Felix Salmon

Uncle Sam spends $3.5 billion buying a subprime lender

By Felix Salmon
July 22, 2010

Quite aside from the costs of rescuing GM itself, the U.S. government spent a whopping $17.2 billion bailing out GM’s subprime lender, GMAC. It’s never going to get repaid in full: at the moment estimates of total losses on that deal are running at about the $6 billion mark.

So the government knows full well how dangerous and costly it can be for GM to own a subprime lender. What’s more, the government currently controls GM, holding an equity stake of about 61% of the company.

So what on earth is GM doing spending $3.5 billion on buying a subprime lender? It’s not enough to simply bail them out, it seems: the government is now using taxpayer money to buy out AmeriCredit’s shareholders at a 24% premium to Wednesday’s closing price.

I do appreciate that GM needs to be able to sell cars to people with bad credit. But there’s no indication that GM is a good owner of subprime lenders — quite the opposite. AmeriCredit is already working with thousands of GM dealers, and the two could easily start rolling out GM-branded products across GM’s dealer network even without an acquisition.

I’m suspicious at the speed with which GM is moving back into the world of financial services: I’m not sure it bodes well for the company, which really should be sticking to building cars, keeping its credit operations outsourced.

If GM wants to build a strategic relationship with AmeriCredit, that’s fine, and anybody who’s bullish on GM would be more than welcome to buy AmeriCredit shares at the same time. But I see no great upside — and lots of danger — in bundling the two. And in any case the last person who should spend $3.5 billion on a subprime lender is anybody at the Treasury.

6 comments so far | RSS Comments RSS

The other shocking thing is that the WSJ says that Treasury knew about the deal, but had no input on whether or not to make the acquisition. Um, why not?

Posted by Curmudgeon | Report as abusive

and they try to make it sound like this will create more value for the IPO. hey – we don’t want more value, we just want our money back. I was told that Whittacre said on the call that they had $75B in cash. ok – GIVE IT BACK TO THE GOVERNMENT!

Posted by KidDynamite | Report as abusive

All I can say is … WTH?

Posted by hsvkitty | Report as abusive

hsvkitty – is that a clean version of WTF? rejoice – hsvkitty and I agree!

Posted by KidDynamite | Report as abusive

The Treasury is in a box: if they blocked the deal, then they would be accused of “state control.” As for the actual acquisition, let’s not kid ourselves, Ed Whitacre knows only one thing: get big then get out (he is the genius who rebuilt ATT). So, ACF is really the only thing GM can do that will get them bigger, other than actually building a good product and selling them at decent prices. Ed don’t know much about that though.

Posted by steamboatbill | Report as abusive

GMAC got bailed out because of its mortgage business.

Posted by topofeatureAM | Report as abusive

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