Late yesterday I finally finished going through the TARP Congressional Oversight Committee's new report (.pdf) on GMAC. It's totally fascinating. Reading the report was like witnessing one of those horrible car accidents where you don't want to look, but you can't look away. It's pretty clear that the Congressional Oversight Committee deeply disapproves of how the GMAC bailout was handled. I do too, so I was eager to read what they had to say. The report is informative, thorough, sensible and revealing.
But it's also long. I can't possibly sum up its entire 170 pages here, but I'll do my best to provide some highlights. If you want the whole story, you can find all the gory details here (.pdf).
A Taxpayer's Nightmare
Who should be concerned with the GMAC bailout? The U.S. taxpayer. This diagram explains why. You're the little building with columns on the left:
(TruPS are "Trust Preferred Securities"; MCP is Mandatory Convertible Preferred Stock)
$17 billion might not seem like much (ya know, in context), but it amounts to a 56% ownership stake in the lender. According to the Office of Management and Budget, the taxpayer loss will be at least $6.3 billion. And that doesn't take into account the $7.4 billion of FDIC guaranteed debt GMAC issued. Or the $7.8 billion credit line ($5 billion utilized) from the Fed's Term Auction Facility. Or the $3.1 billion obtained through the Fed's Term Asset-Backed Securities Loan Facility.
Its financial performance makes pretty clear why a big loss is likely:
As you can see, GMAC is doing horribly in pretty much every aspect of its business. Its Global Automotive Finance (GAF) is near breaking even, but its mortgage portfolio is just awful.
Why Was It Rescued?
So if GMAC was so far gone, then why was it rescued? Not because it was systemically important to the U.S. economy -- according to the Treasury. The report says:
Treasury has never argued that GMAC itself was systemically important, although in 2008 some Treasury staff members believed that GMAC's failure at that time - independent of its effects on the domestic automotive industry - could have thrown an already precarious financial system into further disarray during the depths of the financial crisis.
GMAC, however, was no Bank of America or Citigroup. It wasn't that interconnected like a Goldman Sachs either. It wasn't too big to fail: it was too important to GM to fail.
Why was the lender so vital to the automaker? Not so much because of its auto loans -- GM's customers probably could have got those elsewhere. It had more to do with a different type of loan GMAC and other captive auto lenders provide: dealer floorplan loans. The report explains:
Floorplan financing is a vital cog in the U.S. automotive market, as it allows dealers to offer cars to consumers. Floorplan financing is crucial for dealers because of the significant cost associated with financing their entire inventories via wholesale automobile purchases from the manufacturers. The average floorplan loan is $4.9 million, and collectively U.S. automobile dealers hold about $100 billion worth of inventory. Floorplan loans provide dealers with a revolving line of credit that allows dealers to maintain their inventories for sale to customers. This also helps manufacturers manage their inventory, facilitating the transfer of automobiles from the plant to the dealer. For the lender, the generally low profit margins in floorplan financing are balanced by an attractive credit profile and gateway business opportunities to other, potentially more lucrative product lines (e.g., consumer auto and dealer real estate lending).
Without floorplan loans, dealerships would fail. Without dealerships, GM couldn't sell cars. Without selling cars, GM would fail. And as we know all too well, GM's failure was not an option the federal government was willing to consider. So, really, the big picture shows that GMAC's rescue was just a backdoor bailout of GM. In order to keep GM going, GMAC had to be saved. (I should note that GMAC also provided lending to Chrysler, so the other troubled U.S. automaker was part of that equation too.)
Could Bankruptcy Have Accomplished The Same Task?
So GM needed floorplan loans, but did GMAC necessarily have to be the provider of those loans? The oversight panel isn't so sure. In the executive summary, they write:
Moreover, the Panel remains unconvinced that bankruptcy was not a viable option in 2008. In connection with the Chrysler and GM bankruptcies, Treasury might have been able to orchestrate a strategic bankruptcy for GMAC. This bankruptcy could have preserved GMAC's automotive lending functions while winding down its other, less significant operations, dealing with the ongoing liabilities of the mortgage lending operations, and putting the company on sounder economic footing. The Panel is also concerned that Treasury has not given due consideration to the possibility of merging GMAC back into GM, a step which would restore GM's financing operations to the model generally shared by other automotive manufacturers, thus strengthening GM and eliminating other money-losing operations.
Indeed, other options could have been seriously considered. The Treasury also could have empowered other lenders to provide floorplan financing to GM through guarantees. That wouldn't have been as costly as you think. As the report rightly notes, "Floorplan financing is a low-risk business, particularly in comparison to consumer automotive." I find it a little difficult to believe that other lenders wouldn't have eagerly stepped in to provide already low-risk loans to GM if government guarantees were also in place. That would have been better for moral hazard and would not have forced taxpayers to cover GMAC's enormous mortgage losses.
Another big concern of the oversight panel is that all this money was provided to GMAC without the firm first providing a clear strategy for recovery:
Treasury's previous and current support is not underpinned by a mature business plan. Although GMAC and Treasury are working to produce a business plan, Treasury has already been supporting GMAC for over a year despite the plan's absence. Given industry skepticism about GMAC's path to profitability and the newness of the non-captive financing company model, it is critical that Treasury be given an opportunity to review concrete plans from GMAC as soon as possible.
The report mentions such plans had generally been required when the Treasury involves itself in other seemingly unconditional rescues, like those of GM and Chrysler. Why not GMAC? Indeed, a year later, its losses are still incredibly deep.