The stress test’s biggest loser: GMAC

By Felix Salmon
May 7, 2009

The stress test report is out, and the gory detail is all there on page 9 (which is page 10 of the PDF). The final row is the one everybody’s concentrating: the “SCAP Buffer”, or the amount of money these banks will need to raise in order to come into compliance with the stress test. By far the biggest number on that row is the $33.9 billion for BofA, but that’s just 2% of BofA’s risk-weighted assets. Check out, by contrast, the $11.5 billion that GMAC is being asked to raise: that’s a whopping 6.6% of risk-weighted assets.

It’s worth remembering the benchmarks outlined in the stress tests:

The SCAP capital buffer for each [bank] is sized to achieve a Tier 1 risk-based ratio of at least 6% and a Tier 1 Common risk-based ratio of at least 4% at the end of 2010, under a more adverse macroeconomic scenario than is currently anticipated.

It seems that in order to have a 4% capital ratio at the end of 2010 in the adverse scenario, the government reckons that GMAC needs to raise capital equivalent to 6.6% of its assets today. Yikes. The reason is expected losses of $9.2 billion in 2009 and 2010 under the adverse scenario, of which a whopping $4 billion falls under the unhelpful category of “Other”, which is elucidated as “other consumer and nonā€consumer loans and miscellaneous commitments and obligations”.

Oh, and if GMAC wants to take on the obligations of Chrysler Financial, as intended? Then it’ll need even more capital. But this is where GMAC really stands out from the crowd, and not in a good way at all:

resources.tiff

Most banks have a healthy amount of capital available to absorb losses — something in the 5% range. GMAC’s resources for absorbing losses appear, by contrast, to be negative. The reason is that it has very little in the way of loan loss reserves, and it also has very little in the way of expected future profitability.

A bank like JP Morgan is expected to make a lot of money in 2009 and 2010 — enough to offset total losses of a whopping $97.4 billion under the adverse scenario. GMAC, by contrast, looks like it just doesn’t have any profit centers to offset the losses it’s liable to suffer.

So never mind the numbers in GMAC’s first-quarter earnings presentation — $13.3 billion in cash, common equity of $15.7 billion, a tangible common equity to tangible assets ratio of 8%, and so on. It needs a lot of extra money, and it’s far from obvious where that money might come from, although I’m sure some kind of debt-for-equity swap is going to have to be arranged. Given the levels at which GMAC’s debt is trading these days, the bondholders might even make money, on a mark-to-market basis. But they’re going to end up owning an auto finance company. Good luck with that.

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Comments
10 comments so far

The stress tests were a brilliant idea. At first they seemed the idea was to fool the public, but that was not the point. It was a stall tactic… a cooling off period. Timmy shoots & scores!!

Posted by Mike | Report as abusive

With all these results how can they still assume that the economy is turning around?
just trying to change peoples view doesnt change the facts!!!!!

Posted by rock | Report as abusive

On a personal note…As long as GMAC has enough cash to pay out my bond maturing May 21, I will be happy!!!!

Posted by Raj | Report as abusive

More than half the worst case losses reside in ResCap, a walled off sub of GMAC. Converting the Govt’s pfd’s and cutting ResCap loose is all they need to do to comply with the capital requirements.

Posted by amg | Report as abusive

Simulation of a highly complex system is very difficult. The simplest solution would be start making building like roads and ask people to leave without paying, the idea of employmentism for survival has problem of creating unnecessary employments for increasing population. The simple solution does sound stupid at first but that would be the end of simulation if it is run for many years for entire earth…

Posted by Jalesh Dikshit | Report as abusive

A Simulation has nothing to do with a stress test, which is a scenario.
Problem is this whole exercise is based on Macro economic conditions deteriorating whereas the main unknown lies in the forward no-default probabilities (aka marginal conditional defaults) for the assumed points in time.
Problem is credit curves are either implied through prices or (most often) history, which in this specific instance has additionally been extrapolated….

Posted by J della punta | Report as abusive

Good post. GMAC is the 2nd largest credit provider embedded within an industrial company, the largest being GE Capital. I’m curious to see the stress test results extrapolated to impute a comparable grade on General Electric’s finance division. GE has been resolute — they claim they don’t need capital (they spent extensive time with analysts, equity and bond investors making the point). With Wells Fargo and other steadfast “capital raising deniers” relenting, I hope GE takes advantage of the current market window themselves. Cheers!

Posted by Wallace Renfro | Report as abusive

GMAC as a viable entity was doomed sometime ago. Its main sources of business that being GM and now Chrysler are without much conjecture – collapsing. Does Fiat need GMAC ? Will the brands GM and Chrysler survive their respective Bankruptcies, it doesnt matter. Simply stated no one is buying cars. So GMAC is no longer viable as a business model – its just not relavant as a company. The days of GMAC financing Dodges and Pontiacs no longer exist ! GMAC is a lame duck company whos fate is sealed. GMAC is dead and insolvant.

Posted by steve katen | Report as abusive

While your article was helpful, frankly I am getting tired of news about X number of banks this and X number of banks that (stress test etc.). Why not simply give everyone a list of these banks, even if you don’t have much data on them?

Will someine please tell me if the GMAC bonds thht matured in May, 2009 were paid off at full face value, or not! If not, how were they paid? I sold mine at a loss and am wondering now if I should have hung on. Thanks!

Posted by Randy Gentry | Report as abusive
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