The stress test’s biggest loser: GMAC
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 nonāconsumer 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:
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.