Sunday, March 18, 2007

GM's split from GMAC not painless

Wednesday, March 14, 2007
GM's split from GMAC not painless
Settlement charges of $1 billion tied to sale of profitable finance arm.
Sharon Terlep / The Detroit News

GMAC results
GMAC reported earnings Tuesday for the first time since GM sold a majority stake in the finance company. How GMAC did in 2006:
Net income: $2.1 billion
Automotive finance unit
Operating profit: $791 million
Real estate finance
Operating profit: $182 million
Operating loss: $71 million
Source: GMAC

DETROIT -- The cool $2.1 billion earned by GMAC Financial Services in 2006 must be somewhat bittersweet for General Motors Corp.

Because GM owned all of its longtime captive finance unit until Nov. 30, 2006, the vast majority of those profits went straight to GM's shaky bottom line.

Going forward, though, GM will reap only 49 percent of GMAC's earnings because it sold a 51 percent stake in the finance arm for $14.4 billion to a group led by private equity firm Cerberus Capital Management.

"They will only get 49 percent of the (profit) cushion that GMAC gave them," said auto analyst David Healy at Burnham Securities. "They had to sell half of the crown jewel to fund the turnaround. In ordinary times they would never do that. But when you look at the results they had in 2005, it was an entirely natural reaction."

In addition, GM has agreed to pay approximately $1 billion in settlement charges to GMAC by the end of the first quarter in relation to a change in the lending arm's balance sheet.

The cash settlement, announced Tuesday in GMAC's fourth-quarter financial report, is related to the impact that problems in the subprime mortgage segment, which focuses on borrowers with low credit scores, have had on GMAC's book value.

Overall, GMAC reported net income of $2.1 billion for 2006, down from $2.3 billion a year ago. GMAC made $1 billion in the fourth quarter alone, up from $112 million a year earlier. Results were bolstered by $791 million in tax benefits that came from the split from GM.

Compare that to the financial picture at GM. The automaker lost $91 million in the third quarter of 2006. While GM expects to report a profitable fourth quarter for the year -- the first in two years -- the margin is expected to be slim.

GM was expected to announce its 2006 year-end and fourth-quarter financial statement this morning. The results have been delayed twice, in part because of the GMAC deal.

GM, which lost $10.6 billion in 2005, needed the cash from the GMAC deal to fuel its massive turnaround plan. GMAC needed to separate to improve its debt ratings, which were downgraded along with GM to junk status in 2005. A rating below investment grade makes it more expensive to borrow money.

Only time will determine whether GM made the right move. GMAC spokeswoman Toni Simonetti said the finance company's borrowing costs have already improved and the company is poised for growth.

"To own a smaller percentage of a thriving business is better than owning 100 percent of a constrained business," she said. "We feel like we have a solid foundation for growth. Borrowing costs have already improved and we expect them to get better over time. GM is going to share in this."

The deal marked the end of GM's 87-year ownership of the finance company, which provides auto financing, mortgage lending and real estate services.

While GM reaped billions from GMAC over the years, the finance company is moving fast to distance itself from the automaker.

"We are primarily a GM shop, and that is one of the things we need to change," said GMAC Chief Financial Officer Sanjiv Khattri, responding Tuesday to investor worries that GMAC could suffer if it depends too much on business from GM.

Despite the contrast, not everything is rosy at GMAC.

Losses in the residential mortgage business weighed on the company heavily last year, offsetting gains made in the insurance and automotive lending businesses.

GMAC's home-lending unit, Residential Capital LLC, or ResCap, lost $651 million in the fourth quarter, compared with a $118 million profit in 2005.

The hit was largely because of defaulted mortgage loans made to high-risk borrowers, a trend that's shaking the entire lending industry.

GMAC also confirmed what many analysts were expecting: that GM will turn over $1 billion to the finance company to cover losses that came as a result of the downturn in the residential mortgage business.

GM needed to make the payment because its sales agreement with Cerberus required that the book value of GMAC be more than $14.4 billion at the time of closing.

"Obviously, leaning away from the nonprime market was not sufficient," ResCap Chief Financial Officer Jim Giertz said. "Deterioration in the nonprime market drove the loss in 2006."

Detroit News staff writer Bill Vlasic and Detroit News wire services contributed to this report. You can reach Sharon Terlep at (313)223-4686 or

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