GMAC's Bank Unit Has a Problem

With bad news swamping GMAC LLC, potential problems at an obscure bank unit threaten to further sink the finance company's prospects and add to the woes of private-equity firm Cerberus Capital Management LLP, majority owner of GMAC. A technical snag at GMAC Bank LLC -- a small part of GMAC but crucial to its financial health -- has Cerberus attempting to salvage its ownership of the small Utah bank. Cerberus has until November to get a waiver from the Federal Deposit Insurance Corp. that will allow the group's continued control of GMAC Bank, a so-called industrial-loan corporation. ILCs are FDIC-supervised lenders that offer a way for commercial firms to own banks without being regulated by a federal banking agency. When Cerberus and its co-investors bought a 51% GMAC stake in 2006 from General Motors Corp., the FDIC had imposed a moratorium on the approval of banks owned by nonfinancial companies, such as Wal-Mart Stores Inc., to allow Congress to debate the issue of mixing banking and commerce. Despite the freeze, the FDIC granted Cerberus and GMAC's application because of "the unique circumstances" of GM's restructuring. In exchange, GMAC and Cerberus agreed to satisfy one of the following conditions by November: sell GMAC Bank; the bank would cease using FDIC insurance; or register as a bank holding company. If none of these terms could be achieved, Cerberus would have to get an FDIC waiver. There are still seven months until deadline, but satisfying any of the terms could take time. The options for Cerberus and GMAC are narrowing amid a souring market for lenders like GMAC Bank that are exposed to the slumping residential-mortgage sector. Economic conditions make GMAC Bank a tough sell. "It would be hard to see many interested buyers," says Craig Emrick, a credit analyst at Moody's Investors Service. Getting the waiver also gains more urgency as political sensitivities heat up ahead of the general election. While securing a waiver would be a coup for Cerberus, it also has the potential of being cast by critics as special treatment for a firm that has former high-ranking Republican officials, including John Snow and Dan Quayle, on its payroll. As the credit crunch has made short-term financing costly and elusive, GMAC Bank's $13 billion in deposits and $11 billion in Federal Home Loan Bank advances have become increasingly important sources of stable, low-cost funding for Residential Capital LLC, or ResCap, GMAC's struggling mortgage subsidiary that has come to rely on GMAC Bank for cheap, reliable funding. A deterioration of GMAC Bank's health would likely worsen the weak financial strength of ResCap and GMAC, whose bonds already are suffering due to its exposure to the sickly mortgage market and wilting consumer sector. "If the credit markets continue to decline and we find ourselves in a prolonged environment of capital market shutdown, GMAC could run into substantial difficulty," Cerberus said in a recent letter to investors. The uncertainty surrounding GMAC Bank comes as GMAC and its owners are considering strategic alternatives for ResCap. On Friday the auto-lender injected capital into its struggling mortgage unit by buying back $1.2 billion of debt to ease ResCap's debt burden. GMAC paid a little more than $600 million in the open market for the bonds, or about half their face value. GMAC Bank, which accounted for about 30% of ResCap's funding last year, isn't a specimen of financial vigor. According to the FDIC, the bank lent $17 billion to the residential real-estate sector and retained just $3.3 billion in capital. About $3 billion of those loans were backed by junior liens, while $2 billion went to home-equity loans -- types of debt that have sunk in value during the housing crisis. While selling GMAC Bank near term would be problematic for GMAC, forgoing FDIC insurance, another option, is a nonstarter for a bank that takes deposits. Finally, registering as a bank holding company would likely be anathema to Cerberus, a low-profile firm that doesn't want to disclose its inner workings -- which it would then be required to do. "In general, we despise all the attention we've been getting," Cerberus wrote to investors last month, reflecting on scrutiny of its purchases of GMAC and Chrysler LLC, bought in 2007. That leaves only two options for Cerberus: The FDIC grants it and GMAC a waiver, or Congress enacts legislation allowing GMAC and other nonbank businesses to own ILCs, such as GMAC Bank. So far, the full House has passed a bill, as has the Senate Banking Committee, that would ban most commercial firms from owning ILCs but make an exception for U.S. car makers. That would likely grandfather Cerberus's ownership of GMAC Bank. The bill in the full Senate is stalled and isn't expected to win approval this year. Wednesday Cerberus reiterated a statement it made last week, saying, "We have worked cooperatively with the regulators and believe they will grant the requisite approvals on a timely basis." An FDIC spokesman said on Friday, "The application has been received and it is under consideration."