As we reach the end of a whirlwind year, it’s time we reflect on some of that drunken public spending supposedly intended to save the America we know.

Each and every American should care about the $403.6 billion spent on corporate aid, because a great deal of that money has been heinously misappropriated.

While most of that TARP aid went to banks, it’s important to note that some 20% of all the U.S. bailout bucks went to the auto industry.

Today, in total, $87 billion has been funneled through the American auto industry, most of it by the Obama administration. Politicians don’t justify their actions as being the only way to save America’s automotive industry.

And while saving GM, Delphi and Chrysler probably has some merit – since the beginning of the recession, 150,500 automotive manufacturing jobs and about 78,000 jobs at auto dealerships have been lost – many Americans were still rightly outraged by the easily-exploited scandals that ensued: remember those corporate jets?

Well, the only automotive bailout that really burns my buns is the pointless rescue of GMAC.

Even in the eschewed realm of the “public good,� bailing out GMAC is a dubious proposition.

GMAC – founded in 1919– was for most of its life a financial services slave to General Motors.

By the 80s, as GM’s core business grew sicklier, GMAC helped the automaker stay relatively profitable. It was during this time that GMAC expanded into the highly-profitable home mortgage, insurance, commercial financing and online banking sectors (remember that Ditech and Ally Bank are GMAC’s minions).

By 2006, with GM already locking its sights on bankruptcy, GMAC was tossed to Cerberus Capital Management for a princely sum of $14.1 billion – twice the price Cerberus bought Chrysler for. That was probably the smartest move Rick Wagoner ever made.

Cerberus Capital Management, one of the largest private equity firms in the world, bought GMAC because it viewed financial services as a never-ending source of profit. In fact, Cerberus’ main reasoning for purchasing Chrysler was for its loan portfolio. Cerberus planned on separating the manufacturing arm of Chrysler from Chrysler Financial and selling it off. The goal was to merge Chrysler Financial and GMAC to form one the world’s largest financial services companies.

But we all know how that story ends: as the global economy seized, all of a sudden GMAC and Chrysler Financial suffered unimaginable losses.

To date, GMAC has lost over $5 billion in 2009; it made a small profit in 2008, but lost $2.3 billion in 2007.

The issue that really hurt GMAC in this current downturn is that, like AIG, they sold mortgage guarantees, a type of insurance that covers other companies from losses related to mortgage lending.

To survive the downturn, GMAC was transformed from a consumer finance lender into a Bank Holding Company, in order to take advantage of the Treasury’s TARP funds. Interestingly, in order to meet the minimum capital required instituted by the Federal Reserve, TARP money was lent to GMAC before it was a BHC. So, TARP money was used illegally, in order for GMAC to take advantage of the TARP money legally? Go figure.

In total, the government has lent GMAC $12.5 billion in taxpayer money in return for 35% ownership and “strict� regulation. The FDIC also gave the junk-rated company access to its debt-guarantee program to the tune of $7.4 billion in GMAC-issued debt.

The government did all this because politicians, the Treasury and the Obama automotive task force were coerced into believing that GMAC was a vital part of the automotive landscape.

There are a few problems with that theory.

“A Three Headed Monster�

First off, GMAC isn’t the largest automotive lending company – since 2008, Toyota Financial has been the biggest. As GMAC continues to balance its books, it has raised lending requirements on consumer borrowers, thus reducing its share of the overall lending market. GM and Chrysler’s exclusivity agreements with GMAC haven’t been the helping hand the automaker’s were looking for, especially compared to the aid the captive lending units of Ford, Toyota, Honda, Nissan and Hyundai have provided in stemming losses.

GMAC and Chrysler Financial (two sides of the same coin) had to end or severely limit their various leasing programs and reduce much of the 0% interest, no-money-down schemes that have been extended to spur buying. The lack of leasing drastically reduced GM’s and Chrysler’s ability to sell fleet vehicles and luxury/ SUV vehicles.

So, despite the two bailouts GMAC received, GM and Chrysler continue to perform below the industry average in terms of sales, and that’s largely due to their lack of consumer credit.

GMAC’s relevance in automotive lending has continued to contract even further in 2009, as Chrysler and GM dealers start to seek alternatives. AutoNation, the largest dealer group in the nation with 272 dealerships, says that GMAC has only underwritten 9 loans at its dealership for 2009. That’s a 99% drop from 2008, when GMAC underwrote 1,527 AutoNation vehicles.

