General Motors Acceptance Corp
GMAC Inc  GMAC Inc. Subsidiaries - 2009  content


Special Inspector General for the Troubled Asset Relief Program
January 30, 2013

General Motors Acceptance Corp. (“GMAC,” which has been rebranded as Ally
Financial Inc., “Ally”) is the second largest remaining TARP investment, with
$14.6 billion in TARP funds owed, for which taxpayers own 74% of the company.
As part of the auto bailouts of General Motors Corp. (“GM”) and Chrysler LLC
(“Chrysler”), the Federal Government made a coordinated rescue of GMAC,
once the auto financing subsidiary of GM. According to Treasury, Government
assistance began flowing to GMAC at the end of 2008 to keep financing available
to creditworthy GM dealers so they could continue to order cars, a function
deemed necessary to sustain the auto industry. Treasury made three sequential
TARP investments in GMAC through TARP’s Auto Industry Financing Program
(“AIFP”), continuing to justify its necessity because of GMAC’s ties to GM and
the auto industry. However, Treasury’s rescue of GMAC was markedly different
from the other auto bailouts because GMAC was the only company in the auto
bailout whose business extended beyond the auto industry. GMAC was one of the
nation’s largest subprime mortgage lenders. Taxpayers were not just bailing out an
auto finance company, they were bailing out one of the nation’s largest lenders of
subprime mortgages.
GMAC’s TARP assistance was also markedly different because Treasury
never required GMAC to submit a viability plan outlining how it would resolve
substantial liabilities that led to historic losses. Treasury required GM and Chrysler
to submit viability plans and quickly planned for Chrysler Financial Services
Americas LLC’s liquidation. Treasury’s lack of a plan that would address the
subprime mortgage component going into the GMAC investment may be the
primary reason why still today, four years later, GMAC, now rebranded as Ally,
remains in TARP. By continuing to stand behind GMAC and provide repeated
bailouts of a subprime lender, Treasury underlined the moral hazard encompassed
in TARP – GMAC was too big to fail.
Although the Federal Reserve Board (“Federal Reserve”) required some
restructuring of GMAC as a bank holding company, which was agreed to by
Treasury, neither it nor Treasury addressed GMAC’s subprime mortgage liabilities
through its subsidiary Residential Capital LLC (“ResCap”), where most of its losses
occurred. By not working to fully restructure Ally and ResCap, as it did with GM
and Chrysler, Treasury was merely postponing the resolution of the company’s
substantial mortgage liabilities, and finally in 2012, ResCap filed bankruptcy.

Taxpayers invested in GMAC because of its auto financing business, but
GMAC also has used TARP funds to cover losses in its subprime business. Because
of ResCap’s losses and other issues, GMAC/Ally has failed Federal Reserve stress
tests designed to gauge financial stability, resulting in the Federal Reserve requiring
GMAC to raise additional capital. The company did so largely through three
taxpayer-funded TARP injections totaling $17.2 billion, of which the Office of
Management and Budget estimates taxpayers will lose $5.5 billion.1 Ally has repaid
only $2.5 billion in principal.ii Other subprime mortgage companies failed without receiving TARP funds. The Federal Government has sanctioned Ally for improper mortgage foreclosure practices at ResCap, requiring Ally to pay $316.6 million while being 74% owned by taxpayers. Ally’s CEO Michael Carpenter called ResCap a “millstone” around Ally’s neck, and it seems that ResCap also has become a millstone around taxpayers’ necks.
By failing to have required a fully developed viability plan as a condition of TARP, Treasury missed an opportunity to address GMAC’s mortgage issues, thereby better protecting the taxpayers’ investment and promoting GMAC’s financial stability. Ally’s path to exit TARP now must include a resolution of issues related to the mortgage liabilities, which should have been addressed when Treasury first invested or preceding its subsequent investments. According to Treasury, its exit strategy for its investment in Ally initially encompassed the launching of an initial public offering of stock. That plan has been sidelined. While Treasury has noted that it has several options for possible divestment, including a public or private sale of stock or other sale of Ally assets, Treasury has not decided which of these exit paths to take. Treasury must exercise great care and coordination with the Federal Reserve in developing a more concrete TARP exit plan for Ally that takes into account the need to maintain Ally’s financial stability. It is essential that when the Government finally exits Ally that it do so forever.
Founded as a wholly owned subsidiary of GM in 1919 to provide auto loans to consumers buying GM cars and loans to GM auto dealers buying cars for their lots, GMAC became one of the world’s largest automotive financing companies and was a dependable source of profit for its parent, GM.2 For years, GMAC had a strong credit rating that allowed it to get capital at very low rates. GMAC’s auto dealer financing was profitable with low risk because cars served as collateral for the dealer loans and the GMAC loans typically required GM to repurchase cars that remained unsold after a certain amount of time.3 GMAC’s loans to consumers who bought a GM car also were generally profitable, with the majority of GMAC’s auto loans considered “prime loans,” meaning that GMAC loaned money to customers with high credit scores.4
From 1985 to 2005, GMAC aggressively expanded into loaning home mortgages that were considered subprime.iii Although there is no one definition of subprime loans, they are generally considered to be loans to customers with low credit scores. Subprime loans carry risk of delinquencies and defaults. GMAC’s subprime mortgage business was profitable for years. In 2004, as the housing
ii Ally has also paid $2.9 billion in quarterly dividends to Treasury through December 31, 2012, as required by the terms of its preferred shares. Treasury received $251.9 million in dividends on its Ally trust preferred securities when they were sold in early 2011.
iii In 1985, GMAC acquired Colonial Mortgage Services and the mortgage servicing platform of Norwest Mortgage Inc. ResCap, S-4, 7/15/2005, p.65,

