GMAC: A Perfect Sign of the Times

Includes: GKM, GM
by: Nicholas Jones

The Treasury Department said Monday that it will provide $5 billion to GMAC Financial Services LLC (NYSE:GKM), the ailing financing arm of General Motors Corp. (NYSE:GM), from the $700 billion bank rescue program (The Huffington Post).

GMAC will also potentially receive up to $1 billion from the Treasury in the form of an equity purchase. Shocking right? Not if you have two eyes and can read beyond a 4th grade level.

Back in the first week of September I shared with you this figure from Ty Andros.

  • Lehman Brothers (LEH)--11-13%
  • Merrill Lynch (MER)--11-12%
  • Morgan Stanley (NYSE:MS)--9-10%
  • Citigroup (NYSE:C)--9 ½-10 ½%
  • Keycorp (NYSE:KEY)--11-13%
  • National City (NCC)--13-15%
  • Wachovia (NASDAQ:WB)--10-12%
  • Zions Bancorp (NASDAQ:ZION)--13-15%
  • GM/GMAC (GM)--not possible
  • Washington Mutual (NYSE:WM)--not possible
  • Ford (NYSE:F)--not possible

Of these 11 companies, at least 8 have either gone bankrupt, or received bailout money. I hate to be Captain Obvious here, but you can't run a company that has large short term liabilities and is forced to pay double digit interest rates.

I believe many Americans have grown comfortably numb with the fact that there is an ever pending bailout. The recipient may be unknown in the near term, but there is trouble brewing, and Uncle Sam is waiting with his checkbook.

So instead of going on one of my rants, I would like to focus at the irony of this situation, and how GMAC has been truly a story of the times.

Rush to the Bubble

As you know, GMAC deals in auto lending, mortgage lending, and insurance. So why does a company that has manufactured cars for nearly 100 years get involved in the credit markets?

The answer is very simple: to make money. Just like every bubble that preceded it, there was a lot of money to be had in the credit bubble before it went bust. As a result of Keynesian economic policies in the form of ultra loose fiscal and monetary actions, the system was flush with liquidity.

The firms that had access to the highest tiers of our fractional banking pyramid scheme were the ones that made the most money. The easiest way to access this money and then turn it around for a profit was to lend money. That's what GM decided to do when it created GMAC.

All bubbles come to an end. As you know, when they pop, the markets move hard. Those left long the bubble get burned. For GMAC, their burn amounted to approximately $10 billion in losses over the last two years.

GMAC is simply a perfect sign of the times. GM, a manufacturing giant, altered its long lasting business plan by entering the lending markets. GMAC is a direct product of Keynesian economics. Without loose monetary and fiscal policies, GMAC doesn't have a market. I guess when it's all said and done, GMAC will be another drop in the bucket.

Disclosure: no positions