The Federal Reserve approved GMAC as a bank holding company on Christmas Eve, allowing GMAC, GM’s financial arm, to tap into federal rescue funds for financial services and further shore up GM’s bank balance.
GMAC provides about 75% of financing for GM dealerships and has been frozen out of the credit markets since taking a $7 billion loss earlier this fall.
GM owned most of GMAC until last year, when it sold the majority stake to a private equity firm led by Cerberus. As part of today’s deal, GM will reduce its holdings in GMAC to less than 10% of total shares.
GMAC’s application was approved despite not meeting capital requirements when it applied in November.
Stephanie Mencimer makes the case that Bush’s auto bailout will not help consumers buy cars. Her reasoning: many are already bogged down with existing auto loans, issued by the Big Three, with 85% of loan-holders in negative equity. Most of these car buyers owe $4,400 more than their cars are worth.
According to Mencimer, Detroit has been squeezing local dealerships for more profits in recent years, which means that dealerships make their money through their finance divisions, getting car buyers to take out loans provided by or packaged by the dealership.
This extends to the automakers themselves; in 2002, GM, for instance, made 90% of its profits from its finance division, General Motors Acceptance Corp (GMAC). Half of GMAC’s profits, in turn, came from home mortgages and had nothing to do with cars.
How do dealers make their money on loans? They encourage buyers to roll an old loan– worth more than the old car– into a new loan for a new car, and they virtually guarantee this will happen with American-made cars by stretching terms to six or seven years, longer than most cars will last. The companies then repackage those loans, subprime-style, and sell them on Wall Street as securities, making a tidy profit in the process.
“Ultimately, no matter how much money Congress throws at the automakers, it’s car buyers who will rescue them or not.” — Rosemary Shahan, head of Consumers for Auto Reliability and Safety