market peaked, mortgage lending and servicing (collecting mortgage loans owned by others) helped boost GMAC’s net income to a record $2.9 billion.5 The following year, GMAC organized all its mortgage operations under a new holding company, Residential Capital, LLC. In addition to ResCap making, purchasing, selling, and servicing residential mortgages, it also securitized residential mortgages, meaning it converted loans into bundled assets for investors to purchase.6 ResCap’s 2005 net income surpassed GMAC’s auto lending net income.7 That same year, GM began losing billions of dollars as it struggled with high costs and weak sales of new cars.8
By 2006, GMAC was the nation’s 10th largest mortgage producer, originating nearly $162 billion in home loans.9 On November 30, 2006, facing more losses in its auto sales business, GM spun off a controlling interest in GMAC (a 51% interest) to an investor group led by the private equity fund Cerberus Capital Management L.P. (“Cerberus”) for $7.4 billion as a way to preserve GMAC’s own credit ratings, which were crucial to support its lending to GM dealers.10 GMAC continued to provide loans to GM auto dealers.iv
But in 2007, losses at ResCap brought GMAC down from its 2006 profits to significant losses. GMAC reported a 2006 profit of $2.1 billion, then in 2007 reported a loss of $2.3 billion.11 In its 2007 annual report, GMAC reported that its losses reflected the adverse effects of the disruption in the mortgage, housing, and capital markets on ResCap, as well as lower gains on GMAC’s insurance business, which more than offset the strong performance of its auto financing business.12 GMAC further stated that ResCap’s losses came from increases in delinquent loans and deterioration in the securitization and residential housing markets. GMAC reduced ResCap’s workforce and restructured the unit in 2007, announcing in its end of the year annual report that GMAC was investigating various strategic alternatives including acquisitions, dispositions, alliances, and joint ventures related to all aspects of the ResCap business.13
In the third quarter of 2008, GMAC lost $2.5 billion, “primarily attributable to a significant loss at” ResCap.14 GMAC restructured ResCap in that quarter, cutting 4,800 jobs, closing all GMAC mortgage retail offices, ceasing making certain loans, and selling GMAC Home Services business.15 GMAC forgave $101.5 million in debt owed by ResCap, and forgave $95.3 million owed on ResCap notes held by GMAC.16 When 2008 ended, ResCap had lost nearly $10 billion over eight quarters, prompting GMAC to warn, “there remains substantial doubt about ResCap’s ability to continue as a going concern without the support of GMAC.”17
GMAC’s historically profitable auto finance business lost $2.1 billion in 2008, its first and only annual loss in the company’s history. The loss was driven by writedowns on car leases, an increase in credit reserves, weaker consumer and dealer credit performance, and lower car sales.18 Due to this credit crisis, GMAC decided to create constraints on its loans — lending only to those with strong credit scores of 700 or higher. But those constraints lasted only two months, and on
iv Cerberus is a private equity fund that manages $20 billion in assets. The firm specializes in buying distressed companies, restructuring their finances, and then selling all or part of them for a profit. In addition to GMAC, Cerberus also controlled Chrysler and its auto finance unit, Chrysler Financial, at the time that they received TARP bailouts. Cerberus Capital Management, L.P., “The Firm,”, undated, accessed 1/22/2013.

