GMAC has been nationalized

By Edward Harrison of Credit Writedowns

Yves is going to be in a light posting mode, so I will be posting some links and a few posts for your reading pleasure. The first one is an update to some thoughts that Yves had on GMAC on the 27th.

By the way, where is Jesse? I want to see him posting here too. (hint, hint)

And you thought the bailouts were over and market discipline might be restored.  Not a chance – the bailouts will continue, come hell or high water. The latest demonstration of this is GMAC, where the government will now be majority owner. GMAC has officially been nationalized. Now the government is running auto financing in addition to running the companies making the cars.

Below is a quote from the Financial Times. Notice the parts I have bolded.

GMAC, the car financing company, is set to receive up to $5.6bn in a new capital injection from the Treasury, filling a hole identified in the “stress tests” earlier this year and paving the way for the government to become the majority shareholder.

The company, formerly the financing arm of General Motors, was one of 19 institutions to submit to a capital adequacy programme led by the Federal Reserve and completed in May. That determined that GMAC had a shortfall, which will now be provided by the government in the form of preferred equity, according to two people familiar with the situation.

As widely expected, GMAC has been unable to raise the necessary capital in the market and the company – which will take on fresh lending responsibilities when it merges with Chrysler Financial – was seen as vital to the government-led restructuring of the US automotive industry and deserving of more funds from the $700bn troubled asset relief programme.

“When we laid out the stress tests, we expressly said that some additional Tarp capital may be needed given the severity of the downturn – this capital need is not new information,” said an administration official.

“But the transparency brought about by the stress tests allowed all other institutions to raise the capital required by the stress tests to ensure these firms could withstand a more severe economic scenario than anticipated,” the official said.

What you should be reading from this statement is the following:

  • All the firms identified as lacking capital under the stress tests were given time to raise funds in the capital market to meet the shortfall.
  • Some firms did meet the shortfall and they are now free to do as they please.
  • Others have not and we the government are now going to take a more muscular approach in dealing with them.
  • GMAC is the first public example of our flexing our muscles.
  • But there surely are/will be other examples; some may already be happening in secret.

If the US government is going to throw its weight around to deal with financial firms short of capital, I would personally prefer they try a process which allows these firms to fail whereby equity and debt holders suffer consequences that are consistent with taking market risk.  Bailing out GMAC is a moral hazard plain and simple.

But, what’s done is done. The GMAC case does, however, give a lot more credence to my view that Citigroup’s actions are being dictated by government. As I indicated when the stress tests were done in April, firms were going to get some time to raise capital and if they didn’t, the government was going to move on to Plan B (debt-for-equity swaps, nationalization, and FDIC seizure). Expect to see more indications that other financial companies with capital shortfalls are falling under the government umbrella.

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward


  1. marcel

    “GMAC, the car financing company” – GMAC has held, or at least serviced, my mortgage for the last 7-9 years. I’m in the midst of refinancing it. I hope that this doesn’t mess things up.

  2. mannfm11

    If I had to guess, I would venture that GMAC is a lot broker than they admitted and no one in their right mind would have put money into it. The problem is they are too big to fail. I don’t know about 2008, but in the 1980 era, GMAC was the commercial paper business. Also, the network of lending for the auto industry nationwide couldn’t be shut down without massive implications. This is one of many, just pretends the government attempted to pull off as they had with the large banks in the 1980’s. This isn’t the 1980’s, where we still had all the home equity to drain, the stock market bubble to create and the consumer credit bubble to cover up the mess. This is the end game and deflation will be almost impossible to stop, contrary to popular opinion.

  3. Fair Economist

    What do you mean, “nationalization”? The government will pay the amount needed to nationalize GMAC on the open market, and then some, but Geithner is refusing to take a controlling interest in the company. That’s not nationalization – it’s not even pretending to be. The government is not even using its existing ownership stake to influence the board. GMAC is getting the money with no strings or responsibilities.

    This is straight-up crony capitalism.

    1. Edward Harrison Post author

      Yes, your characterization is a lot better than mine. If you are going to nationalize, you need to take operating control as was done with Fannie and Freddie. Like at AIG, the government is pretending that GMAC is a private company. I can only assume they are doing this to protect the equity or preferreds from being wiped out.

  4. On my way to prosperity

    My my my. Next time you see a young banker type (who cannot afford a German luxury car quite yet) in a GM car, you are seeing a person:

    1) whose salary and bonuses are paid by you;

    2) whose car loan is financed by you; and

    3) a car built with your financing.

    Madness, is it not? You the taxpayer on both sides in all the transactions having led to the setup described above…

  5. Mike Dillon

    Well, at least GMAC will have enough money to pay the $17 million fine that UK regulators hit them with for “Fairbanksing” (SPSing?) British citizens.

    When the hell is anyone in state or federal government going to stop lining their own pockets and start protecting the citizens? Enough people lose their homes to actual, honest to dog, fraudulent foreclosures and there simply will not be enough tax money coming in to keep these entities afloat.

    Nightline ran a story last night about Genesee County Treasurer and county Land Bank Chairman Dan Kildee razing 6,000 homes in Flint, MI. What’s that going to do to the tax base there? Heck, what has it ALREADY done to the tax base because, last I heard, whether legitimate or not, banks weren’t taking possession of foreclosed properties as quickly so as to keep them off of their own books. How many of those homes were the result of a fraudulent foreclosure?

    As long as the American people can keep bailing out these entities so they can steal more homes we’ll be OK. Bernie Madoff and Charlie Ponzi ain’t got nuthin’ on the american state/federal government…

  6. john c. halasz

    Well, your take on Citi and the stress tests matches my own. The government rigged phony stress tests in order to inflate bank share prices and allow them to raise capital in the private markets, (though why anyone would want to invest equity in banks that would only be diluted later by further realized losses beats me), all because an ideological attachment to “free markets” and a fear of the complications of public receiverships. But in goosing the market, the government was complicit in deliberate fraud, while gratuitously bailing out the bond-holders, if not entirely the shareholders, at taxpayer expense.

  7. Mark

    I would like an answer to this question please.

    If the Government is now involved in subsidizing car loans. Will those loans be made to people buying only cars made by GM and Chrystler?

    Catch my drift?

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