GMAC: Guess Who's Back for More Federal Assistance?

Guess who’s back for a second (third or fourth?) bite of the federal apple. Your favorite government owned auto finance company — GMAC (GKM).

It seems that the $3.9 billion second quarter loss ( it lost $2.48 billion in Q2 2008) has put it in a bit of a bind so it’s talking with the Fed about how to go about raising $5.6 billion. That’s the number it got saddled with after the “stress tests” and it has until November to come up with the dough.

An article in the Wall Street Journal suggests three ways to get the money. Sell some assets, attract private capital or get more federal help. I’ll leave it up to your powers of financial analysis to figure out which of those options is not a pipe dream.

The company has sold $4.5 billion of FDIC guaranteed bonds and would like to sell more. They were originally approved for $7.4 billion but they need the approval of the FDIC to sell the rest. That one has to be giving Sheila Bair heartburn. But do the math and an extra $2.9 billion from the bonds still leaves a $2.7 billion hole. Taxpayer can you spare a dime?

You, my friend, currently own 35.4% of this company and it just happens to be the primary source of financing for your two government owned auto companies, so it’s pretty obvious what Tim, Ben and Sheila are going to do here. Take heart, however, more government financing means that you get a larger share of the company, all the better to set you up for the big payday when this all works out.

More here.

Comments

[MarkoPolo:]

Error in article: an additional FDIC-guaranteed bond sale raises cash and liabilities, not equity capital as the article implies. It "does the math" but got the word problem wrong anyway. Back to Finance 101 with you.

Aug 05 08:52 AM

[Alex_G:]

Tom,

You still don't understand the structure and end game of GMAC, do you? Maybe you're upset that you haven't enjoyed the 100-200% gains many of us have in their bonds the last few months. It also appears you didn't listen to the earnings call yesterday. If you did, you would have discovered that:

1. It was a "kitchen sink" quarter, with almost all of the losses coming from a tax bite caused by the conversion to corporation status and cleanup on ResCap, getting ready to put the walled off entity to sleep by the end of the year.

2. ResCap is where all of the problems are held. See point number 1 above.

3. The auto finance division (which will be the surviving entity) made money and will continue to do so.

The Feds will get every penny back when a well capitalized Ally bank sells shares to the public, and any losses will be borne by the current equity holders, which is Cerberus and the Trust that holds the rest.

All of the extra equity they need to raise is a result of the ResCap liability. My best guess is their bondholders will end up with some cash and equity in GMAC.

Aug 05 11:31 AM

[MarkoPolo:]

Alex, nice job of taking this lightweight out behind the woodshed. The article is not up to Seeking Alpha standards.

Aug 07 11:45 AM