A Bank To Save An Auto Company?

Last week, General Motors Corp. (GM) may have received another holiday gift from the government - permission for GMAC Financial LLC to become a bank. In addition, the Treasury Department announced it would provide $5.0 billion to GMAC, out of the $700 billion bank rescue program (TARP). Also, the Treasury will lend up to $1.0 billion to General Motors, so that it can purchase additional equity that GMAC is planning to offer as part of its effort to raise more capital.

Since last week’s decision, GMAC Bank has been advertising 4.00% 12-month CDs - significantly above the 2.66% national overnight average per Bankrate as of last night. If GMAC can attract an equal amount in CD depositors, the new bank would have about $12 billion in capital to lend at approximately a 6.0% average cost. What could this mean to GM?

If GMAC makes available 70% of the capital to customers looking to buy a GM product, and using an average $28,400 sticker price, in theory this could permit GM to sell nearly 300,000 vehicles to “qualified buyers” over the next year. Clearly, this is a small portion of the approximate 5.0-7.0 million cars we suspect GM would produce in 2009.

While GMAC still has a number of issues to work through, being part of the TARP program does ease some of the concerns with respect to raising capital. However, if all issues are worked through to a positive outcome, the US consumer-lending mechanism with respect to the auto industry should begin to move in the right direction. Moreover, it could result in the remaining US auto manufacturers to follow suit.

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Comment by Dr. Sebastian Uremadu

2009-01-01 14:09:53

This arrangement may be good for GMCto riggle out of its present financial constraints, raise more capital through CDs deposits, have a good risk management via LLC Financial Bank and sell its cars at cheaper prices to target US consumers as well as secure additional funds from the Treasury. Other auto makers can indeed follow suit.

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