GMAC's Woes Will Crimp Car Sales

At a time when GM and other automakers need to move as many vehicles as they can, financing arms like GMAC are tapped out

As if a $2.5 billion third-quarter loss weren't enough, lender GMAC Financial Services also said tight credit markets could force it to further restrict loans to car buyers.

That would make life even tougher for General Motors (GM), which relies on GMAC as a principal lender to its dealers and customers. GM said on Nov. 3 that tight credit was to blame for about half of its 45% sales decline in October. GM owns 49% of GMAC and private equity firm Cerberus Capital Management, which also controls Chrysler, has owned the rest since April 2006.

Most of GMAC's losses—$1.9 billion worth—came from its ResCap mortgage unit. But the auto lending operations also lost $294 million. With credit markets tight and the asset-backed-securities market just about closed, GMAC Chief Financial Officer Robert Hull warned in a conference call that the company may have to make fewer loans. "This is the most difficult environment we have ever faced," he said.

Lingering Crunch

GMAC's third-quarter loss widened from $1.6 billion in the same quarter last year. The company has been in a crunch since the housing market began its tumble. ResCap started showing losses in 2006 and has lost more than $9 billion since the fourth quarter of that year.

It's so bad that the company said ResCap could fail without continued help from GMAC. That means the unit could continue to be a cash drain on the lender.

The company's woes are compounding already massive problems at GM, which has lost more than $18 billion this year. GMAC already sent a note to dealers saying the company would write loans only for prime-credit borrowers (, 10/14/08). J.P. Morgan analyst Himanshu Patel said in a research note that GMAC's liquidity problems could continue to hurt car sales.

GMAC has a few options to get more cash to make loans. Hull said the lender may ask current GMAC bondholders to exchange their debt for new issues. He didn't provide details, but one option is to trade short-term notes for longer-term debt. That means GMAC could forgo payments and use the freed-up money to write new loans.

Looking to Uncle Sam

The lender could also use the Federal Reserve's Commercial Paper program to sell more asset-backed securities to the Fed and raise cash. So far, GMAC has sold $5 billion in paper to the Fed.

GMAC also wants to use the Treasury Dept.'s Troubled Asset Relief Program (TARP) in which the federal government buys stock in financial institutions or nonperforming loans. GMAC would sell loans to the Treasury to get more cash to lend.

But its biggest move is an application to become a bank holding company. Hull said the application has been filed with the Fed but has not been approved yet. If it is, GMAC would have more access to the Fed's discount funds window and could issue debt that is secured by the FDIC to raise money.

All of those methods hold promise, but for the time being GMAC will have to tighten its credit standards and, hence, the number of car loans the company can make.

That's why GM executives have been lobbying the government for help for the carmaker and its lending operations. On Monday, Michael DiGiovanni, GM's executive director of global market analysis, said: "It's critical for the banks and the government to help us."

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