In our latest comment in The Institutional Risk Analyst, we opine on the Fed’s approval of GMAC’s application to become a bank holding company:

“Following that line of thinking, the Fed’s 4-1 approval of the GMAC application to become a bank holding company (“BHC”) is, to us, the latest evidence that our central bank badly needs a change in leadership. Providing the enablement for this ersatz BHC to access $6 billion in TARP funds will not change the firm’s problematic financial picture, a picture colored heavily by exposure to the mortgage, consumer and auto sectors of a shrinking US economy.”

We note that the GMAC’s financial situation is perilous and that the Fed has basically thrown out the rule book governing bank regulation when it comes to this very political situation:

“Let’s start with a review of the latest SEC filings for GMAC LLC using the IRA SEC Catalog. At the end of Q3 2008, the $211 billion asset business was imploding, to put it generously. Revenue and assets were down from a year ago, and GMAC LLC showed an operating loss of $2.6 billion in Q3 and $5.5 billion for the nine months ended September 30, 2008. Add $6 billion in fresh TARP funds and you buy a couple of quarters more operating losses – maybe.”

We then look at the GMAC Bank:

“GMAC’s FDIC insured bank, GMAC BANK, rates a “C” on the IRA Bank Monitor’s safety & soundness benchmark at the end of Q3 2008. Registered users of the IRA Bank Cart can purchase the profile of GMAC Bank. With an overall stress index of 3 vs. 1.5 for the industry average stress level, to us GMAC Bank is headed in the wrong direction in terms of financial trends. The $32 billion asset bank has decent efficiency in the 60% range and above peer capital, but the defaults at 97bp (annualized) and low ROE drag the bank’s score up to 2x the industry average.”

Bottom line: We expect to see both General Motors (NYSE:GM) and GMAC in a restructuring in 2009. The fall in revenue in the auto sector and in aggregate GDP across the board spells doom for at least one automaker in North America.

What remains of Chrysler is clearly going to be taken to the curb and sold, and Ford is basically restructured now and controlled by the banks c/o the previous kitchen sink financing, so GM is really the last detail in North America.

Shame nobody told the Fed all of this. As and when GMAC defaults, the Fed will face yet another regulated BHC in bankruptcy court. But that is, after all, where GMAC belongs in the first place.

Category: BP Cafe

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7 Responses to “GMAC Decision by the Fed is a Travesty”

  1. km4 says:

    I agree….the Bush admin has redefined America as a plutocracy fast lurching towards a kleptocracy.

  2. bonghiteric says:

    Over the years there have been a lot of people given the benefit of the doubt that they were experts in their field. The past year has proven this to be categorically false. There are no experts. Its a crapshoot when every decision is so politically motivated. Providing GMAC holding company status is a fucking joke. 18 months ago this choice wasn’t even conceivable, if it had happened the street would’ve pummeled the stock.

  3. Texican says:

    As a nation, we have crossed our Rubicon. Decisions like GMAC are not designed to fix anything. They are merely designed to keep the whole thing from imploding for another day.

    GMAC needs money so that GM can sell cars to people who can’t afford cars and really don’t want to buy cars because they are buried in debt that was used to buy assets that aren’t worth what they paid for them.

    I am a saver. It dawned on me relatively late in life that this makes me an enemy of the state. So be it. I want a better life for my kids and I am determined to see that they get it. They will, but probably not in the USA. I am going long in foreign equities, hard assets (offshore) and shorting the USA. TARP is an admission of defeat. The game is over.

    We lost.

  4. KJ Foehr says:

    Texican Says:

    “… I want a better life for my kids and I am determined to see that they get it. They will, but probably not in the USA. I am going long in foreign equities, hard assets (offshore) and shorting the USA. TARP is an admission of defeat. The game is over.
    We lost.”

    I admire your attitude; don’t give up save, and build a better future. One game ends; some have lost, but you and your family continue.

    IMO, avoid the equities, US and foreign, for another 10 months, preservation of capital in cash or wherever you think it is truly safe is the best plan until then.

    Good luck, and may your children deeply appreciate what you are doing for them.

  5. DL says:

    Notice how the Bush administration kept this issue of back-door funding of GM (via GMAC) out of the media while the bailout debate was raging in Congress.

    The Fed has become a very convenient back-door means to get a lot of things done without Congressional approval.

  6. klhoughton says:

    You’re making the mistake everyone else did–confusing GMAC (which was a major subprime mortgage lender) with General Motors (which makes cars).

    I dealt with this one at Tom’s place back in March of 2007.

    It’s no less of a travesty–all the moreso because it’s basically giving money to Cerberus, after GM already paid them piles more than the company was worth when they committed to that absurd floor valuation more than two years ago–but it’s not a travesty of the automobile industry.

  7. VoiceFromTheWilderness says:

    It is a travestly, in more ways than are indicated in the piece.

    It’s a travesty because up until the TARP, the executive branch needed congress to authorize any money it might want to spend, now it doesn’t, thus we have another step in the erosion of the constitution, brought to us by the right wing (whocouldanode?).

    It’s a travesty because in addition to violating constitutional law they are violating federal law by extending FDIC backing to GMAC. Deposit Insurance being used to backstop bad loans. Oh, okay, sure, why not. Hey, I hear FDIC has an infinite well, no matter how much you take out there’s always more. No? oh. Bummer for the sucker whose bank goes belly up last — the safest, strongest, bank with the calmest, most savings oriented customers — they will lose out. Heh, is this a great system or what?

    It’s a travesty because of Cerberus Capital Mgmt. It appears that the PE firm intimately connected with the Bush White House is going to have it’s horrendous acquisition decisions made whole by fiat action of … the White House. Just exactly what kind of crack was Cerberus smoking when it thought Chrysler and GMAC were good candidates for taking over? Just exactly what kind of crack is the american public smoking when it is willing to extend the financial resources of the group — the credit rating of the country — to make whole the insanely stupid decisions of a bunch of corporate raiders? The kind of crack that leads to the end of the system as it now exists, for sure. America cannot continue to run this way — it will run out of money. Therefore it will not continue to run this way, and since the public has not stopped it yet, it’s a safe bet they won’t ever stop it. So? Someone has to stop it, and someone will when it’s in their interest to do so.

    Look for much wailing and gnashing of teeth in the forecast someday soon.