentral.msn.com/Investing/SuperModels/IsMarketFixTomorrowsCrisis.aspx
From J.H. Elliott, Imperial Spain: 1469-1716:
The Castile of Gonzalez de Cellorigo was thus a society in which both money and labour were misapplied; an unbalanced, top-heavy society, in which, according to Gonzalez, there were thirty parasites for every one man who did an honest day’s work; a society with a false sense of values, which mistook the shadow for substance, and substance for the shadow.
Sound familiar?
A few more quotes from the linked article:
“GM’s net loss may end up being 50 percent bigger than Ford’s $8.7 billion shortfall, he said.”
“GMAC Chief Financial Officer Robert Hull today said the lender’s residual losses average $11,000 a vehicle for GM models. ”
The Titanic is swirling down the vortex.
But why did Cerberus buy the time bomb that GM wanted to unload? I’ve read that Feinberg was concerned about the risk, but was evidently reassured by his staff enough for the deal to go through.
Fair point. I’ll take a wild-bass guess as to some of the reasons: The grunt analysts who do the number crunching are naive and greedy.
The greed motivates them to say yes as often as possible, as they wish to get paid. You don’t get paid as a dealmaker if you don’t make deals. This one seemed too good to pass up; the size of it would pay big transaction fees up front.
The naivete comes from age. Most of the guys doing the low-level crunching are new MBA’s (early 30’s) who oversee Ivy League and top school undergrads who haven’t yet gone to business school (early to mid 20’s.)
These people have drunk the free-markets-always-uptrend Kool Aid and have never experienced recessions as adults. They have no personal experience with the cyclical nature of markets or how leverage creates bigger valleys, and not just bigger peaks. These are the people making most of the recommendations.
The older guys don’t care, and are quick to make excuses for how things have supposedly changed. (They call these “new paradigms.” My advice to you: Never trust anyone who tries to explain irrational behavior with a new found paradigm.)
They seem to ignore the fact that human nature doesn’t change, no matter how many computers or car leases or cell phones that people have compared to their forebearers. Good stories are better than bad stories, so why not just tell a good story?
When it goes bad, we’ll just blame the rating agencies and those who prepared the due diligence reports. That’s why we hired them: to endorse our stupid deals when times are good, and to blame them for the blessing when times are bad.
Detroit-Iron : If I recall, Ditech is an arm of GMAC.
If GM had seen the meltdown coming, Cerebus should have seen it too and had the good sense not to buy it at an inflated price.
The Castile of Gonzalez de Cellorigo = Atlas Shrugged