GMAC/Residential Capital - What this May Mean To GM

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November 15, 2007

It was not to long ago GMAC was General Motors' cash cow and had helped sustain the company throughout most of this decade as their automotive operations struggled. Much of GMAC's successful financial performance has come from their Residential Capital (ResCap) mortgage subsiduary.

On November 30, 2006, GM sold 51% of GMAC to Cerberus Financial a private equity company for $14 billion, to be paid over three years. Until that time, GMAC’s credit rating was linked to GM’s as it was a wholly owned subsidiary. Resulting from GM’s poor financial performance, the cost of borrowing for GMAC was hampered by GM's higher credit cost.

GM’s Standard & Poors Credit rating is junk, standing at BBB-. Since the buyout of GMAC by Cerberus, GMAC’s credit rating, once decoupled from GM, was upgraded to a rated of BB+. This greatly improved GMAC ability to raise capital at a substantially lower rate because of the reduced potential risk. GMAC is a bank and is highly dependent on the credit markets to raise capital for loans.

In the past year, GMAC has struggled as a result of the sub-prime mortgage problem. Because of the problems at Residential Capital and their exposure to questionable lending, the credit rating association Fitch placed GMAC under a credit watch for possible down grade.

In GM's recent financial statements for the 3rd Quarter, it was reported GMAC lost $1.6 billion year-to-date which includes a net loss at ResCap of $2.3B. Bare in mind, GM no longer accounts for full ownership of GMAC and excludes Cerberus's loss. To put this into perspective, let's review GMAC recent contribution to GM's bottom line.


Full YearNet Profit
2006$1.5 b
2005$2.8 b
2004$2.8 b
2003$2.8 b
2002$1.9 b

The biggest issue is how GMAC through ResCap has increased their exposure to questionable lending terms from 2004 through 2006.

GMAC's exposure to interest-only mortgages increased from $15.8 billion, adjustable mortgages from $6 billion, and high loan-to-value mortgages from $9.5 billion in 2004. Given the problems in the housing market and the substantial increase in GMAC's exposure to questionable loans, their should be concern at GMAC.

Recently, I discussed GM's 3rd Quarter results at length. This analysis of GMAC's problems only adds to my earlier thoughts and helps explains GM's warnings about the potential for future profits, particularly at GMAC.

For more information on the problems at ResCap see the following reports:

Reuters - January 16, 2007

Reuters - May 2, 2007

Reuters - October 17, 2007

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