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By Don Miller
Auto and mortgage lender GMAC LLC (NYSE: GKM) reported a first-quarter loss of $675 million and now faces further pressure from bank "stress tests" and freefalling sales volumes that may push its former parent General Motors Corp. (NYSE: GM) into bankruptcy.
GMAC is one of the 19 lenders waiting for results of the government's "stress test," designed to determine which firms need additional capital to weather a deep recession. Results are due Thursday, and some analysts believe GMAC will be one of the banks ordered to find more capital within six months.
Despite receiving a $6 billion government bailout in December, GMAC reported net losses increased to $675 million from $589 million a year earlier, as the Detroit-based company set aside 78% more for loan losses than a year earlier.
"The effects of a soft economy and weaker credit performance on legacy assets continued to put pressure on GMAC's financial performance," Chief Executive Officer Alvaro de Molina said in a statement.
GMAC's auto finance business notched a profit of $225 million, while the mortgage division, which includes Residential Capital LLC (ResCap), lost $125 million. An earlier gain of $900 million was wiped off the books after the company eliminated mortgage debt and revalued some assets.
The first-quarter loss makes six losses out of the last seven quarters for GMAC. The company had reported five straight losses before breaking the string in the fourth quarter of 2008 on gains from a debt swap.
When GMAC became a bank holding company in December in order to tap federal bailout funds, Cerberus Capital Management LP was forced to relinquish most of its 51% controlling interest. GM, which owned 49% of the lender before the bailout, is also giving up its stake and putting it in a trust.
GMAC agreed to provide financing for Chrysler customers and dealers after the automaker filed for bankruptcy protection last week. GMAC is the main provider of financing to buyers of GM vehicles. Cerberus led a buyout of Chrysler in 2007.
In a press briefing on the day of the Chrysler bankruptcy filing, a White House official said GMAC would receive the "financial support necessary" to expand after agreeing to handle Chrysler's new loans.
Nevertheless, GMAC "faces challenges if GM files for bankruptcy," Gimme Credit LLC analyst Kathleen Shanley wrote in a May 1 report to investors, according to Bloomberg News. And while the Chrysler deal presents few risks for GMAC, she recommends selling the company's bonds.
The company's bonds rallied this year after the government said GMAC's auto financing arm is critical to the survival of GM and Chrysler. GMAC said today (Tuesday) in a presentation on its Web site that a GM bankruptcy wouldn't trigger its own filing.
But Pete Hastings, a fixed-income analyst at Morgan Keegan & Co. in Memphis, Tenn., told Bloomberg that a potential GM filing is a concern because it would have a "depressing effect on revenues."
"The end markets are still troubled and the economy is still tough," Hastings said.
GMAC said in April it would resume making car and truck loans to subprime borrowers to boost sales at GM, and that ResCap was hiring 1,000 people to handle a surge in refinancings and jumbo loans.
But GMAC has also said substantial doubt remains about ResCap's ability to continue operating, citing deteriorating credit and mortgage markets, liquidity and capital.
News and Related Story Links:
- Money Morning News Analysis:
Market Moves Will Remain on Hold Until Bank Stress Test Results Are Released Thursday