On the most-stressed list, GMAC stands out
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In the government’s ‘stress testing’ of 19 major financial institutions, GMAC looks like the leading candidate for another federal bailout.
Regulators have ordered the auto and mortgage lender to boost its capital by $11.5 billion by Nov. 9. That would amount to a doubling of the so-called Tier 1 common capital GMAC had as of Dec. 31.
From Reuters:
But unlike the nine other lenders that underwent similar tests and were deemed to require more capital -- only two of which, Bank of America Corp. and Wells Fargo & Co., need more than GMAC -- GMAC has few obvious ways to raise the sum it needs. While it could convert preferred shares issued as part of a $6-billion federal bailout in December, that would get it only about halfway to the target. GMAC became a bank holding company in connection with that bailout and a debt restructuring. The capital shortfall adds to problems for Detroit-based GMAC, which has lost money in six of the last seven quarters as mortgage and other credit losses soar, while sales volume falls at former parent General Motors Corp.
Notably, GMAC has a reputation for paying above-average yields for deposits nationwide via its Utah-based banking operation. (If you save there, you know.) Whatever the company’s fate, depositors don’t have to worry about their money as long as they’re within Federal Deposit Insurance Corp. limits.
And as Reuters notes, the Obama administration probably would want to keep GMAC afloat as the government works to salvage both GM and Chrysler:
GMAC’s auto finance business will get a boost this month when it becomes the preferred lender to Chrysler customers as part of the Obama administration’s agreement with that automaker, which is in bankruptcy. The administration pledged to provide the capital GMAC needs to support the Chrysler business. With the government hoping to refashion GM and Chrysler into smaller companies, preserve jobs and bolster the troubled economy, it may be in its interest to ensure GMAC survives.
Blogger Felix Salmon, also at Reuters, suggests that GMAC’s creditors may have to agree to a debt-for-equity swap:
Given the levels at which GMAC’s debt is trading these days, the bondholders might even make money, on a mark-to-market basis. But they’re going to end up owning an auto finance company. Good luck with that.
-- Tom Petruno