Claiming that GMAC is too big to let fail, the Obama administration is considering a third bailout of the struggling, onetime financial giant.
According to federal officials, the former financial arm of automaker GM continues to teeter on the brink of failing despite two previous infusions of taxpayer money.
Although most industry experts agree that the collapse of GMAC would not initially affect the overall economy to the same degree that the failure of a monolithic bank like Citibank or Chase for instance, it would no doubt be a devastating blow to the automotive industry at a critical time.
Under the terms of GM and Chrysler’s recent bankruptcy restructuring and federal bailouts, GMAC is now the principal financing entity for buyers of both GM and Chrysler automobiles. On November 9, federal regulators will evaluate the overall financial health of the organization and there is speculation that another bailout may be in the works. On Wednesday, GMAC borrowed $2.9 in FDIC guaranteed funds in the bond market.
Most analysts feel that those funds will not be enough to cover the enormous losses suffered by GMAC’s ill-fated foray into the subprime mortgage business. In the second quarter, GMAC’s home mortgage division reported losses of $1.8 billon. It was the seventh consecutive quarter of losses of $1 billion or more.
The company is said to be seeking a total of $5.6 billion in taxpayer funded infusions. This would be in addition to the $12.5 billion the company received in two recent installments.
If the third injection of funds is approved, as many suspect it will be, the American taxpayer could become the majority shareholder in GMAC. The federal government currently owns a 35% share in the company.
GMAC now enjoys the dubious distinction of being the only financial company to attempt a “triple-dip” into the bailout well. Citigroup and Bank of America have each received two rounds of federal bailout funds apiece and each received substantially larger infusions of cash than GMAC.
To date, the federal government has injected over $60 billion in its efforts to rescue GM and Chrysler. Conventional wisdom holds that allowing GMAC to fail at this point would undermine those investments and threaten the recovery of the broader automotive industry.
Brookings Institution fellow, Douglas Elliott, who is a former investment banker says, “We are in too deep for us to sensibly back out now. We will probably lose less money by putting in more now.”
Officials with the Obama administration say that GMAC may actually need less than the $5.6 billion it seeks in order to regain its footing and become profitable based on their assessments that the overall economy has begun to show signs of recovery.
In order to qualify for federal bailout money, GMAC was allowed to convert from a financing concern into a bank at the height of the financial crisis. According to federal bank examiners, GMAC was found to be in better shape than expected when it submitted to last spring’s “stress test” along with 18 other large institutions that had also received federal assistance.
According to industry experts, GMAC is at the very heart of the Obama’s industrial policy. In addition to consumer auto loans, the company provides financing for new car dealers which allows them to purchase inventory from GM and Chrysler. With credit tight and new car sales at their lowest level since 1980, many other lenders have been reluctant to underwrite consumer auto loans. The failure of GMAC would severely exacerbate that situation.
IHS Global Insight chief American financial economist Brian Bethune says, “It’s a very tightly woven system that really greases the wheels of dealers and manufacturers to get cars off of the lot. Without GMAC, General Motors would probably not be able to survive.”