GMAC: Bank Holding Companies Do Go Bankrupt
December 30, 2008
(a) a slippery-slope series of industrial bailouts exceeding $100 billion
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.
a shame that Fed Chairman Ben Bernanke and the other members
of the Federal Reserve Board lacked the courage to say no to the Congress and the
automakers when it came to approving the GMAC application. This was a great
opportunity to show leadership in favor of a "Prime Solution." But alas,
not this time.
And don't cry for Cerberus in the event of a GMAC default. We hear that the buyout fund more than extracted its equity investment in GMAC via dividends and fees, thus the bond holders are the true economic owners. Wonder if the folks at the Fed realize that the imposition of ownership of limitations on Ceberus may really be no imposition at all! Or put another way, does an independent GMAC as envisioned by the Fed's approval order make sense as a stand alone business?
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.
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 by clicking here.
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.
While the Fed is allowed to give BHC applications accelerated processing,
we'd like to see a more detailed explanation from the Board as to just how GMAC
meets the statutory financial strength requirements for a BHC, even with the $6
billion in TARP funds. The Board's written order refers to business plans
and other future actions, but the approval of the GMAC application seems to
violate the safety and soundness requirements of 12 CFR. How can the members of
the Board who voted for this application say that GMAC is able to serve as a
source of financial and managerial strength to GMAC Bank?
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