Lawmakers question GMAC rescue
Friday, February 26, 2010
The federal government went to extraordinary lengths to save the auto financing company GMAC. It was the only bank to get three separate rounds of federal aid -- the most recent in December, even as the broader bailout was winding down -- and it is the only bank in which the government now owns a majority stake.
On Thursday, congressional investigators questioned whether all those efforts were a mistake. Members of the Congressional Oversight Panel, charged by Congress with policing the bailout, pressed Treasury Department officials to explain why the government did not let the company go bankrupt.
They also questioned whether the rescue of GMAC, achieved in part by making it a bank, had created a long-term situation in which the government guarantee of bank deposits was subsidizing sales at General Motors and Chrysler. GMAC is the primary source of financing for GM and Chrysler dealers, and a major source of loans for buyers of their vehicles.
Elizabeth Warren, a Harvard law professor who chairs the panel, said she understood GMAC's utility for GM and Chrysler.
"What I don't understand," she said, "is what the justification is for being an independent bank that takes deposits that has a backup from the United States government."
Ron Bloom, a senior adviser to Treasury Secretary Timothy F. Geithner, told the panel that the rescue of GMAC was necessary to save the automakers, and that the $17.2 billion price tag was a good deal for taxpayers. He said that no other lender or combination of lenders could have quickly replaced GMAC's role in the marketplace.
"Without orders for cars, GM would have been forced to slow or shut down its factories indefinitely to match the drop in demand," Bloom said in prepared testimony. "Given its significant overhead, a slowdown or stoppage in production of this magnitude would have toppled GM."
Under sharp questioning from panelists, Bloom conceded that GM might have survived, but said that the government did not want to take the risk.
But an independent expert, Christopher Whalen of Institutional Risk Analytics, told the panel that the failure of GMAC actually would have helped the auto industry.
"Solvent bank and non-bank competitors of GMAC would have been eager to capture both the floor plan and auto sales business," Whalen said.
GMAC fell into financial trouble in part because of its deep plunge into mortgage lending. Its problems then were compounded by the economic crisis.
In December 2008, the Bush administration invested $5.8 billion in the company and the Federal Reserve gave emergency approval for GMAC to become a bank holding company, allowing it to gather deposits to fund lending.
In May 2009, the Obama administration invested $7.5 billion, and the Federal Deposit Insurance Corp. agreed to help GMAC raise a further $7.4 billion from investors by guaranteeing that it would cover any losses.
And in December, the government gave GMAC $3.8 billion in a third round of federal aid.
As a result of the interventions, the government now owns a 56.3 percent stake in the company.
Federal law draws a strong line between banking and commerce. The government bars manufacturers and other kinds of companies from owning banks, so that the federal guarantee of bank deposits is not abused as a cheap source of funding, allowing companies to take risks at federal expense. The federal guarantee increases the availability of loans; the separation of banking and commerce prevents companies from getting that money too easily.
Automakers have long relied on financing arms to facilitate sales, but until the government's rescue of GMAC, none of those arms had access to deposits as a funding source.
The company has pledged to diversify its operations. Michael A. Carpenter, GMAC's chief executive, told the panel that the company would be able to extend its business model to other manufacturers. He said the company was rebranding itself as "Ally" to emphasize that General Motors was no longer its primary focus. But GMAC also plans to shed its mortgage lending business, which will serve to increase its short-term focus on GM and Chrysler.