GMAC Gets $3.8 Billion In Taxpayer Help

The year 2009 and the decade of the "aughts" may be nearly over but that doesn't mean federal bailouts of financial institutions are.

The U.S. Treasury will be pumping new money into GMAC Financial Services to the tune of $3.8 billion.

While that may sound like bad news to taxpayers, here's something to consider. Earlier in the year Treasury and company officials had thought the company might need a $5.6 billion infusion.

But GMAC's financial needs turned out to be significantly less than previously thought because it didn't take the financial hit that had been expected as part of the GM bankruptcy.

In any event, before the latest infusion, GMAC had received $12.5 billion in taxpayer help.

Still, GMAC is reeling because of losses associated with mortgages held by its ResCap unit which was in the residential-mortgage business.

 

The Treasury had earlier purchased $3.5 billion of GMAC "mandatorily convertible preferred" or MCP securities to help the company raise the $9.1 billion the Federal Reserve said it needed to cushion the company in the event the economy took a significant turn a for the worse.

As part of the restructuring announced Wednesday, the company will convert $3 billion of MCPs to common shares which will give the federal government a 56.3 percent ownership stake in the firm.

The larger government ownership no doubt helps explain the aggressive write-downs of mortgages in GMAC's ResCap unit.

Many financial institutions have generally been loathe to write down their assets during the credit-market crisis since such a move, among other things, would require institutions to raise more money to meet their capital requirements.

Such resistance is futile, however, when the government starts calling the shots as the majority owner.

According to a GMAC press release, the company is writing down $2 billion in mortgages.

Here's a key mortgage-related passage from its press release:

The reclassification of certain international mortgage assets and businesses from held for investment (HFI) to held for sale (HFS), resulting in an estimated pre-tax charge of approximately $1.3 billion. As of Sept. 30, 2009, the assets had an unpaid principal balance of $2.4 billion and a carrying value (net of allowance for credit losses) of $2.0 billion.

The reclassification of domestic mortgage assets from HFI to HFS, resulting in an estimated pre-tax charge of approximately $700 million. As of Sept. 30, 2009, the assets had an unpaid principal balance of $3.3 billion and a carrying value (net of allowance for credit losses) of $2.3 billion.

Additionally, management recorded a repurchase reserve expense of approximately $500 million associated with the mortgage servicing business.

These actions, inclusive of estimated operating losses for the period, required a total capital contribution to ResCap of approximately $2.7 billion in the form of mortgage loans acquired by GMAC from Ally Bank, GMAC debt forgiveness and cash. With the capital contribution, ResCap's net worth will exceed the minimum level required to meet certain covenants.

Following these transactions, GMAC does not expect to incur additional substantial losses from ResCap and will be better positioned to explore strategic alternatives with respect to mortgage operations.

The GMAC Board of Directors reviewed various alternatives related to ResCap and, based on their analysis of the facts and circumstances, the board unanimously concluded that these actions are in the best interests of GMAC and its stakeholders.