GMAC Fails U.S. Treasury Stress Test and Could Fail if the Recession Continues

Color that logo red, as GMAC losses mount -- and it is named one of the weakest banks by the Feds.

Add another worry to the long list already attached to struggling automakers. GMAC, the storied company that supplies dealer and consumer financing for vehicles at General Motors since 1919, is in need of an additional $11.5 billion in capital, according to the U.S. Treasury Department. This amount doesn’t include the additional capital GMAC will need to take over Chrysler’s wholesale and retail financing needs when it emerges from bankruptcy.

Treasury, the agency that has been printing increasing amounts of money by issuing staggering amounts of debt in a desperate attempt to halt the Great Recession, released a list of financial institutions that failed its stress test yesterday afternoon.

GMAC was among the troubled institutions. In fact, GMAC had the biggest problem with liquidity of any bank for its size. That finding came just as the lender revealed that its first-quarter losses had jumped to $675 million, up from $599 million a year ago. The numbers actually would have been worse but for $631 million in after-tax gains from retiring some of its debt.

This means that GMAC now has until November 9, 2009, to increase common shareholder equity by $11.5 billion, of which $9.1 billion must be new capital. Ways to do this could include issuance of new common equity in a depressed market for such, or issuance of mandatory convertible preferred shares, or the conversion of existing equity into a form of “Tier 1” common equity.    GMAC is required to provide the Federal Reserve Bank of Chicago with a plan to attain the capital requirements by June 8, 2009; only one week after GM’s reorganization plan is due.

“Ensuring the availability of credit to consumers and businesses is a key component in stabilizing the economy and a top priority at GMAC,” said Alvaro de Molina, GMAC Chief Executive Officer. “We support the government’s efforts to shore-up the banking system and expect that the additional capital raised will further strengthen GMAC.”

GMAC’s new capital requirements do not include the additional capital required to finance Chrysler dealers and retail customers in GMAC’s agreement of last week with the automaker, which Treasury brokered. Here, Treasury said it intends to support GMAC by providing an unspecified amount of capital required to support the financing of Chrysler. Treasury obviously knew the troubles in GMAC’s balance sheet when it did this.

GMAC is an example of how tangled financial engineering becomes when debt, leverage and inadequate reserves are employed. On November 30, 2006, GM sold a 51% controlling interest in GMAC to a consortium of investors led by Cerberus Capital Management, L.P., a private investment firm, who has now given its leveraged position in Chrysler LLC to U.S. taxpayers in order to get out from under its failed investment there.  

The consortium also included Citigroup Incorporated, which consumed billions upon billions in taxpayer money to prevent its own failure, when it couldn’t cover its losses from sub-prime mortgages and other leveraged securities.

Others in the GMAC group are Aozora Bank Ltd. and a subsidiary of The PNC Financial Services Group, Inc. On Dec. 24, 2008, GMAC was approved as a bank holding company under the Bank Holding Company Act, which allowed the government to prop it up by supplying cash, as part of the $700 billion Troubled Asset Relief Program that taxpayers financed.

Earlier this week, GMAC reported a first quarter 2009 net loss of $675 million, compared to a net loss of $589 million in the first quarter of 2008. Results in the quarter were primarily attributable to continued pressure in mortgage operations from marking down mortgage servicing assets, weaker credit performance on both auto and mortgage assets, mark-to-market adjustments on derivatives, and an original issue discount related to the fourth quarter debt exchange. The losses were partially offset by profitable performance in the insurance business and $631 million in after-tax gains on debt extinguishment transactions. 

“The effects of a soft economy and weaker credit performance on legacy assets continued to put pressure on GMAC’s financial performance in the quarter. We continue to manage through this economic cycle and focus on strengthening operations for the long-term,” said Alvaro de Molina.

GMAC is a global finance company operating in North America, South America, Europe and Asia-Pacific. It specializes in automotive finance, real estate finance, insurance, commercial finance and online banking.

The Treasury stress test itself is controversial. It is a highly debatable proposition that banking regulators had the time and the resources to adequately asses the health of the financial institutions that taxpayers have already spent hundreds of billions dollars propping up. So more bailouts could be on the way — and GMAC looks to be prime candidate.

Paul Eisenstein contributed to the reporting on this story.