Motor City Meltdownby
Sometimes its the vultures who get eaten. General Motors was lucky to unload a majority stake in its finance subsidiary (GMAC) for $14 billion last year. The subsidiary, now 51% owned by vulture fund Cerberus Group, just reported a $1.3 billion loss for the third quarter. That was due to $2.3 billion in red ink from GMAC’s mortage operation GMAC ResCap.
The company’s residential mortgage funding fell 16% in the quarter to $29 billion. Ratings agencies S&P and Moody’s have downgraded GMAC’s debt. According to the investment research firm CreditSights, Cerberus and GM agreed to convert $1.1 billion in prefered stock in the venture into common stock to shore up GMAC’s balance sheet. Still CreditSights writes: “Net-net, the long term viability of the ResCap businesss model and franchise remains in question.” Ouch