GMAC's ResCap in Trouble
Back in the days banks refused to loan money if the reason for it is to purchase a car. During those times it’s not considered practical for someone to loan for mere luxury. Such attitude of the banks has frustrated automakers like General Motors which naturally wanted for people to purchase their vehicles. Since financing was the main problem during those times GM has decided to solve the problem by becoming its own bank.
It was in the year 1919 when GM—world’s largest automaker and producer of quality GM grille insert --- created the General Motors Acceptance Corp., which has become the financial arm of the automaker. The GMAC was created to offer specialized credit to would-be car buyers of GM by means of installment plans.
GMAC has become a huge success and over the years has expanded its operations until it became the significant bottom-line contributor to GM’s profit. Then in the year 1985, GM’s executives decided to further expand the scope of GMAC and this time it will not only be loaning money to purchase cars but loan money to buy homes as well. To pushed through with this plan General Motors has purchased two large mortgage lenders and became the second largest mortgage bank in the US.
In the course of its operation GMAC has also became an expert player in the aspect of structured finance or derivatives. It has taken the income streams generated by all those car and mortgage payments and turned them into bonds through the “securitization” process wherein these bonds are sold off to investors. The GMAC can be considered as a perfect picture to portray an American corporation.
However lately, the GMAC has been painting not so good financial images. And last Thursday GM has succeeded in shaking up Wall Street when it announced that it was delaying the filing of its 2006 Annual Report by a couple of weeks. According to analysts, the reason for the delay was the significant exposure of GMAC to the ever popular subprime lending catastrophe. Just like the other players in the mortgage business, GMAC’s home lending subsidiary, ResCap has been caught in a rather awful situation when it allowed risky loans to homeowners with bad credits.
In a report by the Houston Chronicle, it pictured ResCap as the crown jewel in GMAC’s businesses holding $57 billion of subprime mortgages for investment or approximately 77% of its total loans held for investment. So where did ResCap failed?
The exposure that ResCap had in residual interest in mortgage securities was one of the cited caused of its problem since the loan defaults have turned out to be higher than expected and last Sept. 30 ResCap has recorded loss amounting to $1.4 billion. What will be the effect of such loss to General Motors?
General Motors although the world’s largest automaker is quite a big institution and its financial arm GMAC is in the same respect a huge financial player. But due to the not so clear nature of derivatives trading business, not even the mighty GM can exactly say up to what extent the ResCap problem can affect it. But various analysts said that it’s not going to be good for the automaker.
About Author
Noah Scott is a 30 year old native of New Jersey, writer, and car fan - having grown up with both parents being auto enthusiasts. He works for an automotive consultancy firm and regularly contributes articles to car magazines.
Source: ArticleTrader.com