As GMAC has contracted, several banks have gained significant market share from the ailing lender, including Chase Auto Finance (up 129.5% YTD), US Bank (113%), Wachovia Dealer Services (103.1%) and Hyundai (103%).

According to Experian Automotive, the largest lenders for new car sales in 2009 are as follows: Toyota Financial (with 11.2% market share), followed by Chase (11%), then GMAC (9.1%) and Ford Motor Credit (7.1%).

I don’t believe in the excuse that not bailing out GMAC would have crippled automotive lending. Automotive lending remains highly profitable, even for GMAC; other competitors would have surely taken the place of GMAC quickly. Also, if GMAC were to fail, its automotive lending division would have been snapped up quickly by Chase, Bank of America… maybe even by Hyundai?

The second argument: GMAC is simply too big to fail. Even if GMAC isn’t a big lender today, it was in the past, GMAC currently has about $178 billion in assets and 15 million customers globally. My counter- argument is that we let Washington Mutual (WaMu) go bankrupt, which had $310 billion in assets and serviced a similar amount of customers as GMAC. When WaMu went bankrupt, the financial markets barely flinched.

If the U.S. government deems such a bank not important enough to save, why is GMAC important enough?

For that answer, you have to take a closer look at Cerberus. Cerberus, which is still a major owner in GMAC, has spent a tremendous amount of money and time lobbing on GMAC’s behalf. Cerberus spent $8 million lobbying for GMAC; some of those bills it lobbied for were the very ones that allowed GMAC to become a bank.

Cerberus was also instrumental in a deal that allowed Steve Rattner, Obama’s former Automotive Task Force Czar, to purchase Maxim and Blender Magazines. Rattner’s equity firm subsequently defaulted on its loans from Cerberus, worth $125 million. I’m sure Rattner’s personal entanglement with Cerberus was on his mind as his task force crafted the loans that would be eventually given to GMAC. Also a key factor that allowed Rattner to take such an important leadership role in the Obama Automotive Task Force, was the fact that he made over $100,000 in campaign contributions during Obama’s presidential elections.

In fact, Cerberus has gained splendidly from our bailouts. It still has a preferred interest in GMAC (keep in mind that the lending company may one day become profitable again), and, according to the Institutional Risk Analyst, Cerberus has gotten more than its money’s worth from its GMAC purchase through dividends and fees.

Without the bailouts, Cerberus would have been responsible for enough of the debt to put the hedge fund into bankruptcy. Now you should understand why Cerberus wanted bank holding status for GMAC: if the bank were to become insolvent, the FDIC would assume responsibility, not Cerberus.

Now the U.S. taxpayer is left on the hook for a company that is estimated to lose another $9.2 billion for 2009-2010 under the most adverse scenarios conducted under the Treasury’s “stress tests.�

GMAC, meanwhile, is seeking another $5.6 billion from the U.S. Treasury after the company failed to raise the necessary liquidity to pass the Treasury’s stress requirements – GMAC was the only company out of the 19 lenders included in the test that failed to do so. Will we give the company the money it wants?

The Treasury department has already provisioned the money for GMAC and has cleverly masked it by lumping it into program that will lend $30 billion worth of aid to small businesses; who knew GMAC qualified as a small business? GMAC’s portion of the aid package is intended to spur lending, but since GMAC is hemorrhaging money and needs the $5.6 billion to meet minimal liquidity requirements, I doubt much of the money will reach the hands of consumers.

Bottom-line: so long as Cerberus has the deep pockets to lobby, then the Obama administration will continue to “lend� money to a company that is one of the worst offenders of corporate greed. Remember my mention of Ally Bank (GMAC’s subsidiary) and the FDIC’s $7.4 billion in GMAC-issued debt?

Apparently, Ally Bank has already drunkenly collected huge assets deposits from its high-yield CD accounts (up 57% YTD), offering payouts 2.1 times the national average. Ally can do this because of the explicit backing of the FDIC and the inferred knowledge that the government will continue to finance GMAC’s lending. Financial analysts have already deemed Ally Bank’s scheme unsustainable. I guess that’s all GMAC has ever been good at.

Filed under: Editorial