GMAC Bankruptcy Would Have Cost Treasury $50 Billion


GMAC Bankruptcy Would Have Cost Treasury $50 Billion

February 25, 2010, 2:33 PM EST

By Dakin Campbell

Feb. 25 (Bloomberg) — Bankruptcy for GMAC Inc., the auto and home lender majority owned by the U.S. government, would have cost the government as much as $50 billion, the Treasury Department’s lead auto industry adviser said.

Sending GMAC into bankruptcy would have required the government to inject $40 billion to $50 billion into a newly formed company that would then lend to General Motors Co. and Chrysler Group LLC dealers, said Ron Bloom, chief adviser for the Treasury’s auto task force. Bloom spoke today at a hearing of the Congressional Oversight Panel in Washington.

The panel, headed by Elizabeth Warren, is seeking information on the timing and rationale behind the government’s bailout of Detroit-based GMAC. The firm, which is the primary lender to General Motors and Chrysler dealers, has benefitted from $17.3 billion in bailout funds and is now 56.3 percent owned by U.S. taxpayers.

“Weighing all the risks, we believe this was the most prudent course of action,” Bloom said. Denying GMAC a bailout would have added “execution risk” of reviving GM or Chrysler from their own bankruptcies, he said.

The panel oversees the government’s administration of U.S. bailout funds and recommends regulatory changes. It’s planning a March report on GMAC’s rescue and the company’s efforts to return to profitability, spokesman Peter Jackson said last week.

Enough Capital

At the end of December, GMAC received $3.8 billion in a third installment of government money. GMAC got $12.5 billion in two previous bailouts and almost $1 billion that was funneled through GM, which used it to invest in GMAC.

GMAC Chief Executive Officer Michael Carpenter told the panel the lender is “unlikely to require additional capital.” Chief Financial Officer Robert Hull also testified today, saying the $20 billion in equity the company has on its balance sheet shows it’s solvent.

GMAC posted a $10.3 billion loss last year, driven in part by defaults on home mortgages. Analysts testified today that the best solution for GMAC and General Motors would be to place the lender into bankruptcy and sell the auto-financing business back to GM, which may suffer without its own in-house lender.

“If you do not have a captive finance facility, GM will be at a discount to others who have one, like Ford,” Michael Ward of Soleil-Ward Transportation Research told the panel.

Ford Motor Co., the second-largest U.S. automaker, makes loans to dealers and consumers through Ford Motor Credit Co.

Exit Plan

The best chance for the government to get repaid will come when closely held GMAC proves it can finance itself in the debt markets and then sells shares to the public, according to Jim Millstein, the Treasury Department’s chief restructuring officer. At that time, the government will convert its preferred shares in the company into common, he said.

“The first path toward an exit requires refinancing of the balance sheet and creating a longer runway of liquidity,” Millstein said. “We’re looking at sometime a year out” for an initial public offering, Millstein said.

A GMAC IPO won’t happen until the company decides what to do with its mortgage operations and Residential Capital LLC unit, according to Chris Whalen, managing director of Torrance, California-based Institutional Risk Analytics. GMAC has said it’s considering “strategic alternatives” — Wall Street parlance for a unit’s sale or shutdown — at the unit.

GMAC showed it could access the debt markets without a government guarantee earlier this month. The company sold $2 billion in five-year notes without U.S. backing for the first time since May 2007, according to data compiled by Bloomberg.

GMAC had $27.9 billion of long-term debt coming due this year, and another $36.7 billion combined due in 2011 and 2012, according to the company’s third-quarter filing.


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