GMAC: Who's in Charge?

To me, the most interesting part of the Fed's decision to allow GMAC to become a bank is the fact that it will be broken up to the point at which its owners will effectively have no control over it any more. The Fed seems to have concluded that GMAC has a strong management team in place, and that its current woes are more a function of its shareholders than they are of GMAC's own internal mismanagement.

Which might seem sensible until one remembers the whole misadventure with ResCap, GMAC's subprime mortgage arm. I'm no expert on the history of GMAC, but the impression I get is that the company became a key groundbreaker in securitization technologies as a result of its core auto finance activities, and that it then felt it could make a lot of money by applying those technologies elsewhere, especially in the mortgage market.

GMAC had a stellar reputation in the world of asset-backed securities for many years, and was crucial in helping to prop up its failing parent. Historically, GMAC was a wholly-owned subsidiary of GM; when the car maker ran into financial troubles in 2006, it sold a 51% stake to Cerberus, which had not yet bought Chrysler.

The Fed has strict rules on who is and is not allowed to own a bank, and neither GM nor Cerberus meets those standards. So Cerberus is going to dividend most of its stake in GMAC back to its limited partners, while GM is going to either give or sell most of its stake in GMAC to an independent, Fed-vetted trustee with instructions to sell the equity to someone else within three years.

I don't know what kind of board GMAC is going to end up with, or who is going to sit on it. And although GMAC's managers might have more free rein than they've had until now when it comes to shareholder demands, they will also have much more stringent constraints than before when it comes to capital adequacy and other demands which will surely be made by Federal regulators.

Still, at some point, a lot of big strategic decisions are going to have to be made, both about GMAC's core business of financing GM auto purchases, and about its well-regarded but definitely non-core operations in mortgage finance around the world. Right now it's far from clear who is going to make those decisions, and who is going to sign off on them. And I do hope it will take less than three years for someone to be put unambiguously in charge.

Comments

[Moon Kil Woong:]

The Fed and Treasury's actions are making a lot of ambiguities these days. It's giving everyone a queasy stomach. When Japan took over institutions it used them as a vehicle to support their other zombie holdings carrying the dreaded economic disease "unproductive, unprofitable, subsidized, corporate leeches."

The only difference with the new US model of this is that the carrier as well as the host happens to be the leech. AIG, Fannie May, and Freddie Mac are the biggest leech super-carriers so far. Now we wait for the sub-leeches (new predatory low interest low down mortgage peddlers, shady derivative market makers, bizarre bank/insurance/broker schemers, etc.

With GMAC they can now add hundreds of defunct car lots and 0% down car fraudster dealers. Wanna buy a Corvette even if you don't have an income? Come on, I'm sure you'll like it. It's all in the name of reinvigorating the economy.

2008 Dec 25 03:53 AM

[malach hamo...:]

There are hundreds of soldiers coming in from the front in this unprecedented economic war; if we can stabilize some, maybe we'll find a way to rehabilitate them down the line. Otherwise, if we just let them die, we'll regret it later.

The GMAC conversion stinks like last week's fish; but it's better than having it go down the drain - at least for now.

2008 Dec 25 11:19 AM

[kurt walter:]

Presto. GMAC is a bank. Gaming the system to get tay payer bailout money is sick. I predicted this nonsense when the bailout madness started. Every joker was going to try to get their tin cup filled with money.

2008 Dec 25 01:59 PM

[ashadu:]

Whats going to happen to the short term smartnotes?

2008 Dec 27 07:15 PM