GMAC Financial Services needs more money -- and is likely to get as much as $3.5 billion in federal aid, according to The Detroit Free Press. It seems the Treasury, which has been negotiating for months with the car and home lending firm, has little choice but to pony up more cash, whether it wants to or not.GMAC has already received $12.5 billion from the federal government, which owns over 35% of the company. Government "stress tests" months ago showed the company needed $11.5 billion in capital to protect it from further economic woes. The firm's largest problems are in its ResCap business which provide mortgages to residential homeowners. There has been some consideration of taking the unit into Chapter 11.
%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%%While GMAC decides the fate of its home lending operation, it is still the largest provider of financing for customers buying GM and Chrysler cars. GMAC also finances car dealers who use its loans to buy vehicles from the car companies.
A Treasury infusion of $3.5 billion into GMAC should be seen primarily as a way to protect the almost $70 billion the government has put into GM and Chrysler. The two companies are still struggling with weak sales and weak balance sheets. They are also locked in a fierce competition with Ford (F) and Asian automakers for market share in the US. A reduction in financing options for GM and Chrysler customers would severely damage their ability to sell vehicles.
Nonetheless, many experts believe that GM and Chrysler will never recover enough to repay the taxpayers. If that's the case, providing more money to GMAC to support the two firms is no more than throwing good money after bad.
What's your investing game plan?View Course »