Yesterday, the Congressional Oversight Panel held a hearing on GMAC Financial Services. The panel examined the government’s assistance to GMAC under the Troubled Asset Relief Program, GMAC’s current and future financial condition, the rationale for the government’s investment in GMAC and GMAC’s initiatives to repay the government’s investment. Witnesses before the panel were:

Panel 1

  • Ron Bloom, Senior Advisor to the Secretary of the Treasury
  • Jim Millstein, Chief Restructuring Officer, U.S. Department of Treasury

Panel 2

Panel 3

  • Christopher Whalen, Senior Vice President and Managing Director, Institutional Risk Analytics
  • Michael Ward, Analyst, Soleil-ward Transportation Research

Elizabeth Warren, chair of the COP opened the hearing by noting GMAC’s unusual treatment by the Treasury and its receipt of $17.2 billion in government assistance. She highlighted that, of all of the banks receiving government assistance pursuant to TARP, only GMAC received money through the Automotive Industry Financing Program. Ms. Warren called on the panel to scrutinize Treasury’s “exceptional actions” with respect to GMAC, concluding that “three times, GMAC asked Treasury to cast it a lifeline, and three times, Treasury said yes.”

Mr. Bloom and Mr. Millstein remarked on the relationship between GMAC and the Treasury’s investments in General Motors and Chrysler, noting that the government’s investment in GMAC was a critical component in stabilizing the U.S. auto industry. They said that Treasury remains a “reluctant shareholder” in GMAC, owning 56.3% of its equity, and that it intends to dispose of such ownership “as soon as practicable.” When asked whether Treasury had considered a GMAC bankruptcy as an alternative to TARP funding, Mr. Bloom noted that adding a GMAC bankruptcy to the GM and Chrysler bankruptcy “equations” would have “exponentially risked the success” of the automakers’ bankruptcies. When asked whether the cost of bankruptcy outweighed TARP costs, Mr. Bloom replied that the bankruptcy alternative was “not free of substantial investments as well.”

Mr. Neiman, member of the COP, noted [] that GMAC was rescued “not because it is ‘too big to fail’ but because it is ‘too interconnected to fail’ ... or too co-dependent with General Motors, Chrysler and the American automobile industry,” and questioned the witnesses regarding this inter-connectedness. Mr. Millstein responded that, although Treasury is heavily invested in both GMAC and the car companies, it is “not in a position to dictate policy.” Mr. Bloom further noted that, although Treasury is “quite engaged in knowing what is going on at GM and Chrysler,” the administration is not involved in guiding their relationships with GMAC.

Mr. Carpenter outlined GMAC’s current financial condition, noting its recent issuance of $2.0 billion of unsecured debt and payment of approximately $1.0 billion in dividends on the TARP investment, and set forth GMAC’s strategic objectives to repay the U.S. government. He concluded that the government’s funding not only provided funding for GM dealers, but also for GM retail customers during a time when “alternatives were limited or unavailable.” When asked by COP member Paul Atkins how GMAC deals with its board of directors and the federal government, Mr. Carpenter praised GMAC’s “active” and “capable” board that takes its government responsibilities “very seriously” and noted that the government entities “challenge us constantly to do a better job.” When asked by Mr. Neiman where GMAC is in the process of analyzing its strategic alternatives, Mr. Carpenter noted that they have “just begun the process” and have engaged two major securities firms to assess its alternatives.

Mr. Hull briefly described the impact of the TARP assistance on GMAC, as well as GMAC’s capital restructuring and strategic initiatives, concluding that GMAC has made “great strides in strengthening our balance sheet and improving our capital and liquidity.” When asked about GMAC’s financing program, Mr. Hull explained that, although GM dealers have the ability to offer financing programs through other players, GMAC has the first right to provide such financing. Mr. Hull also highlighted GMAC’s other competitive advantage, its close relationships with manufacturers and dealers. When asked why there is so little competition for auto financing, Mr. Carpenter explained that the barrier to entry is not money, but infrastructure and knowledge of the automobile business.

Mr. Whalen criticized Treasury’s funding of GMAC and expressed his concern that GMAC’s future financial viability depended on its ability to isolate its mortgage origination business, ResCap, from the bank, calling ResCap “the functional equivalent of Chernobyl.” He further questioned Treasury’s ability to recover its investment and labeled claims that GMAC’s financing could not be replicated by third party credit providers as “stretching credibility to the breaking point.” Mr. Ward expressed his belief that GMAC should be re-integrated with GM and noted such actions would be the “best way to save GM from a competitive and valuation aspect.”