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What to Do About GMAC?
With Alfred de Molina’s resignation has come a wave of speculation about what to do about GMAC. In a blog today, Rolfe Winkler of Thomson Reuters suggests that GMAC should cut loose Rescap, the company’s mortgage bank, if not shut GMAC entirely.
An excerpt:
Ally’s funding is also life-support for ResCap, the subprime mortgage unit that helped sink GMAC in the first place. The more cash GMAC/Ally pours down the drain at ResCap, the less taxpayers are likely to get back.
Carpenter should cut his losses by cutting off ResCap. That would be a good start to restructuring GMAC.
Carpenter should cut his losses by cutting off ResCap. That would be a good start to restructuring GMAC.
But if GMAC can’t fund itself without the magical elixir of bailouts, deposit insurance and nation-leading CD rates, then for the sake of taxpayers, depositors and banks struggling on their own, it should be put out of its misery.
But is this really the right response?
Winkler is right that there are risks in GMAC’s deposit grab — but there are also rewards. If I recall, Ally’s deposit rates were something like 50 to 100 basis points above the market before the federal government spanked the company last June. That premium was a small price to pay for capital and liquidity, both of which GMAC desperately needed then, and continues to need today. But the federal government effectively prevented GMAC from financially righting itself through deposit funding. Is that good for you and me, who as taxpayers own much of GMAC? Is it better that GMAC remains fiscally crippled or would you prefer that GMAC pays a relatively small premium to revive its financial health? I’m not so sure the answer is as clear cut as Winkler presented it. At some point, GMAC’s risk profile would have transformed as a result of its deposit funding strategy, no matter how soiled is the company’s mortgage portfolio.
This same sort of opposing argument holds for GMAC’s mortgage portfolio, by the way. There are two variables: a) the mortgage market overall; and b) the state of GMAC’s Rescap portfolio. Should Mr. Carpenter just cut off Rescap, as Winkler suggested, if the mortgage market is going to come back and be an engine for financial improvement at GMAC or should he simply jump ship at the bottom of the Great Recession? Further, just how bad is Rescap’s portfolio? And while I haven’t done the research on this, I wonder whether asset values in the Rescap portfolio might return in the relative near term? Again, do you just cut those assets loose if you think they will return? We’re all shareholder-taxpayers; and speaking as a shareholder, the answers to these questions are anything but clear cut.
That Michael Carpenter has quite the job ahead of him.
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