The U.S. government, and that means ultimately tax payers, have a lot of skin at risk in the auto industry. Two major car companies went bankrupt and are owned by the government. And a major auto-mortgage finance company, GMAC, that was at one time wholly-owned by GM can now call the U.S. one of its biggest shareholders.This investment may well turn out to be one of the most difficult for the government.
We’ve heard a lot about the investment banks and commercial banks that borrowed from the government last fall to gut it out during the credit crisis – and how some of those have paid back what they borrowed and with it, billions in interest payments. A net plus for the taxpayer. GMAC has a long way to go and could becosting taxpayers money for some time.
GMAC reported financial results today – a loss of $3.9 billion for the quarter. Sure, a lot of the loss came from one-time events, like the cost of transitioning to a company from a partnership and other writedowns. But it does have real problems that need to be dealt with.
The above chart, from GMAC’s presentation to investors earlier today, shows this huge sink hole called its mortgage operations. GMAC was a big player in the subprime mortgage business and got stuck holding a bunch of these bad mortgages. This isn’t a problem that is going away anytime soon.
It has problems in its automotive finance business as well. The good news here is that for the second quarter, GMAC had pre-tax income of $346 million. About $135 million of that income came from higher used-car prices – this increased the proceeds to GM when it sells cars that come off of leases. Used cars have become an attractive alternative to cost-conscious consumers. Of course, if we see more dumping of cars into this market by drivers who lost their jobs or don’t need as many cars in the driveway, these used car prices go lower again. Also, a concern has to be the spike in delinquencies. The chart below shows that rate globally is growing again.
What all of this means is that the U.S. government’s investment in GMAC is worth less than when it was made. GMAC reported today its book value (equity) is worth about $26 billion. With the U.S. stake at 35.4%, that roughly means it is worth $9.2 billion. The government has injected $12.5 billion into GMAC since December and, in an interview with Newswires Aparajita Saha-Bubna, CFO Robert Hull indicated the company may come back to the government with hat-in-hand if it can’t find other financing sources.
And it needs more money. In order to meet the government’s own stress test on GMAC earlier in the year, it was determined GMAC needed $5.6 billion more capital by Nov. 9. Which presents a catch 22 – with such heavy government investment already, some believe outside investors will shy away from the company. And to protect its investment, the government may have no choice, especially given its other auto industry investments and the vital role GMAC now plays in providing financing for GM and Chrysler.
People thought Citigroup or Bank of America were messy U.S. investments? Watch this one closely.