TBO.com - TBO is Tampa Bay Online

Housing Troubles Add Another Financial Headache For General Motors

ADVERTISEMENT

By DORON LEVIN, Bloomberg News

Published: November 30, 2007

General Motors Corp. probably thought nothing could be worse than poor quality ratings or a strike by the United Auto Workers union.

Now the world's biggest automaker has a new headache: a nationwide glut of unsold homes and plunging housing-related securities.

With new vehicles such as the Chevrolet Malibu, Saturn Outlook and Cadillac CTS, General Motors is winning better reviews and gaining more consumer interest than it has in many years. The financial side of GM's business is another story.

On Nov. 7, GM reported a $39 billion third-quarter net loss as it wrote down future tax benefits the automaker thinks it won't be able to use against future earnings, or more specifically, the lack of them. But even that ugly statistic wasn't the worst financial event to befall GM so far this year.

GM's 49 percent interest in GMAC LLC, a diversified financial services company, has been arguably the most important reason for a 36 percent slide in the shares since mid-October. Before plunge, which coincided with UAW ratification of GM's new four-year labor contract, GM shares had soared 45 percent since Jan. 1, making it the top performer in the Dow Jones industrial average.

The bitter irony for GM is that just two years ago, its GMAC subsidiary was seen as a valuable, moneymaking asset that needed protection from GM's own dismal credit ratings.

Credit Upgrade

A key reason GM sold a majority stake in GMAC to a group led by Cerberus Capital Management LP last year (besides to raise cash) was to insulate GMAC's credit ratings from GM's and thereby permit GMAC to borrow at more favorable interest rates. Some GMAC bonds had fallen five levels since 2001, and the Cerberus acquisition helped lift them one grade.

But who saw how bad the housing debacle would become? GMAC, along with its automotive lending unit, owns Residential Capital LLC. ResCap, as it's called, has stumbled just like so many other home lenders; it announced a rescue plan Nov. 21 that included its offer to buy back as much as $750 million of its debt securities trading at distressed prices.

The confidence-building tactic of repurchasing some of ResCap's debt will cost GMAC some cash, though it also should improve the unit's earnings.

It's a stopgap measure at best. In the event that U.S. residential real estate suffers a catastrophic collapse, ResCap might be forced to fold. Should that happen, GMAC may wish it had been tighter with its cash.

Survival Mechanism

Eric Feldstein, GMAC's chief executive officer, lately has been stating the truism that not all mortgage finance companies with liquidity will emerge from the current crisis as winners, but all the winners surely will have liquidity. Besides buying back debt, GMAC also is conserving cash by converting some dividend-paying preferred shares held by GM and the Cerberus group to common stock.

The trouble with the panic-stricken U.S. housing market is that prices keep falling, with no bottom in sight. House values dropped 4.5 percent in the third quarter from a year earlier, the most since records began in 1988, S&P/Case-Shiller Index reported Tuesday.

Fortunately for GM, ResCap's financial difficulties so far are limited to GMAC. GM says it has no obligation to provide more capital, though it hasn't ruled out an injection.

Investors and ratings firms are closely watching GM's $30 billion of cash, an amount thought by analysts and investors to be sufficient - perhaps barely so - to carry the automaker through the next few lean years it's expecting.

GMAC once could be relied upon to provide steady dividends to GM, making the unit a beneficial counterweight to poor automotive performance. In the five years ended in 2006, GMAC paid more than $10 billion in dividends to GM. Even a 49 percent interest in GMAC was seen as a strong source of cash and profit, especially if the unit's credit ratings could avoid a tainted association with GM.

Now it's anyone's guess when GMAC will again send GM dividends, which were last paid in 2006.

Positions Suddenly Reversed

With the introduction of new models and improved earnings overseas, GM had prided itself the past year or so for at least staying ahead of the turnaround efforts of crosstown rival Ford Motor Co. Ford also has lost billions of dollars and suffered from declining market share in the United States.

The positions now suddenly are reversed. Ford Motor Credit, Ford's finance subsidiary, hasn't been in the home lending business since the mid-1990s, so it can still send dividends to the parent.

If GM's stock price stays in the 20s, the automaker again may find itself fighting off an opportunistic investor such as Kirk Kerkorian. Kerkorian was attracted to GM's stock at similar prices in May 2005 and sold in late 2006.

Oleg Deripaska, the Russian billionaire, also was cited in some publications as having a stake in GM. By recently declining to confirm whether Deripaska still holds GM, his spokesman implied that the Russian had bought the shares.

GM's improved performance in the U.S. auto market has been welcome. Now the automaker sorely, and unexpectedly, needs a pickup in housing as well.

Doron Levin is a Bloomberg News columnist.

Share this:

Loading Comments...

Email Print

ADVERTISEMENT