US Should Save Just Part of GMAC

The US Treasury and GMAC, the former lending arm of General Motors, sat down today to talk about a third helping of money for the troubled bank holding company. The American taxpayer is already holding 35% of GMAC after sinking $12.5 billion into it. GMAC needs to raise another $11.5 billion to comply with Treasury guidelines after it failed a stress test earlier this year. Uncle Sam should help out, but only if it splits GMAC in two, letting a healthy and smaller GMAC continue while a sick mirror-image GMAC loaded with bad assets goes under in a controlled way.

The official statement read blandly enough, "GMAC is working with the Federal Reserve regarding the remaining capital requirements related to the stress test results," spokeswoman Gina Proia said. "We fully intend to comply with the requirement for additional capital related to the stress test." She added, "We are focused on transforming the company, restoring financial health, and maximizing the investment by our shareholders." This is what panicked managements always say, they're concerned about shareholder value. It suggests that they weren't before. Frankly, the new concern looks like re-arranging the Titanic's deck furniture and no more.

With its latest quarter figures out in August, GMAC confessed to having lost $3.9 billion, but less than $800 million of that was on car loans. Most of what it lost came in the way of subprime mortgages that it took on through its Residential Capital division. It has a reasonably healthy insurance operation, and its Ally Bank is doing well enough (and has some of the best ads on TV, for whatever that may be worth).

So, the way forward is clear. All of the garbage assets should be put into Residential (where most of the junk is already), and the rest should be spun off with healthier balance sheets. This has already been done elsewhere. ING and Commerzbank are undergoing that kind of a metamorphosis, and the EU just approved a similar plan for Britain's troubled Northern Rock.

What shouldn't happen is for the Treasury to cough up another $2.8 to $5.8 billion in exchange for preferred stock. There's enough of that on the Treasury's balance sheet from the last two infusions of money. Instead, the taxpayer should receive the senior most debt and enough warrants to justify loaning the money out at a sufficiently low rate to keep GMAC alive until it can be carved up. Let the Dr. Jekyll part of the operation go on, and kill off its Mr. Hyde.



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