Pull the plug on GMAC

October 28, 2009

It is becoming ever harder to justify the drip feed of government funding to GMAC.

The government has significant sunk costs in the lender after providing $12.5 billion to keep it alive. Just today GMAC sold $2.9 billion of FDIC-backed debt. Handing over up to another $5.6 billion would make little sense.

If the past six months have shown one thing, it is that GMAC’s importance to the auto sector and the economy has been overstated. The company accounted for a vanishingly small 3 percent of auto financing in the first six months of 2009 — half the level of a year ago.

The longer this decline goes on, the tougher it becomes for GMAC to argue that they are pivotal to the survival of the U.S. auto sector. Banks like JPMorgan and Wachovia have been filling the void.

True, the demise of GMAC would certainly be another nail in the coffin of General Motors, for whom it is still the default provider of finance. But there are far more efficient ways for the government to support the automaker.

In subsidizing GMAC Uncle Sam is backing a range of other activities that do nothing to bolster the economy.

The investment strategy of the group’s banking arm looks suspiciously like that of a hedge fund. Low-cost funds from the Federal government have been used to scoop up a range of securities, swelling the bank’s assets by 25 percent over the past quarter, according to Institutional Risk Analytics. It is difficult to see what the taxpayer gets from this.

Indeed GMAC may be undermining more viable banks, according to Christopher Whalen of Institutional Risk Analytics. GMAC’s Ally Bank is offering generous above-market rates of interest on deposits — a desperate strategy that leaches money from solvent institutions. (Were it not for the FDIC guarantee no sane saver would take such a risk.)

Such tactics have not stemmed losses at the finance group. Pouring more government money down this hole would be a mistake. At the very least the government should split up the group, allowing the non-auto finance components to sink or swim alone.

Better still, Washington should cut GMAC adrift completely and consider less wasteful ways of supporting GM sales.

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