Global Insight Perspective | |
Significance | General Motors' former captive finance company, GMAC, has successfully applied for bank holding company status from the U.S. Federal Reserve. This means that it now qualifies for billions of dollars in bail-out funds. |
Implications | Aside from averting immediate bankruptcy, the move will also result in a change of ownership at GMAC, as parent companies General Motors and Cerberus Capital Management must by law dramatically reduce their ownership stakes. |
Outlook | GMAC may have avoided immediate bankruptcy, but it is still unclear how the improved liquidity and change in ownership status will affect its lending practices to dealers and consumers. |
Finance company GMAC has won classification to become a bank holding company, according to a report by Reuters news service. The company, owned jointly by private equity firm Cerberus Capital Management and automaker General Motors (GM), had applied for the status so that it could unload its assets through two programs offered by the U.S. federal government. The status change has been granted by the U.S. Federal Reserve and will allow GMAC to apply for bail-out money from the U.S. Treasury's Troubled Asset Recovery Program (TARP), a US$700-billion fund designed to buy up bad debt. GMAC is expected to apply for roughly US$6 billion in bail-out funds, and could potentially sell an additional US$17.5 billion in federally backed loans in order to raise capital. The moves are expected to allow the company to improve its ability to fund GM dealer inventory and consumer loans, two things that the company has reportedly been pulling back from doing in the past several months as its financial situation has worsened.
It is felt that the status change has saved GMAC from immediate bankruptcy, after several quarters of weak financial results that have basically forced the company to make massive cuts in its workforce, offices, and services. The credit crunch has seen GMAC's ratings plummet, dramatically raising its borrowing costs and hurting GM's ability to sell cars as financing for both dealers and consumers dries up. The company has lost US$7.9 billion over the last five quarters, and has faced even more massive losses as a result of the decimation of the sub-prime mortgage market, in which GMAC's Residential Capital (ResCap) mortgage unit was a major player. The company stated that without the classification as a bank holding company, it would probably have had to attempt the sale of further assets or take other extraordinary measures. Given that the current market for such assets is less than stellar, bankruptcy was a real danger for GMAC. One point of note is that under the new bank holding rules, both GM and Cerberus have to reduce their 49% and 51% stakes in GMAC to 14.9% and 10.0%, respectively. This measure is meant to prevent companies from using banks they own to fund their businesses.
Outlook and Implications
The ironic part about the reduction in ownership percentage allowed by law is that the original purpose of GMAC was as a captive finance company for General Motors. That is, its mission was to help GM dealers finance vehicle sales when the market itself was unable to provide. By that definition, GMAC is necessarily supposed to do exactly what the new federal restrictions are intended to prevent: allow the owners to use the company to fund their own business, indirectly through providing loans to dealers and consumers to buy its cars. This may largely be just a case of semantics, however, as any new owners of GMAC would by necessity have to understand what the company's business model is. It will be interesting to see if anyone actually takes a larger stake in the company, or if no party is allowed to maintain majority control. At present, it does not seem to be serving its original intended purpose very well, as GM executives would attest. GM sales boss Mark LaNeve even lamented that the lack of financing from GMAC was costing GM sales because of its inability to finance consumer loans, resulting in a 41% year-on-year (y/y) sales decline in November.