DealZone

GMAC plays its too-big-to-fail card… again

December 31, 2009

The Treasury, as major shareholder of such credit boom casualties as Citigroup and General Motors, showed with its $3.8 billion infusion into GMAC that it can still be counted on to safeguard the financial system from systemic collapse. The auto-loan company, which had dutifully spread its wings into mortgages in the housing boom, wound up becoming a bank to qualify for TARP bailout funds a year ago – the day after Christmas 2008, to be precise. How could Treasury say no?

Now taxpayers are plonking another $3.8 billion into GMAC to help cover mortgage losses. That gives us another majority shareholding in a company that could not have survived to pay its bills, workers and its executives without aid. No, it’s not much in terms of the government’s balance sheet. But it should rankle in Congress when lawmakers come back from holiday.

Not far behind the brouhaha over universal health care lays the still smoldering debate over “too big to fail”. Is it naïve to note that the timing of GMAC’s new lifeline came when legislators were safely tucked away at home? Arguing that AIG was too big to fail, with its myriad confusing and distracting derivative contracts, and that GM was too big to fail, with its strategic position just behind the aorta of the American manufacturing heartland, or even that Citigroup, with its corner office (sans fireplace) in the U.S. superbanking community can somehow be extended to GMAC might seem farfetched to fiscal hawks.

A report in the New York Post last week certainly would have helped GMAC’s cause. The paper said that Warren Buffett was looking at taking on at least part of ResCap, GMAC’s real estate lending operation. That would probably have gone some way to convincing Treasury folk that GMAC was moving in the right direction. Many analysts see GMAC’s mortgage assets, which make up about a third of the company’s $178.2 billion balance sheet, as the main obstacle to the lender reaching profitability. GMAC said after the capital infusion it does not expect to record more major losses from its mortgage lending unit, which should help stabilize results. Well, if majority government ownership doesn’t stabilize the situation, too big to fail would not be an issue.

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