General Motors Corp. (GM) had another bad day on Tuesday as its partially owned subsidiary GMAC Financial Services announced a major loss for the third quarter.
GMAC is co-owned by GM and Cerberus Capital Management, a private-equity firm. While its original role was to finance the purchase of General Motors autos, over the years it has evolved into a major mortgage lender and insurance company. The company's losses have come from both its subprime lending and vehicle leasing operations and GMAC admitted that its mortgage lender, Residential Capital LLC (ResCap) may not survive the current downturn without significant financial input from GMAC.
GMAC is posting a $2.52 billion loss for the third-quarter with net revenue off 24 percent to $1.72 billion. Last year the company lost $1.6 billion in the third quarter. This is the fifth consecutive quarter in which GMAC has posted a loss, the total of which has reached $7.9 billion
ResCap had a net loss of $1.91 billion which is actually lower than the $2.3 billion loss the unit suffered a year earlier but a broader loss than the $1.86 billion loss reported for the second quarter of 2008 when GMAC said the residential business was stabilizing. GMAC has already cut a number of jobs and restructured the unit in an attempt to turn it to profitability.
The automotive finance unit lost $294 million compared with a profit a year earlier of $554 million. Much of the loss in this unit has come from vehicle leases which have defaulted. The company is tightening its lending standards and increasing fees charged to local deals for auto loans.
In one bright spot, GMAC's financial unit did show a profit of $97 million.
GMAC's fiscal condition is exacerbated by several external situations. One of its parent companies, General Motors, is in substantial distress of its own and seeking, along with Ford Motor and Chrysler Corp., a federal bailout of $25 billion. GM is also in serious merger discussions with Chrysler and the disposition of GMAC will be an issue.
In anticipation of the merger and also in hopes of participating in the Federal Reserve's commercial paper purchase program, GMAC is looking to pare away its noncore business.
At the same time it is seeking to convert its corporate structure to that of a bank holding company which will probably mean raising additional capital but would allow it to participate in the $700 billion financial bailout plan.
General Motors owns 49 percent of GMAC. It spun off the other 51 percent to Cerberus in 2006 in an effort to reverse the failing fortunes of the automobile manufacturing business.