December 30, 2008, just days after receiving $5 billion in TARP funds, it cut the minimum credit score for borrowers to 620.19
In a Coordinated Federal Rescue, Treasury Bails Out GMAC With TARP Funds Because of its Ties to GM
Despite GMAC’s significant losses from ResCap’s subprime mortgage business, it was its auto financing for GM that would lead the Government to bail it out. In November 2008, the CEOs of GM, Chrysler, and Ford Motor Co. testified before Congress requesting Government assistance, saying that at stake was consumer confidence in the entire U.S. auto industry, as well as millions of jobs that were directly or indirectly linked to all three Detroit carmakers.
After several weeks of private talks among GMAC, Federal regulators, and Treasury, a coordinated Government rescue moved forward. GMAC announced on November 20, 2008, that it had applied to the Federal Reserve to reorganize itself as a bank holding company, based on its ownership of online bank GMAC Bank.20 GMAC simultaneously applied to Treasury for TARP money.21 As a bank holding company, GMAC would be eligible to apply for Government assistance from the Federal Reserve’s discount window, the Federal Deposit Insurance Corporation’s (“FDIC”) Temporary Liquidity Guarantee Program (“TLGP”), and from TARP’s Capital Purchase Program (“CPP”), the program in which Treasury was injecting capital into banks.
GMAC’s application for TARP funds was conditioned on it becoming a bank holding company. In order for GMAC to become a bank holding company, the Federal Reserve required that GMAC raise capital levels (consisting of cash and stock) to $30 billion to absorb losses and that GMAC convince 75% of bondholders to exchange their notes for discounted preferred stock that would count as capital.22 GMAC repeatedly extended the debt exchange deadline as it sought to persuade enough bondholders to participate. According to press reports, some big bondholders balked, saying they would not participate unless Cerberus first injected more money into GMAC.23
On December 19, 2008, the President announced $13.4 billion in TARP aid for GM and Chrysler, and that each had until February 17, 2009, to submit a viability plan. The viability plan was a strategic plan for long-term profitability that included concessions from employees, suppliers, creditors, and dealers.24 A White House fact sheet stated, “Taxpayers will not be asked to provide financing for firms that do not become viable.”25SPECIAL INSPECTOR GENERAL I TROUBLED ASSET RELIEF PROGRAM 6

In a coordinated Federal rescue, five days after the GM and Chrysler TARP bailouts, in a rare split vote of 4-to-1, the Federal Reserve approved GMAC’s bank holding company application. The Federal Reserve declared that “emergency conditions” existed and that “the proposal would benefit the public by strengthening GMAC’s ability to fund the purchases of vehicles manufactured by GM and other companies and by helping to normalize the credit markets for such purposes.”26 The Federal Reserve ordered GMAC to boost its capital by raising $7 billion of new equity. Treasury directly supplied $5 billion of that in TARP funds.
Although the Federal Reserve required that GMAC make some changes to its capital structure and its corporate structure in order to meet the regulatory requirements for bank holding company status and Treasury agreed with these changes, this requirement did not address ResCap’s mortgage liabilities or other issues. Treasury’s stated purpose for providing the TARP money (in exchange for preferred stock) was GMAC’s importance to the auto industry.27 Even as the Government required that in exchange for TARP money, the automakers GM and Chrysler plan how they would become financially viable, Treasury rescued GMAC with TARP funds with no viability requirement that would address the mortgage liabilities. Treasury’s initial $5 billion direct investment in GMAC had no strings attached for a plan to ensure repayment of taxpayers’ investment.
Although GMAC had applied for TARP money from CPP, Treasury instead tapped TARP’s Automotive Industry Financing Program (“AIFP”) to provide the bailout funds. “Because the finance companies serve as the lifeblood of the automakers, we knew that our program would need to address the short-term needs of the auto finance companies as well,” Assistant Secretary for Financial Stability Neel Kashkari, who led TARP, said at the time.28 In addition to the direct cash injection to GMAC, Treasury loaned GM $884 million of TARP money so it could invest in GMAC’s stock. Cerberus invested $366 million in GMAC stock.29
According to officials of Treasury’s Auto Team, which formed later, in February 2009, by late 2008 American auto companies lost sales of an estimated 2 million to 2.5 million vehicles because neither dealers nor customers could obtain credit.30 Steven Rattner, the head of Treasury’s Auto Team, described in his book, Overhaul, that GMAC and Chrysler Financial depended on being able to borrow from banks, and the credit crunch had curtailed this source of funding.31 According to Rattner, another source of funding had been cut off – securitizations – loans to consumers and dealers that were “bundled, sliced like a layer cake, and sold off in tranches, typically to investment funds.”32 Accordingly, Rattner explained, as a result, GMAC and Chrysler Financial “had drastically reduced lending to consumers and dealers, a major factor in the steep falloff of car sales.”
Treasury Bails Out GMAC With TARP Funds a Second Time After GMAC Fails Stress Test, With Taxpayer Ownership of GMAC Increasing to 35%
In February and March 2009, two key Federal efforts were happening simultaneously that would lead to a second TARP bailout for GMAC. Treasury’s QUARTERLY REPORT TO CONGRESS I JANUARY 30, 2013 , accessed 1/8/2013.

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