GMAC Bailout: A Sign of the Times
Companies / Credit Crisis Bailouts Dec 31, 2008 - 09:39 AMBy: Oxbury_Research
WASHINGTON — The Treasury Department said Monday that it will provide $5 billion to GMAC Financial Services LLC, the ailing financing arm of General Motors Corp., from the $700 billion bank rescue program.(The Huffington Post)
GMAC will also potentially receive up to $1 billion from the Treasury in the form of an equity purchase. Shocking right? Not if you have two eyes and can read beyond a 4th grade level.
Back in the first week of September I shared with you this figure from Ty Andros.
* Lehman Brothers (LEH)--11-13%
* Merrill Lynch (MER)--11-12%
* Morgan Stanley (MS)--9-10%
* Citigroup (C)--9 ½-10 ½%
* Keycorp (KEY)--11-13%
* National City (NCC)--13-15%
* Wachovia (WB)--10-12%
* Zions Bancorp (ZION)--13-15%
* GM/GMAC (GM)--not possible
* Washington Mutual (WM)--not possible
* Ford (F)--not possible
Of these 11 companies, at least 8 have either gone bankrupt, or received bailout money. I hate to be Captain Obvious here, but you can't run a company that has large short term liabilities and is forced to pay double digit interest rates.
I believe many Americans have grown comfortably numb with the fact that there is an ever pending bailout. The recipient may be unknown in the near term, but there is trouble brewing, and Uncle Sam is waiting with his checkbook.
So instead of going on one of my rants, I would like to focus at the irony of this situation, and how GMAC has been truly a story of the times.
Rush to the Bubble
As you know GMAC deals in auto lending, mortgage lending, and insurance. So why does a company that has manufactured cars for nearly 100 years get involved in the credit markets?
The answer if very simple, to make money. Just like every bubble that preceded it, there was a lot of money to be had in the credit bubble before it went bust. As a result of Keynesian economic policies in the form of ultra loose fiscal and monetary actions, the system was flush with liquidity.
The firms that had access to the highest tiers of our fractional banking pyramid scheme were the ones that made the most money. The easiest way to access this money and then turn it around for a profit was to lend money. That's what GM decided to do when it created GMAC.
All bubbles come to an end. As you know, when the pop, the markets move hard. Those left long the bubble get burned. For GMAC, their burn amounted to approximately $10 billion in losses over the last two years.
GMAC is simply a perfect sign of the times. GM, a manufacturing giant, altered it's long lasting business plan by entering the lending markets. GMAC is a direct product of Keynesian economics. Without loose monetary and fiscal policies, GMAC doesn't have a market. I guess when it's all said and done, GMAC will be another drop in the bucket.
By Nicholas Jones
Analyst, Oxbury Research
Nick has spent several years researching and preparing for the ripsaws in today's commodities markets. Through independent research on commodities markets and free-market macroeconomics, he brings a worldy understanding to all who participate in this particular financial climate.
Oxbury Research originally formed as an underground investment club, Oxbury Publishing is comprised of a wide variety of Wall Street professionals - from equity analysts to futures floor traders – all independent thinkers and all capital market veterans.
© 2008 Copyright Nicholas Jones / Oxbury Research - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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