DealZone

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

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.

Buffett seen raising bet on housing

BuffettWarren Buffett is in talks to buy GMAC’s mortgage lender Residential Capital, the New York Post reports. Teamed up with Appaloosa Management and Avenue Capital, Buffett has large debt positions in the gut-shot company, according to the Post. In September, Buffett’s Berkshire Hathaway and Leucadia National agreed to buy Capmark Financial Group’s mortgage loan and servicing business for up to $490 million.

If the residential property market hasn’t begun a solid recovery, it certainly established a solid bottom over the past six months. New home sales figures out yesterday were shockingly weak, but keep in mind that November and December are not particularly hot months for residential real estate, and new home sales are a much smaller chunk of the market than the existing portion. Lots of analysts were expecting the housing recovery to face a test as we get closer to the extended deadline in March for the $8,000 homebuyer tax credit.

But it’s a rare investor who gets rich betting against Warren Buffett. And if he’s looking to buy low, he could hardly have done better than ResCap. The lender has been flirting with dangerously low capital levels, with the Post reporting it is bouncing around the minimum required net worth of $250 million. It had a tangible net worth of $409 million at the end of the third quarter. The mortgage company has lost over $10 billion in the last three years. The number of loans delinquent rose to 13.40 percent at the end of June from 11.50 percent at the end of 2008.