The biggest loser on the stress test was clearly GMAC. It needs to raise $11.5 billion in capital, which is about half of its current equity. Unlike the commercial banks, it has no earnings power -- it lost $675 million in the first quarter. Yet per Tim Geithner and Ben Bernanke, none of the banks among the 19 will be allowed to fail.
That would seem to mean that come hell or high water, GMAC will continue to exist, probably due to more government money. Keep in mind that this company wasn't even a bank until the Fed looked the other way and approved its application for bank holding company status in December. Let's review a few details.
First, GMAC resembles a bank about as much as I resemble Tom Cruise. It's a mostly failed subprime mortgage bank and an auto finance company. Several years ago, GM in a fit of sanity sold it to Cerberus which was operating without benefit of firing synapses.
As the financial crisis accelerated, its mortgage portfolio turned toxic and began to poison the entire company. It's only hope was a federal bailout so it lined up in front of the Fed with its application to become a bank in hand.
Since the government was knee deep in bailing out GM at that time and even they could figure out that they needed someone to keep on financing GM's cars, the Fed said OK with a condition. Get 75% if your bondholders to convert their debt to equity.
Then began an agonizing series of deadlines for the bondholders to convert. So the company put the creditors on notice that it was convert or BK and the creditors called their bluff. Deadlines came and weren't met and new ones were established. Then in mid-December the Fed delivered a Christmas present. They approved the BHC application. Later we learned that only 52% of the bondholders ever agreed to the debt for equity swap.
The TARP money flowed in, GMAC became a bank and PIMCO and the rest of the holdouts smiled secure in the knowledge that they were now home free. No one was messing with the creditors of banks, not even the Treasury or Fed.
Fast forward to today. Oh, wait a minute. In the meantime, Chrysler Credit folds and GMAC announces it will take over financing for all Chrysler products as well as GM cars. Now GMAC is the go to guy for the new shareholders of GMAC and Chrysler. Anyway, GMAC is now branded as the worst of the Group of Nineteen and has to come up with capital.
Can it pull it off? Of course not. Who would want anything to do with a company that's hemorrhaging money, probably still has a boat load of toxic mortgage assets and is going to say how high when either the government or the UAW say jump.
On second thought, sure it can pull it off. GMAC is leading a charmed life. There is one investor that desperately needs them to hang around and they have the ultimate deep pockets. The federal government will dig down again, put some more money on the table and GMAC will be recapitalized. How else are you going to sell green cars to people that don't want them if you don't have a finance company to give money away.
So one compromise begets another and another and another. Don't think for a moment that the recapitalization of GMAC will be the last compromise.